MIND AND MATTER Annual Report 2018 Contents 3 Letter to the shareholders 7 Sulzer at a glance 7 Our company 9 Our key figures 12 Focus 24 Business review 25 Financial review 31 Business review divisions 43 Sustainable development 44 Values and behaviors 46 Ecological sustainability 49 Social sustainability 52 Corporate governance 53 Corporate structure and shareholders 54 Capital structure 55 Board of Directors 63 Executive Committee 64 Shareholder participation rights 65 Takeover and defense measures 66 Auditors 67 Risk management Information policy 69 70 Compensation report 71 Letter to the shareholders 72 Compensation governance and principles 76 Compensation architecture 84 Compensation of the Board of Directors and the Executive Committee 90 Shareholdings of the Board of Directors and the Executive Committee 92 Auditor’s report 94 Financial reporting 96 Consolidated financial statements 183 Financial statements of Sulzer Ltd Sulzer Annual Report 2018 - Letter to the shareholders 3 Letter to the shareholders Advanced materials and processes open up many new possibilities for Sulzer. They can enable products with better properties, new manufacturing or service concepts, faster and leaner operations or even entirely new products. When utilized optimally, advanced materials and technologies such as additive manufacturing extend the lifetime of our products, increase availability and efficiency, reduce lead times and protect the environment. At Sulzer, it is not a question of mind over matter. It is a question of mind and matter. Explore how the materials of the future are having an impact on Sulzer today in this year’s Annual Report. Performance in 2018 Sulzer grew significantly in 2018, with orders up by 8.4% organically and by 12.5% including acquisitions. While we overperformed in a rebounding oil and gas market, all our segments developed positively, with the exception of the power market, which accounts for slightly more than 10% of our business. Regionally, order intake increased in Europe, the Middle East and Africa (EMEA) and even more so in the Americas. Asia-Pacific remained stable. Sales showed an organic increase of 7.8% and of 11.9% including acquisitions. The higher volumes together with a more efficient cost structure resulted in an increase of operational profit (opEBITA) to report.sulzer.com/ar18 Sulzer Annual Report 2018 - Letter to the shareholders 4 CHF 322.2 million, up by 18.1% organically and by 26.7% including acquisitions. Profitability (opROSA) grew to 9.5% from 8.4% in the previous year. We kept our promises and achieved strong results in 2018. Sulzer demonstrated a resilience to external events and an ability to execute faster and better. Greg Poux-Guillaume, CEO More efficient and more agile We have continued to make Sulzer leaner and more agile. We achieved additional savings of CHF 45 million in 2018, taking cumulative savings to CHF 230 million, one year ahead of schedule and CHF 30 million above our initial target. In 2019, the final year of our Sulzer Full Potential program (SFP), we will add incremental savings of CHF 10 million to reach cumulative savings of CHF 240 million. Driving bolt-on acquisitions and growing profitably We are proud of the new companies that became part of the Sulzer family in 2018. They will boost our profitable growth by expanding our offering and giving us access to new markets. — — — JWC Environmental (USA), closed in January 2018: added solids reduction and removal products to our wastewater business; Medmix Systems (CH), closed in August 2018: added applicators for tissue treatment, bone repair, oral surgery and drug delivery to our healthcare applicator segment; Brithinee Electric (USA), closed in November 2018: expanded our electromechanical services business into Southern California’s renewable power market. The effect from acquisitions closed in 2017 and 2018 amounted to CHF 129 million in order intake and to CHF 127 million in sales in 2018. With our recent acquisitions, we strengthened our portfolio in aftermarket services and low cyclicality markets such as water and healthcare. As for the future, we start 2019 with an active M&A pipeline of small to medium-size targets, maintaining a course of focused targets at reasonable valuations. While our solid balance sheet allows us to consider larger targets, none have cleared our thresholds to date. A year of achievement 2018 started strongly, with a robust first quarter significantly above our initial guidance. Our momentum could have been derailed when, on April 6, the US subjected our then majority shareholder Renova to sanctions. We immediately negotiated with Renova the purchase of five million of our own shares at a price of CHF 109.13 per share, thereby bringing Renova’s shareholding to 48.8%. The US Treasury approved the transaction and confirmed that we were no longer considered part of the Renova group and therefore not subject to sanctions. While this issue disrupted our business, it was resolved within three working days and operations were back to normal within a week. Our customers supported us throughout and the associated costs ended up being non-material. We closed a strong second quarter with orders 15% up in the US. Our products deliver value to our customers, making their processes more efficient and reducing their costs. Sometimes, they also save lives. In the summer of 2018, when the “Wild Boars” youth football team was trapped in a flooded cave in Thailand, our local partner DungDong supplied Sulzer equipment and expertise for the water removal from the caves. 