Sulzer AG Annual Report 2015

Plain-text annual report

Annual Report 2015 ADDRESSInG GLOBAL TREnDS Sulzer specializes in pumping solutions, rotating equipment maintenance and services, and separation, reaction, and mixing technology. We create reliable and sustainable solutions for our key markets: oil and gas, power, and water. Combining engineering and application expertise, our innovative products and services add value and strengthen the competitive position of our customers. Sulzer serves clients around the world through a network of over 170 locations in more than 40 countries. Global megatrends come together in large cities such as New York, NY, USA. Because urban areas are growing constantly, the demand for freshwater, clean air, and energy is rising steadily. Global Trends WATER Supplying clean water on a cost- and energy- efficient basis is crucial in an urbanized world. 10 AIR In the wake of the increasing air pollution, society seeks environment-friendly technology. 16 ENERGY The growing energy demand calls for energy- efficient equipment and services. 22 Sustainable Development INNOVATION AND TECHNOLOGY Sulzer’s innovative technology helps manage the demands arising from megatrends. 45 ECOLOGICAL SUSTAINABILITY Sulzer systematically monitors its ecological footprint to learn from and improve it. 46 SOCIAL SUSTAINABILITY Providing a safe and healthy environment as well as opportunities for development for its employees is important to Sulzer. 48 Contents 1 Introduction 6 Focus 31 Business Review 33 Our Company 38 Our Divisions 44 Our Responsibility 51 Corporate Governance 71 Compensation Report 93 Consolidated Financial Statements Oil and Gas Market Headwinds Impacted Order Intake and Sales Increasing market headwinds impacted the company’s business performance. Order intake and sales decreased in 2015. Strong growth in the power market partially offset reduced activity in the oil and gas and the water markets. Order intake gross margin on a currency-adjusted basis improved. Operational EBITA and operational ROSA decreased. Sales by divisions Sales by market segments Sales by regions 23% Chemtech 54% Pumps Equipment 22% General industry 2015 2015 23% Rotating Equipment Services 13% Water 51% Oil and gas 21% Asia- Pacific 14% Power 38% Americas 2015 41% Europe, Middle East, and Africa Key figures millions of CHF Order intake Order intake gross margin Order backlog Sales EBIT opEBITA opROSA opROCEA Net income attributable to shareholders of Sulzer Ltd2) EPS from continuing operations FCF2) Net liquidity 2015 2 895.8 33.8% 1 510.7 2 971.0 120.9 254.1 8.6% 2014 3 160.8 33.5% 1 699.6 3 212.1 – 69.0 302.9 9.4% 17.0% 17.1% 73.9 2.17 155.8 695.7 275.0 – 4.72 98.0 773.5 Employees (number of full-time equivalents) as of December 31 14 253 15 494 1) Adjusted for currency effects. 2) Includes continuing and discontinued operations. — Abbreviations Change in +/– % – 8.4 – 11.1 – 7.5 +/– %1) – 3.7 – 3.2 – 16.1 – 11.8 – 73.1 59.0 – 10.1 – 8.0 Operating income Return on sales (EBIT/sales) EBIT: ROS: opEBITA: Operating income before restructuring, amortization, impairments, and non-operational items opROSA: Return on sales before restructuring, amortization, impairments, and non-operational items (opEBITA/sales) opROCEA: Return on capital employed (opEBITA/average capital employed) EPS: FCF: Basic earnings per share Free cash flow Managing Demands Resulting from Global Megatrends Sulzer holds leading positions in the oil and gas, power, water, and general industry markets. We are dedicated to creating long-term value and providing sustainable solutions. We support our customers in managing the demands that result from global megatrends. The company at a glance Pumps Equipment Pump technology and solutions We provide a wide range of pumping solutions, related equipment, and services. Customers benefit from extensive research and development. We supply highly efficient products that help reduce emissions and energy consumption. Our state-of-the-art production and testing facilities around the globe ensure customer proximity. Rotating Equipment Services Service solutions for rotating equipment We offer service solutions for turbines, pumps, compressors, motors, and generators. Customers benefit from reliable and efficient repair and maintenance services. Our technically advanced solutions reduce maintenance time and cost. Access to our global network from one point of contact ensures high-quality local service. Chemtech Separation technology and services, mixing and dispensing systems We consist of two business cores today: We supply separation technology, process so- lutions, and field services for the hydrocarbon and chemical processing industry. Further, we provide mixing and dispensing technology. Our market focus is on: — The production, transport, and processing of crude oil and derivates — The supply, treatment, and transport of water as well as wastewater collection — Fossil-fired, nuclear, and renewable Our market focus is on: — Industrial gas and steam turbines — Turbocompressors — Generators and motors for the marine and rail market, the power market, and many more industries Our market focus is on: — High-performing tower internals and separators — Process engineering and skid solutions — Service for towers and static equipment — Mixing and dispensing systems for the power generation — Pumps in the oil and gas market, the healthcare and industrial markets power market, and many more industries opEBITA and opROSA in CHF 118m (2014: 161m) 7.3% (2014: 9.2%) Sales 71m (2014: 65m) 10.2% (2014: 8.9%) 67m (2014: 94m) 10.1% (2014: 12.6%) 1621m (2014: 1 755m) 693m (2014: 725m) 670m (2014: 742m) Order intake 1501m (2014: 1 726m) 698m (2014: 725m) 709m (2014: 718m) 1 ADDRESSING GLOBAL TRENDS AND PROVIDING THE RIGHT ANSWERS A greater need for clean water, growing air pollution, and increasing energy demand are global megatrends that are triggering both innovation and investments. Our excellent product and service offering enables us to face these rising needs successfully and provide the right answers. Our solutions support our customers today and will help them in the future in coping with water scarcity (on page 10), mitigating air pollution (on page 16), and reducing energy consumption (on page 22). Unleashing Sulzer’s full potential One year ago, we introduced the Sulzer Full Potential (SFP) program. This strategic program sets out to complete Sulzer’s transformation into a truly market-oriented, globally operating, and integrated company. It is based on three pillars: strategy, operating model, and operational excellence. The SFP program targets total annual cost savings of approximately CHF 200 million in a steady state from 2018 onwards, allowing us to both mitigate the current market headwinds and close the profitability gap to our top-tier competitors. It got off to a good start in 2015. Important milestones achieved in 2015 At the beginning of 2015, we reorganized our Pumps Equipment division into three market-oriented business units (Oil and Gas, Power, and Water), a dedicated global aftermarket organization (Global Parts, Retrofit, and Nuclear Services organization), and a global operations network to manage our manufacturing assets transversally. We believe it allows us to better serve our customers in our end-markets and regions. We adapted our manufacturing footprint and streamlined our manufacturing capacities in the Pumps Equipment division in China, Brazil, and the USA. In the Chemtech division, we adapted our opera- tional setup and discontinued parts of our manufacturing activities in China, Singapore, Canada, and Switzerland. We restructured our service centers and improved operations in our Rotating Equipment Services division in the UK and other parts of Europe. Further, the company decided to close its foundries in Jundiaí, Brazil, and Kotka, Finland. We created a global procurement organization that works across divisions to fully leverage Sulzer’s procurement power. Finally, we are simplifying our organization to reduce complexity, foster synergies and collaboration, and promote our strong Sulzer brand. A good indicator of progress is the number of Sulzer legal entities, which has dropped from over 160 two years ago to below 100 at the end of 2015. More consolidations are planned in 2016. Significant market headwinds Since the beginning of 2015, Sulzer has faced increasing headwinds, particularly in the oil and gas market. Oil prices are widely expected to remain low, driving Sulzer’s oil and gas customers to further cut their capital and operating costs. In addition, regional developments, such as the economic 2 “Global megatrends are triggering both innovation and investments. Our excellent product and service offering enables us to address these trends successfully.” slowdowns in China and Brazil, negatively affected our business performance. We also felt the impact of the reduced operating hours for gas turbines in Europe on our service revenue and asset use. These adverse market conditions make deepening and accelerating the SFP program a priority. On another note, the Swiss franc has still not fully recovered since January 2015, when the Swiss National Bank decided to end its three-year policy of capping the Swiss franc at CHF 1.20 per euro. However, to a great extent, Sulzer is naturally hedged, producing in the region for the region. Because headquarters and a few Chemtech manufacturing sites are located in Switzerland, we see only a limited transactional foreign exchange impact. Financial performance in 2015 Order intake was CHF 2.9 billion (2014: CHF 3.2 billion). It decreased by 3.7% from the previous year on a currency-adjusted basis. Sales were CHF 3.0 billion (2014: CHF 3.2 billion), which is a decrease of 3.2% on a currency-adjusted basis. The lower sales volumes, lower gross margin, and currency effects negatively affected operational EBITA, which amounted to CHF 254.1 million (2014: CHF 302.9 million). Savings from the SFP program partially offset this decline. As a result, the company has narrowed the profitability gap to its top-tier competitors by approximately 200 basis points (based on Bloomberg consensus estimates as of January 28, 2016). The net income attributable to shareholders of Sulzer Ltd was CHF 73.9 million (2014: CHF 275.0 million). This results in basic earnings per share of CHF 2.17 (2014: CHF 8.09). The Board of Directors will propose an ordinary dividend of CHF 3.50 (2014: CHF 3.50) per share at the Annual General Meeting on April 7, 2016. Commitment to financial discipline Sulzer’s management and board have full confidence in the company’s strong free cash flow gen eration and the success of the ongoing SFP program. We aim to keep sufficient headroom for value accretive M&A activities in the near term but remain committed to optimizing our currently inefficient capital structure in the present interest rate environment. As such, we have decided to return a significant part of our excess cash to shareholders. The Board of Directors will therefore propose a one-time special dividend of CHF 14.60 per share at the Annual General Meeting on April 7, 2016. After the special dividend, Sulzer will continue to have a net cash position and one of the strongest balance sheets in its industry, allowing it to pursue all strategic options. Renova supports Sulzer’s strategy Renova, Sulzer’s anchor shareholder, has increased its stake to 63.42% of all Sulzer shares. Renova has confirmed its long-term commitment to the company and will maintain a balanced approach towards governance. It has clearly stated that it does not intend to change Sulzer’s strategic focus and that it will continue to work closely with Sulzer’s Board and its management to carry out the SFP program successfully. 3 Greg Poux-Guillaume, CEO, and Peter Löscher, Chairman of the Board of Directors 4 Changes in the Board and the management Fabrice Billard joined the Executive Committee as Chief Strategy Officer in March. Gerhard Roiss was elected as new member of the Board of Directors in April. Luciano Respini did not stand for reelection at the Annual General Meeting 2015. Former CEO Klaus Stahlmann left the company in August. From August to November, Thomas Dittrich took over as CEO ad interim in addition to his duties as CFO. Greg Poux-Guillaume was appointed as new Chief Executive Officer in November, effective December 1, 2015. Outlook 2016 Sulzer has a balanced business mix, with half of its business outside the oil and gas market and the aftermarket business accounting for half of sales. However, the company expects continued low oil prices and high volatility throughout 2016 and beyond, resulting in subdued demand and price pressure from its oil and gas customers. Given these market headwinds, Sulzer increases and accelerates cost savings from its ongoing SFP program. The company expects cost savings from the SFP program to be in the range of CHF 60 to 80 million in 2016 and total annual cost savings of approximately CHF 200 million in a steady state from 2018 onwards. For the full year 2016, order intake and sales are expected to decline by 5 to 10%, adjusted for currency effects. Supported by the cost savings from the SFP program, Sulzer expects opEBITA margins of approximately 8% (opEBITA in percent of sales). Dear shareholder, we would like to thank you for your confidence and continued trust. We express our thanks for the willingness and commitment among all of our employees, particularly in this past challenging year. We would also like to thank our customers and partners for their continued cooperation. Yours sincerely, Peter Löscher Chairman of the Board Greg Poux-Guillaume CEO Winterthur, February 24, 2016 Order Intake Order intake was CHF 2.9 billion (2014: CHF 3.2 billion). On a currency-adjusted basis, this is 3.7% less from 2014. FCF Free cash flow (FCF) improved to CHF 155.8 million from the previous year (2014: CHF 98.0 million). Operational EBITA Operational EBITA was CHF 254.1 million (2014: CHF 302.9 million). This is a decrease of 11.8% on a currency-adjusted basis. Operational ROSA Operational ROSA de- clined from 9.4% in the previous year to 8.6% in 2015. – See abbreviations on fold-out page. EPS and Dividend Order In- take Gross Margin Order intake gross margin increased to 33.8% (2014: 33.5%). Sales Sales were CHF 3.0 bil- lion (2014: CHF 3.2 bil- lion) which is a decrease of 3.2% on a currency- adjusted basis compared with the previous year. Net income attributable to shareholders of Sulzer Ltd was CHF 73.9 million (2014: CHF 275.0 million). This results in basic earnings per share (EPS) of CHF 2.17 (2014: CHF 8.09). The Board of Directors will propose an ordinary dividend of CHF 3.50 per share and a one-time special dividend of CHF 14.60 per share at the Annual General Meeting on April 7, 2016. Operational ROCEA Operational ROCEA was 17.0% in 2015 (2014: 17.1%). 6 Sulzer—Annual Report 2015 GLOBAL MEGA- TRENDS With a population of over 24 million inhabitants, Shanghai, China, belongs to the world’s largest cities. In the future, even more people will be living in urban environments. Focus—Global Megatrends 77 10 WATER URBANIzATION ENERGy 22 AIR 16 For the first time in human history, more than half of the global population live in cities—and the trend is rising. We are on the brink of a new level of urbanization: future cities are going to be more varied, interconnected, and sustainable. Urbanization has many implications for our way of living. Significant side effects are the increasing energy demand, greater need for clean water, and growing air pollution. Although cities only cover two percent of the earth’s surface, they consume 75% of global energy, produce 80% of all greenhouse gas emissions, and withdraw a remarkable amount of water. This poses major challenges to humankind. Sulzer offers technology and services that help meet these challenges. On the follow- ing pages, we present you with some of our solutions that address global megatrends: We provide energy-efficient equipment for desalination applications, which improve the supply of freshwater. Our solutions enhance the capture of carbon dioxide and, thus, reduce air pollution. Moreover, we support our customers in decreasing the energy consumption and in increasing the efficiency of their equipment. 8 Sulzer—Annual Report 2015 Thompsons, USA Reduction of CO2 emissions 90% Sulzer provides equipment for a US carbon capture and storage (CCS) project that aims to reduce the CO2 emissions of a fossil fuel power plant by 90%. 16 THREE MEGATRENDS DEfINING OuR WORLD Dams and hydroelectric plants, such as the one in Mooserboden, Austria, serve to satisfy the greater energy demand. Sulzer’s global footprint enables the company to address megatrends around the world and to be close to its customers. Focus—Global Megatrends 9 Kotka, Finland / Winterthur, Switzerland Beihai, China Affordable freshwater supply Generating energy more efficiently 60% Pumps use 60% of all the energy consumed in desalination plants. Sulzer’s pumps, developed in Finland and Switzerland, contribute to the afford - able and energy-efficient supply of freshwater. 600°C Ultra-supercritical power plants generate energy in a highly efficient manner. Because they operate at temperatures above 600°C, the requirements for the equipment are challenging. 10 22 Sulzer is present in over 40 countries around the world Global footprint Americas Sulzer operates in eight countries of North, Central, and South America. More than 4 000 employees are spread across the continent and close to the company’s customer base. Sulzer is most present in the USA and Brazil. Europe, Middle East, and Africa Sulzer’s footprint in Europe, Middle East, and Africa (EMEA) comprises production and service locations in 26 countries. In total, over 6 500 employees work in EMEA. It is Sulzer’s largest region, not only in terms of locations and employees but also in terms of order intake and sales. Asia-Pacific In Asia-Pacific, Sulzer is present in ten countries. The company employs more than 3 500 workers in this region. The production and engineering network is spread across the region. In addition to the EMEA region and the Americas, research and development activities are also carried out in Singapore and Shanghai. 10 Sulzer—Annual Report 2015 WATER SCARCITY IN uRBAN AREAS Water is one of the earth’s most precious resources. Fighting water shortage and supplying freshwater is crucial in a world where roughly 1.1 billion people have no access to clean freshwater. In many regions of the world, the lack of freshwa- ter resources has become a critical concern. Ur- ban populations are growing, which adds to the challenge. Providing access to clean freshwater is critical for a sustainable city life. cesses, 60% is devoted to human consumption. Because energy is the largest single expense for desalination plants, companies are looking for en- ergy-efficient solutions. The urban development in Las Vegas, NV, USA, illustrates the importance of finding new sources for water supply. Seawater desalination is one means of providing freshwater sustainably. Seawater desalination is an important means of providing a sustainable supply of freshwater. Al- though the clean freshwater is used for different purposes, such as industrial and agricultural pro- Sulzer’s pumps for seawater desalination are market leaders in terms of efficiency. Hence, the company supports its customers in supplying clean freshwater in a cost- and energy-efficient manner. Focus—Water 11 WATER SCARCITY IN uRBAN AREAS Increase of global water demand 55% expected increase of global water withdrawals by 2050 Seawater as large source 98% Global water demand Freshwater withdrawals, baseline scenario, 2000 and 2050, world km3 6 000 5 000 4 000 3 000 2 000 1 000 0 Electricity Manufacturing Livestock Domestic Irrigation 2000 2050 of total available water on earth is seawater Source: © OECD 12 Sulzer—Annual Report 2015 from Seawater to freshwater: Providing Equipment for Desalination Plants Seawater desalination is a promising and fast-growing solution to counter water scarcity. Reverse osmosis—a desalination technology—requires less energy and is less expensive than other methods. By providing highly efficient pumps, Sulzer facil- itates the affordable and energy-efficient supply of freshwater. The current climate change scenario predicts that almost half of the world’s population will live in areas of high water stress by 2030. Population growth and industrialization in developing areas are substantially increasing water demand. Governments, national, and international institu- tions, as well as water management companies, are looking for solutions to face one of the most pressing challenges that lies ahead. Since seawater represents 98% of available water on earth, desali- nation of sea and brackish water is a promising ap- proach to provide clean freshwater for human con- sumption, irrigation, or industrial use. Converting seawater into freshwater There are two main methods for converting sea- water into freshwater: desalination technologies based on either thermal processes (such as mul- tiple-effect or multistage flash distillation) or mem- brane processes (reverse osmosis). Although ther- mal desalination technologies consume a lot of energy, they have been predominant in the Middle East because the plants are easy to operate and energy costs are low. However, the market trend is turning towards reverse osmosis, even in those re- gions of low energy costs. Today, more than two- thirds of the newly installed desalination capacity worldwide is based on reverse osmosis technology. The benefits of this process: it needs less energy and is more eco-friendly. Sulzer supplies a full range of pumps for sea or brackish water desalination using either reverse osmosis or mul tiple-effect pro- cesses. To follow the market trend, the company has specialized increasingly in equipment for re- verse osmosis plants. With the proper plant design and equipment selection, reverse osmosis technol- ogy is unbeatable in energy efficiency. Decreasing costs of reverse osmosis plants In the reverse osmosis process, seawater is pushed through a membrane. Water molecules permeate through the membrane, but salt particles do not. The part of the seawater that does not cross the membrane—about 55% of the feed flow—is called brine. It is possible to recover energy from the brine. Over the years, the efficiency of energy recovery systems has increased, thus largely reducing life cy- cle costs. Pumps also play an important role in decreasing operating expenditures. Since the beginning of de- velopment of desalination applications in the 1980s, Sulzer has provided solutions that meet the specific market requirements. In a reverse osmosis plant, Sulzer’s pumps can be used to intake and pretreat Focus—Water 13 The desalination process results in a solution with a high concentration of salt—called brine. Pumps boost the brine back to the ocean through pipelines. Osmosis is the diffusion of fluid through a semipermeable membrane from a solution with a low solute concentration to a solution with a higher concentration. Osmosis can be reversed if sufficient pressure is applied to the concentrated side of the membrane. Reverse osmosis is used for water purification and desalination. The membrane allows only the water to pass through, but not larger molecules or ions (like salt). Seawater desalination with reverse osmosis Osmosis External pressure Reverse osmosis Concentrated solution Semipermeable membrane Water Seawater Semipermeable membrane Freshwater 14 The unique hydraulic design of the SNS pumps ensures extremely efficient pumping in various applications. Engineers in Kotka, Finland, developed this pump range. Watch the video about the new SNS process pump range: www.sulzer.com/sns-pumps. seawater, to provide the pressure for the water to diffuse through the membrane, and to transport the freshwater. Because high-pressure pumps use 60% of all the energy consumed in the desalination plant, they need to be highly efficient, reliable, and as low-cost as possible. Each single percentage of their efficiency increase directly lowers the costs of the water produced. For example, the MBN-RO pumps will be used in the Jubail 4 SWRO project in Saudi Arabia. Built to address the water needs of the city of Al Jubail and the country’s Eastern Province, the plant produces potable water for residents as well as water for in- dustrial processes. Sulzer’s installations around the globe support the production of more than three million m3 of freshwater per day. Highly efficient pumps for desalination plants With this in mind, Sulzer’s teams in Kotka, Finland, and Winterthur, Switzerland, developed the new MBN-RO and MSD-RO pump ranges, which are specifically engineered for reverse osmosis applica- tions. The teams improved the hydraulic efficiency of the pumps by optimizing the suction chamber and the design of the impeller, the diffuser, and the volute. Thanks to their advanced hydraulic design, both the MBN-RO and the MSD-RO are leading products in the market in terms of efficiency. The pumps have already been supplied to several de- salination plants in the Middle East and in China. More efficient than required Because every kilowatt matters with regard to af- fordable water supply, Sulzer’s engineers devel- oped highly efficient end-suction process pumps. The SNS process pumps, originally designed for the pulp and paper industry, can be used in auxiliary services in seawater reverse osmosis and other applications in the water market. They achieve top-level efficiency, and they exceed the European Union’s requirements for energy-related products by a significant margin. These regulations, which aim to reduce energy consumption, specify the minimum efficiency values for water pumps. The Sulzer—Annual Report 2015Focus—Water 15 The MBN-RO pump will help address the water needs in Al Jubail, Saudi Arabia, and its surroundings. The pump is able to cover a capacity of up to 1 000 m3 of water per day. minimum efficiency index (MEI) was set at 0.4 as of the beginning of 2015. Around 40% of the water pumps in use do not comply with this regulation. The SNS process pump range—on the market since 2015—achieved an MEI of 0.7, which is clearly above the required criteria. past, the trend is moving to small- and medium-sized plants. They are easier to construct, install, run, and finance. Sulzer supports its customers from a very early project stage in improving the overall efficiency and ensuring the highest possible profitability of the plants. In this way, Sulzer helps provide an afford- able and energy-efficient supply of freshwater. Spotting future trends While regions such as Algeria, Spain, Australia, and the Middle East have built very large plants in the 16 16 Sulzer—Annual Report 2015 CLEAN AIR IN A GLOBALIzED WORLD Greenhouse gas emissions by economic sectors 6.4% Buildings 14% Transport 21% Industry 24% Agriculture, forestry, and other land use 25% Electricity and heat production 9.6% Other energy Cities as a major pollution source 80% percentage of global greenhouse gas emissions produced by cities Industry as a large pollution source 21% Source: © Intergovernmental Panel on Climate Change 2014 percentage of total global greenhouse gas emissions caused by the industrial sector Focus—Air 1717 Reducing air pollution is an increasingly important topic in a globalized world. Many governments—in developed and emerging countries— have set new limits for emissions such as carbon dioxide (CO2). The amount of CO2 in our atmosphere has risen drastically since preindustrial times. Cities pro- duce about 80% of all greenhouse gas emissions such as CO2. In recent years, governments have actively tried to put a stop to global warming. Tighter environmental regulations and restrictions force companies to look for new, more environ- ment-friendly technology that improve air quality. The industry is advancing technological solutions to mitigate climate change and to reduce carbon dioxide emissions. One way to prevent the re- lease of CO2 into the atmosphere is with carbon capture and storage (CCS). Sulzer offers pumps and mass transfer equipment that can be used in all stages of the CCS chain. The company’s tech- nology thus helps limit the adverse impact of CO2 on the environment. Cities and their industrial areas cause most of the emissions around the world. Germany (aerial photo of Düsseldorf) was able to reduce its greenhouse gas emissions in 2014; other countries are still seeking solutions to counter air pollution. 1818 Capturing Emissions Where They Emerge A carbon capture and storage (CCS) project in the USA aims to reduce the carbon dioxide (CO2) emissions of a fossil fuel power plant by 90%. Sulzer provides the mass transfer technology required for the capturing process. The company’s solutions help customers increase the efficiency of their equipment and lower their costs. After China, the USA is the second-highest emitter of greenhouse gases (GHG) in the world. Most GHG emissions in the USA stem from power generation. The WA Parish power plant—located in Thompsons, TX, USA—is the largest fossil fuel plant in the USA and one of the largest CO2 emitters. CCS is one of the technologies that can help miti- gate GHG emissions and aid in the responsible use of fossil fuels. In 2013, Petra Nova Holdings (a joint venture between NRG Energy and JX Nippon Oil & Gas Exploration) announced a carbon capture retro- fit on one of the four coal-fired units of its Parish Mellapak is the most widely used structured packing around the world. The column internals can take on enormous dimensions (picture on the right). Read more about Mellapak on page 21. Sulzer—Annual Report 2015Focus—Air 19 The carbon capture and storage demonstration unit at the Parish coal plant in Thompsons, TX, USA, is currently under construction. It is expected to go into service this year. plant. After the retrofit, the world’s largest post-com- bustion carbon capture unit will be able to capture 106 million tons of CO2 per year. Designed as a demonstration plant, it aims to capture at least 90% of the CO2 from the feed stream, which equals about 40% of this unit’s capacity or 12% of the plant’s total capacity. Furthermore, it will also re- duce the emission of pollutants such as sulfur oxides (SOx) and nitrogen oxides (NOx). The project, which stands under the Department of Energy of the United States’ Clean Coal Power Initiative, is expected to go into operation at the end of 2016. Absorbing CO2 more energy efficiently and cost effectively In a fossil fuel power plant such as the Parish plant, CO2 emerges during the process of burning fossil fuels. Before it is released into the atmosphere, the CO2 is captured in an absorption column. The inter- nals for such columns, such as the structured pack- ings MellapakTM and MellapakPlusTM, are produced by Sulzer. These enable the efficient capture of CO2 from the flue gas stream before it is released into the atmosphere. The captured CO2 can then be safely stored underground or used for other pur- poses (e.g., enhanced oil recovery). Normally, these columns are very large and use a lot of energy. Sulzer’s structured packing reduces the column size, thus saving material, space, and cost. CCS process providers focus on decreasing energy costs wherever possible. With Sulzer’s products, the pressure drop across the absorber can be re- duced. As a result, less energy is needed for the operation of the plant. Customers benefit from low- er capital and operational expenses. 20 Sulzer—Annual Report 2015 Structured packings such as MellapakPlus are designed to create large surface areas of contact for gases and liquids. This surface area enhances the absorption of CO2. Focus—Air 21 CO2 absorption column Gas stream (to atmosphere, CO2-free) Enabling CO2 removal from gas stream with Mellapak After the fossil fuels have been burned, the off-gas stream runs into an absorption column. In the column, so-called amine solu- tions come in contact with the gas stream and absorb CO2. The larger the contact area, the more CO2 is removed from the gas. The design of structured packings such as Mellapak creates large surface areas of contact for the gas and liquid, thus enhancing the absorption. This process results in a nearly CO2-free gas stream and in amine solutions rich in CO2. Mellapak packing is again used to treat the amine solution; the CO2 is removed for storage and the amine liquid is recycled and reused in the process. Gas blower (gas rich in CO2) Amine solution (CO2-free) Amine solution (rich in CO2) In the Petra Nova project, Sulzer engineers are con- fronted with additional and unique challenges: the shape, material, and dimension of the towers. Two of the towers are rectangular and constructed out of cement. While these features are reasonable from a manufacturing and design perspective, the Sulzer team had to review many of the mechanical strength calculations made for cylindrical columns. The very large size of the columns added to the challenge. However, the engineers were able to op- timize the equipment in close collaboration with a project partner. Offering solutions for various stages of the CCS chain Sulzer has gained significant experience in provid- ing mass transfer technology for CCS. The compa- ny has delivered column internals and engineering expertise for two of the largest CO2 capture demon- stration projects worldwide, among them the Sask- Power Boundary Dam CCS project in Canada. With its technology, customers are able to treat large amounts of flue gas most effectively. This is even more important when considering that, in many cases, not only CO2 needs to be separated from the gas stream, but NOx and SOx emissions as well. In addition to mass transfer technology, Sulzer also offers pumps for various stages of the CCS chain. For example, these pumps can be used to circulate liquids in the capture process. Other application areas are the compression, transport (e.g., via pipe- lines), and injection of the captured CO2. In the case of the WA Parish power plant, the cap- tured CO2 will be used for enhanced oil recovery in the Gulf Coast region. Those responsible expect this will boost oil production from about 500 barrels per day to approximately 15 000 barrels per day. Thus, besides enhancing the long-term viability and sustainability of power plants, it also profitably in- creases oil production. Although CCS technology is still at an early stage, pilot projects around the world have demonstrated the effectiveness of the technology. Sulzer is liaising with customers and is involved at an early stage in the process design phase of such projects. The company is committed to seizing the opportunities emerging in this field. 22 Sulzer—Annual Report 2015 GREATER NEED fOR ENERGY With around 6 500 inhabitants per square kilometer, Hong Kong, China, belongs to the world’s most densely populated cities. Since urbanization is continuing and accelerating—particularly in emerging countries—the need for energy is growing. Focus—Energy 23 Increase of global energy demand 37% expected increase of global energy demand from 2013 to 2035 Cities as main consumer 75% Global energy demand Billion toe 1) 18 16 14 12 10 8 6 4 2 0 Renewables 2) Hydro Nuclear Gas Oil Coal 1965 2000 2035 1) tonne oil equivalent 2) includes biofuels of global energy is used by cities Source: © BP p.l.c. 2015 Cities use the majority of all energy consumed globally. As urbaniza- tion continues—reinforced by the evolution of so-called megacities— the demand for energy will rise steadily. Overall, one-fifth of the global population lives in developed countries. These countries account for half of all energy consumption. Because emerg- ing countries are experiencing rapid urbanization, energy demand all over the world is growing even more. Society is increasingly aware of the nega- tive implications that come with a greater need for energy. Companies are looking for ways to preserve natu- ral resources, and they are investing in more environment-friendly technology that helps save energy. Power plant operators all over the world are optimizing their sites in terms of efficiency. Sulzer’s state-of-the-art technology enables its customers to achieve better performance in gen- erating energy. 24 Saving Energy with Boiler feed Pumps Based on environmental regulations and cost considerations, power generation companies strive to optimize the efficiency of their plants. Sulzer is a trusted and well-experienced partner for particularly challenging assignments—as the example of the largest power plant in China shows. China consumes 22% of the energy used around the world every day. This makes the country the largest consumer of energy in the world. At the same time, it is the largest energy producer. Stringent environmental regulations are changing the power generation landscape around the globe. In an attempt to increase power generation while Saving Costs with Integrated Service Offering The growing energy demand causes not only technological challenges but also costs. In addition to improving the energy efficiency of their equipment, companies are also reducing the number of service suppliers. Providers who can offer multiple services are becoming the preferred partners for many projects. NV Energy engaged Sulzer’s service center in Phoenix, AZ, USA, for the removal, re- build, and reinstallation of pump and motor units of its Goodsprings Energy Recovery Station. The waste heat power plant uses hot exhaust from a neighboring natural gas compressor station to generate electricity. Approximately 3 000 Nevada households benefit from the waste energy generated by this plant. The customer avoids having several contact points for the service of different machines. Sulzer repairs both motor and pump in the same service center. Furthermore, the engi- neers will rebuild, inspect, and test the equipment on-site. This offering is possible be- cause of the company’s service integration, which started in 2014. All over the world, Sulzer is integrating its services for rotating electrical and mechanical equipment. This increases the company’s competitiveness and enables Sulzer to offer even more inno- vative solutions from one access point. decreasing the environmental impact, China has been developing ultra-supercritical (USC) coal-fired power plants. The trend is to generate steam at higher pressures and temperatures and thus in- crease the efficiency of the power plant. Ultra-super- critical steam generation is the latest technology with even higher pressures and steam tempera- tures of above 600°C. Double-reheat technology is a further method of improving a plant’s thermal effi- ciency. By heating the steam in the boiler twice, more energy is transferred. With increased steam parameters of up to 350 bar and 620ºC, double reheating allows for efficiencies of 48%. By compar- ison, with identical steam parameters, the best cur- rent single-reheat USC plants operate at a rate of around 46% efficiency. Since the increase of every percentage point leads to significant energy and cost savings, this improvement can have an import- ant effect on customers’ decisions. Equipment for the largest power station in China The Chinese Shenhua Beihai Power Plant—current- ly under construction—will use USC technology. After its completion in 2017, the plant will be the largest power station in China. Such plants use pumps for boiler feed, condensate extraction, and cooling water processes. Boiler feed pumps—nor- mally high-pressure units—move water to the steam boiler. Because Sulzer is widely recognized as a supplier of highly efficient and reliable pumps in this sector, the Chinese customer ordered Sulzer’s HPT boiler feed pumps for its plant. Sulzer—Annual Report 2015Shenhua Beihai Power Plant Focus—Energy 25 Boiler feed pump 620°C Steam temperatures in the Beihai power plant can reach up to 620°C. Sulzer’s boiler feed pumps are able to manage this challenge. 4 1 2 3 from coal to energy In a coal-fired steam station, such as the Beihai power plant, water is converted into steam, which, in turn, drives turbine generators to produce electricity. 1 2 3 4 The coal is transported to the coal mill and is pulverized into a fine powder. In the boiler, the coal is mixed with preheated air and is burned. The combustion process creates an enormous amount of heat. Inside the boiler, water circulates through pipes. The heat turns the water into steam. The steam drives turbine blades and turns the steam turbine shaft. The latter is connected to the generator, which produces electricity. The steam is then drawn into a condenser, which contains a network of tubes. Cool water from a nearby source, such as a river or lake, runs through the tubes and converts the steam back into water. Afterwards, boiler feed pumps return the condensed water to the boiler to repeat the entire cycle. 26 Sulzer—Annual Report 2015 In its factory in Suzhou, China, Sulzer manufactures engineered pumps. The plant has extensive testing capabilities with four test beds, one test well for vertical pumps, and one high-energy test area. The largest boiler feed pumps (HPT high-pressure barrel-casing pumps) Sulzer has ever manufactured will be delivered to a new power plant in Beihai, China. More information: www.sulzer.com/HPT-pumps. Focus—Energy 27 discharge nozzle pull-out cartridge impeller barrel casing suction nozzle case cover thrust bearing The requirements for modern coal-fired plants of this size are challenging. The Beihai Power Plant will operate with steam temperatures between 600 and 650°C and pressure of up to 350 bar. At such high pressures and temperatures, the demands on the equipment are intense. First, the reliability of the equipment is of vital importance for the safe opera- tion of the power plant. Second, the performance— especially of the pumps—plays a crucial role in the overall costs. Sulzer’s engineers have designed the pumps to meet the heavy-duty performance needs in the Beihai plant. The largest boiler feed pumps The pumps delivered to Beihai are the largest boiler feed pumps Sulzer has ever manufactured. The main pump for Beihai has a capacity of 2 840 tons per hour, with a 500 bar discharge pressure, and shaft power of over 40 MW. The pumps will be man- ufactured in Sulzer’s Suzhou factory, which was opened in 2010 and employs more than 350 peo- ple. On 23 000 m2 floor space, Sulzer makes engi- neered pumps for the oil and gas and the power markets. During the project, the Suzhou factory re- ceived support from Sulzer sites across the globe. For example, the Suzhou factory worked with engi- neers from Winterthur, Switzerland, to select the appropriate pumps for the project. Furthermore, the factory involved the Pumps Equipment site in Leeds, UK, to find the most effective sourcing strategy for the pumps. Sulzer has been operating in China for more than 100 years. Besides Suzhou, the company has man- ufacturing plants in Dalian, Shanghai, and Kunshan, and it runs several sales and service locations. China is planning to build further double-reheat power plants in the near future. Sulzer has supplied roughly 1 000 boiler feed water pumps for various power plants—such as conventional, nuclear, bio- mass, and concentrated solar power plants— around the world. The company is experienced and able to advise its customers on the appropriate solutions. A representative of the Shenhua Beihai Power Plant said, “Sulzer has outstanding references with large boiler feed pumps around the world and the success ful operation of the Shenhua Wanzhou 2 x 1 000 MW single-reheat power plant in China. We trust Sulzer’s technology, engineering, and man- ufacturing capabilities.” 28 Sulzer—Annual Report 2015 SuSTAINABLE DEVELOPMENT Today, roughly 3.5 million kilometers of pipelines are installed in about 120 countries. Pipelines offer a more sustainable and safer alternative to transport by road, railway, air, or sea. Sulzer is an innovative and social employer that focuses on reducing its environmental footprint. These factors are critical for sustainable business development. Focus—Sustainable Development 2929 45 INNOvATION AND TECHNOLOGy SUSTAINABILITy SOCIAL SUSTAINABILITy ECOLOGICAL SUSTAINABILITy 48 46 The pressure and aspiration to be environmentally conscious is growing. Companies are looking for products and services that are more eco-friendly and sustainable. To counteract global warming, organizations need to manage their ecological footprint. Sustainability includes not only environmental, but also social responsibility. As workforces and supply chains are spread across the globe, companies face challenges regarding safety, health, and equal opportunities for their employees. Sulzer develops innovative, efficient, and eco-friendly solutions for customers and takes measures to reduce its own environmental footprint. The company provides employees with a safe and healthy work environment and offers opportunities for professional development. 30 Award Acquisition in Morocco New Technology Sulzer won the interna- tional CPhl Pharma Award 2015 in the category “Innovation in Packaging” for its MIXPAC™ packag- ing and application system. New Random Packing Sulzer introduced the NeXRing™ random pack- ing. It provides significant benefits in efficiency and capacity when compared to con ventional random packing. 45 Sulzer acquired the business of Expert Inter national Pompe Service (EIPS) located in Casablanca, Morocco, enlarging its service offering in North Africa. With the acquisition of InterWeld Inc Ltd, Belfast, Northern Ireland, Sulzer added the full range of automated weld overlay services to its portfolio. Acquisition in the USA Sulzer acquired Precision Gas Turbine Inc., a leading independent service pro vider for gas turbines in Plantation, FL, USA. It thereby enhances its field service offering for customers in the power market. New Pumps Sulzer launched the SNS end-suction single-stage process pump range in 2015. Customers benefit from the highest efficiency rates and a reduced total cost of ownership. 