18 heavy-duty Sulzer pumps report.sulzer.com/ar18 Sulzer Annual Report 2018 - Letter to the shareholders 5 extracted water day and night until the rescue was completed. We are proud of our blue pumps, which you see on many of the rescue pictures, and were happy to play a discreet but mission-critical role in this heartwarming story. We subsequently were the recipient in the third quarter of the largest pipeline pump order in the oil and gas market in the US since the downturn. We also inaugurated a brand-new manufacturing site for Applicator Systems in Wroclaw, Poland, augmenting our ability to serve the dynamic adhesives market. On September 18, we placed all five million shares bought from Renova with international investors, increasing our free float to 51.2% and realizing a capital gain of around CHF 15 million. We closed out the year with results at or above guidance and the gold certificate at the Swiss Digital Economy Awards for BLUE BOX™, our advanced analytics platform for pumps. BLUE BOX uses machine learning and the Internet of Things for predictive maintenance and performance optimization of our customers’ assets. In 2018, we grew profitably despite external business threats and market volatility. Sulzer’s management team reacted decisively and has the company performing at an increasingly high level. This bodes well for 2019. Peter Löscher, Chairman of the Board of Directors Fully refinanced for future growth In 2018, we further optimized our financing mix and took advantage of favorable market conditions. Between June and October, Sulzer issued four bonds with staggered maturities for a total of CHF 860 million. The company was one of the largest issuers of debt on the Swiss market in 2018, confirming investor appetite for Sulzer financial instruments. Changes to the Board of Directors and the Executive Committee The year saw two changes to our Executive Committee. Jill Lee, who had been a Sulzer Board member for seven years and the Chair of our Audit Committee, joined the Executive Committee of Sulzer as Chief Financial Officer as of April 5, 2018. She did not stand for reelection to Sulzer’s Board of Directors. Frédéric Lalanne, our Chief Commercial and Marketing Officer, was appointed President of the Pumps Equipment division at the end of the year, replacing Michael Streicher, who took the helm of our water business, reporting to Frédéric. Sulzer thus reduced the size of its Executive Committee to six members. The Board of Directors welcomed two new members at the Annual General Meeting of April 4, 2018, in Hanne Birgitte Breinbjerg Sørensen and Lukas Braunschweiler. They replaced Jill Lee and Thomas Glanzmann, our longest serving Board member, who did not stand for reelection. Renova reduced its Board representation to two representatives as of May 28, 2018, through the resignation of Axel Heitmann. He was not replaced and Sulzer’s Board of Directors is now composed of seven members. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Letter to the shareholders 6 Outlook for 2019 Sulzer expects the positive momentum in the oil and gas market to continue in 2019. All other markets are also expected to grow, with the continued exception of power. Our early indicators do not show signs of an impending slowdown of the economy in our major markets. We therefore expect to continue our trend of organic growth and improved profitability. For the full year 2019, adjusted for currency effects, order intake is expected to grow organically by 2% to 5% and sales to grow organically by 3% to 5%. Sulzer expects to reach an opEBITA margin (opEBITA in percent of sales) of around 10%. Sincerely, Peter Löscher Chairman of the Board Greg Poux-Guillaume CEO Explore how the materials of the future are having an impact on Sulzer today: — — — — Next-generation materials for impellers Steeled for the future Leading technology for bio-based PLA plastics Pack it up – collapsible cartridges reduce waste and cost report.sulzer.com/ar18 Sulzer Annual Report 2018 - Sulzer at a glance - Our company 7 Our company Sulzer’s core is flow control and applicators. We specialize in pumping solutions, services for rotating equipment, and separation, mixing and application technology. Our customers benefit from a network of over 180 production and service sites in about 50 countries around the world. Pumps Equipment Pump technology and solutions We provide a wide range of pumping solutions, compressors and mixers, including spare parts and service. Customers benefit from extensive research and development to implement the latest industry standards and technologies. 