14 Acquisition in Saudi Arabia In 2015, Sulzer completed the acquisition of Saudi Pump Factory. It now serves Saudi Arabian and Gulf Cooperation Council customers. Agreement Sulzer has signed a worldwide framework agreement with veolia Environnement, now providing premium- efficiency submersible and dry well pumps, mixers, and dedicated services. Read more at www.sulzer.com/news Sulzer—Annual Report 201531 Business Review Our Company 33 Financial Review Our Divisions 38 Pumps Equipment 40 Rotating Equipment Services 42 Chemtech Our Responsibility 44 Strategy and Management 45 Innovation and Technology 46 Ecological Sustainability 48 Social Sustainability i w e v e R s s e n s u B i Sulzer Full Potential Program Partially Offsets Significant Market Headwinds 33 Order intake decreased by 3.7%. A significant decline in the oil and gas market was partially compensated by strong growth in the power market. Sales decreased by 3.2% due to the lower order intake and oil and gas order suspensions in Pumps Equipment. Savings related to the Sulzer Full Potential (SFP) program were offset by lower sales volumes, a lower gross margin, and currency effects. Free cash flow improved strongly by CHF 57.8 million. Low oil price and severe market downturn in China impacted order intake Order intake decreased by 3.7% from 2014 (nominal: –8.4%). Order intake gross margin increased slightly by 0.3 percentage points to 33.8% due to an increased share of higher margin aftermarket business. Order intake of the Pumps Equipment division decreased by 6.7%. Strong growth in the power market and moderate growth in the water market were more than offset by a sharp decline of orders in the oil and gas market. In the Rotating Equipment Services division, order intake weakened by 0.9%, mainly because of lower demand in the oil and gas market and in Europe. Order intake in the Chemtech division grew by 1.4%. Large orders received in the Tower Field Services business unit in the Middle East offset the negative effect of the severe market downturn in China. Order intake in the oil and gas market decreased significantly, mostly because of fewer equipment orders. Oil companies further cut their capital cost, particularly following the significant drop of the oil price since mid-year. This impacted Sulzer’s order intake in the second half of the year. In the power market, order in- take rose strongly, mainly driven by the Pumps Equipment and Rotating Equipment Services divisions. Order intake dwindled in Asia-Pacific and in the Americas, while it increased in EMEA mainly driven by large orders recorded by Chemtech. The fall in order intake was significant in China, due to severe market down- turn. In particular, Pumps Equipment and Chemtech were negatively affected. In the second half of the year, order intake volumes were also increasingly affected in Brazil and Mexico. The currency translation effect amounted to a negative CHF 148.9 million affected by weaker Brazilian real, Russian ruble, euro, and a stronger US dollar. Acquisitions contributed CHF 36.2 million in 2015. “The Sulzer Full Potential program got off to a very good start in 2015. It helped us partially offset the im- pact from significant market headwinds. We expect cost savings from the program to be in the range of CHF 60 to 80 million in 2016.” Thomas Dittrich, Chief Financial Officer Free cash flow Orders millions of CHF Order intake Order intake gross margin Order backlog as of December 31 2015 2 895.8 33.8% 1 510.7 2014 3 160.8 33.5% 1 699.6 CHF 155.8m (2014: CHF 98.0m) As of December 31, 2015, the order backlog decreased to CHF 1 510.7 million (December 31, 2014: CHF 1 699.6 million). Orders in suspension decreased from the half year to CHF 49 million at year-end due to release into execution. Sales decreased slightly because of low oil and gas volumes Sales amounted to CHF 2 971 million—a drop of 3.2% (nominal: – 7.5%). The negative currency translation effect totaled CHF 137.9 million. – See abbreviations on fold-out page. If not otherwise indicated, changes compared with the previous year are based on currency-adjusted figures. Business Review—Financial Review34 In 2015, oil and gas sales were significantly impacted as a result of suspensions of previously received or- ders in Pumps Equipment as well as declining order intake resulting from the low oil price and the severe market downturn in China. Moderate growth in the power market and the general industry partially offset this negative effect. Sales volume in the water market remained broadly flat. Sales increased in EMEA while the Americas and Asia-Pacific were down from the previous year. Consequently, the share of sales in emerging markets slid from 42% in 2014 to 40% in 2015. Gross margin impacted by price pressure in the oil and gas market Gross margin declined by 0.6 percentage points to 30.8% (nominal: 30.6%) compared with 31.4% in 2014. The impact of the strong headwinds in the oil and gas market had a dilutive effect on the gross margin. It was partially absorbed by the positive effect of the changed sales mix and benefits from the SFP program. All divisions reported lower gross margins than in the prior year. Total gross profit decreased by CHF 99.8 mil- lion to CHF 910.1 million (2014: CHF 1 009.9 million) because of lower volumes and margins. Operational EBITA impacted by lower sales volume, margin decline, and foreign exchange effects Operational EBITA (opEBITA) amounted to CHF 254.1 million compared with CHF 302.9 million in 2014, a decrease of 11.8% (nominal: –16.1%). Savings related to the SFP program were offset by lower sales vol- ume and gross margin, as described above, and transactional foreign exchange effects amounting to CHF – 3.8 million (2014: CHF 4.7 million), impacting operational expenses. Operational ROSA (opROSA) decreased to 8.6% compared with 9.4% in 2014. Operating expenses excluding amortization, impairment on goodwill, restructuring expenses, and other non-operational items were reduced by 1.8%. Savings measures in selling as well as administrative expenses were partly offset by acquisition-related cost increases and the abovementioned transactional foreign ex- change effects. Research and development expenses remained broadly stable. Key performance ratios before goodwill impairment opROSA opROCEA 2015 8.6% 17.0% 2014 9.4% 17.1% opROSA 8.6% (2014: 9.4%) The divisions achieved the following profitability figures (opROSA): — Pumps Equipment: 7.3% (2014: 9.2%). The lower profitability was due to market headwinds in the oil and gas industry, adverse transactional currency effects, and an internal shift of expenses. Adjusted for these items, operational ROSA would have been 8.6%. — Rotating Equipment Services: 10.2% (2014: 8.9%). Profitability increased mainly driven by a stronger US domestic market, an internal shift of costs, and strict cost control measures. — Chemtech: 10.1% (2014: 12.6%). Lower sales, particularly in China, resulted in a pronounced drop in gross profit. Although capacities and operating expenses were adjusted swiftly, operational ROSA was negatively affected. – See abbreviations on fold-out page. Sulzer—Annual Report 201535 r e n n e r t l e t i p a K Bridge from EBIT to operational EBITA millions of CHF EBIT Amortization Impairment on tangible and intangible assets Restructuring expenses Adjustments for other non-operational items1) opEBITA opROSA 2015 120.9 42.3 13.0 41.2 36.7 254.1 8.6% 2014 – 69.0 43.3 340.4 11.2 – 23.0 302.9 9.4% 1) Other non-operational items include significant acquisition-related expenses, gains, and losses from sale of businesses or real estate (including release of provisions), and certain non-operational items that are non-recurring or do not regularly occur in similar magnitude. Restructuring expenses and costs for the SFP program impacted operating income As part of the SFP program, Sulzer has initiated several actions to adapt the global manufacturing capac- ities and streamline the organizational setup. The measures resulted in higher restructuring expenses than in 2014. These costs were mainly associated with measures started in Brazil, the Netherlands, China, Swit- zerland, the United States, and Finland. These measures entailed a reduction of 1 128 full-time equivalents. Other non-operational items amounted to CHF 36.7 million in 2015 and included the following main items: SFP-related expenses (CHF – 38.3 million), costs relating to a settled dispute with the purchaser of the locomotive business that Sulzer sold in 1998 (CHF – 8.7 million) partly offset by a release of provisions from the real estate sales in 2010 (CHF 6.8 million), and the adjustment of contingent considerations related to acquisitions (CHF 12.9 million). Consequently, EBIT amounted to CHF 120.9 million compared with CHF – 69.0 million in 2014. Return on sales (ROS) was 4.1% compared with 8.4% 2) in 2014. Financial income: higher interest expenses Total financial expenses amounted to CHF 24.7 million compared with CHF 16.7 million in 2014. Interest expenses were higher (up CHF 6.7 million) because of a CHF 5.2 million payment that related to a settled dispute with the purchaser of the locomotive business. Further, other financial expenses increased by CHF 1.0 million to CHF – 3.3 million. Profit from associates relating to joint ventures in China and the Middle East In 2015, Sulzer established joint ventures in China for the service of gas turbines and in the Middle East for the service of rotating equipment of oil and gas and power customers. In 2015, these joint ventures gen- erated a profit of CHF 3.7 million. 2) For 2014, ROS before impairment on goodwill. – See abbreviations on fold-out page. Business Review—Financial Review36 Lower income tax and effective tax rate Income tax expenses have significantly decreased to CHF 24.9 million (2014: CHF 71.9 million) due to a significantly lower pre-tax income of CHF 99.9 million (2014: CHF 254.3 million excluding adjustment for goodwill impairment). The effective income tax rate for 2015 was 24.9% compared to 28.3% in 2014. Core net income decreased compared with prior year In 2015, net income amounted to CHF 75.0 million which was CHF 203.1 million below the previous year. Core net income, excluding the tax-adjusted effects of the Sulzer Metco divestiture, goodwill impairment, restructuring, and other non-operational items, totaled CHF 175.0 million compared with CHF 205.4 million in 2014. Basic earnings per share decreased from CHF 8.09 in 2014 to CHF 2.17 in 2015. Balance sheet: net working capital improved Total assets as of December 31, 2015, amounted to CHF 4 255 million, which is a decrease of CHF 398 mil- lion from 2014. Non-current assets decreased nominally by CHF 108 million due to lower property, plant, and equipment (CHF – 39 million) and lower goodwill and other intangible assets (CHF – 73 million). Adjusted for currency effects, goodwill, other intangible assets, and property, plant, and equipment increased by CHF 58 million, mainly due to acquisitions. Current assets decreased by CHF 290 million. This drop is due to a reduction in trade and other accounts receivables of CHF 129 million, lower inventories of CHF 78 million, and lower cash positions of CHF 186 mil- lion (including a shift to marketable securities which increased by CHF 102 million). Total liabilities decreased by CHF 190 million to CHF 2 021 million as of December 31, 2015. This was mainly caused by a decrease of CHF 60 million in trade accounts payables as well as by a reduction of CHF 59 million in other current and accrued liabilities. The CHF 500 million bond was reclassified from non-current liabilities to current liabilities because it will mature in July 2016. Equity decreased by CHF 208 million to CHF 2 234 million as a result of the net income of CHF 75 million, currency translation adjustments in the equity of CHF – 154 million, and dividend payments to Sulzer share- holders of CHF – 119 million. – See abbreviations on fold-out page. Sulzer—Annual Report 201537 Free cash flow strongly improved Free cash flow amounted to CHF 155.8 million compared with CHF 98.0 million reported in the prior year. Excluding a positive CHF 25.4 million effect relating to the Sulzer Metco divestiture in 2014, free cash flow improved by CHF 83.2 million on a continuing operations basis. The lower net income contribution was more than offset by a better contribution from net working capital management of CHF 175 million, lower tax payments of CHF 25.3 million, and reduced capital expenditure of CHF 30.9 million. Cash flow from investing activities totaled CHF – 242.0 million compared with CHF 605.3 million in the prior year. In 2014, cash flow from investing activities was positively influenced by proceeds of CHF 870.4 million related to the Sulzer Metco divestiture. Excluding that effect, cash flow from investing activities was CHF 23.1 million above the prior year driven by CHF 30.9 million lower capital expenditures. Cash out for acquisitions amounted to CHF 70.1 million which was on a similar level as in 2014 (CHF 73.0 million). Cash flow from financing activities totaled CHF – 132.5 million. It included the increased dividend payment of CHF 119.2 million (CHF 3.50 per share) compared with CHF 108.9 million in 2014 (CHF 3.20 per share). The repayments of short-term borrowings reduced cash by CHF 16.5 million (2014: CHF 52.8 million). Ex- change losses on cash were CHF 34.0 million, mainly related to the cash balances held in euros (2014: gain of CHF 19.7 million). Outlook 2016 Sulzer has a balanced business mix, with half of its business outside the oil and gas market and the after- market business accounting for half of sales. However, the company expects continued low oil prices and high volatility throughout 2016 and beyond resulting in subdued demand and price pressure from its oil and gas customers. Given these market headwinds, Sulzer increases and accelerates cost savings from its ongoing SFP program. The company expects cost savings from the SFP program to be in the range of CHF 60 to 80 million in 2016 and total cost savings of approximately CHF 200 million in a steady state from 2018 onwards. For the full year 2016, order intake and sales are expected to decline by 5 to 10%, adjusted for currency effects. Supported by the cost savings from the SFP program, Sulzer expects opEBITA margins of approx- imately 8% (opEBITA in percent of sales). – See abbreviations on fold-out page. Business Review—Financial Review38 Order Intake Decreased— Manufacturing Capacities Streamlined Order intake and sales decreased in 2015, impacted by low oil prices. Pumps Equip- ment reported a decline in operational EBITA and operational ROSA from the previ- ous year. Sulzer streamlined the manufacturing capacities of its division, acquired Matis Interventions Sarl, and developed the innovative SNS process pump range. “By introducing innovative products to the market, such as the new highly efficient SNS pump range, we will continue to serve the needs of our customers.” Taking transformation one step further In 2015, the company took its transformation one step further. Since January 2015, Pumps Equipment has been organized in three market-oriented business units (Oil and Gas, Power, and Water); a dedicated glob- al aftermarket organization (Parts, Retrofit, and Nuclear Services; PRN); and a global operations network. This allows the division to serve customers in its end markets and regions even better. Because of the oil and gas market headwinds and in line with the Sulzer Full Potential program, Pumps Equipment stream- lined its manufacturing capacities in Brazil, the USA, and China. The company decided to close its manu- facturing plant in Brookshire, TX, USA, and its foundries in Jundiaí, Brazil, and Kotka, Finland. César Montenegro, Division President Pumps Equipment In April, Sulzer acquired the French company Matis Interventions Sarl and strengthened its position in the nuclear business. In addition, the company completed its acquisition of Saudi Pump Factory. In September, Sulzer launched its innovative SNS process pump range. Developed for pumping applications in various industries, the new pumps excel in efficiency, reliability, and total cost of ownership (more on page 14). Moreover, Sulzer signed a three-year worldwide framework agreement with the French company Veolia Environnement. This makes Sulzer a preferred supplier across the entire Veolia operations for premium-ef- ficiency submersible and dry well pumps, mixers, and dedicated services. Decrease in order intake Order intake decreased by 6.7% from the previous year, impacted by the significant drop in the oil and gas market demand. Projects were postponed to 2016 and beyond or cancelled. Strong growth in the power market—driven by India and the Middle East—and in the aftermarket (PRN) business partially offset this decline. While demand in the water market was stable, it was slightly higher in the general industry, driven by increased activity in the engineered water and pulp and paper segments. Order intake gross margin in- creased by 1.1 percentage points, supported by an improved business mix. Regionally speaking, Pumps Equipment reported moderate order intake growth in Europe, the Middle East, and Africa. Market activity slowed in the Asia-Pacific region, particularly in China, and in the Americas. – See abbreviations on fold-out page. Sulzer—Annual Report 2015Business Review—Pumps Equipment 39 Slight decrease in sales—decrease in operational EBITA Sales decreased slightly by 1.6% from the previous year. Growth in the power and the general industry markets as well as in the aftermarket (PRN) business partially compensated for the low volume and project suspensions in the oil and gas market. Operational EBITA decreased by 19.4%. This drop was due to market headwinds in the oil and gas industry, adverse transactional currency effects, an internal shift of expenses, and higher internal corporate charges. Adjusted for these items, operational ROSA would have been 8.6%. Significant decrease of accident frequency and severity A working environment with a diverse workforce that includes factory workers, office personnel, and em- ployees at customers’ sites requires systematic safety management. In 2015, Pumps Equipment was able to decrease the frequency of its accidents (accident frequency rate; AFR) significantly by 38.5%. The se- verity of accidents (accident severity rate; ASR) was also significantly lower (– 36.6%) than in 2014. These improvements can be credited to Sulzer’s Safe Behavior Program (SBP). Read more about Sulzer’s SBP on page 48. Sales by market segments 16% General industry 22% Water 2015 Sales by regions 22% Asia- Pacific 2015 47% Oil and gas 15% Power 46% Europe, Middle East, and Africa Key figures Pumps Equipment millions of CHF Order intake Order intake gross margin Order backlog Sales EBIT opEBITA opROSA opROCEA 2015 2014 +/–% Change in +/–%1) 32% Americas 1 500.8 1 725.5 – 13.0 – 6.7 34.2% 33.1% 998.0 1 209.4 – 17.5 1 621.0 1 754.9 – 7.6 – 1.6 62.8 – 203.1 118.1 160.6 – 26.5 – 19.4 7.3% 9.2% 15.8% 14.4% Employees (number of full-time equivalents) as of December 31 6 996 7 365 – 5.0 1) Adjusted for currency effects. – See abbreviations on fold-out page. If not otherwise indicated, changes compared with the previous year are based on currency-adjusted figures. 40 Stable Order Intake—Strengthened Local Presence While order intake remained stable, sales decreased slightly compared with 2014. Operational EBITA and operational ROSA improved. Sulzer further extended its service center network and acquired Precision Gas Turbine Inc. as well as Expert International Pompe Service. “We are experiencing a challenging market environ- ment across all our regions. To cope with these head- winds, we have introduced operational improvement and restructuring measures.” Extending offering and local presence through acquisitions In 2015, Rotating Equipment Services continued to integrate services for rotating electrical and mechanical equipment. Hence, the division is able to offer service solutions from one access point (more on page 24). Furthermore, the company opened a new service center in Middlesbrough, UK. The market environment, especially across Europe, the Middle East, and Africa (EMEA), remained challenging. However, the com- pany restructured service centers and improved operations in all three regions. In April, Sulzer acquired the business of Precision Gas Turbine Inc., Plantation, FL, USA, and further ex- tended its range of gas turbine services. Through the acquisition of Expert International Pompe Service (EIPS), Casablanca, Morocco, Sulzer expanded its footprint in North Africa. EIPS, now referred to as Sulzer Maroc, offers the full range of services for rotating equipment such as pumps, gas and steam turbines, compressors, generators, and electrical motors. With a global network and specialist expertise, Sulzer helps ensure that customers’ assets remain in peak operating condition. Stable order intake Order intake remained stable in 2015. While order intake in the power market improved, it was lower in the oil and gas market. General industry remained flat. The low oil price led oil companies to impose strict cost-saving measures, delay maintenance services, and continue to run their equipment for longer periods of time. Order intake gross margin declined by 1.3 percentage points. Despite significant growth in Africa, overall activity in EMEA was slightly lower, mainly because of a weak European market. Therefore, Rotating Equipment Services has introduced various restructuring measures in EMEA. While demand in Asia-Pacific improved, activity in the Americas declined slightly from 2014. Higher demand in North America partially compensated for the difficult market environment in Latin America. Peter Alexander, Division President Rotating Equipment Services – See abbreviations on fold-out page. Sulzer—Annual Report 2015Business Review—Rotating Equipment Services 41 Sales slightly decreased—operational EBITA improved Sales decreased slightly by 1.9%. This figure is based on weak performance in EMEA resulting from the low oil price and an unbalanced workload due to timing of large orders. Operational EBITA increased by 8.8% in 2015, mainly driven by a stronger US domestic market, an internal shift of costs, and strict cost control measures. Operational ROSA also improved. Frequency of accidents decreased In 2015, the frequency of accidents (accident frequency rate; AFR) decreased by 13.8%. The company’s safe behavior program (SBP), which focuses on minor and near-accident reporting as well as comprehen- sive root cause analysis, led to this improvement. The number of lost days per million working hours (acci- dent severity rate; ASR) increased by 23.4%. This rise is less a result of severe accidents but is rather based on local legal restrictions (regarding temporary light-duty work assignments, which allow injured employees to return to work earlier). Please read more about the company’s safety and health efforts on page 48. Key figures Rotating Equipment Services millions of CHF Order intake Order intake gross margin Order backlog Sales EBIT opEBITA opROSA opROCEA Change in +/–%1) – 0.9 +/–% – 3.7 – 3.4 – 4.3 – 21.0 – 1.9 9.8 8.8 2015 2014 698.2 725.2 30.5% 31.8% 205.0 212.2 693.2 724.6 51.4 70.8 65.1 64.5 10.2% 8.9% 16.8% 15.8% Employees (number of full-time equivalents) as of December 31 3 538 3 709 – 4.6 1) Adjusted for currency effects. Sales by market segments 25% General industry 2% Water 2015 47% Oil and gas 26% Power Sales by regions 11% Asia- Pacific 54% Americas 2015 35% Europe, Middle East, and Africa – See abbreviations on fold-out page. If not otherwise indicated, changes compared with the previous year are based on currency-adjusted figures. 42 Order Intake Slightly Increased— New Product Generation Introduced Order intake increased slightly in 2015 compared with the previous year. Sales, op- erational EBITA, and operational ROSA decreased. Sulzer adapted the operational setup of Chemtech, acquired InterWeld Inc Ltd, and introduced a new high perfor- mance random packing generation. “We took immediate actions and adapted our operational setup in 2015 to counter the market headwinds. These measures helped us keep our operational ROSA on a double-digit level.” Setup adapted and new random packing generation introduced Based on shrinking markets, increasing competition—particularly in China and Southeast Asia—and the strong Swiss franc, Sulzer adapted the operational setup of Chemtech. The company discontinued parts of its manufacturing activities in China, Singapore, Canada, and Switzerland. In 2015, Sulzer acquired the business of InterWeld Inc Ltd, Belfast, Northern Ireland. This acquisition broad- ened the service portfolio of Chemtech with weld overlay solutions. To better serve customers’ needs, Sulzer combined the Process Technology and Mass Transfer Technology business units of Chemtech to form the new Separation Technology business unit as of August 2015. Oliver Bailer, Division President Chemtech Sulzer introduced NeXRing™, a new random packing generation. Designed for use in all random packing applications, the new product provides significant benefits in efficiency and capacity over established ran- dom packing types (more on page 45). Furthermore, the division was awarded two long-term supply agree- ments to provide structured and random packings to all Petrobras refineries in Brazil. Slight increase in order intake Order intake increased slightly by 1.4% compared with the previous year. Orders in the oil and gas market remained stable, mainly based on a strong order intake from the Middle East in the Tower Field Services business unit. Demand in general industry dropped, mainly because the process technology business slightly decreased. The Sulzer Mixpac Systems business unit showed slight growth, despite the strong Swiss franc. Order intake gross margin declined by 0.1 percentage points. Regionally speaking, demand was stable in Europe and Africa, while the Middle East grew strongly. Excluding base effects, activity in the Americas was stable. The severe market downturn in the Asia-Pacific region—particularly in China— impacted Chemtech’s order intake. – See abbreviations on fold-out page. Sulzer—Annual Report 2015Business Review—Chemtech 43 Decrease in sales and operational EBITA Sales decreased by 7.8% compared with the previous year. The difficult market environment in China ac- counted for decreasing sales in the Separation Technology business unit. Operational EBITA dropped by 25.5%, mainly due to weak performance in China. Operational ROSA also declined, but still remained on a double-digit level. Improved safety performance clouded by fatality The Chemtech division lowered its accident frequency rate (AFR) significantly by 9.5%. However, this performance was clouded by a fatality; one employee died in an occupational accident while working at a client’s site. Sulzer is profoundly dismayed by this fatality. Investigations to understand the root causes are ongoing. This accident led to an increase of the accident severity rate (ASR) by 18.0%. Please read more about the company’s safety and health efforts on page 48. Key figures Chemtech millions of CHF Order intake Order intake gross margin Order backlog Sales EBIT opEBITA opROSA opROCEA 2015 2014 708.9 718.4 +/–% – 1.3 Change in +/–%1) 1.4 35.6% 35.7% 307.7 282.0 669.6 741.5 33.5 67.4 78.4 93.6 10.1% 12.6% 16.6% 27.3% 9.1 – 9.7 – 57.3 – 7.8 – 28.0 – 25.5 Employees (number of full-time equivalents) as of December 31 3 539 4 287 – 17.4 1) Adjusted for currency effects. Sales by market segments 67% Oil and gas 2015 2015 36% Europe, Middle East, and Africa 32% General industry 1% Power Sales by regions 28% Asia- Pacific 36% Americas – See abbreviations on fold-out page. If not otherwise indicated, changes compared with the previous year are based on currency-adjusted figures. 44 Embedding Sustainability in Daily Business Sulzer wants to do business responsibly. The company embeds its sustainability activities in daily business and sets up suitable management frameworks, systems, and processes. Vision Our customers recognize us for our lead ing technologies and services as well as for delivering innovative and sustainable solutions. The global QESH (Quality, Environment, Safety, and Health) network and functional councils such as HR, Legal and Compliance, and a global Procurement organization drive the sustainability agenda at Sulzer. The group function ESH is in charge of company-wide environment, safety, and health management, which in- cludes defining and implementing ESH standards and initiatives. To ensure quality (Q) management is close to the business, it is carried out on a divisional and a local level. Values — Customer Partnership: We exceed the expectations of our customers with innovative and competitive solutions. — Operational Excellence: We perform on the basis of structured work processes and LEAN principles. — Committed People: We are committed to high standards and show respect for people. Strategic priorities — Technology leadership — Outstanding services — Continuous operational improvement — Collaborative advantage Global functional coordination teams are responsible for the information transfer and collaboration between the group and divisional functions. The QESH officers consult with line management on QESH topics, es- tablish local organizations, and conduct regular training workshops. Complying with international laws and standards As an international company, Sulzer complies with international and national hard law as well as soft law. The company applies the OECD Guidelines for Multinational Enterprises, the United Nations’ Universal Dec- laration of Human Rights and its protocols, the UN Global Compact (UNGC), and the ILO’s Declaration on Fundamental Principles and Rights at Work of 1998. Furthermore, the company participates in the Green- house Gas (GHG) Protocol and the Carbon Disclosure Project (CDP). Sulzer’s integrated management system is based on global standards and norms. All manufacturing and service activities are performed under the issued certificates ISO 9001, ISO 14001, and OHSAS 18001 and/ or SCC. Due to the discontinuation of locations, the rate of certified sites decreased in 2015. However, it remained high; in total, 85% of all sites have earned the ISO 9001; 65% the ISO 14001; and 74% the OHSAS 18001/SCC. The company conducts internal and external QESH audits regularly to ensure legal compliance and compliance with Sulzer’s internal standards and programs. In 2015, 28 Sulzer QESH and external health and safety audits were completed (2014: 18). LEAN and safe behavior Two of the cornerstones of its sustainability efforts are Sulzer’s Safe Behavior Program (SBP, read more on page 48) and Sulzer LEAN. While SBP focuses on implementing a preventive safety culture, the LEAN ini- tiative has the goal of creating value for customers and other stakeholders by reducing waste of all kinds (e.g., overproduction, unnecessary transport, defects, excess inventory, and more). Fair and transparent reporting Sulzer collects data systematically and continues to report on its financial as well as extrafinancial perfor- mance. The centralized reporting platform provides an integrated approach for group-wide reporting across functions. The data is generated and collected on the site level. As a reference, the number of total working hours is used. Overall, 85% of total working hours report on environmental data. The coverage of occupational health and safety data is 86% (of total working hours); 100% (of total working hours) report on HR data. Extrafinancial data is collected according to two different reporting cycles: Environmental data cover the reporting period October 1, 2014 to September 30, 2015. The reporting cycle for the health and safety indicators AFR and ASR as well as HR data is the financial calendar year, i.e., January 1, 2015 to December 31, 2015. During the internal Sulzer audits, the ESH team reviews environmental data critically in coordination with the audited site to ensure accurate reporting of the figures. Sulzer—Annual Report 2015Business Review—Innovation and Technology 45 Observing Global Trends—Providing Innovative Solutions Global megatrends and their effects force society to think about new technological solutions. Sulzer helps manage the ever-increasing demands of a globalized world with its innovative products and services. Today’s technology is already partially able to mitigate negative consequences of climate change. To foster this development, companies must reshape themselves as well as their products and services continuously. In 2015, Sulzer invested CHF 73.4 million in research and development (2014: CHF 76.2 million). This equals 2.5% relative to sales (2014: 2.4% of sales). In total, the company filed 30 patents in 2015. Providing pumps for solar project in China Environment-friendly technology is on the rise. In China, CGN Delingha Solar Energy Co. Ltd launched the first 50 MW solar thermal power project. The plant will consist of a concentrated solar thermal power (CSP) system, which uses pumps to circulate the heat transfer fluid (HTF). Sulzer has successfully supplied vari- ous pumps for such critical HTF applications to CSP plants in Spain, USA, India, Morocco, and South Africa. Therefore, the Chinese customer trusted Sulzer with the order of the heat-transfer-circulation pumps and additional equipment. Sulzer provided an efficient, economical, and competitive solution to CGN Delingha. Since this is the first 50 MW CSP project in China, it will help to position Sulzer for future solar thermal power projects in China. “Every solution starts with a customer’s need. By observ- ing the markets closely and addressing global megatrends, we set the foundation for our innovative technology.” Ralf Gerdes, Head Global Technology Adapting to customer needs In Eastern European oilfields, several thousand pumps are installed. Most of them are relatively old and in need of overhauls. A competitor challenged Sulzer’s retrofit business by offering low-end and low-price pumps with acceptable but rapidly decreasing efficiency levels. Further, they showed rather unsatisfactory quality and reliability compared with industry standards. To offer an alternative to its premium, engineered retrofits, Sulzer has developed cost- and time-efficient standardized retrofit solutions. The upgraded pumps are as efficient as competitors’ pumps, however, their efficiency is stable and their reliability does not decrease over time. Sulzer offers the standard retrofits at an even more competitive price than the original low-end pumps. A further advantage is reduced lead time; the retrofits can be installed within one to three months. Number of patents 30 (2014: 36) Increasing output of hydrogenerator by 15% Because much of the UK hydroelectric capacity was built during the 1950s, the time for large-scale over- hauls and refurbishments is rapidly approaching. Sulzer’s Service Center in Falkirk, Scotland, was awarded a turnkey project to repair one of two generators at the Lochay Power Station, near Stirling, Scotland. One of the generators—commissioned in 1958—started to exhibit some noise and vibration issues. Sulzer re- furbished the hydrogenerator and was able to increase the overall output by 15% (from 22 MW to 25.6 MW). Furthermore, the engineers extended the generator’s working life for another 40 years. Combining capacity, efficiency, and strength Reducing emissions has become an important means of mitigating climate change. To purify natural gas and absorb CO2, separation columns can use either a random or a structured packing. Sulzer has devel- oped NeXRing™, a new generation of high-performance random packing. This new product provides an industry-leading combination of capacity, efficiency, and strength. The open structure of the random pack- ing design lowers the pressure drop by 50% from that of conventional packing. The first test results are promising; the capacity of a CO2 absorber increased by 10% after the conventional random packing was replaced with NeXRing. Furthermore, the combination of more efficient separation with lower pressure drop translates into significant cost savings. R&D investments CHF 73m (2.5% of sales) (2014: CHF 76m/2.4% of sales) 46 “ISO 14001 helps Sulzer continually improve its ecological performance in a diverse production and service environment.” Daniel Oehler, Head of Group Environment, Safety, and Health Energy consumption GJ in 1 000 GJ /1 000 whr 1 400 1 200 1 000 800 600 400 200 0 40 35 30 25 20 15 10 5 0 2011 2012 2013 2014 2015 Total energy consumption in GJ GJ /1 000 working hours (whr) Improving Environmental Performance with Local Initiatives To reduce its environmental footprint, Sulzer’s production and service sites carry out local initiatives based on mandatory ISO 14001 certifications. In 2015, the company further extended its environmental reporting scope. While energy con sumption remained stable, greenhouse gas emissions, waste production, and water consump- tion decreased. Sulzer aims to reduce its environmental footprint systematically. Decreasing energy consumption, green- house gas (GHG) emissions, production of waste, and water consumption are the company’s focus areas. To achieve this goal, local sites have improvement programs in place. Moreover, the company adjusted the reporting requirements for fuel consumption in 2015 and expanded it from on-site transportation to all ve- hicles operated by Sulzer. This measure will further increase the quality of the company’s environmental data. Changes in the energy mix The changed reporting requirements resulted in a modified energy mix. Total energy consumption remained stable in 2015. The use of electricity, fuel oils, and district heating decreased by 8%. Both gas and fuel consumption increased by 1% and 93%, respectively. Sulzer has a rolling year-on-year target to maintain or lower energy consumption per 1 000 working hours. The company has met this target. The energy con- sumption per 1 000 working hours remained stable in 2015. In 2016, the company plans to conduct a pilot project in one of the divisions to reduce the energy con- sumption of its car fleet. In addition, Sulzer’s QESH (Quality, Environment, Safety, and Health) network will continue to focus on sharing best practices regarding energy-reducing measures. In this way, the company strives to keep its energy use stable or to lower it from last year’s level. Decrease of greenhouse gas emissions Sulzer reports greenhouse gas (GHG) emissions (scopes 1, 2, and 31)) according to the Greenhouse Gas Protocol and the Carbon Disclosure Project (CDP) initiative. To meet current reporting practices, the com- pany updated scope 1 reporting fundamentally by introducing new CO2 emission factors in 2015. These factors will be reviewed and updated each year. In 2015, scope 1 emissions, which predominantly stem from the use of fossil energy sources, increased by 5%. The increase of emissions from fuel consumption because of the changed reporting requirements was partially offset by the strong decrease of direct emissions from chemicals (refrigerants). Scope 2 and 3 emissions decreased by 7% and 5%, respectively. Both improvements stem from changes in the coun- try-specific energy mixes. With a decrease of 5% in 2015, Sulzer met its year-on-year rolling target to main- tain or reduce GHG emissions in CO2 eq. per 1 000 working hours. In the short term, the planned pilot projects mentioned above to reduce fuel consumption will affect the amount of CO2 emissions. To further improve the accuracy of its reporting, the company intends to expand its GHG reporting to business flights in 2016. Avoiding, reusing, and recycling waste At Sulzer, waste is usually managed locally as part of ISO-14001-certified environmental management sys- tems. To decrease industrial waste, Sulzer follows the principle “avoid, reuse, and recycle”. Waste quanti- ties vary typically from year to year and depend strongly on the type of projects conducted as well as on construction work done at Sulzer. The company evaluates waste production in two ways: by looking into the waste’s hazardousness, and by considering its treatment. Generally, recycling rates are comparatively high at Sulzer because of the materials used: metals, sandblasting residues, and foundry residues are fairly easy to recycle. Sulzer—Annual Report 2015Business Review—Ecological Sustainability 47 In 2015, total waste decreased by 5%. With a decrease of waste produced by 6% per 1 000 working hours, Sulzer met its year-on-year rolling target to maintain or reduce waste quantities (per 1 000 working hours) compared with last year’s values. In 2016, the company plans to conduct pilot projects with a zero waste policy at selected sites. It aims to improve the amount of recycling by sharing best practices about waste management. Decrease of water consumption Sulzer collects data on the water consumption and discharge of its operations. To shrink its organizational water footprint, the company focuses primarily on reducing water consumption. For Sulzer as a manufac- turer of pumps for the water market, water risks are market related and—to a much lesser extent—related to operations. Overall, water consumption decreased by 17% in 2015. While 37% of the water used was for cooling pur- poses, 35% was process water. The consumption by m3/1 000 working hours decreased by 17%. So, the year-on-year rolling target to maintain or reduce the water consumption per 1 000 working hours was met. Hazardous waste Tons 14 000 12 000 10 000 8 000 6 000 4 000 2 000 0 t /1 000 whr 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 Key figures Energy 2011 2012 2013 2014 2015 Total hazardous waste in t (metric) t /1 000 working hours (whr) 2015 2014 Change in +/– % GJ 970 832 965 814 0.5 — Energy consumption per working hours (whr) GJ per 1 000 whr — Share of electricity — Share of gases — Share of fuels — Share of fuel oils — Share of district heating — Share of other sources Greenhouse gas emissions — GHG emissions per working hours — GHG scope 11) — GHG scope 2 1) — GHG scope 3 1) Waste 37 55 24 12 2 7 < 1 37 60 24 6 2 7 1 % % % % % % tons CO2 eq. 105 960 110 820 tons CO2 eq. per 1 000 whr tons CO2 eq. tons CO2 eq. tons CO2 eq. 4.06 4.28 20 560 19 550 66 290 71 210 19 110 20 060 tons 29 071 30 666 – 9 1 93 – 11 – 10 4 – 4 – 5 5 – 7 – 5 – 5 – 6 – 17 – 17 — Waste per working hours tons per 1 000 whr 1.1 1.2 By treatment — Recycling — Waste to landfill/incineration/other treatment By hazardousness — Non-hazardous waste — Hazardous waste Water % % % % 66 34 84 16 66 34 85 15 m3 1 311 922 1 581 631 — Water consumption per working hours m3 per 1 000 whr 50 61 1) Scope 1: direct emissions from Sulzer stemming from primary energy sources such as natural gas and fuels used on-site; scope 2: indirect emissions from secondary (converted) energy sources such as electricity and district heating; scope 3: indirect emissions from the production and transport of fuels and gases not included in scopes 1 or 2. Find further sustainability data at www.sulzer.com/sustainability 48 Accidents Number of cases AFR 140 120 100 80 60 40 20 0 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Safe Behavior and Targeted Talent Promotion The company focuses on providing a healthy and safe work environment for its roughly 14 000 employees in over 40 countries. To achieve sustainable business success, Sulzer offers learning and development opportunities as well as tools that enable cooperation and respectful behavior. As an industrial company with over 170 locations around the world, Sulzer considers the health and safety of its employees as an essential asset. Because people work in different surroundings such as offices, fac- tories, and at customers’ sites, the safety risks are manifold and—in part—difficult to control. Employees need to feel responsible for their own safety as well as the safety of their colleagues. Empowering employees to act safely Sulzer’s global Safe Behavior Program (SBP) is designed to foster a team-oriented approach to safety. It focuses on developing safety leadership as well as employee empowerment. Thanks to the efforts within the SBP, Sulzer reached an accident frequency rate (AFR) below two cases per million working hours—the lowest AFR ever in its history. In general, Sulzer continued to decrease the severity of its accidents (mea- sured by accident severity rate; ASR). To improve the effectiveness of the SBP, Sulzer instigated the Safety Culture Assessment program. In 2015, almost all Sulzer sites were visited by independent safety experts. They analyzed the maturity of the local safety culture and provided direct guidance on how to further im- prove safety management systems and leadership competence. Despite the company’s efforts, a total of 57 major accidents happened at Sulzer in 2015, resulting in 1 444 lost working days. One employee died in an occupational accident while working at a client’s site. Sulzer is profoundly dismayed by this fatality. Investigations to understand the root causes are ongoing. Sulzer remains committed to pursuing its ultimate goal of zero accidents. 2011 2012 2013 2014 2015 Cases that last > 1 lost day due to occupational accidents Accident frequency rate (AFR) in cases per million working hours To address a subject which is central to safety excellence, Sulzer launched a pilot program aimed at raising safety leadership and risk competence skills at the managerial level in 2015. Beginning in Asia and pro- gressing to Europe, over 100 senior and mid-level managers participated in a series of workshops. These are designed to increase the managers’ ability to engage the workforce more proactively and with greater consistency in safety. Because safety excellence depends on the abilities of all members of a team, Sulzer plans to develop further trainings and workshops to enhance safety competence at all levels. Local initiatives to balance work and free time Sulzer is aware that work-life balance, personal development, and flexibility are becoming more and more important in a job. Thus, the company supports local sites in offering opportunities in this field. For example, Chemtech’s CT Balance program is designed to improve health and work-life balance. It involves numerous events, campaigns, and workshops that are individually designed and adapted to the needs of local staff. Another initiative is the Work Positive program launched by the Pumps Equipment site in Wexford, Ireland, in 2015. The platform includes guidelines and literature as well as on-site training in stress management and improving work-life balance. Training leaders with targeted programs For employees to live out the one company approach, learning processes have to be aligned. Thus, Sulzer’s training efforts focus on developing a common business understanding and fostering collaboration across borders. The company specifically trains its leaders to lead by example. The Sulzer Management Training (SMT) im- parts management basics as well as current leadership topics to executives who are new in their roles. The program has been rolled out globally and supports the company’s strategic goals and its ongoing reorganization. More than 60 participants in all three regions passed the SMT in 2015. Leaders who aim to Sulzer—Annual Report 2015Business Review—Social Sustainablility 49 develop their individual capabilities and to reach a new leadership level can participate in the Leadership Program for Development and Impact (PDI). In 2015, 75 managers and experts participated in one of the PDI. Thanks to its efforts, Sulzer filled 60% of leadership positions with internal talent in 2015. Sulzer’s learning and development programs comprise different learning methodologies and concepts, in- cluding new media. Employees are able to adapt these technologies in their own business environment. The Learning Management System (LMS), a cloud-based platform for training and development adminis- tration, supports them in this regard. The company has completed the implementation of the LMS in the entire Pumps Equipment division and will continue to introduce it throughout the company. Facilitated processes thanks to global eHR tool Efficient human resources (HR) management is becoming an important competitive factor. In recent years, Sulzer has implemented an electronic human resources (eHR) management platform. Currently, it contains information on more than 7 500 employees, secures the data centrally, and enables access from all local sites. The eHR application grants access to all global and local training workshops across the company. It allows HR processes such as recruiting, performance management, succession, or competency to be per- formed online. In the years to come, Sulzer will focus on further rolling out the application globally. With its venture into eHR, the company is ahead of many competitors and is well-equipped for the future. Embracing different backgrounds At Sulzer, employees collaborate across borders—geographic, cultural, and demographic ones. The com- pany’s workforce is geographically spread all over the world. Both Sulzer and its customers benefit from this proximity. Sulzer also appreciates age differences and welcomes fresh impetus; experienced employ- ees work closely with apprentices and younger professionals to embrace different viewpoints. In 2015, 14.5% of the company’s workforce was female. Close collaboration with academic institutions enables Sulzer to attract talented young women and men. Code of Business Conduct guiding all behavior Sulzer shows respect for every individual’s fundamental rights and supports human rights throughout its value chain. The company’s strong vision and values, its Code of Business Conduct, and its efficient com- pliance system guide employees on responsible and ethically correct behavior. The company continuously increases its efforts to ensure a fair, non-discriminatory, and safe work environment. Read more on corpo- rate governance on page 51. Key figures Accident frequency rate (AFR) Accident severity rate (ASR) Health and safety training Voluntary attrition rate Share of women (of total workforce) Leaders from internal talent pipeline Number of employees 2015 2014 Change in +/– % Cases per million working hours Lost days per million working hours 1.9 2.6 – 24.0 48.1 53.9 – 10.8 hours 106 610 81 768 30.4 % % % 7.5 14.5 60 7.2 14.0 0.3 0.5 89 – 29.0 FTE 14 253 15 494 – 8.0 “Achieving the best safety result in our company history makes us proud of our em ployees. It shows that they feel responsible and take their own and their colleagues’ safety seriously.” Andreas Hugener, Head Group Human Resources a.i. Geographical spread of employees 20% Asia- Pacific 29% Americas 2015 51% Europe, Middle East, and Africa Find further sustainability data at www.sulzer.com/sustainability 50 History of sustainability at Sulzer Sulzer has a long tradition of responsible action. The company builds on its strong industrial heritage and engineering competence. Sulzer aims to improve its economic, social, and ecological performance over time. Year 1834 1845 1870 1872 1890 1919 1945 1988 1990 1991 1992 1993 1995 1996 1997 1998 2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015 Measures First statement on “getting it right the first time” from Johann Jakob Sulzer Sickness Benefit Association for factory workers Company-owned apprentice workshop for young craftsmen Society for low-cost housing construction First workers’ council in Switzerland Switzerland’s first regularly published customer magazine Sulzer Technical Review (STR) First working memberships in ISO committees Founding member of the European foundation for quality management (EFQM) First employee participation program First environmental policy Reissue of traditional quality principles, quality as “the attitude in all we do” Official launch of ISO 9001 certification campaign Start of environmental data collection First product life cycle analysis First external environmental report First ISO 14001 certificate First external social report Corporate values with important total quality elements Principles of cooperation Integrated QESH management systems based on ISO 9001:2000 First comprehensive sustainability data collection Corporate values Code of Business Conduct SEED database for sustainability data collection First internal SA 8000 and OHSAS 18001 audits Corporate risk council First lean production initiative First external report on sustainability SEED light database for smaller sites QESH as a key process for operational excellence Program for Development and Impact (PDI) Health and safety awareness program SEED mini database for service sites First GRI A+ rating for the Sulzer Sustainability Report Sulzer safety rules New competency framework Sulzer core values New employer branding strategy Sustainability Council established First environmental product declarations (EPD) Corporate-wide LEAN platform to foster organizational excellence Global employee engagement survey Corporate-wide initiative to increase diversity New strategic priorities Rollout of global Safe Behavior Program (SBP) Consolidation of financial and extrafinancial reporting platforms onto SAP-BPC initiated Global employee engagement survey Consolidation of financial and extrafinancial reporting platforms onto SAP-BPC completed First time to achieve an accident frequency rate below two cases per million working hours Extension of environmental reporting scope Sulzer—Annual Report 201551 Corporate Governance 54 Corporate Structure and Shareholders 54 Capital Structure 55 Board of Directors 64 Executive Committee 64 Shareholder Participation Rights 65 Takeover and Defense Measures 65 Auditors 68 Risk Management 70 Information Policy e c n a n r e v o G e t a r o p r o C Corporate Governance 53 Committed to the Principles of Good Corporate Governance Sulzer is committed to the principles of good corporate governance. They ensure a sound balance of power and support the company in creating sustainable value for its various stakeholders. In brief Core principles The rigorous application of sound corporate governance helps to consolidate and strengthen trust in the company. Sulzer is subject to Swiss corporate and stock exchange laws and applies the Swiss Code of Best Practice for Corporate Governance. See page 54 Board composition The Board of Directors comprises seven members. Each member is elected individually. The term for mem- bers of the Board of Directors is one year. Except for the elections reserved to the Shareholders’ Meeting, the Board of Directors constitutes itself. It appoints from among its members the Vice Chairman of the Board of Directors and the members of the Board committees (except for the members of the Nomination and Remuneration Committee who are elected by the Shareholders’ Meeting). See pages 55 – 57 Committees of the Board There are three standing committees within the Board of Directors: — The Audit Committee assesses the midyear and annual accounts and the activities of the internal and external auditors, the Internal Control System (ICS), and risk management. — The Nomination and Remuneration Committee assesses the criteria for the election and reelection of Board members and nominations for the top two management levels. It also deals with succession plan- ning, compensation systems, and compensation for the members of the Board of Directors and the Executive Committee. — The Strategy Committee advises the Board of Directors on strategic matters (such as material acquisi- tions, divestitures, alliances, and joint ventures) as well as strategic planning and definition of develop- ment priorities. See pages 57 – 60 Changes The following changes occurred in the Board of Directors and the Executive Committee: — Luciano Respini, member of the Board of Directors since April 2004, did not stand for reelection at the Annual General Meeting of April 1, 2015. — Gerhard Roiss was newly elected as a member of the Board of Directors at the Annual General Meeting of April 1, 2015. — All other Board members were reelected for terms of one year. — Fabrice Billard was appointed Chief Strategy Officer and member of the Executive Committee as of March 1, 2015. — Klaus Stahlmann resigned as Chief Executive Officer on August 10, 2015. — Thomas Dittrich was appointed Chief Executive Officer ad interim (in addition to his role as Chief Finan- cial Officer and member of the Executive Committee) as of August 10, 2015. He fulfilled this function until November 30, 2015. — Greg Poux-Guillaume was appointed Chief Executive Officer as of December 1, 2015. See pages 55, 64 54 Sulzer Ltd is subject to the laws of Switzerland, in particular Swiss corporation and stock exchange law. The company also applies the Swiss Code of Best Practice for Corporate Governance. The rigorous appli- cation of sound corporate governance helps to consolidate and strengthen trust in the company. Sulzer has had a single share class and has separated the functions of Chairman of the Board of Directors and CEO for many years. Since the Annual General Meeting of April 8, 2009, only individuals who have never held executive positions at Sulzer have been members of the Board of Directors. Unless otherwise indicated, the following information refers to the situation on December 31, 2015. Further information on corporate gov- ernance is published at www.sulzer.com/corpgov. The information in the following section is set out in the order defined by the SIX Swiss Exchange guidelines on corporate governance information (RLCG), with subsections summarized as far as possible. Sulzer’s consolidated financial statements comply with Inter- national Financial Reporting Standards (IFRS), and in certain sections, readers are referred to the Financial Section in the Sulzer Annual Report 2015. The Compensation Report can be found on pages 71 to 92. 1 Corporate Structure and Shareholders Corporate structure The operational corporate structure is shown in the graphic on page 60 and in the segment reports in the Financial Section on pages 125 to 127 (note 7). Sulzer Ltd is the only Sulzer company listed on a stock exchange. It is based in Winterthur, Switzerland. Its shares are listed and traded on the SIX Swiss Exchange in Zurich (Securities No. 3838891/ISIN CH0038388911). On December 31, 2015, the market capitalization of all registered shares was CHF 3 232 654 600. Information on the major subsidiaries included in the con- solidation can be found under note 37 on pages 152 to 155 of the Financial Section. Significant shareholders According to notifications of Sulzer shareholders, two shareholders held more than 3% of Sulzer Ltd’s share capital on December 31, 2015. On December 8, 2015 (published on the SIX disclosure platform on Decem- ber 16, 2015), Victor Vekselberg held 63.42% of Sulzer shares. The shares are directly held by Liwet Hold- ing AG and Tiwel Holding AG. Both are part of the Renova Group. On February 16, 2015 (published on the SIX disclosure platform on February 25, 2015), T. Rowe Price Associates, Inc., held 3.06% of Sulzer shares. For detailed information, see the respective disclosure notifications on www.six-exchange-regulation.com/ en/home/publications/significant-shareholders.html. For the positions held by Sulzer and information on shareholders, see note 24 in the Financial Section (page 144). There are no cross-shareholdings where the capital or voting stakes on either side exceed the threshold of 3%. 2 Capital Structure Share capital The fully paid-up share capital of Sulzer Ltd amounts to CHF 342 623.70 and is divided into 34 262 370 registered shares with a par value of CHF 0.01 per share. Each registered share entitles the holder to one vote at the Shareholders’ Meeting. There is neither any authorized nor conditional capital, nor are there any participation or dividend certificates. The latest version of the Articles of Association can be viewed at www. sulzer.com/regulations. Information on capital changes can be found in the Financial Statements of Sulzer Ltd (page 160). Restrictions on transferability and nominee registrations Sulzer shares are freely transferable provided that, when requested by the company to do so, buyers declare that they have purchased and will hold the shares in their own name and for their own account. Nominees shall only be entered in the share register with the right to vote if they meet the following con- ditions: the nominee is subject to the supervision of a recognized banking and financial market regulator; the nominee has entered into a written agreement with the Board of Directors concerning its status; the share capital held by the nominee does not exceed 3% of the registered share capital entered in the com- mercial register; and the names, addresses, and number of shares of those individuals for whose accounts the nominee holds at least 0.5% of the share capital have been disclosed. The Board of Directors is also Sulzer—Annual Report 2015Corporate Governance—Corporate Structure and Shareholders 55 entitled, beyond these limits, to enter shares of nominees with voting rights in the share register if the abovementioned conditions are met (see also paragraph 6a of the Articles of Association at www.sulzer. com/regulations). On December 31, 2015, ten nominees holding a total of 1 824 623 shares (5.33% of total shares) had entered into agreements concerning their status. No exceptions have been granted. All of those shares have been entered in the share register with voting rights. There are no transfer restrictions and no privileges under the Articles of Association. A removal or amendment of the transfer restriction requires a shareholders’ resolution with a majority of at least two-thirds of the votes represented. Convertible bonds and options No convertible bonds or warrants are currently outstanding. Details of the options issued to members of the Board of Directors and the Executive Committee (from 2002 up to and including 2008) and restricted stock units (from 2009) as well as performance share units issued to the members of the Executive Committee (in 2010 and yearly as from 2013) are set out in the Financial Section under note 33 (pages 150 to 151) and in the Financial Statements of Sulzer Ltd under note 9 (pages 165 to 166). 3 Board of Directors None of the members of the Board of Directors has ever belonged to the management of a Sulzer com pany or to the Executive Committee, nor do any significant business relationships exist between members of the Board of Directors and Sulzer Ltd or a subsidiary of Sulzer Ltd. Exceptions are Peter Löscher and Marco Musetti who have a close relationship with Sulzer’s largest shareholder; both are employees of Renova Management AG. Peter Löscher is Chief Executive Officer and Delegate of the Board of Directors of Renova Management AG. Business relationships in the low-double-digit-million range exist with companies that are directly or indirectly controlled by the Renova Group. For further information, see Financial Section, note 33 on pages 150 to 151. There are no interlocking directorships. Elections and terms of office The Articles of Association stipulate that the Board of Directors of Sulzer Ltd shall comprise five to nine members. Each member is elected individually. The term for members of the Board of Directors is one year. Luciano Respini, member of the Board of Directors since April 2004, did not stand for reelection at the Annual General Meeting of April 1, 2015. Gerhard Roiss was newly elected as a member of the Board of Directors at the Annual General Meeting of April 1, 2015. All other Board members were reelected for terms of one year. Accordingly, as of April 1, 2015, the Board of Directors comprises seven members: three from Austria, one from Italy, one from Singapore, and two from Switzerland. Professional expertise and interna- tional experience played a key role in the selection of the members. The members of the Board of Directors are presented on pages 58 to 59 and their CVs can be viewed at www.sulzer.com/board. According to the Board of Directors and Organization Regulations, the term of office of a Board member ends no later than on the date of the Annual General Meeting in the year when the member reaches the age of 70. The Board of Directors can make exceptions up to but not exceeding the year in which the mem- ber reaches the age of 73. 56 Internal organization The Board of Directors constitutes itself, except for the Chairman of the Board of Directors who is elected by the Shareholders’ Meeting. The Board of Directors appoints from among its members the Vice Chairman of the Board of Directors and the members of the Board committees, except for the members of the Nom- ination and Remuneration Committee, who are elected by the Shareholders’ Meeting. In the Board meeting following the Annual General Meeting of April 1, 2015, Matthias Bichsel was appointed as Vice Chairman. There are currently three standing Board committees: the Audit Committee (AC), the Nomination and Remuneration Committee (NRC), and the Strategy Committee (SC); for their constitutions, see page 57. The Board of Directors and Organization Regulations and the relevant Committee Regulations, which are published at www.sulzer.com/regulations, define the division of responsibilities between the Board of Directors and the CEO. They also define the authorities and responsibilities of the Chairman of the Board of Directors and of the three standing Board committees. Operating principles of the Board of Directors and its committees All decisions are made by the full Board of Directors. For each application, written documentation is dis- tributed to the members of the Board of Directors prior to the meeting. The Board of Directors and the committees meet as often as required by circumstances. The Board of Directors meets at least six times per year, the Audit Committee and the Nomination and Remuneration Committee meet at least three times per year, and the Strategy Committee meets at least twice a year. In 2015, the Board held one full-day meeting, three half-day meetings, and nine shorter Board meetings. The latter lasted about one hour on average. For further details, see the table below. The CEO, the CFO, and the Group General Counsel (who is the Secretary of the Board of Directors) also generally attend the Board meetings in an advisory role. Other members of the Executive Committee are invited to attend Board meetings as required to discuss the midterm planning, the strategy, and the budget, as well as division-specific items (such as large invest- ments and acquisitions). The committees do not make any decisions, but rather review and discuss the matters assigned to them and submit the required proposals to the full Board of Directors for a decision. At the next full Board meet- ing following the committee meeting, the chairmen of the committees report to the full Board of Directors on all matters discussed, including key findings, opinions, and recommendations. Board of Directors Name Nationality Position Peter Löscher Austria Chairman, Chairman SC Entry March 2014 Matthias Bichsel Switzerland Vice Chairman of the Board 1), Member SC March 2014 Gerhard Roiss 1) Austria Member SC Jill Lee Singapore Member AC, NRC 1) Thomas Glanzmann Switzerland Chairman NRC, Member SC Marco Musetti Luciano Respini 2) Italy Italy Member AC, NRC Vice Chairman of the Board 2), Member NRC, SC April 2004 Klaus Sturany Austria Chairman AC August 2009 AC = Audit Committee, NRC = Nomination and Remuneration Committee, SC = Strategy Committee 1) as of April 1, 2015. 2) until April 1, 2015. April 2015 April 2011 April 2012 April 2011 Attending meetings of the Board AC NRC SC 14 14 10 13 14 13 3 13 8 8 5 8 7 7 1 8 4 6 6 2 4 4 4 Elected until 2016 2016 2016 2016 2016 2016 2015 2016 Sulzer—Annual Report 201557 The Board of Directors and its committees Board of Directors Peter Löscher (Chairman) Matthias Bichsel (Vice Chairman) Klaus Sturany Thomas Glanzmann Jill Lee Marco Musetti Gerhard Roiss Audit Committee Klaus Sturany (Chairman) Jill Lee Marco Musetti Nomination and Remuneration Committee Thomas Glanzmann (Chairman) Jill Lee Marco Musetti Strategy Committee Peter Löscher (Chairman) Matthias Bichsel Thomas Glanzmann Gerhard Roiss Additional mandates of members of the Board of Directors outside the Sulzer group According to Sulzer’s Articles of Association, the maximum number of additional mandates held by mem- bers of the Board of Directors outside the Sulzer group is ten (of which, a maximum of four mandates may be with listed companies). Exceptions (e.g., for mandates held at the request of Sulzer or mandates in charity organizations) are defined in the Articles of Association. Audit Committee The Audit Committee (members listed above) assesses the midyear and annual consolidated financial statements and, in particular, the activities—including effectiveness and independence—of the internal and external auditors, as well as the cooperation between the two bodies. It also assesses the Internal Control System (ICS), risk management, and compliance; at least one meeting per year is dedicated to risk man- agement and compliance. The regulations of the Audit Committee can be viewed at www.sulzer.com/ regulations. The CEO, the CFO, the Group General Counsel (at least partially), the Head of Group Internal Audit (who is also the Secretary of this committee), and the external auditor-in-charge, attend the meetings of the Audit Committee. In 2015, the Audit Committee held four meetings. The external auditor-in-charge attended all of these meetings. Internal experts, such as the Group General Counsel and the Heads of Group Internal Audit, Group Accounting, Group IT, Group ESH, Group Compliance and Risk Management, and Group Taxes gave presentations to the Audit Committee in 2015. In February, the Audit Committee receives and discusses a report addressing the exposures (results of pe- riodic risk assessments) and compliance cases of the prior year. In September, the Audit Committee is briefed on the present state of risk management within the company and on the results of the risk manage- ment process—a process to systematically identify and evaluate significant risks and introduce counter- measures. In the same meeting, an update on Sulzer’s compliance approach, including the respective ongoing and planned activities, is provided. During each meeting, the major current compliance cases (if any) are reported to and discussed by the Audit Committee. > Corporate Governance—Board of Directors58 Board of Directors The Sulzer Board of Directors consists of seven members who are elected individually for one-year terms. None of them has ever held an executive position at Sulzer. Gerhard Roiss was elected as new member of the Board of Directors in April 2015. Luciano Respini did not stand for reelection at the Annual General Meeting 2015. Peter Löscher Born in 1957, Austria Joined the Board of Directors in 2014 Chairman of the Board of Directors / Chairman of the Strategy Committee Klaus Sturany Born in 1946, Austria Joined the Board of Directors in 2009 Chairman of the Audit Committee Matthias Bichsel Born in 1954, Switzerland Joined the Board of Directors in 2014 Vice Chairman of the Board of Directors / Member of the Strategy Committee Sulzer—Annual Report 201559 Gerhard Roiss Born in 1952, Austria Joined the Board of Directors in 2015 Member of the Strategy Committee Thomas Glanzmann Born in 1958, Switzerland Joined the Board of Directors in 2012 Chairman of the Nomination and Remuneration Committee / Member of the Strategy Committee Jill Lee Born in 1963, Singapore Joined the Board of Directors in 2011 Member of the Audit Committee / Member of the Nomination and Remuneration Committee Marco Musetti Born in 1969, Italy Joined the Board of Directors in 2011 Member of the Audit Committee / Member of the Nomination and Remuneration Committee For full CVs, go to: www.sulzer.com/board Corporate Governance—Board of Directors60 Nomination and Remuneration Committee The Nomination and Remuneration Committee (members listed on page 57) assesses the criteria for the election and reelection of Board members and the nomination of candidates for the top two management levels. It deals with succession planning. It also regularly assesses the compensation systems and recom- mends compensation for the members of the Board of Directors and the Executive Committee (including bonus targets for the latter) on behalf of the Board of Directors and in accordance with its specifications. It carries out broadly based compensation benchmarks with an international comparison group, supported by studies of consulting firms such as Mercer and Towers Watson, and it scrutinizes the work of internal and external consultants. The members of the Nomination and Remuneration Committee are elected by the Shareholders’ Meeting. The regulations of the Nomination and Remuneration Committee can be viewed at www.sulzer.com/regulations. The CEO and the Head of Group Human Resources (who is also the Sec- retary of this committee) attend the meetings of the Nomination and Remuneration Committee. In 2015, six meetings were held. External experts from Towers Watson provided benchmarking services (see Compen- sation Report, pages 71 to 92) and supported the Nomination and Remuneration Committee in reviewing the compensation packages of the members of the Board of Directors and the Executive Committee. Strategy Committee The Strategy Committee (members listed on page 57) advises the Board of Directors on strategic matters (such as material acquisitions, divestitures, alliances, and joint ventures) as well as strategic planning and definition of development priorities. The regulations of the Strategy Committee can be viewed at www.sulzer. com/regulations. In 2015, eight meetings took place. The CEO, the CFO, and the three Division Presidents attended all eight meetings. The Chief Strategy Officer (CSO) attended seven and the Group General Coun- sel attended three of these meetings. Division of powers between the Board of Directors and the CEO The Board of Directors has largely delegated executive management powers to the CEO. However, it is still responsible for matters that cannot be delegated in accordance with Art. 716a of the Swiss Code of Obli- gations. These matters include corporate strategy, the approval of midterm planning, and the annual budget, Organizational structure Board of Directors Chief Executive Officer Greg Poux-Guillaume Chief Financial Officer Thomas Dittrich Chief Strategy Officer Fabrice Billard Pumps Equipment César Montenegro Rotating Equipment Services Peter Alexander Chemtech Oliver Bailer Sulzer—Annual Report 201561 as well as key personnel decisions and the creation of the compensation report. The same applies to acquisition and divestiture decisions involving an enterprise value exceeding CHF 15 million or CHF 20 mil- lion respectively, investments in fixed assets exceeding CHF 15 million, major corporate restructurings, approval of dispute settlements with an impact on operating income of more than CHF 20 million, approv- al of research and development projects exceeding CHF 10 million, as well as other matters relevant to the company, and decisions that must be made by law by the Board of Directors (including those defined in the Swiss Mergers Act). The competency regulations and the nature of the collaboration between the Board of Directors and the Executive Committee can be viewed in the organizational regulations at www.sulzer.com/regulations. Information and control instruments Each member of the Board of Directors receives a copy of the monthly financial statements (January to May and July to November), plus the midyear and annual financial statements. These include information about the balance sheet, the income and cash flow statements, and key figures for the company and its divisions. They incorporate comments on the respective business results and a six-month rolling forecast of the key figures. The CEO and CFO report at every Board meeting on business developments and all matters relevant to the company; once each year, the Board receives the forecasted annual results. During these meetings, the chairmen of the committees also report on all matters discussed by their committees and on the key findings and assessments, and they submit proposals accordingly. Each year, the Board of Directors discusses and approves the budget for the following year, and every three years it establishes a midterm plan, which is also subject to periodic review. The Chairman of the Board of Directors regularly consults the CEO and other representatives of the Executive Committee. In addition, the Board of Directors receives an investor relations status update within the monthly reporting. Group Internal Audit Group Internal Audit reports functionally directly to the Chairman of the Audit Committee, but administra- tively to the CFO. Meetings between internal audit and external auditors take place regularly. They are used to prepare for the meetings of the Audit Committee, to review the interim and final reports of the external auditors, to plan and coordinate internal and external audits, and to prepare audit instructions for the attention of external auditors of the individual companies. Group companies are audited by Group Internal Audit based on an audit plan that is approved by the Audit Committee. Depending on the risk category, such audits are carried out on a rotational basis either annually or every second, third, or fourth year. Group Internal Audit carried out 31 audits in the year under review. One of the focal points is the Internal Control System (ICS). The results of each audit are discussed in detail with the companies and (where necessary) the divisions concerned, and key measures are agreed upon. The Chairman of the Board of Directors, the members of the Audit Committee, the CEO, the CFO, the Group General Counsel, as well as the respective Division President and other line managers of the audited unit receive a copy of the audit report. The key measures agreed upon are also presented to and discussed with the CEO, the CFO, the Group General Counsel, and the Division Presidents during the monthly Executive Committee meetings. Twice a year, the divisions present the status of key measures agreed on. A follow-up process is in place for all Group inter- nal audits, which allows efficient and effective monitoring of how the improvement measures are being implemented. Each year, the Head of Group Internal Audit compiles a report summarizing activities and results. This report is distributed to members of the Board of Directors and the members of the Executive Committee, and it is presented to the Executive Committee and the Audit Committee. It is discussed in both committees and thereafter reported to the Board of Directors. Risk management and compliance Sulzer has established and implemented a comprehensive and value-based compliance program that focuses on prevention. It consists of the following main elements: Corporate Governance—Board of Directors62 Strong values and setting an ethical organizational tone Sulzer puts a high priority on carrying out its business with integrity, in compliance with all applicable laws and internal rules (“a clean deal or no deal”), and on accepting only reasonable contractual risks. The Board of Directors and the Executive Committee are convinced that compliant and ethical behavior in all aspects and on all levels is a precondition for a successful and sustainable future. The ethical tone must be set at the top, carry through to the middle, and be transmitted to the entire organization. Sulzer also fosters a speak-up culture and encourages employees to address potentially non-compliant behaviors. Risk assessment As part of Sulzer’s integrated risk management process, compliance risks are assessed regularly, and the results are discussed both with the management within the Sulzer Risk Council and with the Audit Com- mittee. The Audit Committee dedicates at least one full meeting per year to risk management and compli- ance. An overview of the main risks and corresponding mitigation measures is provided on pages 68 to 69. Internal rules and tools In 2010, Sulzer introduced a new Code of Business Conduct, which can be viewed at www.sulzer.com/ regulations in 19 languages. Every employee of the company (including employees of newly acquired busi- nesses) has to confirm in writing that he or she has read and understood this code and will comply with it. Every member of the Sulzer Management Group (approximately 100 managers) as well as the heads of all operating companies and all headquarters, regional, and local compliance officers must reconfirm this com- pliance commitment in writing annually. Furthermore, Sulzer joined the UN Global Compact initiative in 2010. The Communication on Progress Report for the year 2014 was published in 2015 and can be down- loaded at www.sulzer.com/sustainability. Rules Although Sulzer follows a behavior- and principle-based approach, it still requires internal rules that discuss boundaries, define processes, and provide guidance and decision support. Sulzer focuses on the major compliance risks, e.g.: — Bribery and corruption risks: Sulzer has had antibribery and anticorruption guidelines in place since 2010. Further measures include a web-based process that addresses the due diligence of intermediar- ies, a corporate-wide directive that sets maximum levels for offering and receiving gifts and hospitalities, and an e-training (in 13 languages) to familiarize Sulzer employees with the content of the directive. In 2015, face-to-face training was conducted by local compliance officers at 36 locations. — Antitrust and anticompetition risks: Sulzer has an antitrust guideline and a directive addressing behav- iors in trade association in place. Employees representing Sulzer in trade association meetings have to sign a compliance declaration. — Export control risks: Employees involved in export activities have to abide by export control policies and take part in an e-training in trade compliance. In 2015, Sulzer rolled out and implemented its global Trade Control Directive in all legal entities concerned. — Further risks (e.g., stock exchange laws, human-resource-related issues, intellectual property and know-how, privacy and data protection laws, product liability, environmental, quality, and health, etc.): Focused rules and processes address these and many other potential risks. Sulzer has processes that ensure compliance with insider laws as well as stock exchange reporting and notification duties. Tools Because of the speak-up culture it strongly fosters, Sulzer set up a hotline that provides employees with one of many options for reporting (potential) violations of the laws or internal rules. Reports can be made anony- mously or openly via a free hotline or a dedicated website. The company also introduced a directive that further improves internal reporting of compliance cases and sets minimum standards for internal investigation in 2012. Further tools are available to all employees on Sulzer’s intranet (e.g., presentations addressing the major exposures; draft agreements; sales and procurement handbooks with compliance-specific explanations Sulzer—Annual Report 201563 and standard clauses). In 2014, a compliance risk assessment process was established to identify and assess potential compliance risks on a local entity level and to define appropriate measures. Local compli- ance risk assessments were performed at 24 locations throughout 2015. The compliance risk assessment results will also be used to shape the 2016 Sulzer compliance program and to set the priorities in the fields of prevention, detection, and response. Organization As part of the organizational changes at Sulzer in 2013, a “Legal, Compliance, and Risk Management” group function was established (headed by the Group General Counsel). Within this organization, a line reporting structure was established for the three regions: Americas (AME); Europe, Middle East, and Africa (EMEA); and Asia-Pacific (APAC). The local Compliance Officers ultimately report—via Regional Compliance Officers—to the Group General Counsel (who is also the Chief Compliance Officer) in this structure. In addi- tion, the headquartered Compliance and Risk Management team steers and runs the group-wide compli- ance program. The Head of Risk Management and Compliance also reports to the Group General Counsel. To ensure the consistent rollout of Group Compliance initiatives, a dotted reporting line exists between the Regional Compliance Officers and the Head of Compliance and Risk Management. The Sulzer Risk Coun- cil, comprising the CFO, the Group General Counsel, the Head of Internal Audit, the Head of Compliance and Risk Management, and representatives of other Group functions held one meeting in 2015. The Sulzer Risk Council’s tasks mainly include formulating and maintaining adequate risk management policies, sys- tems, and guidelines; initiating and coordinating risk management activities; and advising the CEO and the Executive Committee on matters relating to risk management. Each member of the Executive Committee receives a copy of the minutes of the Sulzer Risk Council. The Group General Counsel informs the Board of Directors and the Executive Committee regularly about legal matters and key changes in legislation that may affect Sulzer, as well as on important litigation. Twice a year, the Audit Committee receives a report about any pending or threatened litigation with worst-case exposure exceeding CHF 0.5 million. Further information on reports to the Audit Committee is provided under Audit Committee on page 57. Awareness building and trainings Sulzer puts substantial effort into training its employees. Training is carried out through e-learning programs (two to three new programs are rolled out every year), in person, or through web conferences. In 2015, a “train the trainers” course was provided to the compliance officers in order to allow for the transfer of train- ing contents to the local entities. In 2015, Sulzer employees completed over 22 000 e-learning courses, and the company conducted web conferences on specific compliance matters. Controls and sanctions Headquarters Legal carried out 12 legal audits in 2015. These audits were conducted within the framework of the audits done by Group Internal Audit and focused on contractual risks. The results of the audits were discussed with the responsible managers. Measures were agreed upon. Implementation of these mea- sures is monitored (follow-up process; see Group Internal Audit on page 61). Group Function Environment, Safety, and Health (ESH) carried out 11 audits and organized seven external health and safety compliance audits. The focal points were primarily environmental protection and workplace safety. The results of each of these audits were discussed directly with the responsible managers, and an agreement was reached on any improvements required. The latest status of the company’s risks relating to environment, safety, and health is reported to the Audit Committee once a year. Apart from these formal audits, many internal inves- tigations (triggered by reports from the compliance hotlines, e-mails, telephone calls, or other avenues of communication) were carried out during 2015 and at least nine employees had to leave Sulzer because of non-compliant behavior with Sulzer’s Code of Business Conduct. Others received warnings or were trans- ferred internally. However, most of the reports received concerned non-material issues. Corporate Governance—Board of Directors64 Continuous improvement It is Sulzer’s goal to constantly improve its compliance and risk management approach. Findings of audits and internal investigations are assessed, internal processes and rules are adjusted, and training modules are improved. Sulzer always reviews compliance violations to determine whether they are rooted in a pro- cess weakness. If that is found to be the case, the process is improved and risk-mitigating measures are set up. Executive Committee 4 The Executive Committee consists of the Chief Executive Officer (CEO), the Chief Financial Officer (CFO), the Chief Strategy Officer (CSO; since March 1, 2015), and the Division Presidents. The Board of Directors delegates executive management powers to the CEO. The CEO delegates the appropriate powers to the Division Presidents. The Division Presidents define and attain business targets for their respective divisions in accordance with group-wide goals. The Board of Directors and Organization Regulations govern, among other things, the transfer of responsibilities from the Board of Directors to the CEO. This regulation can be viewed at www.sulzer.com/regulations. The CFO supports the CEO in his corporate management tasks. There are no management contracts with third parties. None of the Executive Committee members has a contract with a notice period exceeding 12 months. The members of the Executive Committee are presented on pages 66 to 67 and their CVs can be viewed at www.sulzer.com/management. Additional mandates of members of the Executive Committee outside the Sulzer group No member of the Executive Committee may hold more than five mandates, of which no more than one may be in listed companies. Exceptions (e.g., for mandates held at the request of Sulzer or mandates in charity organizations) are defined in the Articles of Association. 5 Compensation Report Information on the compensation of the Board of Directors and the Executive Committee can be found in the Compensation Report (pages 71 to 92). 6 Shareholder Participation Rights Restrictions and representation of voting rights Only nominees are subject to restrictions (see Capital Structure, page 54). No exceptions were granted during the reporting year, and no measures to remove these restrictions are planned. According to the Articles of Association, a shareholder may be represented at a Shareholders’ Meeting by its legal represen- tative, another shareholder with the right to vote, or the independent proxy. Shares held by a shareholder may be represented by only one person. Statutory quorum Changes to the Articles of Association may only be approved by a majority of at least two-thirds of the vot- ing rights represented at the Shareholders’ Meeting; share capital increases are carried out, however, upon an absolute majority of the votes represented. The dissolution or a merger of the company can only be de- cided upon if at least half the shares issued are represented at the Shareholders’ Meeting and two-thirds thereof vote in favor of the corresponding proposal (see also paragraph 16 of the Articles of Association). Sulzer—Annual Report 2015Corporate Governance—Executive Committee 65 Convocation of the Shareholders’ Meeting and submission of agenda items The applicable regulations are in line with the applicable law regarding the convocation of a Shareholders’ Meeting. Shareholders representing at least 2% of the share capital may submit items for inclusion on the agenda of a Shareholders’ Meeting. Such submissions must be requested in writing at least two months prior to the meeting and must specify the agenda items and proposals of the shareholder concerned. Entry in the share register Voting rights may be exercised by shareholders who are already registered in the share register on the rec ord date stated in the invitation to the respective Shareholders’ Meeting. Independent proxy At the Annual General Meeting of April 1, 2015, Proxy Voting Services GmbH was elected as the indepen- dent proxy for a term of office extending until completion of the next Annual General Meeting. Takeover and Defense Measures 7 The Articles of Association contain no opting-out or opting-up clauses. None of the contracts with mem- bers of the Board of Directors contains a change of control clause. The contracts of the members of the Executive Committee who joined the Executive Committee before April 2009 contain a remuneration clause provided the contract is terminated or the member’s function is changed considerably within 18 months after a change of control (see Compensation Report, pages 71 to 92). If there is a change of control (which, for members of the Executive Committee, also includes a replacement of the majority of the members of the Board of Directors) or a public takeover bid that is not supported by the Board of Directors, all allocated restricted stock units (RSU) are automatically vested and the performance share units (PSU) are automati- cally converted into shares on a pro rata basis without being subject to blocking restrictions. 