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 the most effective supply chain and highest quality. Our focus is on: — — — — The production, transport and processing of crude oil and its derivates The supply, treatment and transport of water as well as wastewater treatment Fossil-fired, nuclear and renewable power generation Specific general industries, such as the pulp and paper, mining, metals, fertilizer, food and chemical process industries Rotating Equipment Services Service solutions for rotating equipment We offer technology-based service solutions for complex rotating equipment maintenance, including gas and steam turbines, pumps, compressors, motors, generators and other adjacent equipment – be it Sulzer or third-party equipment. Our services are dedicated to improving customers’ business performance. Fast and safe execution tailored to customers’ needs provides life cycle cost- effectiveness for every project. With our worldwide network of service centers, we offer global expertise locally, anytime, everywhere. This includes maintenance, repair, replacement parts, field service, lifetime extensions and retrofits/upgrades. Our focus is on: — — — — Oil and gas, power, transport, mining, water, heavy and process industries Gas and steam turbines, compressors, hot gas expanders, etc. Generators and electrical motors Pumps report.sulzer.com/ar18 Sulzer Annual Report 2018 - Sulzer at a glance - Our company 8 Chemtech Separation and mixing technology and associated services We offer separation and mixing technology, process solutions and field services for the oil and gas, hydrocarbon and chemical processing industries. Our advanced and economical solutions set standards in the fields of mass transfer and static mixing. Our product offering ranges from process components to complete separation process plants and application technologies. We are the market leader in providing monomer and polymer production technology for polylactic acid (PLA) and devolatilization for the effective removal of residuals. Our customer support covers engineering services for separation and reaction technology as well as tower field services, tray and packing installation, tower maintenance, automated weld overlay and plant turnaround projects. Our focus is on: — — — High-performance tower internals and separators Process engineering and skid solutions Service for towers and static equipment Applicator Systems Systems for liquid applications We offer products and services for liquid application and mixing technology. Our customers benefit from advanced solutions in the field of precise applications as well as one- and two-component mixing and dispensing systems. Our global network ensures local knowledge and competence. Our focus is on: — — — Mixing and dispensing systems for the adhesives and dental markets Precise application systems for liquid color cosmetics and beauty accessories One- and two-component application systems for the healthcare and medical markets report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Sulzer at a glance - Our key figures 9 Our key figures In 2018, order intake increased by 12.5% on a currency-adjusted basis and by 8.4% organically. Sales increased by 11.9% and by 7.8% organically. Operational EBITA rose by 26.7% and the operational EBITA margin increased to 9.5%. Sales by division Sales by (sub-)segment Sales by region 2018 2018 2018 2018 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Sulzer at a glance - Our key figures 10 Key figures millions of CHF Order intake Order intake gross margin Order backlog as of December 31 Sales EBIT opEBITA opROSA opROCEA Net income attributable to shareholders of Sulzer Ltd Basic earnings per share Free cash flow Net liquidity as of December 31 Employees (number of full-time equivalents) as of December 31 2018 (new accounting policies) 1) 2018 (previous accounting policies) 2) 3’531.5 33.3% 1’786.9 3’364.9 183.8 322.5 9.6% 18.1% 113.7 3.56 173.9 –239.0 3’531.5 33.3% 1’666.9 3’404.5 183.6 322.2 9.5% 17.8% 113.0 3.54 173.9 –239.0 2017 3’155.7 34.4% 1’593.5 3’049.0 136.5 255.4 8.4% 15.8% 83.2 2.44 127.0 –225.0 Change in +/–% 3) +/–% adjusted 4) +/–% organic 5) 12.5 8.4 11.9 26.7 7.8 18.1 11.9 4.6 11.7 34.5 26.1 35.8 45.1 37.0 15’572 15’572 14’732 5.7 1) According to IFRS 15, see financial review and note 34 of the consolidated financial statements for details. 2) Without consideration of IFRS 15, applying the same accounting policies as in the prior year. 3) Comparing 2018 (previous accounting policies) with 2017. 4) Adjusted for currency effects. Comparing 2018 (previous accounting policies) with 2017. 