8 Auditors The statutory auditor is elected at the Annual General Meeting for a one-year term of office. Since 2013, KPMG AG acts as the statutory auditor. The acting external auditor-in-charge is François Rouiller (since March 27, 2013). The external auditor-in-charge is replaced every seven years. The Audit Committee is in charge of supervising and monitoring the statutory auditor, and it reports to the Board of Directors (see Board of Directors, page 55). The members of the Audit Committee receive summaries of audit findings and improvement proposals at least once a year. The external auditor-in-charge is invited to attend meetings of the Audit Committee. In 2015, he attended four Audit Committee meetings. The Audit Committee or its Chairman meets separately with the Head of Group Internal Audit and the external auditor-in-charge at least once a year to assess (among other things) the independence of the internal and external auditors. The Audit Committee evaluates the work done by the auditors based on the documents, reports, and presen- tations provided by the auditors, as well as on the materiality and objectivity of their statements. To do so, the committee gathers the opinions of the CFO and the Head of Group Internal Audit. The Audit Committee reviews the fee paid to the auditor regularly and compares it with the auditing fees paid by other interna- tionally active Swiss industrial companies. Said fee is negotiated by the CFO and approved by the Board of Directors. Further information on the auditor, in particular the auditor’s fees and any additional fees received by the auditor for advisory services outside its statutory audit mandate, is listed in the Financial Section under note 34 (page 151). All advisory services provided outside the statutory audit mandate (essentially, consulting services related to audit and accounting as well as legal and tax advisory services) are compliant with the applicable independence rules. > 66 Executive Committee The Sulzer Executive Committee consists of the CEO, the CFO, the Chief Strategy Officer (CSO), and the three Division Presidents. Greg Poux- Guillaume was appointed new CEO in November, effective December 1, 2015. Klaus Stahlmann left the company in August. From August to November, Thomas Dittrich took over as CEO ad interim in addition to his duties as CFO. Fabrice Billard joined the Executive Committee as CSO in March. Greg Poux-Guillaume Born in 1970, France Joined the Executive Committee in 2015 Chief Executive Officer Thomas Dittrich Born in 1964, Switzerland/Germany Joined the Executive Committee in 2014 Chief Financial Officer Sulzer—Annual Report 2015Corporate Governance—Executive Committee 67 Fabrice Billard Born in 1970, France Joined the Executive Committee in 2015 Chief Strategy Officer César Montenegro Born in 1953, Venezuela/USA Joined the Executive Committee in 2008 Division President Pumps Equipment Peter Alexander Born in 1958, USA Joined the Executive Committee in 2005 Division President Rotating Equipment Services Oliver Bailer Born in 1967, Switzerland Joined the Executive Committee in 2013 Division President Chemtech For full CVs, go to: www.sulzer.com/management 68 Enterprise Risk Management Process to Take Risk-Conscious Decisions With its enterprise risk-management (ERM) system, Sulzer has an integrated risk-management system in place allowing the company to take targeted and risk-conscious decisions. Risk Risk exposure Main loss controls External and markets Market assessment Geopolitical shocks Strategic Innovation — More information on page 45 Market developments that are assessed inappropriately could lead to missed business opportunities or losses. — Continuous monitoring and assessment of market developments — Systematic midrange planning based on market developments and expectations A geopolitical shock event could have an impact on operations and travel. Also, it could imply currency risks and default risks of countries and banks. — Monitoring of exposure in critical countries — Monitoring of debt situation of countries and banks — Continuous monitoring of raw material prices and inflation indicators — Sulzer’s global presence mitigates the effect of geopolitical shocks Failure in R&D and innovation activities could negatively impact the ability to operate and to grow the business. Insufficient investments in innovation to maintain technology leadership and develop innovative products. Operational Attraction and retention — More information on page 48 Failure to attract and retain talent could lead to a lack of expertise and negatively impact the ability to operate. Health and safety — More information on page 48 An unsafe working environment could lead to harm to people, reputational damage, fines, as well as liability claims and could have a serious economic impact. — Stage gate process and key performance indicators — Product Development Council with strong focus on midrange planning process — Core Technology Council for development of basic technology — Focus on innovation with strategic customers — Innovation projects planned for 2016 — Implementation of an expert development program for key critical resources in 2016 — Active fostering of corporate values and high ethical standards — Strong Sulzer employer brand strategy — Regular talent review workshops — Development plans and education of employees — Salary benchmarks and reviews — Regular employee engagement surveys — Health and safety directives, guidelines, programs (e.g., Safe Behavior Program), and training — OHSAS 18001 certifications — Monthly health and safety controlling — Global network of health and safety officers — Regular health and safety audits Sulzer—Annual Report 2015Corporate Governance—Risk Management 69 Risk exposure Main loss controls Non-compliant or unethical behavior could lead to reputational damage, fines, and liability claims. — Active fostering of high ethical standards — Continuous monitoring and assessment Risk Operational Compliance — More information on page 61 of potential exposures — Sulzer Code of Business Conduct and a number of supporting regulations (e.g., anticorruption, antitrust, trade control) — Global network of compliance and trade compliance officers — Compliance training (incl. e-learning) and audits — Speak-up culture, compliance hotline, and sanctions — Quality management and assurance systems tailored to specific businesses — Third-party accreditation — Competence development programs and training of employees — Test centers Quality of products and services Failure of products and services could lead to repeated work, reputational damage, or liability claims. Business interruptions Business interruption, such as a fire, could cause damage to people, property, and equipment. It could have a negative effect on the ability to operate at the affected site. — Crisis and emergency management systems (at global and local level) — Risk management policy and guidelines — Corporate and local crisis and emergency management systems — Disaster recovery plans in IT Financial Financial markets — More information on page 111 Credit — More information on page 113 The unpredictability of financial markets may have a negative effect on Sulzer’s financial performance and its ability to raise or access capital. — Corporate financial policy — Foreign exchange risk policy — Trading loss limits for financial instruments Credit risks arising from financial institutions and from customers could have a negative effect on Sulzer’s financial performance and ability to operate. — For financial institutions, only parties with a strong credit quality are accepted (third-party rated) — Individual risk assessment of customers with large order volumes — Continuous monitoring of country risks Liquidity — More information on page 113 Failure in liquidity risk management may have a negative effect on Sulzer’s financial performance and its ability to operate. — Continuous monitoring of the liquidity — Management of liquidity reserves at group level — Cash flow program to optimize liquidity and cash flow management — Efficient use of available cash through cash pooling 70 Information Policy 9 Sulzer Ltd reports on its order intake every quarter (media releases) and on its financial results every half year. In each case, it also comments on business performance and outlook. In addition, the company reports on important events on an ongoing basis (ad hoc publications). The reporting referred to in Section 5 of this Corporate Governance Report (including the respective references to the Financial Section) complies with the recommendations on the content of the Compensation Report as laid out in Section 38 of Annex 1 to the Swiss Code of Best Practice for Corporate Governance. Key dates in 2016 February 25 April 7 April 21 July 28 October 20 Annual results 2015 Annual General Meeting 2016 Order intake Q1 2016 Midyear report 2016 Order intake Q1 – Q3 2016 These dates and any changes can be viewed at www.sulzer.com/events. Media releases (sent via e-mail) can be subscribed to at www.sulzer.com/newsletter. Other information is available on the Sulzer website www.sulzer.com. Material changes The text makes reference to any material changes occurring between the balance sheet date (Decem- ber 31, 2015) and the copy deadline for the Annual Report (February 24, 2016). Sulzer—Annual Report 2015 71 Compensation Report 75 Compensation Governance and Principles 78 Compensation Architecture 85 Compensation of the Board of Directors and the Executive Committee 89 Shareholdings of the Board of Directors and the Executive Committee 91 Outlook: Changes in STI and LTI Plans for 2016 92 Auditors’ Report t r o p e R n o i t a s n e p m o C Incentives for Sustainable Performance Compensation policies and plans at Sulzer reward performance, sustainable growth, and long-term shareholder value creation. Winterthur, February 24, 2016 On behalf of the Board of Directors and the Nomination and Remuneration Committee of Sulzer, please find enclosed our 2015 Compensation Report. The purpose of the Sulzer compensation policy is to enable the company to attract, retain, and motivate the talents that are key to the company’s performance and long-term success. With that in mind, our compensation programs have been designed to reward performance, sustainable growth, and long-term shareholder value creation. The Board of Directors and the Nomination and Remuneration Committee review Sulzer’s compensation policy and programs c on- tinually to ensure that they are aligned with the company’s strategy and the shareholders’ interests, while being compliant with the regulatory requirements. In 2015, we concluded that, although the compensation framework is still fit for purpose, the long-term incentive plan needed some adjustments to strengthen the link between pay and performance. The changes to the long-term incentive plan will be put into effect in 2016. They are summarized at the end of this report. In 2015, following the departure of our former CEO Klaus Stahlmann, the Nomination and Remuneration Committee focused on the search for a new CEO and on strengthening the succession pipeline for Executive Committee positions. Finally, in compliance with the Ordinance against Excessive Compensation in Listed Stock Corporations (the Compensation Ordinance), the following changes related to compensation have been implemented in the reporting year: — Amendments to the Articles of Association and inclusion of provisions on compensation governance and compensation principles. The revised Articles of Association were approved with a vote of 97.4% at the 2015 Annual General Meeting; — Introduction of a binding shareholders’ vote on the aggregate amounts of compensation for the Board of Directors and for the Executive Committee at the 2015 Annual General Meeting. Voting results were 98.9% and 97.0% respectively; — Adjustments of the individual employment contracts of the Executive Committee members in line with the provisions of the Compensation Ordinance. At the 2016 Annual General Meeting, we will again ask for your opinion on our compensation framework and the compensation actu- ally awarded for the business year 2015 through a consultative vote on this Compensation Report. Further, in line with the Compen- sation Ordinance, we will request your approval of the aggregate maximum compensation amounts that may be awarded to the Board of Directors until the next Annual General Meeting and to the Executive Committee for the 2017 business year. Looking ahead, we will continue to assess and review our compensation programs to ensure that they are still effective in the evolving context in which our company operates. We will also continue the open dialogue with you, our shareholders, and your representatives. We would like to thank you for taking the time to share your views with us and trust that you will find this report informative. Sincerely, Thomas Glanzmann Chairman of the Nomination and Remuneration Committee 74 In brief Core principles and compensation governance Compensation policies and plans at Sulzer reward performance, sustainable growth, and long-term share- holder value creation. Compensation programs are competitive, internally equitable, straightforward, and transparent. The compensation policy, programs, and amounts are reviewed by the Nomination and Remuneration Committee each year and, if necessary, adjusted by the full Board of Directors. See page 75 Shareholders’ engagement The shareholders are asked to approve the aggregate maximum amounts of compensation that may be awarded to the Board of Directors and to the Executive Committee in a binding prospective vote. Further, shareholders have the opportunity to express their opinion on the compensation framework and on the compensation actually awarded for the reporting year in a consultative vote on the Compensation Report. See page 76 Compensation of the Board of Directors To reinforce the independence of the Board of Directors in fulfilling its supervisory duties, the compensation of the Board of Directors consists of a fixed remuneration only, delivered as follows: — Fixed cash component — Restricted stock unit (RSU) component The fixed amount of compensation for the Chairman and the other members of the Board of Directors de- pends on the amount of responsibility and complexity of their respective functions, the professional and personal requirements placed on them, and the expected time requirement to fulfill their duties. See page 78 Compensation of the Executive Committee In line with the pay-for-performance key principle, a significant portion of compensation of the CEO and the other members of the Executive Committee consists of variable incentives based on performance. The compensation includes the following components: — Fixed compensation: — Base salary (cash) — Retirement and fringe benefits — Variable compensation: — Short-term annual bonus (cash) — Long-term incentives (performance share units) To ensure that the remuneration is competitive, Sulzer regularly participates in relevant benchmarking surveys. See page 79 The Compensation Report is prepared in accordance with the Ordinance against Excessive Compensation in Listed Stock Corporations (Compensation Ordinance), the SIX Swiss Exchange Guidelines on Corporate Governance Information (RLCG), and the principles of the Swiss Code of Best Practice for Corporate Gov- ernance of economiesuisse. Sulzer—Annual Report 201575 The Compensation Report provides information on the principles of compensation, the compensation pol- icy and programs, the method of determination of compensation, as well as the compensation awarded in the reporting year to the members of the Board of Directors and members of the Executive Committee. 1 Compensation Governance and Principles Nomination and Remuneration Committee The Articles of Association, the Board of Directors and Organization Regulations, and the Nomination and Remuneration Committee Regulations (www.sulzer.com/regulations) define the functions of the Nomination and Remuneration Committee (NRC). The NRC supports the Board of Directors in nominating and assess- ing candidates for positions to the Board of Directors and Executive Committee positions, in establishing and reviewing the compensation strategy and principles, and in preparing the respective proposals to the Shareholders’ Meeting regarding the compensation of the members of the Board of Directors and of the Executive Committee. The NRC is responsible for the following activities and submits all proposals concerning these activities to the Board of Directors, which has the final decision authority: — Periodic assessment of the membership structure of the Board of Directors, determination of selection principles, and identification of potential candidates to the Board of Directors — Succession planning for the CEO and Executive Committee positions (two upper management levels) — Periodic assessment of the compensation policy and programs — Determination of performance targets for the CEO and the Executive Committee positions for the purpose of the incentive plans — Preparation of the respective motions to the Shareholders’ Meeting on the maximum aggregate amounts of compensation of the Board of Directors and of the Executive Committee — Determination of the target compensation for the CEO and for the Executive Committee positions — Review of the Compensation Report The table below describes the levels of authority: Decision authority Selection criteria and succession planning Board of Directors Selection criteria and succession planning Executive Committee proposes CEO Compensation policy and programs Individual compensation of the Board of Directors Compensation of the CEO Individual compensation of the Executive Committee proposes Total maximum compensation amounts to be submitted to vote at the Annual General Meeting Performance objectives and assessment of the CEO Performance objectives and assessment of the Executive Committee proposes Compensation Report NRC proposes reviews proposes proposes proposes reviews proposes proposes reviews proposes Board Shareholders’ Meeting approves approves approves approves approves approves reviews approves approves approves approves (binding vote) consultative vote The NRC consists of a maximum of three members who are non-executive and independent and who are elected individually and annually by the Shareholders’ Meeting for the period of office until the following ordinary Annual General Meeting. At the 2015 Annual General Meeting, Thomas Glanzmann (Chairman), Jill Lee, and Marco Musetti were elected as members of the NRC. Compensation Report—Compensation Governance and Principles76 The NRC meets as often as the business requires, but at least twice a year. In 2015, the NRC held six meet- ings that were attended by all members. Besides the standard agenda items, the NRC concentrated its efforts on the selection and nomination of a new CEO and on the redesign of the long-term incentive plan to strengthen further the pay-for-performance alignment. The CEO and the Head of Group Human Resources, who serves as the Secretary of the NRC, generally attend the meetings. The Chairman of the Committee may invite other executives to join the meeting as advisors, when appropriate. However, the CEO and any other executives do not participate in the meetings, or parts of it, when their own remuneration and/or performance is discussed. The Chairman of the NRC reports to the next meeting of the full Board of Directors on the activities of the NRC and the matters debated on. The Chairman, as far as necessary, submits the respective proposals for approval by the Board of Directors. The minutes of the NRC meetings are available to all members of the Board of Directors. The NRC may appoint third-party companies to provide independent advice or perform services as it deems necessary for the fulfillment of its duties. In the reporting year, the Committee appointed Towers Watson to provide consulting and benchmarking services on compensation matters. Towers Watson has no other mandate with Sulzer. Shareholders’ role and engagement The company is keen to receive shareholders’ feedback on the compensation policy and programs, and it began the practice of holding a consultative vote on the compensation report in 2011. Further, the compa- ny regularly meets with shareholders and shareholder representatives to understand their perspectives. With the implementation of the Compensation Ordinance, the shareholders’ role and their say in compen- sation matters have become more pronounced. At the Annual General Meeting, shareholders are asked to approve the maximum aggregate compensation amounts for the Board of Directors and for the Executive Committee in an annual binding vote. At the 2015 Annual General Meeting, the shareholders approved the amendments to the Articles of Asso- ciation that were required to comply with the Compensation Ordinance. The revised Articles of Association include the following provisions related to compensation (the full version of the Articles of Association can be found under www.sulzer.com/regulations): — Principles of compensation: non-executive members of the Board of Directors receive a fixed compen- sation. Members of the Executive Committee receive fixed and variable compensation elements. The variable compensation may include short-term and long-term variable compensation components. These are governed by performance metrics that take into account the performance of the company, the group or parts of it, targets in relation to the market, other companies or comparable benchmarks and/or individual targets, as well as strategic and/or financial objectives. Compensation may be paid in the form of cash, shares, options, financial instruments or similar units, in kind, in services, or in other types of benefits. — Shareholders’ binding vote on remuneration: the Shareholders’ Meeting shall approve the maximum aggregate amount of compensation of the Board of Directors for the next term of office and the maxi- mum aggregate amount of compensation of the Executive Committee for the following financial year. The Board of Directors shall submit the annual Compensation Report to an advisory vote at the Annual General Meeting. — Additional amount for members of the Executive Committee hired after the vote on remuneration by the Shareholders’ Meeting: to the extent that the maximum aggregate amount of compensation as ap- proved by the Shareholders’ Meeting does not suffice, up to 40% of the maximum aggregate amount of compensation approved for the Executive Committee is available, without further approval, for the compensation of the members of the Executive Committee who were appointed after the Annual General Meeting. Sulzer—Annual Report 201577 — Loans, credit facilities, and post-employment benefits for members of the Board of Directors and of the Executive Committee: the company may not grant loans or credits to members of the Board of Directors and of the Executive Committee. Compensation principles The compensation of the Board of Directors is fixed and does not contain any performance-based variable component. This ensures that the Board of Directors is truly independent in fulfilling its supervisory duties towards the Executive Committee. The compensation of the Executive Committee is driven by the main principle of pay-for-performance. The compensation policy and programs are designed to reward performance, sustainable growth, and long- term shareholder value creation, while offering competitive remuneration to be able to attract and retain highly qualified employees. The compensation principles are: Pay-for-performance A substantial portion of compensation is delivered in the form of variable incentives based on company and individual performance Ownership Part of compensation is delivered in the form of company equity in order to foster ownership and align the interests of executives with those of shareholders Market competitiveness Compensation levels are competitive and in line with market practice in order to attract and retain highly qualified employees Internal equity The internal compensation structure is based on a job grading methodology applied globally Transparency Compensation programs are straightforward and transparent Method of determination of compensation: benchmarking and annual target-setting process To ensure compensation levels that are competitive and in line with market practice, the compensation of the Board of Directors and of the Executive Committee is regularly benchmarked against that of similar roles in comparable companies. For this purpose, a peer group of international industrial companies head- quartered in Switzerland has been selected based on their revenue and number of employees (see box Compensation Benchmark on this page), so that Sulzer is positioned between the median and the third quartile of the peer group. The intention is to pay target compensation around the median of the relevant market. For the Executive Committee, sustainable superior performance is rewarded through actual compensation significantly above the market median. The compensation effectively paid out depends on the performance of the company and/or the divisions and on the achievement of individual performance objectives. Performance objectives are defined at the beginning of the year during annual target setting. Achievement is assessed against each of those objec- tives after year-end and directly influences the variable incentive payouts. Compensation benchmark The comparison group reflects Sulzer’s ambitious business strategy: — ABB — Actelion — Clariant — EMS Chemie — Geberit — Georg Fischer — Holcim — Lonza — Nobel Biocare — Oerlikon — Rieter — Schindler — Sika — Sonova — Syngenta Compensation Report—Compensation Governance and Principles78 Performance appraisal Target setting Performance assessment Compensation determination Definition of two to four individual performance objectives at beginning of the year Performance assessment at year-end Determination of incentive payouts on the basis of company’s/division’s perfor- mance and achievement of individual objectives 2 Compensation Architecture Compensation of the Board of Directors The compensation policy applicable to the Board of Directors is governed by a compensation regulation, is reviewed by the NRC annually, and, if necessary, is adjusted by a decision of the full Board of Directors based on a proposal by the NRC. The compensation of the Board of Directors consists of a fixed cash component and a restricted stock unit (RSU) component with a fixed grant value. Further, Board members are entitled to a lump sum to cover business expenses. The RSU replaced the option plan in 2009 and strengthened the long-term alignment of the interests of the Board members with those of the shareholders. To reinforce the focus of the Board of Directors on the long-term strategy and to strengthen their independence from the Executive Committee, the compensation of the Board of Directors contains no performance-related elements, and Board mem- bers are not entitled to pension benefits. The amount of compensation for the Chairman and for the other members of the Board of Directors is de- termined on the basis of relevant compensation benchmarks (see box Compensation Benchmark on page 77). The compensation reflects the responsibility and complexity of their respective function, the pro- fessional and personal requirements placed on them, and the expected time required to fulfill their duties. The compensation amounts were reviewed and adjusted in 2014 to be in line with market practice and are described in the table below. Annual compensation of the Board of Directors 1) in CHF Basic fee for Board membership Basic fee for Board chairmanship 2) Additional fees: Board vice chairmanship Committee chairmanship Committee membership Cash component (net of social security contributions) Grant value of restricted stock units 125 000 250 000 30 000 70 000 420 000 30 000 40 000 25 000 Lump-sum expenses 5 000 10 000 1) Compensation for the period of service (from AGM to AGM). 2) The Chairman of the Board of Directors does not receive additional remuneration for committee activities. Sulzer—Annual Report 2015Compensation Report—Compensation Architecture 79 The members of the Board of Directors are remunerated for their service during their term of office. The cash remuneration is paid in quarterly installments for Board members, monthly installments for the Chair- man; the lump-sum expenses are paid out in December and the RSU are granted once a year. The grant value of the RSU is fixed at CHF 125 000 per Board member and CHF 250 000 for the Chairman of the Board of Directors. The number of RSU is determined by dividing the fixed grant value by the volume-weight- ed average share price of the last ten trading days before the grant date, which lies between the date of the publication of the year-end results and the Annual General Meeting. One-third of the RSU each vest after the first, second, and third anniversaries of the grant date respectively. Upon vesting, one vested RSU is converted into one share of the company. The vesting period for RSU granted to the members of the Board of Directors ends no later than on the date on which the member steps down from the Board. Although the value of the RSU grant is fixed (at grant), it then fluctuates with the share price during the vest- ing period, which means that the value at vesting will differ from the value at grant. Compensation of the Executive Committee The compensation of the Executive Committee is governed by internal regulations such as the total reward policy, the bonus plan, the performance share plan (PSP), and benefits plans. The compensation of the Executive Committee is reviewed by the NRC annually and, if necessary, adjusted and approved by deci- sion of the Board of Directors based on a proposal by the NRC. In line with the pay-for-performance principle, a significant portion of the compensation of the CEO and the other members of the Executive Committee consists of variable incentives based on performance. The compensation is structured as follows: — Fixed compensation: — Base salary (cash) — Retirement and fringe benefits — Variable compensation: — Short-term annual bonus (cash) — Long-term incentives (performance share plan) The elements of the compensation of the members of the Executive Committee are summarized in the table below. Overview of compensation elements Fixed compensation Variable compensation Base salary Benefits Short-term incentive plan Long-term incentive plan Base salary Pension and social security contributions, fringe benefits Bonus plan Performance share plan (PSP) 80 Compensation elements for the members of the Executive Committee Base salary Benefits Short-term incentive plan (bonus plan) Long-term incentive plan (PSP 2015) Main parameters Function, level of role, profile of incumbent (skills set, experience) Pension and social security contributions, fringe benefits Achievement of financial and individual objectives Achievement of long- term, company-wide objectives Key drivers Labor market Protection against risks, labor market Operational EBITA, sales, return on capital employed adjusted (ROCEA), operating net cash flow (ONCF) Cumulative EBIT/ operational EBITA, relative total shareholder return (TSR) Link to compensation principles Competitive compensation Competitive compensation Pay for performance Sustainable growth and value creation Vehicle Amount Cash Fixed Pension and insurance plans, perquisites Cash Performance share units (PSU) Fixed Variable, capped at 200% of target bonus. Target bonus amounts to 90% of annual base salary for the CEO and 60% of annual base salary for the other members of the Executive Committee. Variable. Grant value is defined based on the Global Grade and corresponds to CHF 1 200 000 for the CEO and between CHF 175 000 and CHF 300 000 for the other members of the Executive Committee. Vesting value is capped to 3.0 times grant value for the CEO and 3.8 to 4.4 times grant value for the other members of the Executive Committee. Grant date Monthly Monthly and / or annually March of the following year April 1 of the current year Performance period Vesting date – – – – 1 year (January 1, 2015 – December 31, 2015) 3 years (April 1, 2015 – March 31, 2018) – March 31, 2018 Sulzer—Annual Report 2015Compensation Report—Compensation Architecture 81 Base salary (fixed, in cash) The base salary is determined at the discretion of the Board of Directors based on the market value of the respective position and the incumbent’s qualifications, skills set, and experience. Positions are evaluated according to the Towers Watson Global Grading System (GGS). The GGS is a job-leveling tool to determine internal job levels. It takes into consideration company criteria such as size, complexity, and geographic scope. Furthermore, it assesses each role against standard factors based on its content and how it con- tributes to the organization overall. The GGS is used as a basis to build the internal salary structure. For further details, please refer to http://www.towerswatson.com/en/Services/Tools/job-leveling-global-grading- and-career-map. Bonus (variable, performance-based, cash remuneration) The bonus rewards the financial performance of the company and/or its businesses, as well as the achieve- ment of individual performance objectives over one calendar year. The target bonus is expressed as a per- centage of annual base salary according to the level of the role in the GGS framework. It amounts to 90% for the CEO and to 60% for the other members of the Executive Committee. For the CEO and the other members of the Executive Committee, 70% of the bonus is based on the achievement of financial objectives at company and/or division level, and 30% is based on the achievement of individual objectives as described below: Category Weight Objectives Rationale Operational EBITA Measure of profitability (bottom-line) Sales Measure of growth (top-line) CEO /CFO /CSO Division President Sulzer Division Sulzer 25% 15% 25% 15% Financial performance 70% Individual performance 30% Return on capital employed adjusted (ROCEA) Operating net cash flow (ONCF) Strategy Innovation Finance Management / Operations Measure of capital efficiency Sulzer 10% 10% Measure of cash generated by the revenues Sulzer 20% 20% Individual objectives address key business issues and depend on the nature of the respective function and its impact on the organization. They may include other financial objectives and/or more strategic goals that are crucial for long-term business success, such as mergers and acquisitions, development of new products, and leadership goals. Individual 30% 30% Total 100% 100% The objectives are set within the annual target-setting process. For each objective, an expected level of performance is determined (“target”). In addition, a threshold of performance below which the respective payout factor is zero and a maximum level of performance above which the respective payout factor is capped are determined for each objective as well. The payout level between the threshold, the target, and the maximum is calculated by linear interpolation. The actual bonus payout depends on the weighted average of the payout factors achieved for each objective and can range from 0% to 200% of the target bonus. The bonus is paid out in cash in March of the following year. 82 Bonus calculation Payout factor (0% – 200%) Financial performance (70%) Annual base salary × Target bonus % × + Bonus = Individual performance (30%) Sulzer strives for transparency in relation to pay for performance. However, disclosure of financial and indi- vidual objectives may create a competitive disadvantage to the company, as it renders sensitive insights into Sulzer’s strategy. To ensure transparency whilst avoiding competitive risk, Sulzer provides a general performance assessment at the end of the performance cycle (see Compensation of the Executive Com- mittee on page 86). Performance share plan (variable, performance-based, share-based remuneration) The performance share plan (PSP) rewards the performance of the company over three years and aligns the interests of the members of the Executive Committee with those of the shareholders by delivering a substantial portion of the compensation as company equity. The PSP is an annual plan with annual grants and is available exclusively to the members of the Executive Committee. The grant value is determined on the basis of the level of the executive’s role in the GGS framework. It amounts to CHF 1 200 000 for the CEO and to between CHF 175 000 and CHF 300 000 for the other members of the Executive Committee. The number of performance share units (PSU) granted is calculated by dividing the grant value by the three- month volume-weighted average share price before the grant date. Each PSU is a conditional right to a certain number of shares of the company. The PSU are subject to a three-year vesting period with two performance conditions: — A combination of operating income (EBIT) for 2015 and of cumulated operating income before restructur- ing, amortization, impairments, and non-operational items (operational EBITA) for 2016 and 2017; — Relative total shareholder return (TSR) of Sulzer against the performance of 30 peer companies respec- tively (see box below). Peer group for relative TSR performance of PSP 2015 International peers Swiss industrial peers . Aker solutions . Cameron . Crane Co. . Ebara . Flowserve . FMC . Idex . IMI . KSB . National Oilwell Varco . Pentair . Schlumberger . Smiths Group . SPX Flow . Technip . Weir . Wood Group . ABB . Bobst . Burckhardt Compression . Conzetta . Georg Fischer . Inficon . Interroll . Komax . Meyer Burger . Oerlikon . Rieter . Schindler . Schweiter Peer group changes in 2015: due to the spin-off of the SPX Flow business in a stand-alone listed company, SPX has been replaced by SPX Flow. Further, because of the divestiture of Sulzer Metco, Praxair is no longer a relevant peer and has been replaced by Smiths Group. Sulzer—Annual Report 2015Compensation Report—Compensation Architecture 83 On the vesting date, the number of vested shares is calculated by multiplying the initial number of PSU granted by the sum of the achievement factor of each performance condition as follows: Number of PSU granted x (Achievement Factor KPI 1 + Achievement Factor KPI 2) = Number of performance shares vest- ed. The number of vested shares is subject to an absolute cap based on the level of the role in the GGS framework. Number of PSU vested Number of PSU granted × Target achievement EBIT/cumulative operational EBITA (between 0 and 2) + Target achievement relative TSR (between 0 and 2) = Number of PSU vested Number of PSU granted Grant values are defined based on the level of the role in the GGS framework: CEO: CHF 1 200 000 EC: CHF 175 000 to 300 000 Number of PSU vested The maximum vesting value is capped at a multiple of the value at grant: CEO: 3.0 times EC: 3.8 to 4.4 times Factor based on EBIT and cumulative opEBITA com- pared to midrange plan (MRP) EBIT/opEBITA in % of the MRP, EBIT/opEBITA defined as sum of EBIT in 2015 and cumulative opEBITA in 2016 and 2017, divided by cumulative MRP EBIT/opEBITA values of the respective years. Threshold (factor 0): below 60% of MRP Target (factor 1): 100% of MRP Cap (factor 2): 140% of MRP Possible adjustments: the Board of Directors can, at its sole discretion, adjust the cumulative EBIT in case of acquisitions exceeding CHF 100 million, exchange rate fluctuations with major currencies of more than +/– 2%, and unforeseen IFRS changes. Factor based on relative TSR Relative TSR is defined as share price growth (ending share price minus starting share price) plus dividends during the vesting period; then divided by the ending share price. The TSR is measured against the per- formance of the peer group based on the ranking method. Threshold (factor 0): 10th per - centile of peer group Target (factor 1): median of peer group Cap (factor 2): 90th percentile of peer group Possible adjustments: the Board of Directors has the right to change the composition of the peer group in case of merger and acquisition or any other change leading to a delisting or a fundamental change in the scope of the business of a peer group company. In such a situation, the Board will select a new peer company. Sulzer strives for transparency in relation to pay for performance. However, disclosure of financial and indi- vidual objectives may create a competitive disadvantage to the company, as it renders sensitive insights into Sulzer’s strategy. To ensure transparency whilst avoiding competitive risk, Sulzer provides a general performance assessment at the end of the performance cycle. In case of termination of employment, the following provisions apply: — Resignation of the participant: unvested PSU forfeit without any compensation. — Termination by the employer for cause: unvested PSU forfeit. — Termination of employment as a result of retirement: unvested PSU are retroactively granted on a prorated basis and are vested according to the achievement factor at the end of the vesting period. — Termination of employment as a result of disability: unvested PSU continue to vest in full as if the employment had not been terminated. 84 — Termination by the employer without cause or termination as a result of death: the participant or his or her beneficiaries shall be entitled to a monetary compensation reflecting the pro rata vesting of the unvested PSU multiplied with the pro rata achievement factor. Calculation of the underlying share price to determine the pro rata relative TSR performance is based on the volume-weighted average share price of three months preceding the exit date or death of the participant. The pro rata cumulative EBIT/ opEBITA calculation is based on the most accurate figures available at time of termination. The Board of Directors determines the final payment considering the above parameters. — Termination following change of control: unvested PSU shall be converted into shares based on the pro rata achievement as defined above under termination without cause/death. Further information on share-based compensation can be found in the Financial Statements of Sulzer Ltd under note 9 (pages 165 to 166). Adjustments to PSP 2014 – 2016 In 2015, the Board of Directors has decided that the external reporting will be based on operational EBITA instead of EBIT (operating income). For this reason, the performance indicator in the ongoing PSP 2014 has been adjusted accordingly to focus also on operational EBITA, which gives a more accurate picture of operational profitability before special effects. Operational EBITA is defined as operating income before re- structuring, amortization, impairments, and non-operational items such as significant acquisition-related expenses, gains, and losses from sale of businesses or real estate (including release of provisions), and certain non-operational items that are non-recurring or do not regularly occur in similar magnitude. Consequently, the PSP 2014 – 2016 is now based on the following performance indicators: — Cumulative EBIT for 2014 – 2015 and operational EBITA for 2016 (50% weight); — Relative TSR over 2014 – 2016 (50% weight). Discontinued restricted stock unit plan (variable, fixed grant value, share-based remuneration) The RSU plan that was in place as a long-term incentive for members of the Executive Committee since 2009 was discontinued when the new PSP 2013 was introduced. However, RSU may still be granted to newly hired Executive Committee members to compensate for deferred awards forfeited at their previous employer as a result of joining Sulzer. Benefits Members of the Executive Committee participate in the regular employee pension fund applicable to all employees in Switzerland. The retirement plan consists of a basic plan that covers annual earnings up to CHF 146 628 a year and a supplementary plan in which income over this limit, up to the ceiling set by law, is insured (including variable cash remuneration). The contributions are based on age and are shared between the employer and the employee. Furthermore, each member of the Executive Committee is entitled to a representation allowance in line with the expense regulations for all members of management in Switzerland and approved by the tax authorities. Contracts of employment The employment contracts of the Executive Committee have been adjusted to comply with the provisions of the Compensation Ordinance. They are of undetermined duration and have a notice period of maximum 12 months. Members of the Executive Committee are not entitled to any impermissible severance or change of control payments. The employment contracts of the Executive Committee may include non-com- petition agreements with a time limit of one year and with a maximum total compensation of one annual target compensation. Sulzer—Annual Report 2015Compensation Report—Compensation of the Board of Directors and the Executive Committee 85 3 Compensation of the Board of Directors and the Executive Committee Compensation of the Board of Directors In 2015, the Board of Directors received a total compensation of CHF 2 075 000 (previous year: CHF 1 993 000). Of this total, CHF 1 068 000 was in cash (previous year: CHF 979 000); CHF 874 000 was in RSU (previous year: CHF 905 000); and CHF 133 000 was social security contributions (previous year: CHF 109 000). This compensation is an increase of 4% from the previous year. In 2014, the remuneration to the Chairman of the Board of Directors was significantly lower since Peter Löscher was elected at the Annual General Meeting in March 2014 (nine months of compensation in 2014 compared with 12 months of compensation in 2015). The portion of compensation delivered in RSU amounts to 56% of the cash compensation for the Chairman, and to between 87% and 124% for the other members of the Board of Directors. The RSU are subject to a staged three-year vesting period. Compensation of the Board of Directors (audited) thousands of CHF Board of Directors Cash fees 1 068 Peter Löscher, Chairman 1) Matthias Bichsel, Vice Chairman Thomas Glanzmann 2) Jill Lee Marco Musetti Gerhard Roiss 3) Klaus Sturany 4) Luciano Respini 5) Vladimir V. Kuznetsov 6) 443 125 143 121 127 76 – 33 – 2015 2014 Restricted stock unit (RSU) plan 7) 874 250 155 125 125 125 94 – – – Social security contribu- tions 8) 133 45 20 19 17 18 12 – 2 – Other Total Cash fees Restricted stock unit (RSU) plan – – – – – – – – – – 2 075 738 300 287 263 270 182 – 35 – 979 329 76 135 99 118 – – 200 22 905 250 125 125 125 125 – – 155 – Social security contribu- tions 109 – 3 27 22 25 – – 29 3 Other Total – – – – – – – – – – 1 993 579 204 287 246 268 – – 384 25 1) Chairman and Chairman of the Strategy Committee. 2) Chairman of the Nomination and Remuneration Committee. 3) Member of the Board of Directors since April 1, 2015. 4) Chairman of the Audit Committee. Klaus Sturany is waiving his compensation for personal reasons. In return, Sulzer makes donations to two non-profit organizations in the amount of the cash fees. 5) Vice Chairman until April 1, 2015. 6) Chairman ad interim from January 1 until March 20, 2014. 7) RSU awards assigned during the reporting period had a fair value of CHF 109.25 at grant date. The amount represents the full fair value of grants made in 2015. 8) The amount included covers mandatory social security contributions the company made or expects to make with respect to cash fees and RSU (based on the respective fair value). As of December 31, 2014 and 2015, there were no outstanding loans or credits granted to the members of the Board of Directors or former members of the Board of Directors. In 2014 and 2015, no compensation was granted to former members of the Board of Directors or related parties. 86 Compensation of the Executive Committee Compensation of the CEO in 2015 Grégoire Poux-Guillaume was hired as new CEO of Sulzer effective December 1, 2015. His annual com- pensation package was determined as follows: — Annual base salary of CHF 950 000 — Target bonus of CHF 855 000 (90% of annual base salary) — Grant value under the PSP of CHF 1 200 000 — Expense lump sum of 15 500 — Participation in the regular retirement and benefits plans of Sulzer Switzerland — Relocation and integration services for the move from France to Switzerland, including temporary housing and commuting for up to six months, home search and settling-in services, tuition cost for the children for maximum two years The above compensation was prorated for 2015 (one month of employment). In addition, in compensation for forfeited compensation at the previous employer, 30 242 RSU were granted on December 1, 2015. Those RSU will vest in two tranches over a period of three years: 50% of the RSU will vest 18 months after grant date and the remaining 50% will vest 36 months after grant date. The RSU are forfeit in case of voluntary resignation or in case of termination for cause. The fair value of the RSU at grant date is disclosed in the compensation table on page 87. Thomas Dittrich was CEO ad interim between August and November 2015. As compensation for this ad- ditional work, Thomas Dittrich received a lump-sum payment of CHF 162 000. This amount corresponds to the difference in compensation level between the CEO role and the CFO role for four months. Performance in 2015 Overall, the financial results were below the target value with an achievement between 58% and 83%, whereas the individual objectives scored above the targets. Performance in 2015 Objectives Assessment relative to plan Threshold Target Cap Sales Operational EBITA ROCEA Operating net cash flow (ONCF) Individual objectives This performance translates into a payout factor in the bonus plan between 79% and 93% (on average 85%) for the members of the Executive Committee. In 2015, there was no vesting in the PSP; the grant under the PSP 2010 had vested in 2013, and the first grant under the PSP 2013 will vest in 2016. However, the acquisition of a further 29.5% of the share capital of Sulzer by Renova triggered a change of control under the PSP plan rules. The provisions of the PSP allow for a pro rata accelerated vesting based on the performance achieved between the grant date and the date of change of control. All members of the Executive Committee have agreed to waive their rights to the ac- celerated pro rata vesting. Therefore, the PSU granted under the PSP 2013, 2014, and 2015 continue to Sulzer—Annual Report 2015Compensation Report—Compensation of the Board of Directors and the Executive Committee 87 vest according to the original vesting schedule. However, the company has guaranteed a minimum vesting level for those grants, so that the participants are not disadvantaged for having accepted to waive their rights to the accelerated vesting. The minimum guaranteed vesting level corresponds with the pro rata vesting level that would have been achieved if the change of control provisions had been applied according to the plan rules. For the two Executive Committee members who are taxable residents in the US, the accelerated pro rata vesting had to be implemented to ensure compliance with US tax legislation. Compensation awarded to the Executive Committee in 2015 In 2015, the Executive Committee received a total compensation of CHF 14 283 000 (previous year: CHF 12 437 000). Of this total, CHF 5 190 000 was in cash (previous year: CHF 5 891 000); CHF 4 204 000 was in PSU (previous year: CHF 2 834 000); CHF 1 781 000 was in pension and social security contributions (previous year: CHF 1 809 000); and CHF 185 000 was in other payments (previous year: CHF 103 000). This is an increase of 15% from the previous year. The main reason for this increase is the higher value of the performance share and the restricted stock units granted. This is due to the hiring of the new CEO (RSU replacement award) and to the fact that the Chief Strategy Officer joined the Executive Committee as an additional member. Compensation of the Executive Committee (audited) thousands of CHF Highest single compensation, Greg Poux-Guillaume, CEO Highest single compensation, Klaus Stahlmann, CEO Base salary Bonus 2) Other 3) 79 71 – – – – 2015 Re- stricted stock unit (RSU ) plan 4) Pension and social security contri- butions 6) Perfor- mance share plan (PSP)5) Base salary Bonus 2) Total Other Re- stricted stock unit (RSU ) plan Perfor- mance share plan (PSP) 2014 Pension and social security contri- butions 2014 Total 2 923 122 230 3 425 – – – – – – 824 810 – 2 – – – – – 1 291 367 3 294 Total Executive Committee 1) 3 349 1 841 185 2 923 4 204 1 781 14 283 3 139 2 752 103 1 800 2 834 1 809 12 437 1) Members of the Executive Committee: — Greg Poux-Guillaume, CEO since December 1, 2015 — Klaus Stahlmann, CEO until August 10, 2015. The total Executive Committee compensation of 2015 includes the compensation of Klaus Stahlmann. The 12-months notice period will end in August 2016. — Thomas Dittrich, CFO and CEO a.i. between August 10 and November 30, 2015 — Fabrice Billard, Chief Strategy Officer since March 1, 2015 — César Montenegro, Division President Pumps Equipment — Peter Alexander, Division President Rotating Equipment Services — Oliver Bailer, Division President Chemtech. 2) Expected bonus for performance year 2015 and 2014, respectively. 3) Other consists of housing allowances, schooling allowances, private share of company cars, tax services, and child allowances. Child allowances were not disclosed in 2014. 4) Replacement awards to compensate for forfeited remuneration at previous employer as a result of joining Sulzer. The amount represents the full fair value of grants made in 2015. 5) Represents the full fair value of the PSU of the PSP 2015 granted (CHF 4.1 million) and the fair value of the minimum vesting level for PSU which has been guaranteed for the grants 2013, 2014 and 2015 in connection with the change of control (CHF 63 000). 6) Includes the employer contribution to the social security institutions of the fair value of all grants made in 2015 (RSU and PSP). 88 For the entire Executive Committee, the variable component (without replacement award) represented 114% of the fixed component (base salary, other, pension and social security contributions). The relation- ship between the fixed and the variable components of compensation reflects Sulzer’s high performance orientation. Further, it represents the company’s strong emphasis on aligning the interests of the Executive Committee and the shareholders to create long-term shareholder value and profitable growth. Compensation overview Executive Committee 1 966 000 Benefits 2 300 000 Grant of PSU 2015 3 349 000 Base salary 1 841 000 Bonus No severance payments to members of the Executive Committee were made during the reporting year. As of December 31, 2014 and 2015, there were no outstanding loans or credits granted to the members of the Executive Committee or former members of the Executive Committee. In 2014 and 2015, no compensation was granted to former members of the Executive Committee or related parties. Sulzer—Annual Report 2015Compensation Report—Shareholdings of the Board of Directors and the Executive Committee 89 4 Shareholdings of the Board of Directors and the Executive Committee Shareholdings of the Board of Directors As of the end of 2014 and 2015, the members of the Board of Directors held the following shares in the company: Shareholders 2015 Board of Directors Peter Löscher Matthias Bichsel Thomas Glanzmann Jill Lee Marco Musetti Gerhard Roiss Klaus Sturany Shareholders 2014 Board of Directors Peter Löscher Matthias Bichsel Thomas Glanzmann Jill Lee Marco Musetti Luciano Respini Klaus Sturany Sulzer shares Restricted stock units (RSU) Total share awards and shares 45 663 26 684 342 4 616 3 095 2 692 4 000 4 204 13 149 3 657 2 103 2 081 2 081 2 081 1 146 – 58 782 30 341 2 445 6 697 5 176 4 773 5 146 4 204 Sulzer shares Restricted stock units (RSU) Total share awards and shares 45 563 26 000 – 3 700 2 179 1 776 8 027 3 881 11 051 2 052 1 026 1 851 1 851 1 851 2 097 323 56 614 28 052 1 026 5 551 4 030 3 627 10 124 4 204 90 Shareholdings of the Executive Committee As of the end of 2014 and 2015, the members of the Executive Committee held the following shares in the company: Shareholders 2015 Executive Committee Greg Poux-Guillaume Peter Alexander Oliver Bailer Fabrice Billard Thomas Dittrich César Montenegro Shareholders 2014 Sulzer shares Restricted stock units (RSU) Total share awards and shares Perfor- mance share units (PSU) 2013 Perfor- mance share units (PSU) 2014 Perfor- mance share units (PSU) 2015 33 301 40 976 74 277 4 860 7 212 13 800 – 30 242 30 242 – 10 928 – 10 928 4 860 1 303 1 187 7 000 231 – 1 534 1 187 9 842 16 842 12 883 661 13 544 – – – – – 1 967 1 967 – 964 2 314 942 2 402 2 402 2 402 2 826 2 826 Executive Committee 22 344 17 903 40 247 7 422 20 741 13 651 Sulzer shares Restricted stock units (RSU) Total share awards and shares Blocked Sulzer shares out of PSP 2010 Perfor- mance share units (PSU) 2013 Perfor- mance share units (PSU) 2014 Klaus Stahlmann Peter Alexander Oliver Bailer Thomas Dittrich César Montenegro 5 400 6 649 852 – 568 682 5 400 7 217 1 534 1 500 14 763 16 263 – 15 881 3 711 4 860 – – – – – 6 439 1 967 1 967 964 2 314 7 943 1 890 9 833 3 711 Sulzer—Annual Report 2015Compensation Report—Outlook: Changes in STI and LTI Plans for 2016 91 5 Outlook: Changes in STI and LTI Plans for 2016 To strengthen the pay-for-performance alignment, the PSP plan has been amended as follows, effective January 1, 2016 (e.g., for the PSU grant that will be awarded in 2016): — The vesting performance conditions will be average ROCEA (return on capital employed adjusted) over the 3-year performance period weighted 25%, operational EBITA growth weighted 25%, and relative three-year TSR weighted 50%. The decision was made to replace the cumulated EBIT condition through ROCEA and operational EBITA growth because the two KPI capture the essence of operating efficiency, balancing operating profitability with responsible capital management, which is more strongly aligned with the long-term shareholders’ interests. — The threshold of TSR performance will be increased. Performance at the 25th percentile rank in the peer group is required for any vesting to be triggered. This condition strengthens the link between perfor- mance and pay. — The maximum vesting level will be capped at 250% of grant value for a performance at or above 75th per- centile (TSR) or 140% (ROCEA, operational EBITA). The reduction of the cap is more aligned with compet- itive market practice and with the expectations of the shareholders and their representatives. The other features of the PSP plan, such as the equity instrument used (PSU), the performance period of three years, and the provisions in case of termination of employment, will remain unchanged. Because the ROCEA performance condition was introduced into the PSU plan, the bonus plan will also be amended for 2016 to avoid any duplication of measures of performance between the two plans. The performance conditions in the bonus plan will be as follows: Category Weight Objectives Rationale Operational EBITA in % of sales Measure of profitability (bottom-line) Financial performance 70% Sales Measure of growth (top-line) Operating net cash flow (ONCF) Measure of cash generated by the revenues Individual performance 30% Strategy Innovation Finance Management / Operations Individual objectives address key business issues and depend on the nature of the respective function and its impact on the organization. They may include other financial objectives and/or more strategic goals that are crucial for the long-term business success, such as mergers and acquisitions, development of new products, and leadership goals. This combination of performance measures between the bonus plan and the PSP plan ensures a balanced way of evaluating performance of the company holistically, and it is more strongly aligned with the long-term interests of the shareholders. CEO /CFO /CSO Division President 25% 25% 20% 25% 25% 20% Sulzer Division Sulzer Division Sulzer Divison Individual 30% 30% Total 100% 100% 92 Report of the Statutory Auditor to the General Meeting of Sulzer Ltd, Winterthur We have audited the accompanying Compensation Report dated February 24, 2016 of Sulzer Ltd for the year ended December 31, 2015. The audit was limited to the information according to articles 14 – 16 of the Ordinance against Excessive Compensation in Stock Exchange Listed Companies (Compensation Ordinance) contained in the tables referred to as audited on pages 85 to 87 of the Compensation Report. Responsibility of the Board of Directors The Board of Directors is responsible for the preparation and overall fair presentation of the Compensation Report in accordance with Swiss law and the Ordinance against Excessive Compensation in Stock Exchange Listed Companies (Compensation Ordi- nance). The Board of Directors is also responsible for designing the remuneration system and defining individual remuneration pack- ages. Auditor’s responsibility Our responsibility is to express an opinion on the accompanying Compensation 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 Compensation Report complies with Swiss law and articles 14 – 16 of the Compen- sation Ordinance. An audit involves performing procedures to obtain audit evidence on the disclosures made in the Compensation Report with regard to compensation, loans, and credits in accordance with articles 14 – 16 of the Compensation Ordinance. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatements in the Compensation 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 Compensation 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 Compensation Report for the year ended December 31, 2015 of Sulzer Ltd complies with Swiss law and articles 14 – 16 of the Compensation Ordinance. KPMG AG Zurich, February 24, 2016 François Rouiller Licensed Audit Expert Auditor in Charge Roman Wenk Licensed Audit Expert Sulzer—Annual Report 201593 Consolidated Financial Statements 95 Consolidated income statement 96 Consolidated statement of comprehensive income 97 Consolidated balance sheet 98 Consolidated statement of changes in equity 99 Consolidated statement of cash flows 100 Notes to the Con solidated Financial Statements 156 Auditors’ Report on the Consoli- dated Financial Statements of Sulzer Ltd s t n e m e t a t S l i a c n a n F i 157 Five-Year Summaries 160 Financial Statements of Sulzer Ltd 167 Auditors’ Report on the Financial Statements of Sulzer Ltd 169 Investor Information Notes to the Consolidated Financial Statements 1 | General information 100 17 | Other financial assets 141 34 | Auditor remuneration 151 2 | Key accounting policies and valuation 18 | Inventories 141 35 | Corporate risk management methods 100 process 151 36 | Subsequent events after the balance sheet date 151 37 | Major subsidiaries 152 Auditors’ report 156 3 | Financial risk management 110 contracts 142 19 | Percentage of completion 4 | Critical accounting estimates and 20 | Trade accounts receivable 142 judgments 117 5 | Acquisitions and divestitures of subsidiaries / Discontinued operations / Significant changes in the scope of consolidation 119 6 | Major currency exchange rates 124 7 | Segment information 125 8 | Personnel expenses 128 9 | Employee benefit plans 128 10 | Research and development 21 | Other accounts receivable and prepaid expenses 143 22 | Cash and cash equivalents 143 23 | Marketable securities 144 24 | Share capital 144 25 | Earnings per share 145 26 | Borrowings 145 27 | Provisions 146 expenses 133 28 | Other current and accrued liabilities 147 11 | Other operating income and expenses 133 29 | Derivative financial instruments 147 12 | Financial income and 30 | Other financial commitments 148 expenses 134 13 | Income taxes 134 14 | Intangible assets 137 15 | Property, plant, and equipment 139 16 | Associates 141 31 | Contingent liabilities 148 32 | Share participation plans 148 33 | Transactions with members of the Board of Directors, Executive Committee, and related parties 150 95 Notes 07 2015 2014 2 971.0 – 2 060.9 3 212.1 – 2 202.2 910.1 1 009.9 – 303.9 – – 334.3 – 340.0 – 303.9 – 303.9 – 674.3 – 674.3 Consolidated income statement January 1 – December 31 millions of CHF Continuing operations Sales Cost of goods sold Gross profit — Selling and distribution expenses — Impairment on goodwill Total selling and distribution expenses General and administrative expenses Research and development expenses Other operating income and expenses, net Operating income Interest and securities income Interest expenses Other financial income and expenses, net Share of profit/(loss) of associates Income before income tax expenses Income tax expenses Net income from continuing operations Discontinued operations Net income from discontinued operations, net of income taxes 05 Net income Attributable to shareholders of Sulzer Ltd Attributable to non-controlling interests Earnings per share (in CHF) Basic earnings per share Diluted earnings per share Continuing operations (in CHF) Basic earnings per share continuing operations Diluted earnings per share continuing operations Discontinued operations (in CHF) Basic earnings per share discontinued operations Diluted earnings per share discontinued operations 25 25 25 25 25 25 10 11 12 12 12 16 13 – 348.2 – 73.4 – 63.7 120.9 6.5 – 27.9 – 3.3 3.7 99.9 – 24.9 75.0 – 75.0 73.9 1.1 2.17 2.16 2.17 2.16 – – – 331.0 – 76.2 2.6 – 69.0 6.8 – 21.2 – 2.3 – – 85.7 – 71.9 – 157.6 435.7 278.1 275.0 3.1 8.09 8.05 – 4.72 – 4.70 12.81 12.75 Financial Section—Consolidated Financial Statements 96 Consolidated statement of comprehensive income January 1 – December 31 millions of CHF Net income Items that may be reclassified subsequently to the income statement Cash flow hedges, net of tax Reclassification to the income statement of foreign currency translation difference relating to the disposal of Metco Currency translation differences Total of items that may be reclassified subsequently to the income statement Items that will not be reclassified to the income statement Remeasurements of defined benefit obligations, net of tax Total of items that will not be reclassified to the income statement Notes 29 09 2015 75.0 – 3.5 – – 154.4 – 157.9 – 13.1 – 13.1 2014 278.1 – 8.0 59.1 17.6 68.7 – 137.9 – 137.9 Total other comprehensive income – 171.0 – 69.2 Total comprehensive income for the year Attributable to shareholders of Sulzer Ltd Attributable to non-controlling interests – 96.0 – 96.6 0.6 208.9 205.4 3.5 Sulzer—Annual Report 201597 Consolidated balance sheet December 31 millions of CHF Non-current assets Goodwill Other intangible assets Property, plant, and equipment Associates Other financial assets Non-current receivables Deferred income tax assets Total non-current assets Current assets Inventories Advance payments to suppliers Trade accounts receivable Other accounts receivable and prepaid expenses Marketable securities Cash and cash equivalents Total current assets Total assets Equity Share capital Reserves Equity attributable to shareholders of Sulzer Ltd Non-controlling interest Total equity Non-current liabilities Non-current borrowings Deferred income tax liabilities Non-current income tax liabilities Defined benefit obligations Non-current provisions Other non-current liabilities Total non-current liabilities Current liabilities Current borrowings Current income tax liabilities Current provisions Trade accounts payable Advance payments from customers Other current and accrued liabilities Total current liabilities Total liabilities Total equity and liabilities Notes 2015 20141) 14 14 15 16 17 679.8 246.4 491.4 4.0 11.6 7.1 693.7 305.0 530.7 2.5 11.9 11.3 13 133.7 126.8 1 574.0 1 681.9 18 409.3 487.5 20 21 23 22 79.8 851.1 123.3 208.3 79.0 955.9 147.2 106.8 1 009.0 1 194.7 2 680.8 2 971.1 4 254.8 4 653.0 24 0.3 0.3 2 224.4 2 435.1 2 224.7 2 435.4 9.5 6.6 2 234.2 2 442.0 26 13 13 9 27 26 13 27 28 7.2 69.4 2.6 510.3 91.2 2.6 294.8 280.9 73.5 24.6 71.3 38.2 472.1 994.5 514.4 9.9 137.3 323.8 197.5 365.6 17.7 32.4 147.7 383.6 210.9 424.2 1 548.5 1 216.5 2 020.6 2 211.0 4 254.8 4 653.0 1) The balance sheet as of December 31, 2014 has been restated following the finalization of the valuation of the net assets acquired related to acquisitions in 2014. A reconciliation to the previously published balance sheet is provided in note 5. Financial Section—Consolidated Financial Statements98 Consolidated statement of changes in equity January 1 – December 31 millions of CHF Equity as of January 1, 2014 Comprehensive income for the year: Net income — Cash flow hedges, net of tax — Remeasurements of defined benefit obligations, net of tax — Currency translation differences Other comprehensive income Total comprehensive income for the year Transactions with owners of the company: Transactions in treasury shares Share-based payments, net of tax Dividends Change in scope of consolidation Equity as of December 31, 2014 Comprehensive income for the year: Net income — Cash flow hedges, net of tax — Remeasurements of defined benefit obligations, net of tax — Currency translation differences Other comprehensive income Total comprehensive income for the year Transactions with owners of the company: Changes in ownership in subsidiaries Transactions in treasury shares Share-based payments, net of tax Dividends Change in scope of consolidation Equity as of December 31, 2015 Attributable to shareholders of Sulzer Ltd Notes Share capital Retained earnings Treasury shares Cash flow hedge reserve Currency translation adjustment Non-con- trolling interests Total Total equity 0.3 2 691.1 – 26.9 2.3 – 332.4 2 334.4 6.3 2 340.7 29 09 32 275.0 – 137.9 – 137.9 – 137.1 – 3.5 – 6.3 8.0 – 109.6 – 8.0 – 8.0 – 8.0 76.3 76.3 76.3 275.0 – 8.0 – 137.9 76.3 – 69.6 205.4 – 2.8 8.0 3.1 278.1 0.4 0.4 3.5 – 8.0 – 137.9 76.7 – 69.2 208.9 – 2.8 8.0 – 109.6 – 2.6 – 112.2 – – 0.6 – 0.6 24 0.3 2 720.3 – 23.4 – 5.7 – 256.1 2 435.4 6.6 2 442.0 29 09 32 73.9 – 13.1 – 13.1 – 3.5 73.9 – 3.5 – 13.1 1.1 75.0 – 3.5 – 13.1 – 153.9 – 153.9 – 0.5 – 154.4 – 3.5 – 153.9 – 170.5 – 0.5 – 171.0 – 60.8 – – 3.5 – 153.9 – 96.6 0.6 – 96.0 – 1.8 – 7.0 8.3 – 119.2 5.6 – 1.8 – 1.4 8.3 0.9 – 0.9 – 1.4 8.3 – 119.2 – 1.9 – 121.1 24 0.3 2 661.4 – 17.8 – 9.2 – 410.0 2 224.7 – 3.3 9.5 3.3 2 234.2 Sulzer—Annual Report 201599 Notes 12 12 13 14/15 05 05 Consolidated statement of cash flows January 1– December 31 millions of CHF Cash and cash equivalents as of January 1 Net income Interest and securities income Interest expenses Income tax expenses Depreciation, amortization, and impairments Income from disposals of subsidiaries; property, plant, and equipment; and financial instruments Changes in inventories Changes in advance payments to suppliers Changes in trade accounts receivable Changes in advance payments from customers Changes in trade accounts payable Change in provision for employee benefit plans Changes in provisions Changes in other net current assets Other non-cash items Interest received Interest paid Income tax paid Total cash flow from operating activities Purchase of intangible assets Purchase of property, plant, and equipment Sale of property, plant, and equipment Acquisitions of subsidiaries, net of cash acquired Acquisitions of associates Divestitures of subsidiaries Purchase of financial assets Sale of financial assets Purchase of marketable securities Sale of marketable securities Total cash flow from investing activities Dividend Purchase of treasury shares Sale of treasury shares Dividend paid to non-controlling interests Changes in non-controlling interests Additions in non-current borrowings Repayment of non-current borrowings Additions in current borrowings Repayment of current borrowings Total cash flow from financing activities Exchange gains/losses on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents as of December 31 22 2015 1 194.7 75.0 – 6.5 27.9 24.9 129.4 – 0.1 49.6 – 4.2 32.6 3.9 – 33.4 9.4 3.2 0.6 – 2.1 6.4 – 20.4 – 73.4 222.8 – 2.1 – 71.6 6.7 – 70.1 – 0.2 – 0.5 – – 253.6 149.0 – 242.0 – 119.2 – 3.5 2.1 – 1.9 – 0.1 0.6 – 0.4 6.4 – 16.5 – 132.5 – 34.0 – 185.7 1 009.0 2014 549.9 278.1 – 6.9 21.6 81.0 463.2 – 423.5 – 45.2 10.5 – 46.3 – 65.1 20.0 – 8.6 0.9 6.4 3.6 6.7 – 16.5 – 98.7 181.2 – 5.6 – 99.0 21.4 – 73.0 – 2.3 870.4 – 0.1 0.1 – 106.6 – 605.3 – 108.9 – 3.6 – – 2.6 – 2.1 – 1.9 6.3 – 52.8 – 161.4 19.7 644.8 1 194.7 Financial Section—Consolidated Financial Statements100 Notes to the Consolidated Financial Statements 1 General information Sulzer Ltd (the “company”) is a company domiciled in Switzerland. The address of the company’s registered office is Neuwiesenstrasse 15 in Winterthur, Switzerland. The consolidated financial statements for the year ended December 31, 2015, comprise the company and its subsidiaries (together referred to as the “group” and individually as the “subsidiaries”) and the group’s interest in associates and joint ventures. The group specializes in pumping solutions, rotating equipment maintenance and services as well as separation, re- action, and mixing technology. Sulzer was founded in 1834 in Winterthur, Switzerland, and employs around 14 300 people. The company serves clients in over 150 production and service sites worldwide. Sulzer Ltd is listed on the SIX Swiss Exchange in Zurich, Switzerland (symbol: SUN). These consolidated financial statements were authorized for issue by the Board of Directors on February 24, 2016. 2 Key accounting policies and valuation methods 2.1 Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Re- porting Standards (IFRS) using the historical cost convention except for the following: — financial instruments at fair value through profit or loss which are measured at fair value (incl. derivative financial instruments), — available-for-sale financial instruments, — liabilities for cash-settled share-based payments, and — net position from defined benefit plans, where plan assets are measured at fair value and the plan liabil- ities are measured at the present value of the defined benefit obligation (see 2.19 a). The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by all subsidiaries. The preparation of financial statements in conformity with IFRS requires the use of certain critical account- ing estimates. It also requires management to exercise its judgment in the process of applying the group’s accounting policies. The areas involving a higher degree of judgment or complexity or areas where assump- tions and estimates are significant to the consolidated financial statements are disclosed in note 4 “Critical accounting estimates and judgments.” Standards, amendments, and interpretations to published standards effective in 2015 2.2 Change in accounting policies a) The group has adopted the following new standards and amendments with a date of initial application of January 1, 2015: — Amendment to IAS 19 ‘Employee Contributions’. The amendment clarifies how an entity should account for contributions made by employees or third parties to defined benefit plans, based on whether those contributions are dependent on the number of years of service provided by the employee. — Amendments deriving from the annual improvement program 2010 – 2012 and 2011 – 2013 addressing specific aspects in various standards. Sulzer—Annual Report 2015101 Standards, amendments, and interpretations issued but not yet effective which the group has b) decided not to early adopt in 2015 A number of new standards and amendments to standards have been published that are not mandatory for December 31, 2015 reporting periods and have not been early adopted by the group. None of these is expected to have a significant effect on the consolidated financial statements of the group, except the following: — IFRS 9 ‘Financial Instruments’, published in July 2014, replaces the existing guidance in IAS 39 ‘Finan- cial Instruments: Recognition and Measurement’. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after January 1, 2018. The group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 9. — IFRS 15 ‘Revenue from Contracts with Customers’ establishes a comprehensive framework for deter- mining whether, how much, and when revenue is recognized. It replaces existing revenue recognition guidance, including IAS 18 ‘Revenue’, IAS 11 ‘Construction Contracts’, and IFRIC 13 ‘Customer Loy- alty Programs’. The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Under IFRS 15, an entity recognizes revenue when a performance obligation is satisfied. IFRS 15 is effective for annual reporting periods beginning on or after January 1, 2018. Sulzer has started a project and is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 15. — IFRS 16 ‘Leases’, published in January 2016, introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. IFRS 16 is effective for annual periods beginning on or after January 1, 2019. The group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 16. Business combinations 2.3 Consolidation a) The group accounts for business combinations using the acquisition method when control is transferred to the group (see 2.3 b). The consideration transferred in the acquisition is measured at the fair value of the assets given, the liabilities incurred to the former owner of the acquiree, and the equity interest issued by the group. Any goodwill arising is tested annually for impairment (see 2.6 a). Any gain on a bargain purchase is recognized in profit or loss immediately. Acquisition-related costs are expensed as incurred, except if related to the issue of debt or equity securities. Identifiable assets acquired, and liabilities and contingent liabilities assumed in a business combination, are measured initially at their fair values at the acquisition date. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss. If share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards), then all or a portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. The determina- tion is based on the difference between the market-based measure of the replacement awards compared with the market-based measure of the acquiree’s awards and the extent to which the replacement awards relate to pre-combination service. Subsidiaries b) Subsidiaries are all entities controlled by the group. The group controls an entity when it is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. Financial Section—Notes to the Consolidated Financial Statements 102 According to the full consolidation method, all assets and liabilities as well as income and expenses of the subsidiaries are included in the consolidated financial statements. The share of non-controlling interests in the net assets and results is presented separately as non-controlling interests in the consolidated balance sheet and income statement, respectively. Non-controlling interests c) The group recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, at the non-controlling interest’s proportionate share of the recognized amounts of the acquiree’s identifiable net assets. Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions. When the group loses control over a subsidiary, it derecognizes the assets and liabilities of the subsidiary, and any related non-controlling interest and other components of equity. Any resulting gain or loss is rec- ognized in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. Associates and joint ventures d) Associates are those entities in which the group has significant influence, but no control, over the financial and operating policies. Significant influence is presumed to exist when the group holds, directly or indirect- ly, between 20% and 50% of the voting rights. Joint ventures are those entities over whose activities the group has joint control, established by contractual agreement and requiring unanimous consent for strate- gic, financial, and operating decisions. Associates and joint ventures are accounted for using the equity method and are initially recognized at cost. Transactions eliminated on consolidation e) All material intercompany transactions and balances and any unrealized gains arising from intercompany transactions are eliminated in preparing the consolidated financial statements. Unrealized losses are elimi- nated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. Discontinued operation f) A discontinued operation is a component of the group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the group, and which: — represents a major line of business; — is part of a single coordinated plan to dispose of a separate major line of business; or — is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held-for-sale. When an operation is classified as discontinued operation, the comparative statement of profit or loss is represented as if the operation had been discontinued from the start of the comparative year. All disclosures in the notes to the consolidated financial statements refer to continuing operations, except where otherwise indicated. 2.4 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Executive Officer. The Chief Executive Officer, who is responsible for allocating resources and assessing performance (e.g. operating income) of the operating segments, has been identified as chief operating decision maker. Functional and presentation currency 2.5 Foreign currency translation a) Items included in the financial statements of subsidiaries are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Swiss francs (CHF). Transactions and balances b) Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denom- inated in foreign currencies are recognized in the income statement. Sulzer—Annual Report 2015103 Changes in the fair value of monetary items, denominated in foreign currency classified as available-for-sale are analyzed between translation differences resulting from changes in the amortized cost of the item and other changes in the carrying amount of the item. Translation differences related to changes in the amor- tized costs are recognized in profit or loss; other changes in the carrying amount are recognized in other comprehensive income. Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. Translation differences on non-monetary financial assets and liabilities, such as equities held at fair value through profit or loss, are recognized in profit or loss as part of the fair value gain or loss. Trans- lation differences on non-monetary financial assets, such as equities classified as avail able-for-sale, are included in the available-for-sale reserve in other comprehensive income. Subsidiaries c) The results and financial position of all the subsidiaries (excluding the ones with hyperinflationary economy) that have a functional currency different from the presentation currency of the group are translated into the presentation currency as follows: — assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet, and — income and expenses for each income statement are translated at average exchange rates. Translation differences resulting from consolidation are taken to other comprehensive income. In the event of a sale or liquidation of foreign subsidiaries, exchange differences that were recorded in other compre- hensive income are recognized in the income statement as part of the gain or loss on sale or liquidation. If a loan is made to a group company, and the loan in substance forms part of the group’s investment in the group company, translation differences arising from the loan are recognized directly in other comprehensive income as foreign currency translation differences. When the group company is sold or partially disposed of, and control no longer exists, gains and losses accumulated in equity are reclassified to the income statement as part of the gain or loss on disposal. Intangible assets 2.6 An intangible asset is classified either as an asset with indefinite useful life when timely limitation of gener- ating net cash inflows is not foreseeable, or as an asset with a finite useful life. Intangible assets with an indefinite useful life are not to be amortized. The group performs an annual review determining whether events and circumstances still support this measurement. Reassessing the useful life indicates that an asset might be impaired. The intangible assets with finite useful life are amortized in line with the expected useful life, usually on a straight-line basis. The period of useful life is to be assessed according to business rather than legal criteria. This assessment is made at least once a year. An impair- ment might be required in the event of sudden or unforeseen value changes. a) Goodwill Goodwill represents the difference between the consideration transferred and the fair value of the group’s share in the identifiable net asset value of the acquired business at the time of acquisition. Any goodwill arising as a result of a business combination is included within intangible assets. Goodwill is subject to an annual impairment test and valued at its original acquisition cost less accumulat- ed impairment losses. In cases where circumstances indicate a potential impairment, impairment tests are conducted more frequently. Profits and losses arising from the sale of a business include the book value of the goodwill assigned to the business being sold. For impairment testing goodwill is allocated to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Goodwill originating from the acquisition of an associated company is included in the book value of the participation in associated companies. Trademarks and licenses b) Trademarks, licenses, and similar rights acquired from third parties. Such assets are amortized over their expected useful life, generally not exceeding ten years. Financial Section—Notes to the Consolidated Financial Statements 104 Research and development c) Expenditure on research activities is recognized in profit or loss as incurred. Development costs for major projects are capitalized only if the expenditure can be measured reliably, the product or process is techni- cally and commercially feasible, future economic benefits are probable, and the group intends and has sufficient resources to complete development and to use or sell the asset. Otherwise, it is recognized in profit or loss as incurred. Subsequently such assets are measured at cost less accumulated amortization (max. five years) and any accumulated impairment loss. d) Computer software Acquired computer software licenses are capitalized on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortized over their estimated useful lives (three to max. five years). Customer relationships e) As part of a business combination, acquired customer rights are recorded at fair value (cost at the time of acquisition). These costs are amortized over their estimated useful lives, generally not exceeding 15 years. 2.7 Property, plant, and equipment Property, plant, and equipment is stated at acquisition cost less depreciation and impairments. Acquisition cost includes expenditure that is directly attributable to the acquisition of the item. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that the future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. The carrying amount of the replaced item is derec ognized. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation is provided on a straight-line basis over the estimated useful life. Land is stated at cost and is not depreciated. The useful lives are as follows: Buildings Machinery Technical equipment Other non-current assets 20 – 50 years 5 – 15 years 5 – 10 years max. 5 years Property, plant, and equipment financed by long-term financial leases is capitalized and amortized in the same way as other assets. The applicable leasing commitments are shown as liabilities and are included under long-term borrowings. An asset’s carrying amount is impaired immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Impairment of property, plant and equipment and intangible assets 2.8 Assets with an indefinite useful life are not amortized, but tested annually for impairment. Assets with a finite useful life are only tested for impairment if relevant events or changes in circumstances indicate that the book value is no longer recoverable. An impairment loss is recorded equal to the excess of the carrying value over the recoverable amount. The recoverable amount is the higher of the fair value of the asset less disposal costs and its value in use. The value in use is based on the estimated cash flow over a five-year period and the extrapolated projections for subsequent years. The results are discounted using an appro- priate pre-tax, long-term interest rate. For the purposes of the impairment test, assets are grouped together at the lowest level for which separate cash flows can be identified (cash-generating units). 2.9 Financial assets Financial assets, including marketable securities, are classified into the following four categories: “financial assets at fair value through profit or loss,” “available-for-sale financial assets,” “loans and receivables,” and “held-to-maturity financial assets.” Classification depends on the purpose for which the financial assets were acquired. Management determines the classification of assets at the date of purchase and reviews it on every accounting date. The fair value of financial instruments is either taken from an actively traded market or, in the case of non-traded financial instruments, from a valuation using standard formula-based methods. The marketable securities held by the group belong either to the first or the second level. Sulzer—Annual Report 2015 105 Financial assets at fair value through profit or loss a) Assets in this category are capitalized at fair value and subsequently adjusted to fair values, with any ad- justments charged or credited to financial income. Derivative financial instruments are recorded at fair value (cost at the time of acquisition) and subsequently adjusted to fair values. Financial assets designated at fair value from inception are those that are managed and their performance is evaluated on a fair value basis, in accordance with a documented investment strategy. With the exception of derivative financial instru- ments that meet the requirements of a “cash flow hedge” or a “net investment hedge,” all adjustments are charged or credited to financial income. Derivative financial assets are classified as current assets or in case maturity is later than 12 months from the balance sheet date as non-current assets. Available-for-sale financial assets b) Available-for-sale financial assets are non-derivatives that are either designated in this category or not in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Loans and receivables c) Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in the current assets, unless the maturity is greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet. Held-to-maturity financial assets d) Non-derivative financial assets with fixed or determinable payment terms and fixed maturities are classi fied as held-to-maturity when there is the positive intention and ability to hold to maturity. After initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method. Purchases and disposals of financial assets are recognized on the trade date. The group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the income statement. Available-for- sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity financial assets are carried at amortized cost using the effective interest method. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss are presented in the income statement line “Other financial income” in the peri- od they arise. Dividend income from financial assets at fair value through profit or loss is recognized in the income statement as part of financial income. Financial assets are derecognized when the right to receive cash flows from the investments has expired or has been transferred and the group has transferred all substantial risks and rewards of ownership. Changes in the fair value of financial assets classified as available-for-sale are recorded in equity. When these assets are sold or impaired, the accumulated fair value adjustments recorded in equity are recycled and booked to the financial income. 2.10 Derivative financial instruments and hedging activities The group uses derivative financial instruments, such as forward currency contracts, other forward contracts and options, to hedge its risks associated with fluctuations in foreign currencies arising from operational and financing activities. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on the derivatives during the year that do not qualify for hedge accounting are taken directly into profit or loss. Sulzer applies hedge accounting to secure future cash flows which have a high probability of occurrence. These hedges are classified as “cash flow hedges” whereas the hedge instrument is recorded on the bal- ance sheet at fair value and the effective portions are booked against “Other comprehensive income” in the column “Cash flow hedge reserve.” If the hedge relates to a non-financial transaction which will subse- quently be recorded on the balance sheet, the adjustments accumulated under “Other comprehensive Financial Section—Notes to the Consolidated Financial Statements 106 income” at that time will be included in the initial book value of the asset or liability. In all other cases, the cumulative changes of fair value of the hedging instrument that have been recorded in other comprehensive income are included as a charge or credit to income when the forecasted trans action is recognized or when hedge accounting is discontinued as the criteria are no longer met. In general, the fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion on the hedge is recognized in other com- prehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the in- come statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is partially disposed of or sold. At the inception of the transaction, the group documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. 2.11 Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts, and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. 2.12 Inventories Raw materials, supplies, and consumables are stated at the lower of cost or net realizable value. Finished products and work in progress are stated at the lower of production cost or net realizable value. Production cost includes the costs of materials, direct and indirect manufacturing costs, and contract-related costs of construction. Inventories are valued by reference to weighted average costs. Provisions are made for slow-moving and excess inventories. 2.13 Trade receivables Trade and other accounts receivable are stated at nominal value less provision for impairments. The respec- tive value corresponds approximately to the amortized cost. Trade receivables are classified as loans and receivables. A provision for impairment of trade receivables is established when there is objective evidence that the group will not be able to collect all the amounts due according to the original payment terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. Receivables are subject to regular review and adequate impairment is considered. The amount of the impairment provision is the difference between the carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. An impairment charge is booked within selling and marketing expenses in the income statement and the carrying amount of the trade receivable is deducted through an allowance account. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Any subsequent recoveries of amounts previously written off are credited against selling and marketing costs in the income statement. 2.14 Cash and cash equivalents Cash and cash equivalents comprise bills, postal giros, and bank accounts, together with other short-term highly liquid investments with a maturity of three months or less from the date of acquisition. Bank over- drafts are reported within borrowings in the current liabilities. 2.15 Share capital Ordinary shares are classified as equity. Costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects. When share capital is repur- chased, the amount of the consideration paid, which includes directly attributable cost, is net of any tax effects and is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequent- ly, the amount received is recognized as an increase in equity and the resulting surplus or deficit on the transaction is transferred to/from retained earnings. Sulzer—Annual Report 2015107 2.16 Trade payables Trade payables and other payables are stated at face value. The respective value corresponds approx- imately to the amortized cost. 2.17 Borrowings Financial debt is stated at fair value when initially recognized, after recognition of transaction costs. In sub- sequent periods, it is valued at amortized cost. Any difference between the amount borrowed (after deduc- tion of transaction costs) and the repayment amount is reported in the income statement over the duration of the loan using the effective interest method. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 2.18 Current and deferred income taxes The current income tax charge comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. It is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the group’s subsidiaries and associates operate and generate taxable income. The man- agement periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. The liability method is used to provide deferred taxes on all temporary differences between the tax base of assets and liabilities and their carry ing amounts in the consolidated financial statements. Deferred taxes are valued by applying tax rates (and regulations) substantially enacted on the balance sheet date or any that have essentially been legally approved and are expected to apply at the time when the deferred tax asset is realized or the deferred tax liability is settled. Income tax is recognized in profit of loss except to the extent that it relates to items recognized directly in equity or other comprehensive income, in which case it is recognized directly in equity or other comprehen- sive income. Deferred tax assets are recognized for unused tax losses and deductible temporary differences to the ex- tent that it is probable that a taxable profit will be available against which they can be used. Deferred tax liabilities arising as a result of temporary differences relating to investments in subsidiaries and asso ciated companies are applied, unless the group can control when temporary differences are reversed and it is unlikely that they will be reversed in the foreseeable future. Defined benefit plans 2.19 Employee benefits a) The group’s net obligation in respect of defined benefit plans is calculated separately for each plan by esti- mating the amount of future benefit that employees have earned in the current and prior periods, discount- ing that amount using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and deducting the fair value of any plan assets. The calculation of defined benefit obligations is performed annually by a qualified actuary using the project- ed unit credit method. When the calculation results in a potential asset for the group, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, con- sideration is given to any applicable minimum funding requirements. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest income on plan assets), and the effect of the asset ceiling (if any, exclud- ing interest), are recognized immediately in OCI. The group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expenses and other expenses related to defined benefit plans are recognized in profit or loss. Financial Section—Notes to the Consolidated Financial Statements 108 When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. The group recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs. b) Defined contribution plans Defined contribution plans are defined to be pure savings plans, under which the employer makes certain contributions into a separate legal entity (fund) and does not have a legal or an extendible (constructive) liability to contribute any additional amounts in the event this entity does not have enough funds to pay out benefits. A “constructive” commitment exists when it can be assumed that the employer will voluntarily make additional contributions in order not to endanger the relationship with its employees. Company con- tributions to such plans are considered in the income statement as personnel expenses. c) Other employee benefits Some subsidiaries provide other employee benefits like “Early retirement benefits” or “Jubilee gifts” to their employees. Early retirement benefits are defined as termination benefits for employees accepting voluntary redundancy in exchange for those benefits. Jubilee gifts are other long-term benefits. For example, in Swit- zerland, Sulzer makes provisions for jubilee benefits based on a Swiss local directive. The provisions are reported in the category “Other employee benefits” (Note 27). Short-term benefits are payable within 12 months after the end of the period in which the employees render the related employee service. In the case of liabilities of a long-term nature, the discounting effects and employee turnover are to be taken into consideration. Obligations to employees arising from restructuring measures are included under the category “Restruc- turing provisions.” 2.20 Share-based compensation Sulzer operates two equity-settled share-based payment programs. A performance share plan (PSP) covers the members of the Executive Committee and a restricted stock plan (RSP) covers the members of the Board of Directors and the members of the Sulzer Management Group. Performance share plan (PSP) a) The fair value of the employee services received in exchange for the grant of the performance share units is recognized as a personnel expense with a corresponding increase in equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the share units granted, excluding the impact of any non-market vesting conditions (e.g. profitability targets). At each balance sheet date, the group reassesses its estimates of the number of share units that are expected to vest. It recog- nizes the impact of the reassessment of original estimates, if any, in the income statement, and a corre- sponding adjustment to equity. The fair value of performance share units granted is measured by external valuation specialists based on a Monte Carlo simulation. The group accrues for the expected cost of social charges in connection with the allotment of shares under the PSP. The dilution effect of the share-based awards is considered when calculating diluted earnings per share. Restricted share plan (RSP) b) The fair value of the employee services received in exchange for the grant of the share units is recognized as a personnel expense with a corresponding increase in equity. The total amount expensed is recognized over the vesting period, which is the period over which the specified service conditions are expected to be met. The fair value of the restricted share units granted for services rendered is measured at the Sulzer grant date closing share price, and discounted over the vesting period using a discount rate that is based on the yield of Swiss government bonds with maturities matching the duration of the vesting period. Participants are not entitled to dividends declared during the vesting period. The grant date fair value of the restricted share units is consequently reduced by the present value of dividends expected to be paid during the vesting period. Sulzer—Annual Report 2015109 The group accrues for the expected cost of social charges in connection with the allotment of shares under the RSP. The dilutive effect of the share-based awards is considered when calculating diluted earnings per share. 