5) Adjusted for acquisition and currency effects. Comparing 2018 (previous accounting policies) with 2017. Data per share CHF Net income attributable to a shareholder of Sulzer Ltd Change from prior year Equity attributable to a shareholder of Sulzer Ltd Ordinary dividend Special dividend Payout ratio 2018 3.56 46% 48.00 3.50 1) – 98% 2017 2.44 41% 49.40 3.50 – 2016 1.73 –20% 46.40 3.50 – 143% 202% 2015 2.17 –73% 65.30 3.50 14.60 161% 2014 8.09 17% 71.60 3.50 – 43% Average number of shares outstanding 31’934’459 34’084’133 34’102’610 34’035’862 34’007’309 1) Proposal to the Annual General Meeting. report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Sulzer at a glance - Our key figures 11 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 Shareholder structure as of December 31, 2018 Number of shares 1–100 101–1’000 1’001–10’000 10’001–100’000 More than 100’000 2018 2017 2016 2015 2014 137.50 76.30 78.05 129.90 102.30 118.20 107.80 120.10 75.55 105.00 88.55 94.35 143.90 94.95 106.00 33’950’499 34’043’093 34’084’909 34’075’179 34’007’430 2’650 163% 21.9x 4.5% 4’024 240% 48.4x 3.0% 3’579 226% 60.6x 3.3% 3’215 145% 43.5x 3.7% 3’605 148% 13.1x 3.3% Number of shareholders Shareholding 4’046 4’219 460 105 19 0.6% 3.8% 3.6% 8.7% 60.2% 77.0% Total registered shareholders and shares (excluding treasury shares Sulzer Ltd) 8’849 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Focus - Next-generation materials for impellers 12 Next-generation materials for impellers Which material and process technologies shape the future of pump impellers? Sulzer’s material and processing specialists are well underway to improving the operational security and lifetime of pumps with new materials. Exploring and extracting oil and gas resources from offshore reservoirs forces the oil and gas industry to push its limits. More and more water injection pumps are used in deep- or ultra-deep water. There, the pumped fluids have higher temperatures and contain more corrosive substances. The deeper the reservoirs are, the higher the operating pressure needs to be. The pump must withstand a pressure of 1’000 bar (100 MPa). This can be expressed as a weight of about 1’000 kg acting on each square centimeter (14’500 pounds per square inch) of the pressurized area. Furthermore, the pump spins at 6’000 revolutions per minute (rpm) 24 hours a day, seven days a week, causing billions of load cycles per year on the impeller. Improving corrosion resistance and strength Deploying the appropriate material is crucial for the long-term performance and reliability of the pump. Usually, super-duplex stainless steel is used as material for high-pressure water injection pumps. However, with a pressure of 1’000 bar, this steel reaches its mechanical limits. The new material needs to be equally or more corrosion-resistant, and stronger than casted super- duplex stainless steel. Not an easy task, since material strength and corrosion resistance generally oppose each other. In addition, if you increase the mechanical and corrosion properties, it often influences the manufacturing method and increases production costs tremendously. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Focus - Next-generation materials for impellers 13 Evaluating new materials Sulzer looks ahead to meet the future demands of high-energy pumps. Its material specialists constantly evaluate and test new materials and process technologies. After having considered a wide range of new materials to produce impellers, the company’s specialists selected a special nickel-based alloy as the material with the most promising potential. In addition to the materials, our engineers needed to consider the manufacturing process of impellers. To reduce lead times, the specialists favored processes based on rapid technologies. Day by day I’m inspired by the tremendous improvements we can achieve for our customers by working with new materials and processes. Frédéric Lalanne, Division President Pumps Equipment Testing different manufacturing processes Sulzer’s engineers compared a variety of processes against each other. Repeatability was one of the most important factors to guarantee material quality. For the water-injection pump impellers, the team chose vacuum investment casting as the preferred process. After the casting process, hot isostatic pressing (HIP) is applied. This technology closes internal holes that naturally evolve during casting. By using HIP, the material becomes denser and thus more fatigue-resistant. As a final step, a specific heat treatment is used to further improve the mechanical properties. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Focus - Next-generation materials for impellers 14 Encouraging test results The test results of the new nickel-based alloy material and the new manufacturing route are encouraging. As the material is currently not listed in any international material standard, the teams have to carry out a full-blown material characterization in addition to the standard material tests. Sulzer expects the test phase to be successfully completed soon. Afterwards, the company will roll out the process for the production of water-injection pump impellers across the globe. Once again, we have proved that we can overcome previous limits with new materials and manufacturing processes. More stories about our products and services at www.sulzer.com/stories. New materials for additive manufacturing Sulzer makes use of new materials and additive manufacturing technologies for the production of pump parts. New materials can be processed through conventional casting methods but also by additive manufacturing (AM) technologies. AM allows complex, high-quality parts to be manufactured in short lead times. It also results in improved mechanical properties and offers full freedom of design. This further expands the operating envelope of the equipment that we offer to customers. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Focus - Steeled for the future 15 Steeled for the future Sulzer engineers came up with a new repair method for steam turbines in geothermal power generation. The improved welding technique uses 12% chromium stainless steel. It gives rotors running in harsh conditions an extended life. In 2017, Asia accounted for nearly two-thirds of the global increase in renewable energy generating capacity, according to a report by the International Renewable Energy Agency. One important energy source is the heat from the earth: renewable geothermal steam from underground. Four out of the top ten biggest geothermal power plants in the world are located in Asia (Indonesia and Philippines). In power plants, steam turbines are used to convert steam energy into mechanical energy. This energy drives a generator that produces electrical energy. Power lines transport the energy to homes and businesses. Innovation in the service business is part of our DNA. We improve our repair technologies and response time to optimize cost of ownership of our customers. Daniel Bischofberger, Division President Rotating Equipment Services Washed away by corrosion Steam turbines operate under extreme temperatures and pressures. In addition, geothermal steam turbines work with steam that contains some very corrosive components. Because it is a natural process, they are variable and unpredictable. In practice, very substantial damage can occur over time due to corrosion and erosion, which can cause the areas exposed to the steam to be “washed away”. The rotors used for these steam turbines employ a range of steels specially developed to retain their strength over a long operating life of 25 or even 30 years and to be corrosion-resistant. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Focus - Steeled for the future 16 Welding instead of replacing The fast repair of critical rotating components is one of the main activities of Sulzer’s Rotating Equipment Services division. Original equipment manufacturers often propose to customers the very costly option of purchasing new replacement rotors. Our Indonesian team saw a market opportunity to repair the rotors by welding. In this process, an area of damaged material is removed and a large mass of weld material is used to replace it. The geometry is then recreated to finish the renovated rotor. This can be much quicker than ordering a replacement part because the long lead-time for new forgings can be avoided. Both the customer and Sulzer profit from the improved cost structure. Collaborating for better resistance The idea was born in 2013 at Sulzer Indonesia. A Philippine customer needed a rotor repair of a geothermal steam turbine that was showing cracks and stress corrosion. The Sulzer team had some concerns about the weld material used at that time. A low-alloy weld wire for turbine rotor material typically has a high nickel content, which is likely to suffer corrosion cracking when exposed to a hostile environment. The Indonesian team consulted with Sulzer colleagues in the US and eventually came up with the 12% chromium steel (12Cr) weld wire option. Extending rotor lifetime The 12Cr weld has even greater corrosion resistance than similar alloys developed by the different rotor suppliers in the specific hostile environment where the geothermal steam is extracted from the rock. This means that in some cases, the 12Cr weld can actually give the renovated rotor an improved life over the original material. The Sulzer Executive Committee recognized the innovative approach and exemplary collaboration of these two teams across a vast geographical distance by honoring them with a “Sulzer Innovation Award” in 2018. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Focus - Steeled for the future 17 More stories about our products and services at www.sulzer.com/stories. New ways to speed up delivery Sulzer’s Rotating Equipment Services division is finding new ways to shorten the lead times and increase the quality of the parts it provides to customers. Rapid casting, where we print the patterns from which we cast the parts, creates supply chain flexibility. It also enables manufacturing closer to the customer’s location. The division is gradually expanding its use of this technology within pumps services, region by region. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Focus - Leading technology for bio-based PLA plastics 18 Leading technology for bio-based PLA plastics Conventional plastics are usually not degradable. Polylactic acid (PLA) is a sustainable alternative: It can be used to produce plastics that are biodegradable. Sulzer delivers process know-how and key equipment for the production of PLA. Common plastics take a very long time to degrade or are not degradable at all. This means that microorganisms are not able to break the material down into organic matter that living organisms can utilize. For example, a plastic bottle needs a stunning 450 years to degrade. Bottles made of PET will never biodegrade. The sustainable alternative to oil-based plastic Sustainable alternatives for these conventional plastics already exist. One is polylactic acid (PLA) that can be used to produce plastics that are bio-based, biodegradable and 100% recyclable to their original form. With our technology, one of the world’s top two PLA manufacturers built a large plant to produce 75’000 tons of PLA plastics per year. This is how we help customers deliver high-quality bioplastic solutions for a greener future. Torsten Wintergerste, Division President Chemtech The base material for PLA production is glucose or sugars from crops like corn, wheat, sugar cane and sugar beet – also called first-generation raw materials. PLA is the most promising biopolymer based on renewable feedstock and has started to replace conventional polymers produced from fossil fuels. Its global capacity is expected to grow from 0.3 million metric tons per annum (MTA) today to one million MTA over the next five years. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Focus - Leading technology for bio-based PLA plastics 19 From bottles to medical devices to 3D printing Sulzer has played an active role in optimizing the PLA process for industrial use over the last 25 years. The resulting bioplastic has mechanical and thermal properties that are comparable or superior to its traditional oil-based counterparts. PLA bioplastic serves as the base material for packaging (e.g. bottles, bags), textiles, components for the automotive industry, electronic devices, medical devices and implants, and 3D printing processes. One-stop provider for PLA processes Sulzer delivers single, key equipment solutions for PLA manufacturing. The company also designs and installs equipment and integrated modular solutions for the individual steps of the polymerization process. At the customer’s location, installation supervisors and start-up engineers from Sulzer provide support in the assembly, installation, commissioning and start-up of the equipment. Building a PLAnet™ for sustainable bioplastics At year-end 2018, Futerro, Sulzer and TechnipFMC teamed up to simplify the manufacture of bioplastics. The three major process technology and equipment specialists formed the PLAnet™ initiative. The strategic collaboration will support investors from both ends of the sugar-to-PLA value chain in entering the bioplastic market. PLAnet is a “one-stop shop” for customers and is able to provide a single point of contact and responsibility. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Focus - Leading technology for bio-based PLA plastics 20 Degrading at different speeds One of the main benefits of the Sulzer technology is that the properties of the polymer can be adapted easily using the same equipment. There is no need for different process lines. This flexibility is important because the adjustable settings influence how fast or slow PLA-based products will biodegrade. For example, disposable applications such as food packaging with a short shelf life should be easily biodegradable, whereas electronic components need to be more durable. The most important factor for a good polymerization is that the process temperature is maintained at a controlled, constant level and that the feed material is thoroughly mixed. Sulzer offers special mixer reactors, the SMR, that combine these two functions: mixing and cooling. New generation of raw material While feedstock-based materials work well for PLA production, they require agricultural land that is also needed for food production. This is why researchers try to find a new generation of raw material. One option is a material that stems from non-food sources such as agricultural residues (second- generation raw material). In its fully equipped laboratory in Switzerland, Sulzer runs tests and trials for customers. The results are then scaled up to industrial level for use in large plants. More stories about our products and services at www.sulzer.com/stories. Fast lead times thanks to additive manufacturing Sulzer uses a range of materials for its column packings, such as metal, polymers and composites. We are developing and deploying additive manufacturing (AM) technologies that are adapted both to the specific and to the variety of materials that we use. We are producing small-scale static mixers by additive manufacturing, namely selective laser melting. By melting metal powder onto a platform, the product is built up layer by layer. Today, AM technologies are mainly used for prototyping, and to produce support parts, small batch size parts or tools. AM helps us achieve fast lead times, particularly for lower-volume production. report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Focus - Pack it up - collapsible cartridges reduce waste and cost 21 Pack it up – collapsible cartridges reduce waste and cost Working with adhesives causes waste. Sulzer’s Applicator Systems division has developed a packaging system that not only reduces waste but also reduces total system cost for customers. Introducing: the ecopaCC™ collapsible cartridge. Adhesives, an invisible fastening technology, surround us everywhere in our daily lives. It is a technology used in many different industries. Adhesives provide various benefits – such as sealing and bonding of all kinds of substrates – that mechanical fastening systems do not offer. Adhesives are used in civil construction, for windshield bonding in your car and for bathroom sealing applications in your home, amongst many other uses. Innovative solutions for waste reduction needed Adhesives dispensed by cartridge-based packaging systems generate waste. The disposal process for residual material, transportation and storage contribute to higher costs. National and international regulation increases on a daily basis. For example, the state of California in the US has introduced penalties for excessive use of rigid plastic packaging. The EU is about to release a new regulation to avoid plastic waste. The Japanese government has also started discussions to tackle the problem of plastic waste. Next-generation functional packaging Conscious of the ecological challenges to come, Sulzer’s Applicator Systems division engineered a next-generation primary packaging for adhesives applications: the ecopaCC™ collapsible cartridge. The cartridge, which uses high-tech multilayer foils suitable for various chemicals, is collapsible and provides customers with savings across the entire value chain. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Focus - Pack it up - collapsible cartridges reduce waste and cost 22 With our eco-friendly alternative to conventional packaging, customers reduce their costs across the value chain. Amaury de Menthiere, Division President Applicator Systems Conventional cartridge systems are disposed of once emptied. With the ecopaCC™, the only waste that remains is the collapsed foil and the small front part. Both take very little space. Moreover, the support sleeve for the cartridge is reusable and thus an important factor behind the ecological concept. Significant cost reduction Overall, customers can achieve significant savings by using ecopaCC™. For example, the transportation and storage cost of the empty, pre-collapsed 600 ml cartridge can be reduced by up to 85%, since seven times more cartridges can be packed onto a euro pallet. Additionally, once the cartridge reaches the end of its lifetime, waste disposal will cost our customer 75% less. The new packaging system is designed to fulfill the highest quality expectations. The molding technology allows for a 100% leak-proof connection between the foil and front-end part. The system is compatible with our dedicated dispenser range as well as the static mixers. Eco-friendly and ready to be certified Sulzer has applied for the renowned EU Ecolabel for its new product. With more than 54’000 products and services on the market, the EU Ecolabel is well recognized. It is a very reliable and effective way to show consumers that a product or a service is both eco-friendly and of supreme quality. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Focus - Pack it up - collapsible cartridges reduce waste and cost 23 The EU Ecolabel also opens up new business opportunities. B2B companies are facing increasing pressure to work with manufacturers of products that bear ecolabels in accordance to ISO standards in order to fulfill high-level supply chain requirements by customers. More stories about our products and services at www.sulzer.com/stories. Additive manufacturing speeds up prototyping When new products are launched, we want to deliver solutions to customers as quickly as possible. Additive manufacturing of smaller- volume components allows us to speed up the early stages of development before an expensive manufacturing tool has been built. Thanks to additive manufacturing, Sulzer has considerably accelerated the development process and hence time to market of mascara brushes. We can deliver a prototype to customers within one week instead of 18 weeks. Thanks to a new material applied through selective laser sintering (an additive manufacturing technology) the bristles are