2.21 Provisions Provisions are recognized when: the group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognized for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required is determined by considering the class of obligation as a whole. A provision is recognized even if the likelihood of an outflow with respect to a single item included in the class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognized as interest expense. 2.22 Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and rendering of services in the ordinary course of the group’s activities. Revenue is shown net of value-added tax, returns, rebates, and discounts and after eliminating sales within the group. The group recog nizes revenue when the amount of revenue can be reliably measured, when it is probable that future economic benefits will flow to the entity, and when specific criteria have been met. Sale of goods/products a) Revenue from the sale of goods/products derives in the ordinary course of business. Goods and products are described as ordinary when they are part of the official product range of the organization. Goods and products are those items produced/engineered and/or purchased for resale. This includes standard prod- ucts (off the rack) as well as (pre-) engineered or tailor-made products. Revenue from the sale of goods is recognized when all of the conditions stated below are fulfilled. The return rights of products and goods are also considered. The conditions for the recognition of revenue from sale of goods and products are as follows: — it is probable that any future economic benefit associated with the revenue will flow to the entity, — the revenue can be measured reliably, — the cost incurred or to be incurred can be measured reliably, — the entity (seller) has transferred significant risks and rewards of ownership to the buyer; basis of the risk/reward terms are the agreed clauses with the customer in the sales contract, generally linked to the internationally accepted Incoterms, and — the entity (seller) has retained neither continuing managerial involvement nor effective control over the goods. Revenue is recognized only when it is probable that it is collectible and measurable. Revenue can only be collectible when there is a binding sales agreement. Once revenue is recognized, any subsequent uncer- tainty about the collectability of the revenue is recognized as an expense/adjustment to the amount receiv- able rather than as an adjustment to revenue. Rendering of services b) The rendering of services involves an entity performing an agreed task for a customer. This service may involve asset maintenance; professional services; and the construction, development, or customization of assets. Service contracts may be single-element contracts, in which the entity renders one type of service, or multiple-element contracts that provide for the delivery of more than one service, or may include the delivery of goods as well as services. Services are often performed within the reporting period. The percent- age of completion basis is applicable to such services, but the stage of completion increases from 0% to 100% within one accounting period. Financial Section—Notes to the Consolidated Financial Statements 110 Services that are provided over a period beyond the reporting period involve estimates. Revenue is then recognized according to the stage, or percentage, of completion of the contract. The method used to de- termine the stage of completion will depend on the nature of the contract. A consistent approach is taken to the revenue recognition of similar contracts. Revenue from rendering of services is recognized by reference to the stage of completion of the transaction when the following conditions are cumulatively met: — the amount of revenue can be measured reliably, — the flow of economic benefits to the entity is probable, — the state of completion at the period end can be measured reliably, and — the cost incurred to date and the cost to completion can be measured reliably. Percentage of completion method (PoC) c) Major long-term customer orders are reported using the percentage of completion method (PoC), based on the percentage of costs to date compared with the total estimated contract costs, contractual mile- stones, or performance. The income statement contains a share of sales, including an estimated share of profit, while the balance sheet includes the corresponding trade accounts receivable after adjustment for advance payments received. When it appears probable that the total costs of an order will exceed the expected income, the total amount of expected loss is recognized immediately in the income statement. d) Other revenue Revenue from the use of entity assets by third parties yielding interest, royalties, and dividends in the form of: — interest charges for the use of cash or cash equivalents or amounts due to the entity, — royalty charges for the use of long-term assets (e.g. patents, trademarks, copyrights, and computer software), and — dividend distribution of profits to holders of equity investments in proportion to their holdings of a particular class of capital. Interest is recognized using the effective interest method. Royalties are recognized on an accrual basis in accordance with the substance of the relevant agreement. Dividends are recognized when the share- holder’s right to receive payment is established. 2.23 Assets and disposal groups held for sale A non-current asset or a group of assets is classified as “held for sale” (IFRS 5) if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the management must be committed to sell the assets, the assets must be actively marketed for sale, and the sale is expected to be completed within one year. A non-current asset or a group of assets classified as “held for sale” shall be measured at the lower of its carrying amount or fair value less selling cost. 2.24 Dividend distribution Dividend distribution to the shareholders of Sulzer Ltd is resolved upon decision of the general assembly and will be paid in the same reporting period. 3 Financial risk management 3.1 Financial risk factors The group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk, and price risk), credit risk, and liquidity risk. The group’s over- all risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the group’s financial performance. The group uses derivative financial instru- ments to hedge certain risk exposures. Risk management is carried out by a central treasury department (Group Treasury). Group Treasury identi- fies, evaluates, and hedges financial risks in close cooperation with the group’s subsidiaries. Principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity exist in writing. Sulzer—Annual Report 2015111 Foreign exchange risk a) Market risk (I) The group operates internationally and is exposed to foreign exchange risk arising from various currency exposures. Foreign exchange risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the entity’s functional currency. Management has set up a policy to require subsidiaries to manage their foreign exchange risk against their functional currency. The subsidiaries are required to hedge their major foreign exchange risk exposure using forward contracts or other standard instruments, usually transacted with Group Treasury. Each subsidiary designates their contracts with Group Treasury as fair value hedges or cash flow hedges, as appropriate. Presently, most of the contracts are designated as cash flow hedges. External foreign ex- change contracts are designated as hedges of foreign exchange risk on specific assets, liabilities, or future transactions on a gross basis. The group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. If required, currency exposure arising from the net assets of the group’s foreign operations is managed primarily through borrowings denominated in the relevant foreign currencies. Derivative financial instruments are only used on an ad-hoc basis to manage foreign currency translation risk. The following tables show the hypothetical influence on the income statement for 2015 and 2014 related to foreign exchange risk of financial instruments. The volatility used for the calculation is the one-year his- toric volatility on December 31 for the relevant currency pair and year. For 2015, the currency pair with the most significant exposure and inherent risk were the EUR versus the CHF. If, on December 31, 2015, the EUR had increased by 22.6% against the CHF with all other variables held constant, profit after tax for the year would have been CHF 1.8 million lower mainly due to foreign exchange losses on CHF-denominated financial assets. A decrease of the rate would have caused a gain of the same amount. Hypothetical impact of foreign exchange risk on income statement millions of CHF Currency pair Exposure Volatility Effect on profit after tax (rate increase) Effect on profit after tax (rate decrease) millions of CHF Currency pair Exposure Volatility Effect on profit after tax (rate increase) Effect on profit after tax (rate decrease) EUR/ CHF EUR/ RUB EUR/ CNY 2015 EUR/ USD – 10.4 – 3.4 5.4 – 5.4 22.6% 27.8% 12.6% 12.3% – 1.8 1.8 – 0.7 0.7 0.5 – 0.5 – 0.5 0.5 EUR/ RUB USD/ SEK USD/ CHF 2014 EUR/ CHF 6.1 8.9 3.3 3.8 28.1% 8.3% 6.7% 1.9% 1.2 – 1.2 0.5 – 0.5 0.2 – 0.2 0.1 – 0.1 The following tables show the hypothetical influence on equity for 2015 and 2014 related to foreign exchange risk of financial instruments for the most important currency pairs as at December 31 of the re- spective year. The volatility used for the calculation is the one-year historic volatility on December 31 for the relevant currency pair and year. Most of the hypothetical effect on equity is a result of fair value changes of derivative financial instruments designated as hedges of future cash flows in foreign currencies. Financial Section—Notes to the Consolidated Financial Statements 112 Hypothetical impact of foreign exchange risk on equity 6.3% – 1.9 1.9 2014 EUR/ CHF millions of CHF Currency pair Exposure Volatility USD/ CHF EUR/ CHF USD/ MXN USD/ BRL EUR/ USD GBP/ USD 2015 USD/ INR – 43.0 – 29.0 – 48.6 – 23.7 39.2 47.9 – 40.6 22.9% 22.6% 10.9% 21.2% 12.3% 8.4% Effect on equity, net of taxes (rate increase) Effect on equity, net of taxes (rate decrease) – 7.4 7.4 – 4.9 4.9 – 4.0 4.0 – 3.8 3.8 3.6 – 3.6 3.0 – 3.0 millions of CHF Currency pair Exposure Volatility Effect on equity, net of taxes (rate increase) Effect on equity, net of taxes (rate decrease) USD/ BRL GBP/ USD USD/ MXN EUR/ USD USD/ CHF USD/ INR – 27.1 61.3 – 44.0 26.6 – 22.8 – 17.9 – 35.8 13.6% 5.6% – 2.7 2.7 2.5 – 2.5 7.3% – 2.3 2.3 6.2% 1.2 – 1.2 6.7% – 1.1 1.1 6.0% – 0.8 0.8 1.9% – 0.5 0.5 (II) Price risk As per December 31, 2015, the group was not exposed to significant price risk related to investments in equity securities either classified as “available-for-sale” or at “fair value through profit or loss.” Interest rate sensitivity (III) The group’s interest rate risk arises from interest-bearing assets and liabilities. Assets and liabilities at vari- able rates expose the group to cash flow interest rate risk. Assets and liabilities at fixed rates expose the group to fair value interest rate risk. The group analyzes its interest rate exposure on a net basis, and if required enters into derivative instruments in order to keep the volatility of net interest income or expense limited. Currently the group has not entered into such derivative financial instruments related to interest rate risk management. The following table shows the hypothetical influence on the income statement for variable-interest-bearing assets net of liabilities at variable interest rates, assuming market interest rate levels would have increased/ decreased by 100 basis points. For the most significant currencies, CHF, USD, CNY, and INR, increasing interest rates would have had a positive impact on the income statement, since the value of variable-inter- est-bearing assets (comprising mainly cash and cash equivalents) would exceed the value of variable inter- est-bearing liabilities. In case of the EUR, increasing interest rates would have had a negative impact. Hypothetical impact of interest rate risk on income statement millions of CHF Variable-interest-bearing assets (net) CHF USD CNY INR EUR 2015 Impact on post-tax profit Sensitivity in basis points rate increase rate decrease 100 100 100 100 100 2.5 1.6 0.4 0.2 – 0.2 – 2.5 – 1.6 – 0.4 – 0.2 0.2 Amount 331.0 212.3 58.9 31.6 – 28.0 Sulzer—Annual Report 2015113 millions of CHF Variable-interest-bearing assets (net) CHF USD CNY GBP SGD 2014 Impact on post-tax profit Sensitivity in basis points rate increase rate decrease 100 100 100 100 100 6.7 1.1 0.5 0.3 0.2 – 6.7 – 1.1 – 0.5 – 0.3 – 0.2 Amount 926.3 145.4 75.5 34.6 32.3 On December 31, 2015, if the interest rates on CHF-denominated assets net of liabilities had been 100 ba- sis points higher with all other variables held constant, post-tax profit for the year would have been CHF 2.5 million higher (2014: CHF 6.7 million higher), mainly as a result of higher interest income on cash and cash equivalents. A decrease of interest rates on CHF-denominated assets net of liabilities would have caused a loss of the same amount. On December 31, 2015, the CHF amount exposed to interest rate risk was reduced compared with 2014, because the CHF 500 million bond due in 2016 is now considered as liability at variable interest rate and thus reducing the net exposure accordingly. b) Credit risk Credit risk arises from cash and cash equivalents, derivative financial instruments, and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The maximum exposure to credit risk per class of financial assets is outlined in the fair value table in note 3.3. Not exposed to credit risks are equity securities classified as available-for-sale. Credit risks of banks and financial institutions are monitored and managed centrally. Generally, only inde- pendently rated parties with a strong credit rating are accepted, and the total volume of transactions is split among several banks to reduce the individual risk with one bank. For every customer with a large order volume, an individual risk assessment of the credit quality of the customer is performed that considers independent ratings, financial position, past experience, and other factors. Additionally, bank guarantees and letters of credit are requested. For more details on the credit risk out of trade accounts receivable, please refer to note 20. Liquidity risk c) Prudent liquidity risk management includes the maintenance of sufficient cash and marketable securities, the availability of funding from an adequate number of committed credit facilities, and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, Group Treasury maintains flexibility in funding through a committed credit line. Management anticipates the future development of the group’s liquidity reserve on the basis of expected cash flows by performing regular Group-wide cash forecasts. In 2012, a syndicated credit line of CHF 500 million with an original maturity date of 2017 was established to furthermore provide financial flexibility in the short run. In 2015, this syndicated credit line has been extended to 2020, with two further one-year extension options. If special needs arise, financing will be reviewed case by case. The following table analyzes the group’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts dis- closed in the table are the contractual undiscounted cash flows calculated with the year-end closing rates. Borrowings include the notional amount as well as interest payments. Financial Section—Notes to the Consolidated Financial Statements 114 Maturity profile of financial liabilities millions of CHF 2015 Borrowings Trade accounts payable Other current and non-current liabilities (excluding derivative liabilities) Carrying amount < 1 year 1 – 2 years 3 – 5 years > 5 years Total 521.6 522.0 323.8 323.8 5.9 – 67.8 43.6 16.6 1.8 – 6.2 0.2 – 529.9 323.8 1.4 67.8 millions of CHF 2014 Borrowings Trade accounts payable Other current and non-current liabilities (excluding derivative liabilities) Carrying amount < 1 year 1 – 2 years 3 – 5 years > 5 years Total 528.0 31.3 510.9 383.6 383.6 – 6.2 – 0.3 – 548.7 383.6 124.9 86.8 21.2 15.4 1.5 124.9 The following table analyzes the group’s derivative financial instruments that will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractu- al maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows calculat- ed with the year-end closing rates. With every forward exchange contract the group is obliged to pay an amount; however, it also receives the equivalent amount in a different currency. In case of options, only sold options are considered, as only these positions may generate a payment liability. Maturity profile of derivative financial instruments millions of CHF Forward exchange contracts — outflow — inflow Other derivative instruments — outflow — inflow millions of CHF Forward exchange contracts — outflow — inflow Other derivative instruments — outflow — inflow Total < 1 year 1 – 2 years 3 – 5 years > 5 years 2015 – 1 027.0 – 1 009.0 – 17.9 1 027.0 1 009.0 17.9 – – – – – – – 0.1 0.1 – – – – – – 2014 Total <1 year 1–2 years 3–5 years >5 years – 989.7 – 985.4 989.7 985.4 – 4.3 4.3 – 0.8 – 0.8 – – – – – – – – – – – – 3.2 Capital risk management The group’s objectives when managing capital are to safeguard the group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In this respect, the group aims at maintaining an invest- ment grade credit rating, either as a perceived rating or an external rating issued by a credit rating agency. Sulzer—Annual Report 2015115 In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt. As do others in the same industry, the group monitors capital on the basis of the gearing ratio. This ratio is calculated as total financial debt divided by equity attributable to shareholders of Sulzer Ltd (debt-to-equity ratio). The equity capital as shown in the balance sheet corresponds to the managed equity capital. The slight increase in the gearing ratio during 2015 resulted from a decrease in equity. As at December 31, 2015 and 2014, the gearing ratio was as follows: Gearing ratio millions of CHF Borrowings Equity attributable to shareholders of Sulzer Ltd Borrowings-to-equity ratio (gearing) 2015 521.6 2 224.7 0.23 2014 528.0 2 435.4 0.22 3.3 Fair value estimation The following tables present the carrying amounts and fair values of financial assets and liabilities as at December 31, 2015 and 2014, including their levels in the fair value hierarchy. For financial assets and financial liabilities not measured at fair value in the balance sheet, fair value information is not provided if the carry ing amount is a reasonable approximation of fair value. Fair values are categorized into three different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: The fair value of financial instruments traded in active markets (including a fund investment classified as at fair value through profit or loss, or the outstanding bond) is based on quoted market prices at the balance sheet date. Such instruments are included in level 1. The fair values included in level 2 are based on valuation techniques using observable market input data. This may include discounted cash flow analysis, option pricing models or reference to other instruments that are substantially the same, while always making maximum use of market inputs and relying as little as possible on entity-specific inputs. The fair values of forward contracts are measured based on broker quotes for foreign exchange rates and interest rates. Other financial assets measured at fair value through profit or loss include time deposits and other interest-bearing investments with maturities between 3 and 12 months, their fair value is determined based on discounted cash flows. Fair values measured using unobservable inputs are categorized within level 3 of the fair value hierarchy. This applies particulary to contingent considerations in business combinations. Contingent considerations are linked on the fulfillment of certain parameters, mainly related to earn-out clauses and technology transfer. For more information please refer to note 5. Financial Section—Notes to the Consolidated Financial Statements 116 Fair value table millions of CHF Notes Carrying amount Fair value Level 1 Level 2 Level 3 December 31, 2015 Financial assets measured at fair value Financial assets at fair value through profit or loss Available-for-sale financial assets Derivative assets—non-current Derivative assets—current 23 17 29 21, 29 208.3 208.3 98.4 109.9 4.5 – 6.4 4.5 – 6.4 – – – 4.5 – 6.4 Total financial assets measured at fair value 219.2 219.2 98.4 120.8 Financial assets not measured at fair value Loans and receivables 17 Non-current receivables (excluding non-current derivative assets) Trade accounts receivables Other accounts receivables (excluding current derivative assets) Cash and cash equivalents Total financial assets not measured at fair value Financial liabilities measured at fair value Derivative liabilities—non-current Derivative liabilities—current Contingent considerations Total financial liabilities measured at fair value Financial liabilities not measured at fair value Outstanding bond Bank loans and other borrowings Other non-current liabilities (excluding non-current derivative liabilities) Trade accounts payable Other current liabilities (excluding current derivative liabilities) 7.1 7.1 20 851.1 21 22 78.4 1 009.0 1 952.7 29 28, 29 5 26 26 – 0.4 11.2 22.1 33.7 – – – – – – 0.4 11.2 – 11.6 0.4 11.2 22.1 33.7 499.6 506.4 506.4 – – 22.0 24.2 323.8 Total financial liabilities not measured at fair value 913.2 506.4 506.4 – – 28 43.6 – – – – – – – – 22.1 22.1 Sulzer—Annual Report 2015Fair value table millions of CHF Notes Carrying amount Fair value Level 1 Level 2 Level 3 December 31, 2014 117 – – – – – – – – 56.5 56.5 Financial assets measured at fair value Financial assets at fair value through profit or loss Available-for-sale financial assets Derivative assets—non-current Derivative assets—current 23 17 29 21, 29 106.8 106.8 99.4 4.5 – 7.4 4.5 – 7.4 – – – 7.4 4.5 – 7.4 Total financial assets measured at fair value 118.7 118.7 99.4 19.3 Financial assets not measured at fair value Loans and receivables Non-current receivables (excluding non-current derivative assets) Trade accounts receivables Other accounts receivables (excluding current derivative assets) Cash and cash equivalents Total financial assets not measured at fair value Financial liabilities measured at fair value Derivative liabilities—non-current Derivative liabilities—current Contingent considerations Total financial liabilities measured at fair value Financial liabilities not measured at fair value Outstanding bond Bank loans and other borrowings Other non-current liabilities (excluding non-current derivative liabilities) Trade accounts payable Other current liabilities (excluding current derivative liabilities) 17 7.4 11.3 20 955.9 21 22 102.4 1 194.7 2 271.7 29 28, 29 5 26 26 – 0.1 11.6 56.5 68.2 – – – – – – 0.1 11.6 – 11.7 0.1 11.6 56.5 68.2 498.9 514.4 514.4 – – 29.1 38.1 383.6 28 86.8 Total financial liabilities not measured at fair value 1 036.5 514.4 514.4 – – 4 Critical accounting estimates and judgments All estimates and assessments are continually reviewed and are based on historical experience and other factors, including expectations regarding future events that appear reasonable under the given circum- stances. The group makes estimates and assumptions that relate to the future. By their nature, these esti- mates will only rarely correspond to actual subsequent events. The estimates and assumptions that carry a significant risk, in the form of a substantial adjustment to the present values of assets and liabilities within the next financial year, are set out below. Contingent considerations At December 31, 2015, the group had CHF 22.1 million (December 31, 2014: CHF 56.5 million) of contin- gent considerations resulting from business combinations. The total payments under contingent consider- ations arrangements could be up to CHF 55.0 million (December 31, 2014: CHF 73.0 million). The estimat- ed amounts are the expected payments, determined by considering the possible scenarios of forecast sales and other performance criteria, probabilities of occurrence, and the use of simulation models. The estimates could change substantially over time as new facts emerge and scenarios develop. Further details are disclosed in note 5. Financial Section—Notes to the Consolidated Financial Statements 118 Employee benefit plans The present value of the pension obligation and the plan assets depends on a number of factors that are determined on an actuarial basis using a number of assumptions. Assumptions used in determining the defined benefit obligation and the plan assets include the discount rate, future salary and pension increas- es, and mortality rates. The assumptions are reviewed and reassessed at the end of each year based on observable market data, i.e. interest rate of high-quality corporate bonds denominated in the corresponding currency and asset management studies. Further details are provided in note 9. Income taxes The group is obliged to pay income taxes in numerous jurisdictions. Significant assumptions are required in order to determine income tax provisions. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of the business. The group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differ- ences will impact the income tax and deferred tax provisions in the period in which such determination is made. Management believes that the estimates are reasonable, and that the recognized liabilities for in- come tax related uncertainties are adequate. Further details are disclosed in note 13. Goodwill and other intangible assets Goodwill amounted as per December 31, 2015 to CHF 679.8 million (December 31, 2014: CHF 693.7 million). In accordance with the accounting policies set forth in section 2.6 “Intangible assets,” the group carries out an annual impairment test on goodwill in the fourth quarter of the year, or when indications of a potential impairment exist. The recoverable amount from cash-generating units is measured on the basis of value- in-use calculations influenced materially by the terminal growth rate, the discount rate, and the projected cash flows. Information about assumptions and estimation uncertainties that have significant risk of result- ing in a material adjustment in the year ending December 31, 2015 are disclosed in note 14. Revenue recognition The group uses the percentage of completion method (PoC) in accounting for major long-term contracts. The use of the PoC method requires the group to estimate the proportional revenue and costs. If circum- stances arise that may change the original estimates of revenues, costs, or extent of progress toward completion, estimates are revised. These revisions may result in increases or decreases in estimated reve- nues or costs and are reflected in income in the period in which the circumstances that give rise to the revision become known by management. Revenue from the application of the PoC method recognized in the year 2015 amounted to CHF 469.8 million (2014: CHF 561.1 million). Further details are disclosed in note 19. Provisions Provisions are made, among other reasons, for warranties, disputes, litigation and restructuring. A provision is recognized in the balance sheet when the group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. The nature of these costs is such that judgment has to be applied to estimate the timing and amount of cash outflows. Depending on the outcome of the respective transactions, actual payments may differ from these estimates. Further details are disclosed in note 27. Sulzer—Annual Report 20155 Acquisitions and divestitures of subsidiaries / Discontinued operations / Significant changes in the scope of consolidation The purchase price allocation for the acquisitions in 2015 is preliminary for up to 12 months after the ac- quisition date and is subject to refinement as more detailed analysis is completed and additional information about the fair values of the assets and liabilities becomes available. The allocation of the consideration transferred may therefore change in the subsequent period. 119 Acquisitions in 2015 Net assets acquired millions of CHF Intangible assets Property, plant, and equipment Cash and cash equivalents Trade accounts receivable Other current assets Liabilities with third parties Deferred tax liabilities Net identifiable assets Non-controlling interests Goodwill Total consideration Purchase price paid in cash Contingent consideration Total consideration Saudi Pump Factory Precision Gas Turbine Others 1.5 13.2 0.3 1.7 8.8 – 12.2 – 0.3 13.0 – 3.3 21.2 30.9 30.9 – 4.1 0.2 – – 0.9 – – 5.2 – 7.2 12.4 8.4 4.0 30.9 12.4 Total 8.9 16.2 0.8 2.2 9.7 3.3 2.8 0.5 0.5 – – 1.1 – 13.3 – 6.0 – 3.0 9.0 6.3 2.7 9.0 – 0.3 24.2 – 3.3 31.4 52.3 45.6 6.7 52.3 Saudi Pump Factory On June 29, 2015, Sulzer acquired a 75% controlling interest in Saudi Pump Factory for CHF 30.9 million. Saudi Pump Factory, located in Riyadh, Saudi Arabia, has a workforce of 170 employees. The acquisition enables Sulzer to serve its Saudi Arabian and Gulf Cooperation Council customers with products to the highest Sulzer standards from a local base. The goodwill is attributable to synergies from combined solu- tions and shared services. None of the goodwill is expected to be deductible for tax purposes. Transaction cost recognized in the income statement amounted to CHF 0.9 million. The non-controlling interest has been recognized as a proportion of net assets acquired. Since the acquisition date, the acquired business contributed order intake of CHF 7.1 million, sales of CHF 10.6 million, and net income of CHF – 0.7 million to the group. Precision Gas Turbine Inc. On June 3, 2015, Sulzer acquired a 100% controlling interest in Precision Gas Turbine Inc. (Florida). The total consideration was CHF 12.4 million, of which CHF 8.4 million was paid in cash and CHF 4.0 million arose from a contingent consideration arrangement. Through this acquisition, Sulzer will further develop its current capabilities for field services for European-manufactured gas turbines. The goodwill is attributable to synergies from combined solutions and shared services. The goodwill is tax deductible over 15 years. Transaction cost recognized in the income statement amounted to CHF 0.2 million. Since the acquisition date, the acquired business contributed order intake of CHF 2.5 million, sales of CHF 2.1 million, and net income of CHF 0.0 million to the group. The contingent consideration is dependent on the future performance of the acquired company, and is linked to the gross margin from the company’s product portfolio. The bonus for the gross margin depends on the degree of gross margin realized within three years, and is payable on a yearly basis. The total liabil- ity is limited at CHF 5.6 million. The calculation of the contingent consideration is based on management assessments that the criteria will be achieved at a probability of 71%. Financial Section—Notes to the Consolidated Financial Statements120 Other acquisitions Expert International Pompe Service On July 28, 2015, Sulzer acquired the business of Expert International Pompe Service (EIPS) located in Casablanca, Morocco. Through this acquisition, Rotating Equipment Services expands its footprint in North Africa for repair of pumps of new equipment. MATIS INTERVENTIONS SARL On April 9, 2015, Sulzer acquired 100% of the French company MATIS INTERVENTIONS SARL (Locquel- tas). With the acquisition, the Pumps Equipment division strengthens its presence in the French power market, especially in the nuclear business, and will enhance Sulzer’s service offering to its customers in the French market. InterWeld Inc Ltd On February 12, 2015, Sulzer acquired 100% of InterWeld Inc Ltd located in Northern Ireland. With this acquisition, the Chemtech division will enhance the competitiveness of its tower field service activities by adding the offering of a full range of automated weld overlay services to the oil and gas as well as the pow- er market. The goodwill of the other acquisitions is attributable to synergies from combined solutions and shared services. None of the goodwill is expected to be deductible for tax purposes. Total transaction costs rec- ognized in the income statement amounted to CHF 0.5 million. Since the acquisition date, the acquired business contributed order intake of CHF 5.9 million, sales of CHF 4.4 million, and net income of CHF –1.8 mil- lion to the group. The gross amount of the trade accounts receivable are expected to be collectable at the date of acquisition. Had all above acquisitions occurred on January 1, 2015, management estimates that total net sales of the group would amount to CHF 2 995.0 million, and the consolidated net income would increase to approxi- mately CHF 77.0 million. Acquisitions in 2014 Net assets acquired millions of CHF Intangible assets Property, plant, and equipment Cash and cash equivalents Trade accounts receivable Other current assets Liabilities with third parties Deferred tax liabilities Net identifiable assets Goodwill Total consideration Purchase price paid in cash Contingent consideration Total consideration ASCOM/ ProLab Grayson Inc. aixfotec GmbH 46.3 11.7 0.8 1.3 5.8 – 9.6 – 13.7 42.6 43.9 86.5 36.5 50.0 86.5 4.5 8.7 2.8 4.1 1.3 – 2.8 – 2.8 15.8 27.2 43.0 38.1 4.9 43.0 3.3 0.1 1.1 0.4 0.5 – 2.4 – 0.8 2.2 2.0 4.2 2.6 1.6 4.2 Total 54.1 20.5 4.7 5.8 7.6 – 14.8 – 17.3 60.6 73.1 133.7 77.2 56.5 133.7 ASCOM/ProLabNL On September 15, 2014, Sulzer acquired 100% of Advance Separation Company (ASCOM) B.V. and Pro- cess Laboratories Netherlands (ProLabNL) B.V. both located in Arnhem, the Netherlands. The Ascom/ ProLabNL Group includes three subsidiaries. The acquisition expands the offering of the Sulzer Chemtech division for gas-liquid and liquid-liquid separation technologies. The goodwill is attributable to synergies from additional and combined solutions. Transaction cost recognized in the income statement amounted to CHF 0.3 million. Sulzer—Annual Report 2015121 The contingent consideration is linked to the fulfillment of criteria such as order intake, gross profit, and EBITDA (earnings before interest, taxes, depreciation, and amortization) as well as the development of specified technologies and products. There are minimum threshold values for some of the mentioned cri- teria. The contingent consideration is limited at CHF 65.5 million and is payable within a period of three years. The calculation of the contingent consideration is based on a Monte-Carlo simulation using a confi- dence level of 95%. Grayson Armature Inc. On August 1, 2014, Sulzer acquired 100% of the shares of Grayson Armature Large Motor Division, Inc. and Grayson Armature Orange Texas, Inc. The Grayson companies were merged into Sulzer Grayson Inc. on the same day and operate as one legal entity. This acquisition adds electromechanical capabilities to Sulzer’s Rotating Equipment Services division, complementing its range of services for rotating equipment. The goodwill is attributable to synergies from additional and combined solutions. Transaction cost recog- nized in the income statement amounted to CHF 0.3 million. The contingent consideration consists of retention bonuses for key management personnel and a bonus linked to the continuation of a defined agreement with a customer. The liability is limited at CHF 5.9 million. The calculation of the contingent consideration is based on management’s assessment that the criteria will be achieved at a probability of 90% to 95%. aixfotec GmbH On March 31, 2014, Sulzer acquired 100% of aixfotec GmbH, a leading technology company in extrusion systems for the production of polymer foams, based in Aachen, Germany. This acquisition widens Sulzer Chemtech’s portfolio in the field of polymer technology and strengthens its position as a technology leader and system supplier in plastics manufacturing. The goodwill is attributable to synergies from combined solutions and shared services. The contingent consideration consists of retention bonuses for key management personnel and a bonus linked to the gross margin from the company’s product portfolio. The bonus for the gross margin is limited in amount, depends on the degree of gross margin realized within three years, and is payable on a yearly basis. The liability includes the full amount based on management’s current estimate of the future market development. Cash flow from acquisitions of subsidiaries millions of CHF Cash consideration paid Contingent consideration paid Cash acquired Payments for acquisitions in prior years Total cash flow from acquisitions, net of cash acquired 2015 – 45.6 – 22.0 0.8 – 3.3 – 70.1 2014 – 77.2 – 4.7 – 0.5 – 73.0 Restated balance sheet as of December 31, 2014 In the financial statements 2014, the accounting for the ASCOM/ProLab and Grayson Armature Inc. acqui- sitions was provisional based on preliminary valuations of the assets and liabilities. These valuations have been finalized in 2015, and as a result the comparative balance sheet information as of December 31, 2014, has been restated. Financial Section—Notes to the Consolidated Financial Statements122 millions of CHF Goodwill Other intangible assets Other accounts receivable and prepaid expenses Deferred income tax liabilities Other non-current liabilities Total As reported 2014 Measurement adjustments Restated 2014 675.1 317.4 148.6 – 93.7 – 30.9 1 016.5 18.6 – 12.4 – 1.4 2.5 – 7.3 – 693.7 305.0 147.2 – 91.2 – 38.2 1 016.5 Restated acquisitions 2014: net assets acquired millions of CHF Intangible assets Property, plant, and equipment Cash and cash equivalents Trade accounts receivable Other current assets Liabilities with third parties Deferred tax liabilities Net identifiable assets Goodwill Contingent consideration Purchase price paid in cash Contingent consideration millions of CHF Balance as of January 1 Assumed in a business combination Payment of contingent consideration Release to other operating income Currency translation difference Total contingent consideration as of December 31 ASCOM as reported 2014 Grayson as reported 2014 aixfotec GmbH Total as reported 2014 58.7 11.7 0.8 1.3 7.2 – 9.6 – 16.2 53.9 25.3 – 42.7 36.5 4.5 8.7 2.8 4.1 1.3 – 2.8 – 2.8 15.8 27.2 – 4.9 38.1 Measure- ment adjust- ments – 12.4 – – – – 1.4 – 2.5 – 11.3 18.6 – 7.3 Restated 2014 54.1 20.5 4.7 5.8 7.6 – 14.8 – 17.3 60.6 73.1 – 56.5 3.3 0.1 1.1 0.4 0.5 – 2.4 – 0.8 2.2 2.0 66.5 20.5 4.7 5.8 9.0 – 14.8 – 19.8 71.9 54.5 – 1.6 – 49.2 2.6 77.2 – 77.2 2015 56.5 6.7 – 22.0 – 12.9 – 6.2 22.1 Restated 2014 2.3 56.5 – – –2.3 56.5 As of December 31, 2015, there was a decrease of CHF 12.9 million recognized in the income statement for the contingent consideration arrangements, as the assumed probability-adjusted gross profit and EBITDA (earnings before interests, taxes, depreciation, and amortization) was recalculated. Sulzer—Annual Report 2015123 Discontinued operations Effective June 2, 2014, Sulzer transferred control over Metco and consequently derecognized all related assets and liabilities. Income statement from discontinued operations millions of CHF Sales Expenses Operating income Financial result Income before income tax expenses from operating activities Income tax expenses Income from operating activities of discontinued operations Gain on sale of discontinued operations before reclassification of currency translation differences Reclassification of currency translation differences Income tax on sale of discontinued operations Net income from discontinued operations Attributable to shareholders of Sulzer Ltd Attributable to non-controlling interests Cash flows from discontinued operations millions of CHF Total cash flow from operating activities Total cash flow from investing activities Total cash flow from financing activities 2015 – – – – – – – – – – – – – 2015 – – – 2014 301.7 – 265.6 36.1 – 0.5 35.6 – 9.0 26.6 518.9 – 59.1 – 50.7 435.7 435.7 – 2014 33.4 – 8.0 – 21.0 Financial Section—Notes to the Consolidated Financial Statements124 Effect of disposal on the financial position of the group millions of CHF Cash and cash equivalents Inventories Advance payments to suppliers Trade accounts receivable Other accounts receivable and prepaid expenses Intangible assets Property, plant, and equipment Other financial assets Non-current receivables Deferred income tax assets Trade accounts payable Advance payments from customers Short-term borrowings Current income tax liabilities Current provisions Other current and accrued liabilities Long-term borrowings Deferred income tax liabilities Non-current provisions Net assets Consideration received (cash and cash equivalents) Income tax on sale of discontinued operations Cash and cash equivalents disposed of Net cash inflow 6 Major currency exchange rates CHF 1 EUR 1 GBP 1 USD 1 BRL 1 CAD 100 CNY 100 INR 100 MXN 100 SEK 1 SGD 100 ZAR 2015 – – – – – – – – – – – – – – – – – – – – 0.2 – – 0.2 2014 – 34.0 – 128.3 – 4.9 – 108.0 – 15.9 – 132.7 – 152.7 – 0.1 – 17.1 – 13.8 37.2 11.6 0.1 18.9 5.3 53.0 11.8 4.1 29.2 – 436.3 955.1 – 50.7 – 34.0 870.4 2015 2014 Average rate Year-end rate Average rate Year-end rate 1.07 1.47 0.96 0.29 0.75 1.08 1.47 0.99 0.25 0.71 1.21 1.51 0.92 0.39 0.83 1.20 1.54 0.99 0.37 0.85 15.32 15.23 14.86 15.94 1.50 6.07 1.49 5.69 1.50 6.88 1.56 6.72 11.42 11.76 13.35 12.82 0.70 7.57 0.70 6.36 0.72 8.44 0.75 8.55 Sulzer—Annual Report 2015125 7 Segment information Segment information by divisions millions of CHF Order intake (unaudited) Nominal growth (unaudited) Pumps Equipment Rotating Equipment Services Chemtech 2015 2014 2015 2014 2015 2014 1 500.8 1 725.5 698.2 725.2 708.9 718.4 – 13.0% – 4.2% – 3.7% 3.7% – 1.3% – 4.2% Adjusted growth1) (unaudited) – 6.7% – 1.1% – 0.9% 6.4% 1.4% – 2.1% Order backlog as of December 31 (unaudited) 998.0 1 209.4 205.0 212.2 307.7 282.0 Sales 2) Nominal growth 1 621.0 1 754.9 693.2 724.6 669.6 741.5 – 7.6% – 3.7% – 4.3% 2.7% – 9.7% – 0.3% Adjusted growth1) (unaudited) – 1.6% – 0.5% – 1.9% 5.3% – 7.8% 1.6% opEBITA 3) in % of sales 4) 118.1 160.6 70.8 64.5 67.4 93.6 7.3% 9.2% 10.2% 8.9% 10.1% 12.6% in % of average capital employed 15.8% 14.4% 16.8% 15.8% 16.6% 27.3% Restructuring expenses Amortization Impairments on tangible and intangible assets Non-operational items EBIT 5) – 23.8 – 4.0 – 10.3 – 17.2 – 19.7 – 6.4 – 340.0 – 7.9 – 62.8 – 203.1 – 6.3 – 1.3 – 1.5 51.4 – 7.2 – 5.7 – 13.5 65.1 – 7.2 – – 16.7 – 15.2 – 5.4 – 4.6 33.5 – – 78.4 Depreciation – 29.2 – 31.2 – 14.7 – 15.3 – 26.3 – 25.7 Operating assets Unallocated assets 1 557.9 1 659.0 624.8 682.8 846.9 743.0 – – – – – – Total assets as of December 31 1 557.9 1 659.0 624.8 682.8 846.9 743.0 Operating liabilities Unallocated liabilities 688.8 756.3 210.4 231.7 324.5 242.8 – – – – – – Total liabilities as of December 31 688.8 756.3 210.4 231.7 324.5 242.8 Operating net assets Unallocated net assets 869.1 902.7 414.4 451.1 522.4 500.2 – – – – – – Total net assets as of December 31 869.1 902.7 414.4 451.1 522.4 500.2 Capital expenditure 30.6 41.5 16.6 26.4 24.0 22.6 Employees (number of full-time equivalents) as of December 31 6 996 7 365 3 538 3 709 3 539 4 287 1) Adjusted for currency effects. 2) Sales between segments are not material. 3) Operating income before restructuring, amortization, impairments, and non-operational items. 4) Return on sales before restructuring, amortization, impairments, and non-operational items (opEBITA/sales). 5) Operating income. Financial Section—Notes to the Consolidated Financial Statements126 Segment information by divisions millions of CHF Total Divisions Others 2) Total Sulzer Order intake Nominal growth (unaudited) Adjusted growth1) (unaudited) 2015 2014 2015 2014 2015 2014 2 907.9 3 169.1 – 12.1 – 8.3 2 895.8 3 160.8 – 8.2% – 2.5% – 3.6% 0.3% n/a n/a n/a n/a – 8.4% – 2.7% – 3.7% 0.0% Order backlog as of December 31 (unaudited) 1 510.7 1 703.6 – – 4.0 1 510.7 1 699.6 Sales Nominal growth Adjusted growth1) (unaudited) opEBITA 3) in % of sales 4) in % of average capital employed Restructuring expenses Amortization 2 983.8 3 221.0 – 12.8 – 8.9 2 971.0 3 212.1 – 7.4% – 1.5% – 3.1% 1.2% n/a n/a n/a n/a – 7.5% – 1.6% – 3.2% 1.2% 256.3 318.7 – 2.2 – 15.8 254.1 302.9 8.6% 9.9% 16.3% 17.1% – 41.3 – 11.2 – 40.2 – 40.6 n/a n/a 0.1 – 2.1 0.1 n/a n/a 8.6% 9.4% 17.0% 17.1% – – 41.2 – 11.2 – 2.7 – 0.4 – 42.3 – 43.3 – 13.0 – 340.4 Impairments on tangible and intangible assets – 13.1 – 340.0 Non-operational items EBIT 5) – 14.0 13.5 – 22.7 9.5 – 36.7 23.0 147.7 – 59.6 – 26.8 – 9.4 120.9 – 69.0 Depreciation – 70.2 – 72.2 – 3.9 – 7.0 – 74.1 – 79.2 Operating assets Unallocated assets 3 029.6 3 084.8 – 159.3 96.9 2 870.3 3 181.7 – – – – 1 384.5 1 471.3 Total assets as of December 31 3 029.6 3 084.8 – 159.3 96.9 4 254.8 4 653.0 Operating liabilities Unallocated liabilities 1 223.7 1 230.8 106.6 177.4 1 330.3 1 408.2 – – – – 690.3 802.8 Total liabilities as of December 31 1 223.7 1 230.8 106.6 177.4 2 020.6 2 211.0 Operating net assets Unallocated net assets 1 805.9 1 854.0 – 265.9 – 80.5 1 540.0 1 773.5 – – – – 694.2 668.5 Total net assets as of December 31 1 805.9 1 854.0 – 265.9 – 80.5 2 234.2 2 442.0 Capital expenditure 71.2 90.5 2.5 5.5 73.7 96.0 Employees (number of full-time equivalents) as of December 31 14 073 15 361 180 133 14 253 15 494 1) Adjusted for currency effects. 2) The most significant activities under “Others” relate to the Corporate Center. Interdivisional order intake and sales are eliminated in this column. 3) Operating income before restructuring, amortization, impairments, and non-operational items. 4) Return on sales before restructuring, amortization, impairments, and non-operational items (opEBITA/sales). 5) Operating income. Information about reportable segments Operating segments are determined based on the reports reviewed by the Chief Executive Officer that are used to track performance, make strategic decisions and allocate resources to the segments. The business is managed on a divisional basis and the reported segments have been identified as follows: Pumps Equipment—pump technology and solutions: This division offers a wide range of pumping solutions and related equipment. The market focus is on (a) production, transport, and processing of crude oil and gas, (b) supply, treatment, and transport of water as well as wastewater collection, and (c) fossil-fired, nuclear, and renewable power generation. A global man- ufacturing and service network ensures high customer proximity. Sulzer—Annual Report 2015127 Rotating Equipment Services—provider of service solutions for rotating equipment: This division offers a full range of repair and maintenance services. The market focus is on (a) industrial gas and steam turbines, (b) turbocompressors, and (c) generators and motors. Chemtech—separation, mixing, and service solutions: This division offers products and services for separation, reaction, and mixing technology. The market focus is on (a) separation solutions, (b) tower field services, and (c) two-component mixing and dispensing sys- tems. Customers benefit from advanced solutions in the fields of process technology and separation equip- ment, as well as two-component mixing and dispensing systems. Others: Certain expenses related to the Corporate Center are not attributable to a particular segment and are re- viewed as a whole across the group. Also included are reconciling and other items, e.g. adjustments made in preparing the financial statements, and interdivisional order intake and sales elimination. The Chief Executive Officer primarily uses a measure of adjusted earnings before interest, tax, and amorti- zation (operational EBITA) to assess the performance of the operating segments. However, the Chief Exec- utive Officer also receives information about the segments’ order intake and backlog, revenue, and operat- ing assets and liabilities on a monthly basis. Operational EBITA (opEBITA) excludes amortization, restructuring expenses, and impairments when the im- pairment is the result of an isolated, non-recurring event. It also excludes certain non-operational items that are non-recurring or do not regularly occur in similar magnitude such as acquisition-related expenses, gains and losses from sale of businesses or real estate, or expenses related to the Sulzer Full Potential program. Revenue from external customers reported to the Chief Executive Officer is measured in a manner consis- tent with that in the income statement. There are no significant sales between the segments. No individual customer represents a significant portion of the group’s revenue. Operating assets and liabilities are assets or liabilities related to the operating activities of an entity and contributing to the operating income. Segment information by region The allocation of assets is based on their geographical location. Non-current assets exclude other financial assets, deferred tax assets, and employee benefit assets. The allocation of sales is based on the location of the customer. millions of CHF Europe, Middle East, Africa — thereof Switzerland — thereof Germany — thereof United Kingdom — thereof Sweden — thereof other countries Americas — thereof USA — thereof Brazil — thereof other countries Asia-Pacific — thereof China — thereof India — thereof other countries Total Non-current assets by region Sales by region 2015 2014 2015 2014 1 003.2 1 093.7 1 214.0 1 264.7 171.9 192.6 19.4 26.1 21.3 23.6 160.7 159.2 171.4 175.5 191.2 215.8 295.9 346.7 41.5 48.0 342.7 355.3 801.2 815.6 279.3 288.1 1 134.9 1 177.4 227.3 221.5 778.0 746.4 20.8 31.2 33.3 33.3 89.9 148.5 267.0 282.5 137.1 150.1 622.1 770.0 76.8 17.5 42.8 85.8 15.5 48.8 236.2 319.7 51.6 70.0 334.3 380.3 1 419.6 1 531.9 2 971.0 3 212.1 Financial Section—Notes to the Consolidated Financial Statements128 8 Personnel expenses millions of CHF Salaries and wages Defined contribution plan expenses Defined benefit plan expenses Cost of share-based payment transactions Other personnel costs Total personnel expenses 2015 802.4 23.9 29.0 8.3 157.2 1 020.8 2014 836.4 26.8 15.8 7.4 159.8 1 046.2 9 Employee benefit plans The defined benefit obligation for the active members of pension plans is the present value of accrued pension obligations at balance sheet date considering future salary and pension increases as well as turn- over rates (using the Project Unit Credit Method). The defined benefit obligation for the retirees is the present value of the current and future pension benefits considering future pension increases. millions of CHF Reconciliation of the amount recognized in the balance sheet as of December 31 Funded plans Switzerland Funded plans United Kingdom Funded plans USA Funded plans Others Unfunded plans 2015 Total Present value of funded defined benefit obligation – 1 326.2 – 598.3 – 63.6 – 54.6 – – 2 042.7 Fair value of plan assets 1 239.6 478.6 41.3 Overfunding (+) / underfunding (–) – 86.6 – 119.7 – 22.3 Present value of unfunded defined benefit obligation Adjustment to asset ceiling Asset (+) / liability (–) recognized in the balance sheet – – 1.3 – – – – – 87.9 – 119.7 – 22.3 — thereof as liabilities under defined benefit obligation – 97.5 – 119.7 – 22.3 — thereof as prepaid expenses 9.6 – – 45.1 – 9.5 – – – 9.5 – 9.5 – – – 1 804.6 – 238.1 – 45.8 – 45.8 – – 1.3 – 45.8 – 285.2 – 45.8 – 294.8 – 9.6 millions of CHF Reconciliation of the amount recognized in the balance sheet as of December 31 Funded plans Switzerland Funded plans United Kingdom Funded plans USA Funded plans Others Unfunded plans 2014 Total Present value of funded defined benefit obligation – 1 372.0 – 670.1 – 61.0 – 62.6 – – 2 165.7 Fair value of plan assets 1 307.5 554.1 42.5 47.2 Overfunding (+) / underfunding (–) – 64.5 – 116.0 – 18.5 – 15.4 – – 1 951.3 – 214.4 Present value of unfunded defined benefit obligation Adjustment to asset ceiling Asset (+) / liability (–) recognized in the balance sheet – – 2.4 – – – – – – – 53.4 – 53.4 – – 2.4 – 66.9 – 116.0 – 18.5 – 15.4 – 53.4 – 270.2 — thereof as liabilities under defined benefit obligation – 77.4 – 116.0 – 18.5 – 15.6 – 53.4 – 280.9 — thereof as prepaid expenses 10.5 – – 0.2 – 10.7 Sulzer operates major funded defined benefit (“DB”) pension plans in Switzerland, UK, Ireland, and the USA. Unfunded defined benefit plans relate to German pension benefit plans. The plans are exposed to actuarial risks, e.g. longevity risk, currency risk, interest rate risk, and the funded plans additionally to market (invest- ment) risk. Sulzer—Annual Report 2015129 In Switzerland, Sulzer contributes to two pension plans funded via two different pension funds, i.e. a base plan for all employees and a supplementary plan for employees with salaries exceeding a certain limit. Both plans provide benefits depending on the pension savings at retirement. They include certain legal minimum interest credits to the pension savings (i.e. investment return) and guaranteed rates of conversion of pension savings into an annuity at retirement. In addition, the plans offer death in service and disability benefits. The two pension funds are collective funds administrating pension plans of Sulzer group companies and also unrelated companies. In case of a material underfunding of the pension plans, the regulations include pre- defined steps, such as higher contribution by employer and employees or lower interest on pension savings, to eliminate the underfunding. The pension funds are legally separated from the group. The vast majority of the active participants in the two pension funds are employed by companies not belonging to the Sulzer group. The Board of Trustees for the base plan comprises ten employee and ten employer representatives. Based on the actual market environment the discount rate remained in 2015 at 0.7% (2014: 0.8%). The stable discount rate results in a similar return on plan assets and stable DBOs. The total expense for 2015 was CHF 18.0 million (2014: expense of CHF 6.8 million). In November 2014, the Board of Trustees decided the following changes: The applicable conversion rate for the pension plan will be decreased step by step over the next two years, the “Retirement savings capital” will be increased, and the risk contributions will be slightly reduced. The one-time effect of these changes resulted in a profit of CHF 8.0 million for 2014. No one-time effect was recognized in 2015. In the UK, Sulzer operates two funded defined benefit plans managed as sections of the Sulzer Pension Scheme. The Company operates a defined benefit scheme in the UK which is a final salary plan and pro- vides benefits linked to salary at retirement or earlier date of leaving service. The scheme consists of two sections, of which both sections are closed to new entrants and future accruals. The scheme is managed by six trustees forming the Board. Both plans are multi-employer schemes with Sulzer (UK) Holding being the principal sponsor. Based on the persistent low market interest rate, the discount rate was relatively stable at 3.6% (2014: 3.5%), which when combined with unfavorable asset performance over the period caused the net pension liability to increase from CHF 116.0 million in 2014 to CHF 119.7 million in 2015. The total expense recognized in the income statement has increased significantly to the previous year (2015: CHF 13.3 million compared to 2014: CHF 8.9 million) largely due to the much lower market interest rate at the start of the 2015 financial year. In the USA, Sulzer operates non-contributory defined benefit retirement plans covering substantially all of their employees. The salaried plans provide benefits that are based on years of service and the employee’s compensation, averaged over the five highest consecutive years preceding retirement. The hourly plans’ benefits are based on years of service and a flat dollar benefit multiplier. All plans were closed to new en- trants. In 2015 an expense of CHF 0.7 million was recognized in the income statement (2014: an expense of CHF 0.8 million). The discount rate remained unchanged at 4% as reported in 2014. This resulted in a slight increase of the amount recognized in OCI of CHF 4.3 million. In addition, Sulzer sponsors two Irish-funded defined benefit plans. In 2013, the plan was closed for new entrants and a new defined contribution plan was introduced. The total expense recognized in the income statement was CHF 1.8 million in 2015 (2014: CHF 1.3 million). In Germany, Sulzer operates a range of different DB pension plans. The majority of these plans are unfunded and benefits are paid directly by the employer to the beneficiaries as they became due. All DB plans are closed for new joiners and a new defined contribution plan for all employees was introduced in 2007. Existing employees who participated in the DB plans continued to be eligible for these DB pensions but became also eligible for the new defined contribution pensions. However, benefits received under the defined contribution plan are offset against the benefits under the DB plans. The different DB plans offer retirement pension, disability pension, and survivor’s pension benefits. Financial Section—Notes to the Consolidated Financial Statements 130 Employee benefit plans millions of CHF Reconciliation of effect of asset ceiling Adjustment to asset ceiling at January 1 Interest expense/(income) on effect of asset ceiling Change in effect of asset ceiling excl. interest income/(expense) Adjustment to asset ceiling at December 31 Reconciliation of asset (+) / liability (–) recognized in the balance sheet Asset (+) / liability (–) recognized at January 1 Defined benefit cost recognized in profit or loss Defined benefit cost recognized in OCI Employer contribution Change in scope of consolidation Currency translation differences 2015 2014 – 2.4 – 1.1 – 1.3 – 270.2 – 35.8 – 13.6 25.7 – 8.7 – 51.5 – 1.1 50.2 – 2.4 – 116.6 – 20.2 – 174.9 26.2 20.3 – 5.0 Asset (+) / liability (–) recognized at December 31 – 285.2 – 270.2 Components of defined benefit cost in profit or loss Current service cost (employer) Interest cost Interest income on plan assets Past service cost Effects of curtailments and settlement Interest expense/(income) on effect of asset ceiling Other administrative cost Expense recognized in profit or loss — thereof charged to personnel expenses — thereof charged to financial expense Components of defined benefit cost in OCI Actuarial gain/(loss) on defined benefit obligation Return on plan assets excl. interest income Change in effect of asset ceiling excl. interest expense/income Return on reimbursement right excl. interest income Defined benefit cost recognized in OCI1) – 28.4 – 38.1 31.3 – 0.2 – – 0.8 – 35.8 – 29.0 – 6.8 54.6 – 69.5 1.1 0.2 – 13.6 – 23.5 – 57.8 54.5 8.0 – – 1.1 – 0.3 – 20.2 – 15.8 – 4.4 – 299.2 73.9 50.2 0.2 – 174.9 1) The tax effect on defined benefit cost recognized in OCI amounted to CHF 0.5 million (2014: CHF 37.0 million). Sulzer—Annual Report 2015131 Employee benefit plans millions of CHF Reconciliation of defined benefit obligation 2015 2014 Defined benefit obligation as of January 1 – 2 219.1 – 2 034.7 Interest cost Current service cost (employer) Contributions by plan participants Past service cost Benefits paid/deposited Effects of curtailments and settlement Change in scope of consolidation Other administrative cost Actuarial gain (+) / loss (–) on obligation Currency translation differences – 38.1 – 28.4 – 9.1 – 111.5 0.2 – – 0.9 54.6 40.8 Defined benefit obligation as of December 311) – 2 088.5 – 57.8 – 23.5 – 9.3 8.0 120.6 – 108.3 – 0.3 – 299.2 – 31.2 – 2 219.1 Reconciliation of the fair value of plan assets Fair value of plan assets as of January 1 1 951.3 1 969.6 Interest income on plan assets Employer contribution Contributions by plan participants Benefits paid/deposited Change in scope of consolidation Return on plan assets excl. interest income Currency translation differences Fair value of plan assets as of December 31 Total plan assets at fair value – quoted market price Cash and cash equivalents Equity instruments third parties Equity instruments Sulzer Ltd Debt instruments third parties Real estate funds Investment funds Others 31.3 25.7 9.1 – 111.3 – – 69.5 – 32.0 1 804.6 95.3 646.1 – 558.3 33.7 0.2 34.0 54.5 26.2 9.3 – 120.6 – 88.1 73.9 26.5 1 951.3 114.8 614.8 0.4 657.3 28.7 0.3 46.2 Total assets at fair value – quoted market price as of December 31 1 367.6 1 462.5 Total plan assets at fair value – non-quoted market price Properties occupied by or used by third-parties (real estate) Others Total assets at fair value – non-quoted market price as of December 31 265.8 171.2 437.0 264.2 224.6 488.8 Best estimate of contributions for upcoming financial year Contributions by the employer 28.6 26.9 1) The defined benefit obligation 2015 includes the funded part (CHF 2 042.7 million) and the unfunded part (CHF 45.8 million). Financial Section—Notes to the Consolidated Financial Statements132 Employee benefit plans millions of CHF Components of defined benefit obligation, split Defined benefit obligation at December 31 for active members Defined benefit obligation at December 31 for pensioners Defined benefit obligation at December 31 for deferred members Total defined benefit obligation at December 31 Components of actuarial gain/(losses) on obligations Actuarial gain/(loss) arising from changes in financial assumptions Actuarial gain/(loss) arising from changes in demogr. assumptions Actuarial gain/(loss) arising from experience adjustments Total actuarial gain/(loss) on defined benefit obligation Components of economic benefit available Economic benefits available in form of refund Economic benefits available in form of reduction in future contribution Total economic benefit available 2015 2014 – 475.7 – 1 362.5 – 250.3 – 2 088.5 17.7 4.4 32.5 54.6 – 10.5 10.5 – 507.6 – 1 433.5 – 278.0 – 2 219.1 – 318.6 – 2.9 22.3 – 299.2 0.2 12.6 12.8 Maturity profile of defined benefit obligation Weighted average duration of defined benefit obligation in years 12.7 13.1 Sensitivity analysis of defined benefit obligation Discount rate (decrease 0.25%) Discount rate (increase 0.25%) Future salary growth (decrease 0.25%) Future salary growth (increase 0.25%) Life expectancy (decrease 1 year) Life expectancy (increase 1 year) – 67.3 71.6 3.5 4.9 115.7 – 105.2 – 73.1 77.2 11.7 – 3.1 113.1 – 103.3 Since the defined benefit obligation for the Swiss and UK pension plans represent more than 94% (2014: 94%) of the group, the following significant actuarial assumptions apply exclusively to the two countries: millions of CHF 2015 2014 Principal actuarial assumptions as of December 31 Switzerland United Kingdom Switzerland United Kingdom Discount rate for active employees Discount rate for pensioners Future salary increases Future pension increases 1.1% 0.6% 1.0% 0.0% 3.6% 3.6% 3.4% 2.5% 1.2% 0.8% 1.0% 0.0% 3.5% 3.5% 3.9% 2.5% Life expectancy at retirement age (male/female) in years 22/24 22/24 21/24 23/24 Sulzer—Annual Report 201510 Research and development expenses A breakdown of the research and development expenses per division is shown in the table below: 133 millions of CHF Pumps Equipment Rotating Equipment Services Chemtech Others Total 11 Other operating income and expenses millions of CHF Income from release of contingent consideration Income from sale of property, plant, and equipment Release of real estate provision Income from services to third parties Operating currency exchange gains, net Income from legal cases Income from negative past service costs Other operating income Total other operating income Restructuring expenses Impairments of tangible and intangible assets Cost for mergers and acquisitions Expenses related to defined benefit plans Withholding tax expenses Loss from settlement of legal cases Operating currency exchange losses, net Other operating expenses Total other operating expenses Total other operating income and expenses, net 2015 32.8 1.3 37.6 1.7 73.4 2015 12.9 0.3 6.8 0.2 – 0.7 – 13.6 34.5 – 41.2 – 13.0 – 3.4 – 8.8 – – 10.8 – 3.8 – 17.2 – 98.2 – 63.7 2014 37.7 2.3 38.1 – 1.9 76.2 2014 – 14.4 3.2 4.3 4.7 1.3 8.0 11.3 47.2 – 11.2 – 0.3 – 4.9 – 5.0 – 3.3 – 0.8 – – 19.1 – 44.6 2.6 During 2015 the group reassessed the achievement of the earn-out targets related to contingent consider- ation arrangements. The reassessment resulted in an income of CHF 12.9 million. The group further re- leased a provision of CHF 6.8 million for warranties made relating to the sale of Sulzer Real Estate Ltd in 2010 (2014: CHF 3.2 million). Following the restructuring announcements in 2015, the group recognized restructuring cost of CHF 41.2 mil- lion (2014: CHF 11.2 million). The group further performed impairment tests on the related production machines and facilities leading to impairments of CHF 13.0 million (2014: CHF 0.3 million). Following the decision of the arbitral tribunal regarding a dispute with the purchaser of the locomotive business (sold in 1998), the group recognized, in addition to the existing provision, expenses of CHF 8.7 mil- lion as loss from legal cases. The difference between employer contribution and total defined benefit cost according to the actuarial calculation resulted in other operating expenses of CHF 8.8 million (2014: CHF 5.0 million). Financial Section—Notes to the Consolidated Financial Statements134 12 Financial income and expenses millions of CHF Interest and securities income Interest income on employee benefit plans Total interest and securities income Interest expenses Interest expenses on employee benefit plans Total interest expenses Net interest expenses Income from investments and other financial assets Fair value changes Other financial income/(expenses) Currency exchange gains/(losses) (net) Total other financial expenses Total financial expenses — thereof from financial assets held at fair value through profit or loss — thereof from loans and receivables — thereof from borrowings — thereof from investments — thereof from employee benefit plans 2015 6.5 – 6.5 – 21.1 – 6.8 – 27.9 – 21.4 0.1 12.8 – 1.4 – 14.8 – 3.3 – 24.7 12.8 – 9.7 – 21.1 0.1 – 6.8 2014 6.4 0.4 6.8 – 16.4 – 4.8 – 21.2 – 14.4 – 0.1 – 2.9 – 0.7 1.4 – 2.3 – 16.7 – 2.9 7.1 – 16.4 – 0.1 – 4.4 The income on interest and securities remained largely unchanged compared with 2014. Interest expenses comprise an extraordinary expense of CHF 5.2 million related to the dispute with the purchaser of the lo- comotive business as further detailed in note 27. Apart from that, interest expenses, comprising the annu- al expenses on the CHF 500 million bond of CHF 12.0 million, slightly decreased compared with 2014, mainly due to the reduction of other borrowings. The “Fair value changes” largely comprise the fair valuation of derivative financial instruments that are classified as financial assets or financial liabilities at fair value through profit or loss and that are used as hedging instruments with regard to foreign exchange risks. 13 Income taxes millions of CHF Current income tax expenses Deferred income tax income Total income tax expenses 2015 – 52.9 28.0 – 24.9 2014 – 89.6 17.7 – 71.9 The weighted average tax rate results from applying each subsidiary’s statutory income tax rate to the in- come before taxes. Since the group operates in countries that have differing tax laws and rates, the con- solidated weighted average effective tax rate will vary from year to year according to variations in income per country and changes in applicable tax rates. Sulzer—Annual Report 2015135 Reconciliation of income tax expenses millions of CHF Income/(loss) from continuing operations before income tax expenses Weighted average tax rate Income taxes at weighted average tax rate Income taxed at different tax rates Effect of tax loss carryforwards and allowances for deferred income tax assets Expenses not deductible for tax purposes incl. goodwill impairment Effect of changes in tax rates and legislation Prior year items and others Total income tax expenses Effective income tax rate 2015 99.9 23.2% – 23.2 13.0 – 3.7 – 4.3 – 1.0 – 5.7 – 24.9 24.9% 2014 – 85.7 27.3% 23.4 – 17.0 1.5 – 83.4 0.3 3.3 – 71.9 – 83.9% The decrease in the effective income tax rate to 24.9% (2014: 28.3% excl. the goodwill impairment in the Water business) can be explained through a change in allocation of taxable profits among the countries. Income tax liabilities millions of CHF Balance as of January 1 Changes in scope of consolidation Additions Released as no longer required Utilized Currency translation differences Total income tax liabilities as of December 31 — thereof non-current — thereof current 2015 35.0 0.7 54.7 – 13.4 – 61.6 – 2.9 12.5 2.6 9.9 2014 30.6 0.5 122.4 – 11.6 – 107.5 0.6 35.0 2.6 32.4 Summary of deferred income tax assets and liabilities in the balance sheet millions of CHF Intangible assets1) Property, plant, and equipment Other financial assets Inventories Other assets Non-current provisions Defined benefit plans Current provisions Other current liabilities Tax loss carryforwards Elimination of intercompany profits 2015 2014 Assets Liabilities Net Assets Liabilities Net – 82.7 – 82.4 – 22.5 – 20.0 0.3 2.9 3.4 20.6 16.8 15.0 52.4 26.3 23.2 25.4 0.7 – 70.1 – 69.8 – 16.3 – 13.4 – 0.8 – 6.8 – 9.2 – 2.8 – – 1.2 – 15.5 – – 2.6 13.8 7.6 12.2 52.4 25.1 7.7 25.4 0.7 0.3 2.5 1.8 18.2 25.9 13.2 51.0 24.7 23.2 21.6 2.5 – 2.9 – 5.5 – 8.3 – 3.5 – 0.3 – 0.9 – 22.7 – – – 1.1 12.7 17.6 9.7 50.7 23.8 0.5 21.6 2.5 35.6 Tax assets/liabilities 187.0 – 122.7 64.3 184.9 – 149.3 Offset of assets and liabilities – 53.3 53.3 – – 58.1 58.1 – Net recorded deferred income tax assets and liabilities 133.7 – 69.4 64.3 126.8 – 91.2 35.6 1) The balance sheet as of December 31, 2014 has been restated following the finalization of the valuation of the net assets acquired related to acquisitions in 2014. A reconciliation to the previously published balance sheet is provided in note 5. Financial Section—Notes to the Consolidated Financial Statements136 Cumulative deferred taxes directly recognized in equity as of December 31, 2015, amounted to CHF 33.1 mil- lion (December 31, 2014: CHF 31.8 million). In compliance with the exception clause of IAS 12, the group does not recognize deferred taxes on investments in subsidiaries in the balance sheet. Movement of deferred income tax assets and liabilities in the balance sheet millions of CHF Intangible assets Property, plant, and equipment Other financial assets Inventories Other assets Non-current provisions Defined benefit plans Current provisions Other current liabilities Tax loss carryforwards Elimination of intercompany profits Total millions of CHF Intangible assets1) Property, plant, and equipment Other financial assets Inventories Other assets Non-current provisions Defined benefit plans Current provisions Other current liabilities Tax loss carryforwards Elimination of intercompany profits Total Balance as of January 1 – 82.4 – 20.0 – 1.1 12.7 17.6 9.7 50.7 23.8 0.5 21.6 2.5 35.6 Balance as of January 1 – 87.1 – 15.9 – 4.7 21.3 9.9 3.4 18.9 22.7 – 4.0 23.5 2.9 – 9.1 Recognized in profit or loss Recognized in other comprehen- sive income Acquisition of subsidiaries Currency translation differences 7.2 5.9 1.1 0.9 – 5.0 3.2 – 0.3 3.5 5.8 7.5 – 1.8 28.0 – – 0.8 – – – 0.5 – – – – – 0.3 – – – – – – – – – – 5.7 0.7 1.8 0.2 – 5.0 – 0.7 1.5 – 2.2 1.4 – 3.7 – 1.3 – 0.3 –0.3 Recognized in profit or loss Recognized in other comprehen- sive income Acquisition of subsidiaries Currency translation differences 2015 Balance as of December 31 – 69.8 – 13.4 2.6 13.8 7.6 12.2 52.4 25.1 7.7 25.4 0.7 64.3 2014 Balance as of December 31 12.6 1.5 3.6 – 9.5 7.8 5.9 – – 2.4 – – – – 5.7 37.0 – 3.2 – 1.0 – 0.7 17.7 – – – – – 12.5 – 4.8 – – – – – – – – – 39.4 – 17.3 4.6 – 82.4 – 0.8 –2.4 0.9 – 0.1 0.4 0.5 1.1 1.3 – 0.9 0.3 4.9 – 20.0 – 1.1 12.7 17.6 9.7 50.7 23.8 0.5 21.6 2.5 35.6 1) The balance sheet as of December 31, 2014 has been restated following the finalization of the valuation of the net assets acquired related to acquisitions in 2014. A reconciliation to the previously published balance sheet is provided in note 5. Sulzer—Annual Report 2015137 Tax loss carryforwards millions of CHF Expiring in the next 3 years Expiring in 4 – 7 years Available without limitation Total tax loss carryforwards as of December 31 millions of CHF Expiring in the next 3 years Expiring in 4 – 7 years Available without limitation Total tax loss carryforwards as of December 31 Amount 10.1 69.1 61.0 140.2 Amount 21.4 20.0 73.3 114.7 Potential tax assets Valuation allowance Carrying amount 1.9 15.5 16.8 34.2 – 1.1 – 4.7 – 3.0 – 8.8 0.8 10.8 13.8 25.4 Potential tax assets Valuation allowance Carrying amount 5.1 4.9 17.6 27.6 – 0.7 – 1.9 – 3.4 – 6.0 4.4 3.0 14.2 21.6 2015 TLCF 1.6 23.3 12.1 37.0 2014 TLCF 3.2 7.6 13.7 24.5 Deferred income tax assets are recognized for tax loss carryforwards to the extent that the realization of the related tax benefit through future taxable profits is probable. No deferred income tax assets have been recognized on tax loss carryforwards (TLCF) in the amount of CHF 37.0 million (2014: CHF 24.5 million). 14 Intangible assets millions of CHF Acquisition cost Trademarks and licenses Goodwill Research and develop- ment Computer software Customer relationship Total 2015 Balance as of January 1 1 033.7 144.6 9.6 44.7 348.3 1 580.9 Changes in scope of consolidation 31.4 0.4 Additions Disposals Reclassifications Currency translation differences Balance as of December 31 Accumulated amortization Balance as of January 1 Additions Disposals Reclassifications Impairments Currency translation differences Balance as of December 31 Net book value As of January 1 As of December 31 – – – – – 0.1 – 45.3 – 11.9 1 019.8 133.2 340.0 – – – – – 340.0 82.5 13.1 – – – – 2.2 93.4 – – – 0.7 – 0.1 – 2.5 6.3 2.0 1.0 – 0.7 – 1.1 – 2.3 1.1 – 2.1 – 0.7 0.7 – 2.2 44.6 8.5 – – 0.1 – 0.4 40.3 2.1 – 1.5 0.3 – 23.9 – 85.8 332.4 1 536.3 38.3 119.4 582.2 4.0 – 0.7 – – – 2.1 39.5 24.2 – 0.1 – 0.1 – 42.3 – 1.5 – 0.1 1.1 – 7.3 – 13.9 136.1 610.1 693.7 679.8 62.1 39.8 7.6 5.2 6.4 5.1 228.9 998.7 196.3 926.2 Following the announcement of a restructuring program in Switzerland, the group performed an impairment test on the related intangible assets, resulting in impairments as of December 31, 2015, of CHF 1.1 million (December 31, 2014: no impairments). Financial Section—Notes to the Consolidated Financial Statements138 millions of CHF Acquisition cost Trademarks and licenses Goodwill Research and develop- ment Computer software Customer relationship Total 2014 Balance as of January 1 978.4 155.1 Changes in scope of consolidation1) Additions Disposals Reclassifications Currency translation differences Balance as of December 31 Accumulated amortization Balance as of January 1 Additions Disposals Reclassifications Impairments Currency translation differences Balance as of December 31 Net book value As of January 1 As of December 31 73.1 – – – 0.9 0.3 – 5.2 – – 17.8 – 6.5 1 033.7 144.6 – – – – 340.0 – 340.0 73.4 13.3 – 2.5 – – – 1.7 82.5 978.4 693.7 81.7 62.1 2.5 7.3 – – – – 0.2 9.6 – 1.4 – – – 0.6 2.0 2.5 7.6 44.0 316.2 1 496.2 0.2 4.5 – 6.1 1.7 0.4 45.7 127.2 0.7 – 0.7 – 4.1 – 9.5 5.5 – 12.0 – 2.4 – 33.6 44.7 348.3 1 580.9 38.5 102.1 214.0 5.3 – 6.1 – – 23.3 – 0.4 – 4.2 43.3 – 9.0 – 4.2 – 340.0 0.6 – 1.4 – 1.9 38.3 119.4 582.2 5.5 6.4 214.1 1 282.2 228.9 998.7 1) The balance sheet as of December 31, 2014 has been restated following the finalization of the valuation of the net assets acquired related to acquisitions in 2014. A reconciliation to the previously published balance sheet is provided in note 5. Goodwill impairment test millions of CHF Growth rate residual value Goodwill 2015 Pre-tax discount rate Goodwill, net book value as of December 31 is allocated as follows Pumps Equipment—business unit Water 679.8 272.9 Growth rate residual value 2014 Pre-tax discount rate Goodwill 693.7 1.0% 11.0% 281.8 1.0% 11.3% Pumps Equipment—individually not significant 25.3 2.0% 10.6% 17.0 2.0% 11.3% Rotating Equipment Services—region EMEA 145.1 2.0% 10.8% 172.4 2.0% 10.7% Rotating Equipment Services—individually not significant 79.2 2.0% 10.6% 76.1 2.0% 10.7% Chemtech 157.3 0.0% 10.0% 146.4 0.0% 10.2% Goodwill is allocated to the smallest cash-generating unit (CGU) at which the goodwill is monitored for in- ternal management purposes (i.e. business units or areas). The fair value of these units is determined by calculating its value in use over a five-year cash flow projection period. The calculation uses the budget for next year and the mid-term plan for subsequent periods that have been reviewed and approved by man- agement. Cash flows beyond this planning period are extrapolated using a terminal value including the growth rates as stated above. The impairment test performed in 2014 revealed that for the business unit Water the value in use was low- er than its carrying amount by CHF 340 million, leading to a corresponding impairment of the goodwill. The carrying value of the net operating assets including the remaining goodwill equal to the recoverable amount. The impairment loss resulted from changes of the future growth and profitability assumptions in order to Sulzer—Annual Report 2015139 bring them in line with expected market developments, past performance of the business and from an adjusted pre-tax discount rate. Sensitivity analyses The recoverable amount from cash-generating units is measured on the basis of value-in-use calculations influenced materially by the terminal growth rate used to determine the residual value, the discount rate, and the projected cash flows. A reduction of the terminal growth rate by 1% or an increase of the pre-tax discount rate by 1% would not lead to an impairment for all the cash-generating units. 15 Property, plant, and equipment millions of CHF Acquisition cost Balance as of January 1 Changes in scope of consolidation Additions Disposals Reclassifications Currency translation differences Balance as of December 31 Accumulated depreciation Balance as of January 1 Changes in scope of consolidation Additions Disposals Reclassifications Impairments Currency translation differences Balance as of December 31 Net book value As of January 1 As of December 31 Machinery and technical equipment Land and buildings Other non-current assets Assets under construction 2015 Total 381.1 701.4 198.6 34.7 1 315.8 8.9 5.2 5.2 24.5 2.1 6.8 – 35.1 16.2 71.6 – 3.2 – 35.6 – 5.8 – – 44.6 9.9 28.4 2.7 – 41.4 – 0.4 – 24.7 – 44.8 – 14.7 – 2.4 – 86.6 377.2 679.1 189.7 26.0 1 272.0 148.0 488.4 148.7 – 13.7 – 3.0 0.1 6.3 – 43.5 – 30.6 – 0.3 5.1 – 16.9 – 4.6 0.4 0.5 – 9.6 – 32.2 – 10.7 155.5 473.9 151.2 – – – – – – – – 785.1 – 74.1 – 38.2 0.2 11.9 – 52.5 780.6 233.1 213.0 221.7 205.2 49.9 38.5 34.7 530.7 26.0 491.4 Thereof leased property, plant, and equipment Acquisition cost of leased property, plant, and equipment Accumulated depreciation Net book value as of December 31 0.5 0.5 – 0.4 – 0.4 0.2 – 0.2 Leasing commitments (present value) as of December 31 0.2 0.3 0.2 – – – – 1.1 0.5 0.6 0.7 Fire insurance value as of December 31 520.5 1 043.2 581.6 26.0 2 171.3 Pledged assets as of December 31 – 2.3 – – 2.3 Following the restructuring announcements in 2015, the group performed impairment tests on the related production machines and facilities, resulting in impairments of CHF 11.9 million as of December 31, 2015 (December 31, 2014: CHF 0.3 million), all of which were charged to other operating expenses. The impaired assets do not meet the criteria for classification as held for sale as of December 31, 2015. Financial Section—Notes to the Consolidated Financial Statements140 In 2015, fixed assets with a book value of CHF 6.4 million (2014: CHF 7.0 million) were sold for CHF 6.7 mil- lion (2014: CHF 21.4 million), resulting in a gain of CHF 0.3 million (2014: CHF 14.4 million). millions of CHF Acquisition cost Balance as of January 1 Changes in scope of consolidation Additions Disposals Reclassifications Currency translation differences Balance as of December 31 Accumulated depreciation Balance as of January 1 Changes in scope of consolidation Additions Disposals Reclassifications Impairments Currency translation differences Balance as of December 31 Net book value As of January 1 As of December 31 Machinery and technical equipment Land and buildings Other non-current assets Assets under construction 2014 Total 346.8 652.0 189.0 28.6 1 216.4 7.1 13.6 – 6.9 8.0 12.5 13.2 27.3 0.2 13.4 – 36.3 20.5 90.6 – 25.2 – 15.7 – – 47.8 14.6 19.5 8.0 3.7 – 31.7 1.5 – 1.1 37.2 381.1 701.4 198.6 34.7 1 315.8 133.0 451.8 139.6 – 13.2 – 3.6 0.3 0.4 4.7 – – 45.8 20.2 – 21.7 – 15.5 – 1.0 – 0.1 13.6 1.4 – 3.0 148.0 488.4 148.7 – – – – – – – – 724.4 – 79.2 – 40.8 0.7 0.3 21.3 785.1 213.8 200.2 233.1 213.0 49.4 49.9 28.6 492.0 34.7 530.7 Thereof leased property, plant, and equipment Acquisition cost of leased property, plant, and equipment Accumulated depreciation Net book value as of December 31 Leasing commitments (present value) as of December 31 0.7 0.7 – – 2.4 1.3 1.1 0.7 0.5 0.3 0.2 – – – – – 3.6 2.3 1.3 0.7 Fire insurance value as of December 31 549.4 1 112.8 536.0 34.7 2 232.9 Pledged assets as of December 31 1.6 1.7 – – 3.3 Sulzer—Annual Report 2015141 16 Associates millions of CHF Balance as of January 1 Addition Profit from continuing operations Dividend payments received Currency translation differences Total investments in associates as of December 31 2015 2.5 0.1 3.7 – 2.3 – 4.0 2014 – 2.4 – – 0.1 2.5 The newly formed company Hua Rui in China started its operating activities in the first half of 2015. The year- to-date profit of Sulzer’s 49% stake in the company was recognized in profit from continuing operations. On June 26, 2015, Sulzer formed a new company with the Unaoil Group dedicated to the service of rotating equipment for oil and gas, and power customers in Southern Iraq. Sulzer’s stake of 49% of the year-to-date profit was recognized in profit from continuing operations. 17 Other financial assets millions of CHF Balance as of January 1 Additions Currency translation differences Balance as of December 31 millions of CHF Balance as of January 1 Additions Disposals Currency translation differences Balance as of December 31 Available-for- sale Loans and receivables 4.5 – – 4.5 7.4 0.5 – 0.8 7.1 Available-for- sale Loans and receivables 4.5 – – – 4.5 6.6 0.8 – 0.1 0.1 7.4 2015 Total 11.9 0.5 – 0.8 11.6 2014 Total 11.1 0.8 – 0.1 0.1 11.9 Financial assets that belong to the category “Available-for-sale financial assets” include investments in equity securities. The category “Loans and receivables” includes items with maturities beyond 12 months. 18 Inventories millions of CHF Raw materials, supplies, and consumables Work in progress Finished products and trade merchandise Total inventories as of December 31 2015 120.9 207.6 80.8 409.3 2014 123.3 270.5 93.7 487.5 In 2015, Sulzer recognized write-downs of CHF 22.5 million (2014: CHF 18.1 million) in the income state- ment. Total accumulated write-downs on inventories amounted to CHF 72.9 million as of Decem- ber 31, 2015 (2014: CHF 68.7 million). Material expenses in 2015 amounted to CHF 1 137.6 million (2014: CHF 1 235.3 million). Financial Section—Notes to the Consolidated Financial Statements142 19 Percentage of completion contracts millions of CHF Contract revenue recognized for the year Net receivables resulting from construction contracts as of December 31 Net liabilities resulting from construction contracts as of December 31 Advance payments received from customers for construction contracts as of December 31 2015 469.8 190.7 – 31.9 2014 561.1 176.8 – 15.5 – 399.1 – 436.2 Sales recognized in accordance with the percentage of completion method for the year 2015 amounted to CHF 469.8 million (thereof related to ongoing contracts CHF 294.2 million), which corresponds to 15.8% of total sales (2014: CHF 561.1 million, or 17.5% of sales). The costs related to these sales amounted to CHF 338.3 million (thereof to ongoing contracts CHF 230.9 million) and to CHF 425.7 million in 2014. The impact on gross profit was CHF 131.5 million, which corresponds to 14.4% of total gross profit (2014: CHF 135.4 million, 13.4%). 20 Trade accounts receivable Aging structure of trade accounts receivable millions of CHF Not past due Past due 1– 30 days 31– 60 days 61–120 days >120 days Total trade accounts receivable as of December 31 2015 Gross amount Allowance Net book value Gross amount Allowance 2014 Net book value 613.8 – 1.0 612.8 675.1 – 7.6 667.5 85.7 38.8 33.9 – 0.5 – 0.6 – 2.0 116.6 – 33.6 85.2 38.2 31.9 83.0 105.8 44.3 54.8 – 0.1 – 0.8 – 8.4 115.6 – 22.8 105.7 43.5 46.4 92.8 888.8 – 37.7 851.1 995.6 – 39.7 955.9 Allowance for doubtful trade accounts receivable millions of CHF Balance as of January 1 Changes in scope of consolidation Additions Released as no longer required Utilized Currency translation differences Balance as of December 31 2015 39.7 – 15.8 – 9.8 – 5.0 – 3.0 37.7 2014 33.5 0.3 23.5 – 14.7 – 4.1 1.2 39.7 Approximately 31% (2014: 32%) of the gross amount of trade accounts receivable is past due, and an al- lowance of CHF 37.7 million (2014: CHF 39.7 million) was recorded. The recoverability of trade accounts receivable is regularly reviewed, and the credit quality of new customers is thoroughly assessed. Due to the large and heterogeneous customer base, the credit risk of the group is limited. Sulzer—Annual Report 2015Accounts receivable by geographical region millions of CHF Accounts receivable by region 143 Europe, Middle East, Africa — thereof United Kingdom — thereof Germany — thereof Switzerland — thereof other countries Americas — thereof USA — thereof Mexico — thereof other countries Asia-Pacific — thereof China — thereof India — thereof other countries Total as of December 31 21 Other accounts receivable and prepaid expenses millions of CHF Receivables from tax authorities Derivative financial instruments Other accounts receivable Total other accounts receivable as of December 31 Insurance premiums Prepaid contributions to employee benefit plans Other prepaid expenses Total prepaid expenses as of December 31 2015 453.2 167.2 54.1 39.6 192.3 203.5 143.4 27.0 33.1 194.4 134.1 25.1 35.2 851.1 2015 59.9 6.4 18.5 84.8 2.5 9.6 26.4 38.5 2014 412.2 93.7 21.8 37.4 259.3 283.7 183.8 20.0 79.9 260.0 152.0 42.6 65.4 955.9 20141) 64.0 7.4 38.4 109.8 2.6 10.7 24.1 37.4 Total other accounts receivable and prepaid expenses as of December 31 123.3 147.2 1) The balance sheet as of December 31, 2014, has been restated following the finalization of the valuation of the net assets acquired in 2014. A reconciliation to the previously published balance sheet is provided in note 5. For further details on the position “Derivative financial instruments,” refer to note 29. Other accounts receiv- able do not include any material positions that are past due or impaired. 22 Cash and cash equivalents millions of CHF Cash Cash equivalents Total cash and cash equivalents as of December 31 2015 902.2 106.8 1 009.0 2014 865.9 328.8 1 194.7 As of December 31, 2015 and 2014, the group held no significant restricted cash and cash equivalents. Financial Section—Notes to the Consolidated Financial Statements144 23 Marketable securities millions of CHF Designated at fair value through profit or loss Total marketable securities as of December 31 2015 208.3 208.3 2014 106.8 106.8 Marketable securities designated at fair value through profit or loss as of December 31, 2015, mainly com- prises an investment in a fund investing in short-term bonds with high credit ratings. Further, during 2015 the group invested in time deposits and other interest-bearing investments with maturity between 3 and 12 months, leading to an increase of the carrying amount compared to 2014. Any fair value adjustments are recognized in financial income. 24 Share capital thousands of CHF Number of shares 2015 Share capital Number of shares 2014 Share capital Balance as of December 31 (par value CHF 0.01) 34 262 370 342.6 34 262 370 342.6 The share capital amounts to CHF 342 623.70, made up of 34 262 370 shares with dividend entitlement and a par value of CHF 0.01. All shares are fully paid in and registered. Share ownership Sulzer shares are freely transferable provided that, when requested by the company to do so, buyers de- clare that they have purchased and will hold the shares in their own name and for their own account. Nominees shall only be entered in the share register with the right to vote, provided that they meet the following conditions: the nominee is subject to the supervision of a recognized banking and financial market regulator; the nominee has entered into an agreement with the Board of Directors concerning his status; the share capital held by the nominee does not exceed 3% of the registered share capital entered in the commercial register; and the names, addresses, and number of shares of those individuals for whose account the nominee holds at least 0.5% of the share capital have been disclosed. The Board of Directors is also entitled, beyond these limits, to enter shares of nominees with voting rights in the share register, provided that the above-mentioned conditions are met (see also paragraph 6a of the Articles of Association at www.sulzer.com/regulations). Shareholders holding more than 3% Renova Group First Pacific Advisors BlackRock T. Rowe Price Associates Dec 31, 2015 Dec 31, 2014 Number of shares in % Number of shares 21 728 414 63.42 11 159 790 n/a n/a 1 051 364 n/a n/a 3.07 1 716 616 1 149 976 n/a in % 32.57 5.01 3.36 n/a Sulzer Ltd is not aware of any agreements between the shareholders named above regarding the shares held or regarding the execution of voting rights. Retained earnings The retained earnings include prior years’ undistributed income of consolidated companies and all remea- surements of the net liability for defined benefit plans. Treasury shares The total number of shares held by Sulzer Ltd as of December 31, 2015, amounted to 187 191 (Decem- ber 31, 2014: 254 940 shares), which are mainly held for the purpose of issuing shares under the manage- ment share-based payment programs. Sulzer—Annual Report 2015145 Cash flow hedge reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments where the hedged transaction has not yet occurred. Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss. Currency translation reserve The currency translation reserve comprises all foreign exchange differences arising on the translation of the financial statements of foreign controlled entities. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. Dividends On April 1, 2015, the Annual General Meeting approved a dividend of CHF 3.50 (2014: CHF 3.20) per share, to be paid out of reserves. The dividend was paid to shareholders on April 9, 2015, less 35 percent with- holding tax. The total amount of the gross dividend paid was CHF 119.2 million (2014: CHF 109.6 million). The Board of Directors decided to propose to the Annual General Meeting an ordinary dividend for the year 2015 of CHF 3.50 per outstanding share (2014: CHF 3.50 per outstanding share) and a special dividend of CHF 14.60 per outstanding share (2014: CHF 0.00 per outstanding share). 25 Earnings per share Net income attributable to shareholders of Sulzer Ltd—continuing operations Net income attributable to shareholders of Sulzer Ltd—discontinued operations Net income attributable to shareholders of Sulzer Ltd (millions of CHF) 2015 73.9 – 73.9 2014 – 160.7 435.7 275.0 Issued number of shares Adjustment for the average treasury shares held 34 262 370 34 262 370 – 226 508 – 255 061 Average number of shares outstanding as of December 31 34 035 862 34 007 309 Adjustment for share participation plans 148 139 153 808 Average number of shares for calculating diluted earnings per share as of December 31 34 184 001 34 161 117 Earnings per share, attributable to a shareholder of Sulzer Ltd (in CHF) as of December 31 Basic earnings per share — thereof basic earnings per share continuing operations — thereof basic earnings per share discontinued operations Diluted earnings per share — thereof diluted earnings per share continuing operations — thereof diluted earnings per share discontinued operations 2.17 2.17 – 2.16 2.16 – 8.09 – 4.72 12.81 8.05 – 4.70 12.75 26 Borrowings millions of CHF Bonds Bank and other loans Leasing obligations Total borrowings as of December 31 — thereof due in < 1 year — thereof due in 1– 5 years — thereof due in > 5 years 2015 2014 Short-term Long-term Total Short-term Long-term Total 499.6 14.5 0.3 514.4 514.4 – – – 6.5 0.7 7.2 – 7.0 0.2 499.6 21.0 1.0 521.6 514.4 7.0 0.2 – 498.9 498.9 17.5 0.2 17.7 17.7 – – 10.8 0.6 28.3 0.8 510.3 528.0 – 17.7 510.0 510.0 0.3 0.3 Financial Section—Notes to the Consolidated Financial Statements146 Borrowings by currency BRL CHF EUR SAR Other millions of CHF 7.0 in % 1.3 499.7 95.8 0.3 8.8 5.8 0.1 1.7 1.1 Total as of December 31 521.6 100.0 2015 Interest rate millions of CHF in % 4.2 22.0 498.9 94.5 0.4 – 6.7 0.1 – 1.2 528.0 100.0 8.0% 2.4% 2.9% 4.2% – – 2014 Interest rate 8.0% 2.3% 4.0% – – – In May 2015 Sulzer voluntarily amended and extended its CHF 500 million syndicated credit facility origi- nally signed in 2012. The new maturity date is May 2020 with two one-year extension options. The amended facility is further available for general corporate purposes including financing of acquisitions. The facility is subject to financial covenants based on net financial indebtedness and EBITDA, which were adhered to throughout the reporting period. The facility was not used during 2015 due to the group’s net liquidity situation, and also the amount of other borrowings was further reduced. Outstanding bond millions of CHF 2.25% 07/2011– 07/2016 Total as of December 31 2015 2014 Amortized costs Nominal Amortized costs Nominal 499.6 500.0 498.9 500.0 499.6 500.0 498.9 500.0 In July 2011 Sulzer Ltd issued a CHF-denominated 2.25% domestic bond in the aggregate principal amount of CHF 500 million for a term of five years. This bond with maturity in July 2016 is reclassified from long- to short-term. The effective interest rate is 2.42%. The bond is traded at the SIX Swiss Exchange and the fair value amounts to CHF 506.4 million as per December 31, 2015 (2014: CHF 514.4 million). The fair value of the other financial borrowings is approximately equivalent to their carrying amount. 27 Provisions millions of CHF Balance as of January 1, 2015 Changes in scope of consolidation Additions Released as no longer required Utilized Currency translation differences Total provisions as of December 31, 2015 — thereof non-current — thereof current Warranties/ liabilities Restruc- turing Environ- mental Other employee benefits 36.8 1.4 31.1 – 1.3 99.5 – 1.3 – 34.9 40.1 – 16.4 – – 24.3 – 31.7 – 13.1 – 0.8 42.9 36.2 6.7 – 8.4 77.9 4.3 73.6 – 0.6 27.7 1.0 26.7 Other 64.9 – Total 219.0 1.4 16.2 122.3 – 12.5 – 30.2 – 19.7 – 88.8 – 2.7 46.2 15.9 30.3 – 12.9 210.8 73.5 137.3 16.5 – – – – – 0.4 16.1 16.1 – The category “Other employee benefits” includes provisions for jubilee gifts, early retirement of senior man- agers, and other obligations to employees. The utilized provision in the category “Warranties/liabilities” is mainly related to a settlement of a dispute of the locomotive business (sold in 1998). Following the decision of the arbitral tribunal the group recognized in addition to the existing provision, expenses of CHF 8.7 million in other operating income and expenses, and CHF 5.2 million as interest expenses. Sulzer—Annual Report 2015147 As part of the Sulzer Full Potential (SFP) program, Sulzer has initiated several actions to adapt the global manufacturing capacities and streamline the organizational setup. Restructuring provisions are mainly as- sociated with measures started in Brazil, the Netherlands, China, Switzerland, the United States, and Fin- land. In 2015, the group recognized restructuring provisions of CHF 40.1 million. The remaining provision as of December 31, 2015 is CHF 27.7 million, of which CHF 26.7 million is expected to be utilized within one year. “Environmental” mainly consists of expected costs related to inherited liabilities. “Other” includes provisions that do not fit into the aforementioned categories. A large number of these provisions refer to indemnities, in particular related from divestitures. In addition, provisions for ongoing asbestos lawsuits and other legal claims are included. Based on the currently known facts, Sulzer is of the opinion that the resolution of the open cases will not have material effects on its liquidity or financial condi- tion. Although Sulzer expects a large part of the category “Other” to be realized in 2016, by their nature the amounts and timing of any cash outflows are difficult to predict. 28 Other current and accrued liabilities millions of CHF Social security institutions Taxes (VAT, withholding tax) Derivative financial instruments Other current liabilities Total other current liabilities as of December 31 Vacation and overtime claims Salaries, wages, and bonuses Contract-related costs Other accrued liabilities Total accrued liabilities as of December 31 2015 10.6 19.3 11.2 13.7 54.8 26.7 82.5 103.7 97.9 310.8 2014 10.5 42.8 11.6 33.5 98.4 32.7 78.1 129.1 85.9 325.8 Total other current and accrued liabilities as of December 31 365.6 424.2 29 Derivative financial instruments millions of CHF Forward exchange contracts Other derivative instruments Total as of December 31 — thereof due in < 1 year — thereof due in 1– 2 years — thereof due in 3 – 5 years 2015 2014 Derivative assets Derivative liabilities Derivative assets Derivative liabilities Notional value 437.5 – 437.5 437.3 0.2 – Fair value Notional value Fair value Notional value Fair value Notional value 6.4 – 6.4 6.4 – 589.5 11.6 407.1 – 589.5 571.7 17.7 0.1 – 11.6 11.2 0.4 – 407.1 406.4 0.7 – 7.4 – 7.4 7.4 – 582.6 0.8 583.4 579.8 3.6 – Fair value 11.6 0.1 11.7 11.6 0.1 The notional and the fair value of derivative assets and liabilities include current and also non-current deriv- ative financial instruments. The cash flow hedges of the expected future sales were assessed as highly effective. As at December 31, 2015, a net cumulative unrealized loss of CHF 12.8 million (2014: loss of CHF 10.1 million) with a deferred tax asset of CHF 3.6 million (2014: CHF 4.4 million) relating to these cash flow hedges were included in other comprehensive income. In 2015, a loss of CHF 3.1 million (2014: a gain of CHF 1.4 million) cash flow hedge reserve was recognized in profit or loss. There was no ineffectiveness that arose from cash flow hedges in 2015 (2014: CHF 0.0 million). The maximum exposure to credit risk at the reporting date is the fair value of the derivative assets in the balance sheet. Financial Section—Notes to the Consolidated Financial Statements148 The hedged, highly probable forecast transactions denominated in foreign currency are mostly expected to occur at various dates during the next 12 months. Gains and losses recognized in the hedging reserve (cash flow hedges) in equity on forward foreign exchange contracts as of December 31, 2015, are recognized either in sales, cost of goods sold, or in other operating income/expenses in the period or periods during which the hedged transaction affects the income statement. This is generally within 12 months from the balance sheet date unless the gain or loss is included in the initial amount recognized for the purchase of fixed assets, in which case, recognition is over the lifetime of the asset (5 to 10 years). The group enters into derivative financial instruments under enforceable master netting arrangements. These agreements do not meet the criteria for offsetting derivative assets and derivative liabilities in the consolidated balance sheet. As per December 31, 2015, the amount subject to such netting arrangements was CHF 3.8 million (2014: CHF 2.5 million). Considering the effect of these agreements the amount of derivative assets would reduce from CHF 6.4 million to CHF 2.6 million (2014: from CHF 7.4 million to CHF 4.9 million), and the amount of derivative liabilities would reduce from CHF 11.6 million to CHF 7.8 mil- lion (2014: from CHF 11.7 million to CHF 9.2 million). 30 Other financial commitments millions of CHF Maturity < 1 year Maturity 1 – 5 years Maturity > 5 years Operating lease as of December 31 Rented premises 20.4 51.8 23.1 95.3 2015 Total 29.4 64.1 23.1 Other 9.0 12.3 – 21.3 116.6 Rented premises 20.0 51.4 19.1 90.5 2014 Total 30.7 69.8 19.1 Other 10.7 18.4 – 29.1 119.6 Total commitments for future investments and acquisitions as of December 31 0.7 1.6 2.3 1.2 1.4 2.6 31 Contingent liabilities millions of CHF Guarantees in favor of third parties Total contingent liabilities as of December 31 2015 10.0 10.0 2014 10.0 10.0 As of December 31, 2015, guarantees provided to third parties amounted to CHF 10 million expiring in the year 2022. The guarantee is related to a disposed business and certain environmental matters. 32 Share participation plans Share-based payments charged to personnel expenses millions of CHF Restricted share unit plan Performance share plan Total charged to personnel expenses 2015 9.6 – 1.3 8.3 2014 6.4 1.0 7.4 Restricted share unit plan settled in Sulzer shares This long-term incentive plan covers key members of the management and members of the Board of Di- rectors. Restricted share units (RSU) are granted annually depending on the organizational position of the employee. Vesting of the RSU is subject to continuous employment over the vesting period. Awards to members of the Board of Directors automatically vest with the departure from the board. The plan features graded vesting over a three-year period. One RSU award is settled with one Sulzer share at the end of the vesting period. The fair value of the RSU granted is measured at the grant date closing share price of Sulzer Ltd, and discounted over the vesting period using a discount rate that is based on the yield of Swiss gov- ernment bonds for the duration of the vesting period. Participants are not entitled to dividends declared Sulzer—Annual Report 2015149 during the vesting period. Consequently, the grant date fair value of the RSUs is reduced by the present value of the dividends expected to be paid during the vesting period. During 2015, the Renova shareholder group exceeded the threshold of 50% of the voting rights in Sulzer Ltd., qualifying as a Change of Control under the RSU plan. The Change of Control triggered the acceler- ated vesting of all outstanding RSUs and entitled the plan participants to immediately receive shares. The group offered the plan participants the opportunity to continue participating in the RSU plans. If the plan participants waived the right to accelerated vesting and immediate allocation of shares and agreed to hold the RSUs through to the end of their original vesting periods, plan participants, not including the Members of the Board of Directors and the Executive Committee, received additional RSUs in a number equal to 20% of the number of unvested RSUs that the plan participants held at the time of the Change of Control. The additional RSUs granted will vest at the same date as the last tranche of the original RSUs. Restricted share units Grant year 2015 2014 2013 2012 2011 Total Outstanding as of December 1, 2014 Granted Exercised Forfeited Outstanding as of December 31, 2014 Outstanding as of December 1, 2015 Granted Exercised Forfeited – – – – – – – 49 635 36 710 15 681 102 026 69 984 303 – – 70 287 – – 18 761 – 20 516 – 15 681 – 54 958 – 1 725 – 5 665 – 1 852 68 259 25 512 14 342 68 259 25 512 14 342 98 035 3 426 993 – – 20 621 – 32 046 – 16 212 – 13 204 – – 3 713 – 1 682 – 1 138 – – – – – – – – 9 242 108 113 108 113 102 454 – 82 083 – 6 533 121 951 Outstanding as of December 31, 2015 77 414 35 926 8 611 – Average share price at grant date in CHF 102.18 122.00 166.61 129.13 142.62 Performance share plan settled in Sulzer shares This long-term incentive plan covers the members of the Executive Committee. Participants are granted performance-based share units (PSU). Vesting of the PSU is subject to continuous employment and to the achievement of two equally weighted performance conditions over the performance period. The two performance conditions are based on cu- mulated operational EBITA and the relative performance of the Sulzer share price, measured as Total Shareholder Return (TSR), compared to a selected group of 30 peer companies. TSR is measured with a starting value of the Volume Weighted Average Share Price (VWAP) over the first three months of the first year, and an ending value of the VWAP over the last three months of the vesting period. The rank of Sulzer’s TSR at the end of the performance period determines the effective number of total shares. The average fair market value at grant date has been calculated using a Monte Carlo simulation. Performance share units—terms of awards Grant year Number of awards granted Grant date 2015 21 665 2014 15 965 2013 37 035 April 1, 15 April 1, 14 April 1, 13 Performance period for cumulative opEBITA 01/15 – 12/17 01/14 – 12/16 01/13 – 12/15 Performance period for TSR Fair value at grant date in CHF 04/15 – 03/18 04/14 – 03/17 04/13 – 03/16 193.97 206.63 294.81 Financial Section—Notes to the Consolidated Financial Statements150 Performance share units Grant year Outstanding as of January 1, 2014 Granted Exercised Forfeited Outstanding as of December 31, 2014 Outstanding as of January 1, 2015 Granted Exercised Forfeited Outstanding as of December 31, 2015 2015 2014 2013 Total – – – – – – – 37 035 37 035 15 965 – 15 965 – – 4 860 – 4 860 – 2 314 – 5 717 – 8 031 13 651 26 458 40 109 13 651 26 458 40 109 21 665 – – – – 21 665 – 5 717 – 5 717 – 7 865 – 6 439 – 15 881 – 30 185 13 800 7 212 4 860 25 872 Share option plan From 2002 until 2008, there was a Sulzer stock option plan in place for the Sulzer Management Group and Board members. Awards were made annually and were dependent on the organizational position of the employee. The exercise price was determined on the basis of the average stock market price of the Sulzer share during the last ten days before the options were granted. Option right for ten Sulzer shares Grant year Outstanding as of January 1, 2014 Exercised Outstanding as of December 31, 2014 Outstanding as of January 1, 2015 Exercised Outstanding as of December 31, 2015 2005 1 410 – 830 580 580 – 580 – 2004 200 – 200 – – – – Total 1 610 – 1 030 580 580 – 580 – Average share price at grant date in CHF 52.20 31.80 33 Transactions with members of the Board of Directors, Executive Committee, and related parties Key management compensation 2015 Equity- based compensa- tion Pension and social security contribu- tions Short-term benefits Equity- based compensa- tion Pension and social security contribu- tions Short-term benefits Total thousands of CHF Board of Directors 1 068 1 570 135 2 773 904 862 99 1 865 Executive Committee 5 375 57 1 781 7 213 5 994 2 250 1 809 10 053 The amounts for equity-based compensation are valued according to IFRS 2. There are no outstanding loans with members of the Board of Directors or the Executive Committee as per balance sheet date. No shares have been granted to members of the Board of Directors, the Executive Committee, or related persons, with the exception of shares granted in connection with equity-settled plans and service awards. Average exercise price in CHF 49.67 48.24 52.20 52.20 52.20 – 2014 Total Sulzer—Annual Report 2015151 Related parties As of December 31, 2015, sales with related parties controlled by the major shareholder (Renova Group) amounted to CHF 9.2 million (2014: CHF 16.2 million) with open receivables of CHF 2.0 million (2014: CHF 6.0 million). Open payables of CHF 0.6 million (2014: CHF 0.0 million) were recognized. Expenses for services from a company controlled by the major shareholder of Sulzer amounted to CHF 0.7 million (2014: CHF 0.2 million). Sales with associates recorded in 2015 amounted to CHF 2.5 million (2014: CHF 0.0 mil- lion). Open payables with associates amounted to CHF 1.0 million (2014: CHF 0.0 million). At the time when these consolidated financial statements were authorized for issue by the Board of Directors on February 24, 2016, no other major business transactions or outstanding balances with the Renova Group, their repre- sentatives, or any other related parties or companies were known. 34 Auditor remuneration Fees for the audit services by KPMG as the appointed group auditor amounted to CHF 2.7 million (2014: CHF 2.6 million). Additional services provided by the group auditor amounted to a total of CHF 0.5 million (2014: CHF 0.3 million). This amount includes CHF 0.3 million (2014: CHF 0.3 million) for tax and legal advisory services and CHF 0.2 million for other consulting services (2014: CHF 0.0 million). 35 Corporate risk management process Sulzer has an integrated risk management system that is under constant scrutiny for further improvement. A defined risk management process and four common tools (risk assessment schedule, risk-profiling ma- trix, risk description schedule, loss control schedule) are applied in order to assess and control all key risks, to implement and maintain risk financing and risk transfer measures, to monitor the results, and to define and implement corrective actions if required. In order to reflect the organizational changes towards a more market-oriented approach, the risk management process was adapted accordingly. Key risks were as- sessed on business unit level and consolidated on group level. The business units together with the divi- sions and the group functions generate their respective key risk-profiling matrices and complete and update the related risk control schedules on an annual basis. These schedules identify specific risk exposures and the related risk objectives, list existing loss controls, address their effectiveness, list (where required) addi- tional or alternative loss controls, and determine responsibilities and time frames for their implementation. The business units’ key risk-profiling matrices are reviewed at the group level and are then consolidated into a Sulzer key risk-profiling matrix. The head of Risk Management informs the Audit Committee at least once a year of the current risks and risk mitigation as well as of the progress toward achieving major risk objec- tives. The assessment of risk management processes is included within the charter and scope of Group Internal Audit. 36 Subsequent events after the balance sheet date The Board of Directors authorized these consolidated financial statements for issue on February 24, 2016. They are subject to approval at the Annual General Meeting, which will be held on April 7, 2016. At the time when these consolidated financial statements were authorized for issue, the Board of Directors and the Executive Committee were not aware of any events that would materially affect these financial statements. Financial Section—Notes to the Consolidated Financial Statements152 37 Major subsidiaries December 31, 2015 December 31, 2015 Europe Subsidiary Switzerland Sulzer Chemtech AG, Winterthur Belgium Germany Sulzer Mixpac AG, Haag Sulzer Markets and Technology AG, Winterthur Sulzer Management AG, Winterthur Tefag AG, Winterthur Sulzer International AG, Winterthur Sulzer Pumps Wastewater Belgium N.V./S.A., St. Stevens-Woluwe Sulzer Pumpen (Deutschland) GmbH, Bruchsal Sulzer Pumps Wastewater Germany GmbH, Bonn Sulzer Pump Solutions Germany GmbH, Lohmar Sulzer Chemtech GmbH, Linden Sulzer Pumps Grundbesitz Germany GmbH, Lohmar Denmark Sulzer Mixpac Denmark A/S, Greve Finland France Greece Sulzer Pumps Denmark A/S, Farum Sulzer Pumps Finland Oy, Kotka Sulzer Pompes France, Mantes Sulzer Pumps Wastewater Greece A.E., Athens Great Britain Sulzer Pumps (UK) Ltd., Leeds Sulzer Chemtech (UK) Ltd., Stockton on Tees Dowding & Mills Plc., Birmingham Sulzer (UK) Holdings Ltd., Leeds Ireland Sulzer Pump Solutions Ireland Ltd., Wexford Sulzer Finance (Ireland) Limited, Wexford Italy Sulzer Pumps Wastewater Italy S.r.l., Casalecchio di Reno Sulzer Chemtech Italia S.r.l., Milano Norway Sulzer Pumps Wastewater Norway A/S, Sandvika Sulzer Pumps Norway A/S, Klepp Stasjon The Netherlands Sulzer Pumps Wastewater Netherlands B.V., Maastricht-Airport Sulzer Chemtech Nederland B.V., Breda Sulzer Turbo Services Rotterdam B.V., Europoort Advanced Separation Company (Ascom) B.V., Arnhem Process Laboratories Netherlands (PROLAB NL) B.V., Arnhem Sulzer Turbo Services Venlo B.V., Lomm Sulzer Netherlands Holding B.V., Breda Sulzer Capital B.V., Breda Sulzer ownership and voting rights Registered capital (including paid-in capital in the USA t c e r i and Canada) D n o i t a p c i t r a p i d t L l r e z u S y b t n e m p o e v e d l & h c r a e s e R & n o i t c u d o r P g n i r e e n g n e i 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%                       CHF 10 000 000 CHF 100 000 CHF 4 000 000 CHF 500 000 CHF 500 000 CHF 100 000 EUR 123 947 EUR 3 000 000 EUR 300 000 EUR 1 000 000 EUR 300 000 EUR 300 000 DKK 500 000 DKK 500 000 EUR 16 000 000 EUR 6 600 000 EUR 117 400 GBP 9 610 000 GBP 100 000 GBP 15 409 555 GBP 6 100 000 EUR 2 222 500 EUR 100 EUR 600 000 EUR 100 000 NOK 502 000 NOK 500 000 EUR 15 882 EUR 1 134 451 EUR 18 000 EUR 18 000 EUR 18 000 EUR 444 704 EUR 10 010 260  EUR 50 000                          l s e a S                          i e c v r e S                       Sulzer—Annual Report 2015 December 31, 2015 Europe Subsidiary Austria Poland Sulzer Austria GmbH, Wiener Neudorf Sulzer Turbo Services Poland Sp. z o.o., Lublin Sulzer Pumps Wastewater Poland Sp. z o.o., Warszawa Russia ZAO Sulzer Pumps, St. Petersburg Sulzer Pumps Rus LLC, Moscow Sulzer Turbo Services Rus LLC, Moscow Sulzer Chemtech LLC, Serpukhov Sulzer Pumps Sweden AB, Norrköping Sulzer Pumps Spain S.A., Madrid Sweden Spain Sulzer Pumps Wastewater Spain S.A., Rivas Vaciamadrid Turkey Sulzer Pompa Çözümleri Ltd. Sti., Istanbul North America Canada Sulzer Pumps (Canada) Inc., Burnaby Sulzer Chemtech Canada Inc., Edmonton Sulzer Rotating Equipment Services (Canada) Ltd., Edmonton USA Sulzer Pumps (US) Inc., Brookshire, Texas Sulzer Pumps Solutions Inc., Easley, South Carolina Sulzer Pump Services (US) Inc., Brookshire, Texas Sulzer Chemtech USA, Inc., Tulsa, Oklahoma Sulzer Mixpac USA Inc., Salem, New Hampshire Sulzer Turbo Services Houston Inc., La Porte, Texas Sulzer Turbo Services New Orleans Inc., Belle Chasse, Louisiana Sulzer Grayson Inc., Pasadena, Texas Sulzer US Holding Inc., Sugar Land, Texas Mexico Sulzer Pumps México, S.A. de C.V., Cuautitlán Izcalli Sulzer Chemtech, S. de R.L. de C.V., Cuautitlán Izcalli Sulzer ownership and voting rights Registered capital (including paid-in capital in the USA t c e r i and Canada) D 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% EUR 350 000 PLN 2 427 000 PLN 800 000 RUB 8 000 000 RUB 6 000 600 RUB 7 500 000 RUB 55 500 000 SEK 3 000 000 EUR 1 750 497 EUR 2 000 000 TRY 800 000 CAD 2 771 588 CAD 1 000 000 CAD 7 000 000 USD 40 381 108 USD 27 146 250 USD 1 000 USD 47 895 000 USD 100 USD 18 840 000 USD 4 006 122 USD 12 461 286 100% USD 200 561 040 100% 100% MXN 4 887 413 MXN 31 345 500 t n e m p o e v e d l & h c r a e s e R & n o i t c u d o r P g n i r e e n g n e i d t L l r e z u S y b n o i t a p c i t r a p i                                 l s e a S                       153 i e c v r e S                      Financial Section—Notes to the Consolidated Financial Statements 154 Major subsidiaries December 31, 2015 December 31, 2015 Central and South America Subsidiary Sulzer ownership and voting rights Registered capital (including paid-in capital in the USA t c e r i and Canada) D n o i t a p c i t r a p i d t L l r e z u S y b t n e m p o e v e d l & h c r a e s e R & n o i t c u d o r P g n i r e e n g n e i Argentina Brazil Chile Colombia Venezuela Africa Sulzer Turbo Services Argentina S.A., Buenos Aires Sulzer Brasil S.A., Jundiaí Sulzer Pumps Wastewater Brasil Ltda., Curitiba Sulzer Services Brasil, Triunfo Sulzer Bombas Chile Ltda., Vitacura Sulzer Pumps Colombia S.A.S., Cota Sulzer Pumps (Venezuela) S.A., Barcelona Sulzer Turbo Services Venezuela S.A., Caracas 100% 100% 100% 100% 100% ARS 9 730 091 BRL 82 054 659 BRL 18 166 785 BRL 40 675 856 CLP 46 400 000 100% COP 7 800 000 000 100% VEB 200 000 000 100% VEB 5 000 South Africa Sulzer Pumps (South Africa) (Pty) Ltd., Elandsfontein 75% ZAR 100 450 000 Sulzer (South Africa) Holdings (Pty) Ltd., Elandsfontein Sulzer Chemtech (Pty) Ltd., Johannesburg Sulzer Pumps Wastewater South Africa (Pty) Ltd., Johannesburg Expert International Pompe Service SARL1), Casablanca Sulzer Pumps (Nigeria) Ltd., Lagos Sulzer Zambia Ltd., Chingola Morocco Nigeria Zambia Middle East United Arab Emirates Sulzer Pumps Middle East FZCO, Dubai Sulzer Saudi Pump Company Limited 1), Riyadh Bahrain Sulzer Chemtech Middle East S.P.C., Al Seef 1) Acquired in 2015. 100% 100% 100% 100% 100% 100% ZAR 16 476 ZAR 121 ZAR 1 001 MAD 3 380 000 NGN 10 000 000 ZMK 15 000 000 100% AED 500 000 75% SAR 44 617 000 100% BHD 50 000                         i e c v r e S                 l s e a S                Sulzer—Annual Report 2015 December 31, 2015 Asia Subsidiary India Sulzer Pumps India Ltd., Navi Mumbai Sulzer India Pvt. Ltd., Pune Sulzer Tech India Pvt. Ltd., Navi Mumbai Sulzer Chemtech Tower Field Services (India) Pvt. Ltd., Mumbai Sulzer ownership and voting rights Registered capital (including paid-in capital in the USA t c e r i and Canada) D 99% 100% 100% 100% INR 25 000 000 INR 34 500 000 INR 100 000 INR 500 000 Indonesia PT Sulzer Turbo Services Indonesia, Purwakarta 100% IDR 28 234 800 000 PT Sulzer Pumps Indonesia, Purwakarta Japan Sulzer Daiichi K.K., Tokyo Sulzer Japan Ltd., Tokyo Malaysia Sulzer Pumps Wastewater Malaysia Sdn. Bhd., Selangor Darul Ehsan Advanced Separation Company Asia SDN BHD, Kuala Lumpur Singapore Sulzer Asia Pacific Pte. Ltd., Singapore Sulzer Asia Holding Pte. Ltd., Singapore Sulzer Chemtech Pte. Ltd., Singapore South Korea Sulzer Korea Ltd., Seoul Thailand Sulzer Chemtech Co., Ltd., Rayong People’s Republic of China Sulzer Dalian Pumps & Compressors Ltd., Dalian Australia Sulzer Pumps Suzhou Ltd., Suzhou Sulzer Pump Solutions (Kunshan) Co., Ltd., Kunshan Sulzer Shanghai Eng. & Mach. Works Ltd., Shanghai Sulzer Pumps Wastewater Shanghai Co. Ltd., Shanghai Sulzer Chemtech Pty Ltd., Brisbane Sulzer Australia Pty Ltd., Brendale Sulzer Australia Holding Pty Ltd., Wheelers Hill 100% 60% 100% 100% 100% 100% 100% 100% USD 300 000 JPY 30 000 000 JPY 10 000 MYR 500 000 MYR 2 SGD 1 000 000 SGD 31 894 001 SGD 1 000 000 100% KRW 222 440 000 100% THB 5 000 000 100% 100% 100% 100% 100% 100% 100% 100% CHF 21 290 000 CNY 82 069 324 USD 5 760 000 CNY 61 432 607 USD 1 550 000 AUD 500 000 AUD 5 308 890 AUD 34 820 100 d t L l r e z u S y b t n e m p o e v e d l & h c r a e s e R & n o i t c u d o r P g n i r e e n g n e i               n o i t a p c i t r a p i                      155 i e c v r e S                l s e a S                  Financial Section—Notes to the Consolidated Financial Statements 156 Report of the Statutory Auditor to the General Meeting of Shareholders of Sulzer Ltd, Winterthur Report of the Statutory Auditor on the Consolidated Financial Statements As statutory auditor, we have audited the consolidated financial statements of Sulzer Ltd, which comprise the income statement, statement of com- prehensive income, balance sheet, statement of changes in equity, statement of cash flows and notes (pages 95 to 155) for the year ended Decem- ber 31, 2015. Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and the requirements of Swiss law. This responsibility includes designing, implementing, and maintaining an internal control system relevant to the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards as well as International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidat- ed financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements for the year ended December 31, 2015 give a true and fair view of the financial position, the results of operations, and the cash flows in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. 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. KPMG AG Zurich, February 24, 2016 François Rouiller Licensed Audit Expert Auditor in Charge Roman Wenk Licensed Audit Expert Sulzer—Annual Report 2015 157 Five-year summaries of key financial data Key figures from consolidated income statement and statement of cash flows millions of CHF Order intake 2015 2014 2013 2012 2011 2 895.8 3 160.8 3 249.9 3 343.4 3 566.1 Order intake gross margin 33.8% 33.5% 33.5% 34.5% 33.1% Order backlog Sales Operating income Operational EBITA 1 510.7 1 699.6 1 672.1 1 753.6 1 864.0 2 971.0 3 212.1 3 263.9 3 340.7 3 577.9 EBIT 120.9 – 69.0 264.0 328.7 364.1 opEBITA 254.1 302.9 304.1 378.4 431.3 Operational EBITA margin (operational EBITA/sales) opROSA 8.6% 9.4% 9.3% 11.3% 12.1% Return on capital employed (operational EBITA in % of average capital employed)1) opROCEA 17.0% 17.1% 14.6% 18.1% 20.6% Net income attributable to shareholders of Sulzer Ltd 73.9 275.0 234.4 302.9 279.8 — in percentage of equity attributable to shareholders of Sulzer Ltd Reported EPS Depreciation Amortization ROE EPS 3.3% 11.3% 10.0% 13.7% 13.8% 2.17 8.09 6.89 8.91 8.25 – 74.1 – 79.2 – 73.0 – 66.8 – 78.5 – 42.3 – 43.3 – 41.6 – 41.5 – 39.7 Impairments on tangible and intangible assets 2) – 13.0 – 0.4 0.0 – 0.2 – 0.5 Research and development expenses – 73.4 – 76.2 – 70.6 – 66.9 – 71.7 Capital expenditure Free cash flow FCF conversion (free cash flow/net income) Employees (number of full-time equivalents) as of December 31 Personnel expenses 73.7 155.8 2.08 96.0 98.0 0.35 80.5 93.0 113.2 218.7 347.9 0.93 1.12 82.3 0.29 14 253 15 494 15 382 15 537 17 002 1 020.8 1 046.2 1 047.4 1 019.8 1 056.3 1) Since 2014 opEBITA/operational capital employed (excl. other intangible assets). For 2013 and earlier capital employed. 2) does not include impairment on goodwill. Key figures from consolidated balance sheet millions of CHF Non-current assets 2015 2014 2013 2012 2011 1 574.0 1 681.9 1 891.5 2 237.8 2 225.6 — thereof property, plant, and equipment 491.4 530.7 492.0 650.0 619.5 Current assets 2 680.8 2 971.1 2 652.4 2 371.7 2 336.0 — thereof cash and cash equivalents and marketable securities Total assets 1 217.3 1 301.5 528.7 513.1 430.7 4 254.8 4 653.0 4 543.9 4 609.5 4 561.6 Equity attributable to shareholders of Sulzer Ltd 2 224.7 2 435.4 2 334.4 2 216.6 2 022.4 Non-current liabilities — thereof long-term borrowings Current liabilities 472.1 994.5 825.3 956.5 998.7 7.2 510.3 515.9 533.0 531.4 1 548.5 1 216.5 1 377.9 1 429.6 1 534.5 — thereof short-term borrowings 514.4 17.7 56.6 76.0 236.2 Net liquidity1) Equity ratio2) 695.7 773.5 – 36.2 – 95.9 – 336.9 52.3% 52.4% 51.4% 48.1% 44.3% Borrowings-to-equity ratio (gearing) 0.23 0.22 0.25 0.27 0.38 1) Cash and cash equivalents and marketable securities, less short- and long-term borrowings from continuing and discontinued operations. 2) Equity attributable to shareholders of Sulzer Ltd in relation to total assets. Financial Section—Five-Year Summaries of Key Financial Data158 Five-year summaries by division Order intake Sales millions of CHF Divisions 2015 2014 2013 2012 2011 2015 2014 2013 2012 2011 2 907.9 3 169.1 3 250.7 3 334.6 3 558.5 2 983.8 3 221.0 3 270.9 3 332.6 3 570.1 Pumps Equipment/Sulzer Pumps1) 1 500.8 1 725.5 1 801.5 2 094.3 1 705.6 1 621.0 1 754.9 1 821.6 2 097.5 1 747.8 Rotating Equipment Services/Sulzer Turbo Services1) 698.2 725.2 699.3 535.2 477.6 693.2 724.6 705.6 510.5 488.0 Chemtech Sulzer Metco Others Total 708.9 718.4 749.9 705.1 701.7 669.6 741.5 743.7 724.6 667.0 – – – – 12.1 – 8.3 – 0.8 – 8.8 673.6 – – – 7.6 – 12.8 – 8.9 – 7.0 – 8.1 667.3 7.8 2 895.8 3 160.8 3 249.9 3 343.4 3 566.1 2 971.0 3 212.1 3 263.9 3 340.7 3 577.9 Order backlog Employees 2) millions of CHF Divisions 2015 2014 2013 2012 2011 2015 2014 2013 2012 2011 1 510.7 1 703.6 1 672.1 1 754.3 1 861.7 14 073 15 361 15 198 15 362 16 758 Pumps Equipment/Sulzer Pumps1) 998.0 1 209.4 1 190.9 1 309.1 1 343.5 6 996 7 365 7 389 8 573 8 211 Rotating Equipment Services/Sulzer Turbo Services1) 205.0 212.2 190.7 151.6 130.1 3 538 3 709 3 642 2 703 2 654 Chemtech Sulzer Metco Others Total millions of CHF Divisions 307.7 282.0 290.5 293.6 310.7 3 539 4 287 4 167 4 086 3 634 – – – – 4.0 – – – – 0.7 77.4 2.3 – 0 0 0 2 259 180 133 184 175 244 1 510.7 1 699.6 1 672.1 1 753.6 1 864.0 14 253 15 494 15 382 15 537 17 002 Operational EBITA Operational capital employed 2015 2014 2013 2012 2011 2015 2014 2013 3) 2012 3) 20112) 256.3 318.7 332.9 373.1 437.8 1 574.6 1 866.9 2 158.7 2 270.1 1 965.9 Pumps Equipment/Sulzer Pumps1) 118.1 160.6 166.9 228.1 221.0 746.3 1 115.6 Rotating Equipment Services/Sulzer Turbo Services1) Chemtech Sulzer Metco Others Total 70.8 67.4 – 64.5 93.6 – 71.0 95.0 – – 2.2 – 15.8 – 28.8 61.7 83.3 – 5.3 60.7 79.7 76.4 – 6.5 422.0 408.7 n/a n/a 1 464.6 820.0 371.5 356.2 406.3 342.6 412.8 434.0 412.2 – – – – 377.5 – 76.8 – 99.6 – 68.9 – 26.2 – 29.4 254.1 302.9 304.1 378.4 431.3 1 497.8 1 767.3 2 089.8 2 243.9 1 936.5 1 Values for the years 2011 to 2012 are based on the former divisional structure with Sulzer Pumps, Sulzer Turbo Services, and Sulzer Chemtech. 2) Number of full-time equivalents as of December 31. 3) Since 2014 operational capital employed (excl. other intangible assets). For 2013 and earlier capital employed. Sulzer—Annual Report 2015159 Five-year summaries by region Order intake by region millions of CHF Europe, Middle East, Africa Americas Asia-Pacific Total Sales by region millions of CHF 2015 2014 2013 2012 2011 1 303.7 1 305.5 1 329.7 1 431.2 1 554.5 1 065.3 1 165.4 1 123.2 1 214.9 1 225.5 526.8 689.9 797.0 697.3 786.1 2 895.8 3 160.8 3 249.9 3 343.4 3 566.1 2015 2014 2013 2012 2011 Europe, Middle East, Africa 1 214.0 1 264.7 1 402.4 1 421.2 1 574.6 Americas Asia-Pacific Total 1 134.9 1 177.4 1 130.0 1 145.5 1 167.6 622.1 770.0 731.5 774.0 835.7 2 971.0 3 212.1 3 263.9 3 340.7 3 577.9 Capital employed (average) by company location millions of CHF Europe, Middle East, Africa Americas Asia-Pacific Total Employees by company location2) Europe, Middle East, Africa Americas Asia-Pacific Total 2015 2014 20131) 20121) 20111) 875.5 1 152.4 1 365.1 1 500.2 1 319.7 415.8 406.6 481.0 497.0 418.1 206.5 208.3 243.7 246.7 198.7 1 497.8 1 767.3 2 089.8 2 243.9 1 936.5 2015 6 504 4 139 3 610 2014 6 607 4 545 4 342 2013 6 749 4 361 4 272 2012 6 938 4 653 3 946 2011 8 211 4 739 4 051 14 253 15 494 15 382 15 537 17 001 1) Since 2014 operational capital employed (excl. other intangible assets). For 2013 and earlier capital employed. 2) Number of full-time equivalents as of December 31. Financial Section—Five-Year Summaries of Key Financial Data160 Financial Statements of Sulzer Ltd 161 Balance sheet of Sulzer Ltd 162 Income statement of Sulzer Ltd 162 Statement of changes in equity of Sulzer Ltd 163 Notes to the financial statements of Sulzer Ltd 166 Appropriation of net profit 167 Auditors’ Report 161 Balance sheet of Sulzer Ltd December 31 millions of CHF Current assets Cash and cash equivalents Marketable securities1) Accounts receivable from subsidiaries Other current accounts receivable1) Prepaid expenses1) Total current assets Non-current assets Loans to subsidiaries — thereof subordinated CHF 0.0 million (2014: CHF 2.8 million) Other loans and financial assets Investments in subsidiaries1) Investments in third parties1) Total non-current assets Total assets Current liabilities Current interest-bearing liabilities Current interest-bearing liabilities with subsidiaries Current liabilities with subsidiaries Other current liabilities1) Accrued liabilities1) Current provisions Total current liabilities Non-current liabilities Non-current interest-bearing liabilities Non-current provisions Total non-current liabilities Total liabilities Equity Registered share capital Legal capital reserves1) Voluntary retained earnings — Free reserves — Retained earnings — Net profit for the year Treasury shares1) Total equity Notes 3 5 5 4 4 2015 563.3 98.4 392.9 1.2 1.8 1 057.6 2014 640.6 99.4 81.7 0.5 1.1 823.3 472.9 684.4 4.5 1 465.4 3.6 1 946.4 4.5 1 342.0 3.1 2 034.0 3 004.0 2 857.3 499.6 21.9 22.1 2.6 20.1 5.7 572.0 – 57.8 57.8 629.8 0.3 205.5 1 786.5 170.6 229.2 – 17.9 2 374.2 – – 11.2 0.9 17.3 8.6 38.0 498.9 64.6 563.5 601.5 0.3 205.5 1 486.5 15.5 575.0 – 27.0 2 255.8 Total equity and liabilities 3 004.0 2 857.3 1) Certain prior-year amounts have been reclassified to conform to current year’s presentation. These primarily relate to the changes due to the new Swiss Code of Obligations. Financial Section—Financial Statements of Sulzer Ltd162 Income statement of Sulzer Ltd January 1– December 31 millions of CHF Income Investment income Financial income Other income Total income Expenses Administrative expenses Financial expenses1) Investment and loan expenses Other expenses1) Direct taxes Total expenses Notes 8 7 8 2015 278.5 46.7 40.2 365.4 72.8 36.8 22.4 2.0 2.2 136.2 2014 999.0 32.0 44.7 1 075.7 48.8 25.4 419.0 4.4 3.1 500.7 Net profit for the year 229.2 575.0 1) Certain prior-year amounts have been reclassified to conform to current year’s presentation. These primarily relate to the changes due to the new Swiss Code of Obligations. Statement of changes in equity of Sulzer Ltd January 1– December 31 millions of CHF Share capital Legal reserves Reserves for treasury shares Free reserves Retained earnings Net income Treasury shares Total Equity as of December 31, 2013 0.3 178.6 26.9 1 226.5 13.6 371.5 – 40.6 1 776.8 Transfer 26.9 – 26.9 – Equity as of January 1, 2014 0.3 205.5 – 1 226.5 13.6 371.5 – 40.6 1 776.8 Dividend Allocation of net income Net profit for the year Change in treasury shares – 109.6 260.0 1.9 – 261.9 575.0 – 109.6 – 575.0 13.6 13.6 – Equity as of December 31, 2014 0.3 205.5 – 1 486.5 15.5 575.0 – 27.0 2 255.8 Dividend Allocation of net income Net profit for the year Change in treasury shares – 119.9 300.0 155.1 – 455.1 229.2 – 119.9 – 229.2 9.1 9.1 Equity as of December 31, 2015 0.3 205.5 – 1 786.5 170.6 229.2 – 17.9 2 374.2 Sulzer—Annual Report 2015163 Notes to the Financial Statements of Sulzer Ltd 1 General information Sulzer Ltd, Winterthur, Switzerland (the Company) is the parent company of the Sulzer Group. Its uncon- solidated financial statements are prepared in accordance with Swiss law and serve as complementary information to the consolidated financial statements. These financial statements were prepared according to the provisions of the Swiss Law on Accounting and Financial Reporting (32nd title of the Swiss Code of Obligations). Where not prescribed by law, the significant accounting and valuation principles applied are described below. Certain prior-year amounts have been reclassified to conform to the current year’s presentation. These primarily relate to the changes due to the new Swiss Code of Obligations. 2 Key accounting policies and principles Treasury shares Treasury shares are recognized at acquisition cost and deducted from shareholders’ equity at the time of acquisition. In case of a resale, the gain or loss is recognized through the income statement as financial income or financial expenses. Investments in subsidiaries and third parties The participations are valued at acquisition cost or if the value is lower, at value in use, using generally ac- cepted valuation principles. Marketable securities Marketable securities mainly comprise an investment in a fund investing in short-term bonds with high credit ratings and are valued at their quoted market price as at the balance sheet date. A valuation adjust- ment reserve has not been accounted for. Interest-bearing liabilities Interest-bearing liabilities are recognized in the balance sheet at nominal value. Discounts and issue costs for bonds have been deducted from the nominal value and are amortized on a straight-line basis over the bonds maturity period. Share-based payments Should treasury shares be used for share-based payment programs, the difference between the acquisition costs and any consideration paid by the employees at grant date is recognized as compensation to the Board of Directors. Foregoing a cash flow statement and additional disclosures in the notes As Sulzer Ltd has prepared its consolidated financial statements in accordance with a recognized account- ing standard (IFRS), it has decided to forego presenting additional information on audit fees and inter- est-bearing liabilities in the notes as well as a cash flow statement in accordance with the law. Investments in subsidiaries 3 A list of the major subsidiaries held directly or indirectly by Sulzer Ltd is included in note 37 of the consoli- dated financial statements. 4 Registered share capital The share capital amounts to CHF 342 623.70, made up of 34 262 370 shares with a par value of CHF 0.01. All shares are fully paid in and registered. Financial Section—Financial Statements of Sulzer Ltd164 Shareholders holding more than 3% Renova Group First Pacific Advisors BlackRock T. Rowe Price Associates Treasury shares held by Sulzer Ltd millions of CHF Balance as of January 1 Revaluation Purchase Sale Share-based remuneration Balance as of December 31 Dec 31, 2015 Dec 31, 2014 Number of shares in % Number of shares 21 728 414 63.42 11 159 790 n/a n/a 1 051 364 n/a n/a 3.07 1 716 616 1 149 976 n/a in % 32.57 5.01 3.36 n/a 2 015 Total transac- tion amount Number of shares 2 014 Total transac- tion amount Number of shares 254 940 27.0 282 415 30.4 – – 3.5 – 37 298 3.8 30 545 – 22 964 – 2.0 – 3 062 – 82 083 – 7.4 – 54 958 187 191 17.9 254 940 – 3.9 – 0.3 – 7.0 27.0 The total number of treasury shares held by Sulzer Ltd as of December 31, 2015, amounted to 187 191 (December 31, 2014: 254 940 shares), which are mainly held for the purpose of issuing shares under the management share-based payment programs. The average sales price was CHF 106.57 in 2015 (2014: CHF 119.71). 5 Outstanding bond millions of CHF Total as of December 31 2 015 2 014 Book value Nominal Book value Nominal 499.6 500.0 498.9 500.0 In July 2011 Sulzer Ltd issued a CHF-denominated 2.25% domestic bond in the aggregate principal amount of CHF 500 million for a term of five years. The bond is traded at the SIX Swiss Exchange. 6 Contingent liabilities millions of CHF 2015 2014 Guarantees, sureties, comfort letters for subsidiaries — to banks and insurance companies — to customers — to others Guarantees for third parties 1 268.4 360.1 45.1 10.0 1 295.4 370.4 36.4 10.0 Total contingent liabilities as of December 31 1 683.6 1 712.2 As of December 31, 2015, CHF 336.2 million (2014: CHF 310.7 million) of guarantees, sureties, and comfort letters for subsidiaries to banks and insurance companies were utilized. Sulzer—Annual Report 2015165 7 Administrative expenses millions of CHF Compensation of Board of Directors Other administrative expenses Total administrative expenses 2015 2.3 70.5 72.8 2014 1.7 47.1 48.8 Sulzer Ltd does not have any employees. The compensation to the Board of Directors includes share- based payments and remuneration. Other administrative expenses contain management services and cost related to the Sulzer Full Potential project. Investment income and investment and loan expenses 8 In 2015, the investment income contains ordinary and extraordinary dividend payments from subsidiaries amounting to CHF 131.3 million. Sulzer Pumps Ltd has been merged with Sulzer Ltd in the reporting year. The merger gain amounted to CHF 135.2 million and is included in investment income. In 2014, the income from investment contains the profit from the sale of the Metco division amounting to CHF 390.8 million. Ordinary as well as extraordinary dividend payments from subsidiaries amounted to CHF 576.9 million. The investment and loan expenses contain allowances on investments amounting to CHF 18.4 million (2014: CHF 405.2 million). 9 Share participation of the Board of Directors, Executive Committee, and related parties Restricted share units for members of the Board The compensation of the Board of Directors consists of a fixed cash component and a restricted share unit (RSU) component with a fixed grant value. The number of RSUs is determined by dividing the fixed grant value by the volume weighted share price of the last ten days prior to the grant date. One-third of the RSUs each vest after the first, second, and third anniversaries of the grant date respecitvely. Upon vesting, one vested RSU is converted into one share of Sulzer Ltd. The vesting period for RSUs granted to the members of the Board of Directors ends no later than on the date on which the members steps down from the Board. Sulzer shares Restricted share units (RSU) (NF)1) Other call options Total call options, share awards and shares Perfor- mance share units (PSU) 20132) Perfor- mance share units (PSU) 20143) Perfor- mance share units (PSU) 20154) 2015 Board of Directors 45 633 13 149 Peter Löscher Matthias Bichsel Thomas Glanzmann Jill Lee Marco Musetti Gerhard Roiss Klaus Sturany Executive Committee Greg Poux-Guillaume Peter Alexander Oliver Bailer Fabrice Billard Thomas Dittrich César Montenegro 26 684 342 4 616 3 095 2 692 4 000 4 204 3 657 2 103 2 081 2 081 2 081 1 146 – 33 301 40 976 – 30 242 10 928 1 303 1 187 7 000 12 883 – 231 – 9 842 661 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 4 860 7 212 13 800 – 4 860 – – – – – 1 967 1 967 – 964 2 314 942 2 402 2 402 2 402 2 826 2 826 1) Restricted share units assigned by Sulzer. 2) The average fair value of one performance share unit 2013 at grant date amounted to CHF 294.81. 3) The average fair value of one performance share unit 2014 at grant date amounted to CHF 206.63. 4) The average fair value of one performance share unit 2015 at grant date amounted to CHF 193.97. Financial Section—Financial Statements of Sulzer Ltd166 Allocated to members of the board 8 948 980 980 7 428 906 220 2015 2014 Quantity Value in CHF Quantity Value in CHF Sulzer shares Restricted share units (RSU) (NF)1) Other call options Total call options, share awards and shares Blocked Sulzer shares out of PSP 2010 Perfor- mance share units (PSU) 20132) Perfor- mance share units (PSU) 20143) 2014 Board of Directors 45 563 11 051 Peter Löscher Matthias Bichsel Thomas Glanzmann Jill Lee Marco Musetti Luciano Respini Klaus Sturany 26 000 – 3 700 2 179 1 776 8 027 3 881 2 052 1 026 1 851 1 851 1 851 2 097 323 Executive Committee 22 344 17 903 Klaus Stahlmann Peter Alexander Oliver Bailer Thomas Dittrich César Montenegro 5 400 6 649 852 – 568 682 1 500 14 763 7 943 1 890 – – – – – – – – – – – – – – 56 614 28 052 1 026 5 551 4 030 3 627 10 124 4 204 – – – – – – – – – – – – – – – – – – – – – – – – 40 247 7 422 20 741 13 651 5 400 7 217 1 534 16 263 – 15 881 3 711 4 860 – – – – – 6 439 1 967 1 967 964 2 314 9 833 3 711 1) Restricted share units assigned by Sulzer as compensation. 2) The average fair value of one performance share unit 2013 at grant date amounted to CHF 294.81. 3) The average fair value of one performance share unit 2014 at grant date amounted to CHF 206.63. 10 Subsequent events after the balance sheet date At the time when these financial statements were authorized for issue, the Board of Directors were not aware of any events that would materially affect these financial statements. Appropriation of net profit in CHF Net profit for the year Unallocated profit carried forward from previous year Total available profit Proposal by the Board of Directors: Appropriation from/(to) free reserves Ordinary dividend Special dividend 2015 2014 229 200 000 575 000 000 170 532 721 15 451 016 399 732 721 590 451 016 300 000 000 – 300 000 000 – 119 263 127 – 497 497 613 – 119 918 295 – Balance carried forward 82 971 981 170 532 721 Distribution per share CHF 0.01 Gross dividend less 35% withholding tax Net payment 18.10 6.34 11.76 3.50 1.23 2.27 The Board of Directors proposes the payment of an ordinary dividend of CHF 3.50 per outstanding share and a special dividend of CHF 14.60 per outstanding share to the Annual General Meeting on April 7, 2016. The Company will not pay a dividend on treasury shares held by Sulzer Ltd or one of its subsidiaries. Sulzer—Annual Report 2015167 Report of the Statutory Auditor to the General Meeting of Shareholders of Sulzer Ltd, Winterthur Report of the Statutory Auditor on the Financial Statements As statutory auditor, we have audited the financial statements of Sulzer Ltd, which comprise the balance sheet, income statement, statement of changes in equity and notes (pages 161–166) for the year ended December 31, 2015. Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the financial statements in accordance with the requirements of Swiss law and the com- pany’s articles of incorporation. This responsibility includes designing, implementing, and maintaining an internal control system relevant to the prepa- ration of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further respon sible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements for the year ended December 31, 2015 comply with Swiss law and the company’s articles of incorporation. Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. 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 net profit complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved. KPMG AG Zurich, February 24, 2016 François Rouiller Licensed Audit Expert Auditor in Charge Roman Wenk Licensed Audit Expert Financial Section—Auditors’ Report168 Imprint Published by: Sulzer Ltd, Winterthur, Switzerland, © 2016 Concept/Layout: wirDesign, Berlin Braunschweig, Germany Photographs: Getty Images (cover, back cover/ pages 6 – 9/13/16 –17/22 – 23); Corbis (cover, back cover/pages 10 –11/13); Plainpicture (pages 28 – 29); Geri Krischker, Zurich, Switzerland (pages 3/33/38/40/42/58 – 59/66 – 67); Kevin Cassidy, Humble, TX, USA (page 19); Sulzer Ltd (pages 14 –15/18/20/26 – 27) Printing: Kunst- und Werbedruck, Bad Oeynhausen, Germany This document may contain forward-looking statements, including, but not limited to, projections of financial developments and future performance of materials and products, containing risks and uncer- tainties. These statements are subject to change based on known and unknown risks and various other factors that could cause the actual results or performance to differ materially from the statements made herein. The Sulzer Annual Report 2015 is also available in German and online at www.sulzer.com/AR15. Furthermore, the report is available as a summary in German or in English. The original version is in English. This report is printed in a climate-neutral process on Forest Stewardship Council® (FSC®) certified paper. carbon neutral natureOffice.com | DE-149-399445 print production Sulzer—Annual Report 2015Financial Section—Investor Information 169 Data per share in CHF Basic earnings per share Change from prior year Equity attributable to a shareholder of Sulzer Ltd Ordinary dividend Special dividend Payout ratio 2) 2015 2.17 – 73% 65.30 3.501) 14.601) 161% 2014 8.09 17% 71.60 3.50 0.00 43% 2013 6.89 – 23% 68.70 3.20 0.00 46% 2012 8.91 8% 2011 8.25 – 8% 65.20 59.60 3.20 0.00 36% 3.00 0.00 36% Average number of shares outstanding 34 035 862 34 007 309 33 999 429 34 009 267 33 906 689 Stock market information Registered share (in CHF) — high — low — year-end Market capitalization as of December 31 — number of shares outstanding — in millions of CHF — in percentage of equity P/E ratio as of December 31 Dividend yield as of December 31 2) 2015 2014 2013 2012 2011 120.10 143.90 171.00 147.50 158.50 88.55 94.35 94.95 129.60 101.40 84.35 106.00 143.90 144.10 100.40 34 075 179 34 007 430 33 979 955 34 032 810 33 804 507 3 215 145% 43.5x 3.7% 3 605 148% 13.1x 3.3% 4 890 209% 20.9x 2.2% 4 904 221% 16.2x 2.2% 3 394 168% 12.2x 3.0% Title Listed on SIX Swiss Exchange registered share Security No. Investdata Reuters Bloomberg 3 838 891 SUN SUN.S SUN SW Shareholder structure as of December 31, 2015 number of shares 1 – 100 101 – 1 000 1 001 – 10 000 10 001 – 100 000 More than 100 000 Number of shareholders Shareholding 3 408 2 825 358 45 7 0.5% 2.6% 2.9% 3.2% 70.7% Total registered shareholders and shares (excluding treasury shares Sulzer Ltd) 6 643 79.9% 1) Proposal to the Annual General Meeting. 2) Based on ordinary dividend. Sulzer Ltd 8401 Winterthur Switzerland Phone +41 52 262 11 22 +41 52 262 01 01 Fax www.sulzer.com

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