stable enough to separate the eyelashes yet elastic enough not to hurt the eyes. In this way, the customer can actually test the prototypes effectively. Functional principle of the selective laser sintering process, also called SLS. report.sulzer.com/ar18 Business review 25 Financial review 31 Business review divisions 31 Pumps Equipment 34 Rotating Equipment Services 37 Chemtech 40 Applicator Systems Sulzer Annual Report 2018 - Business review - Financial review 25 Strong order growth and significant profitability improvement Order intake grew by 8.4% organically and by 12.5% including acquisitions. Sales increased by 7.8% organically, supported by higher order backlog entering the year, and by 11.9% including acquisitions. Profitability increased by 1.1 percentage points to 9.5%, driven by CHF 45 million savings from the Sulzer Full Potential (SFP) program and acquisitions. Free cash flow grew by CHF 47 million to CHF 174 million on higher operating income. If not otherwise indicated, changes from the previous year are based on currency-adjusted figures. These are reported without consideration of IFRS 15, applying the same accounting policies as in the prior year. Strong order growth Order intake increased by 12.5% in 2018. 8.4% organic growth and CHF 129.0 million from acquisitions drove this upsurge. Order intake gross margin decreased by 1.1 percentage points to 33.3%, largely because of the higher share of new equipment orders in oil and gas and continuing margin pressure in the power segment. Sulzer delivered strong financial results in 2018 with double-digit sales growth, a significant profitability increase and healthy free cash flow. Jill Lee, Chief Financial Officer Order intake in the Pumps Equipment division increased significantly by 16.5%, due to 8.6% organic growth and 7.9% from acquisitions. The strong organic growth was the result of higher oil and gas orders, partly offset by the decline in the power segment. In the Rotating Equipment Services division, order intake grew by 7.6% on the back of 5.8% organic growth and acquisitions. Organic growth was boosted by a rebound in the oil and gas segment, while negatively affected by a drop in power orders. Order intake in the Chemtech division grew by 20.5% organically supported by strong growth across all regions. In the Applicator Systems division, orders increased by 4.2% as a result of the acquisitions of Transcodent and Medmix. Orders remained flat organically. Sulzer’s total order intake grew in the Americas, Europe, the Middle East and Africa, while remaining stable in Asia- Pacific. Currency translation effects amounted to CHF –19.5 million, due to the weaker Russian rouble, Brazilian real and Argentinian peso, partly offset by the stronger euro. As of December 31, 2018, the order backlog amounted to CHF 1’666.9 million (December 31, 2017: CHF 1’593.5 million). Negative currency translation effects totaled CHF 47.8 million. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Financial review Orders millions of CHF Order intake Order intake gross margin Order backlog as of December 31 2018 (new accounting policies) 1) 2018 (previous accounting policies) 2) 3’531.5 33.3% 1’786.9 3’531.5 33.3% 1’666.9 26 2017 3’155.7 34.4% 1’593.5 1) According to IFRS 15, see financial review and note 34 of the consolidated financial statements for details. 2) Without consideration of IFRS 15, applying the same accounting policies as in the prior year. Higher sales on strong organic growth and acquisitions Sales amounted to CHF 3’404.5 million in 2018 – an increase of 11.9%. This rise was driven by strong organic growth of 7.8% on the back of higher order backlog entering the year, the strong order intake during the year and CHF 126.9 million of acquisition-related sales. Negative currency translation effects totaled CHF 8.3 million. In 2018, sales grew in all market segments. The most significant increase was recorded in the water segment, driven by strong organic growth and the JWC acquisition, as well as in the oil and gas segment, riding on the higher opening backlog. Sales in the power segment grew from the acquisition of Rotec and Brithinee, offsetting a slight organic decline. The general industry segment recorded higher sales from both organic growth and acquisitions. Sales grew across all regions, most pronounced in Asia-Pacific. The share of sales in emerging markets increased from 41% in 2017 to 44% in 2018. Lower gross margin Gross margin decreased from 30.7% in 2017 to 28.7% in 2018. Gross margin was impacted by the price erosion in the oil and gas and power segments. In addition, the higher share of sales from lower-margin new equipment business negatively affected the overall gross margin. Total gross profit increased to CHF 978.0 million (2017: CHF 936.6 million) supported by higher sales volumes. Operational return on sales increased to 9.5% Operational EBITA (opEBITA) amounted to CHF 322.2 million compared with CHF 255.4 million in 2017, an increase of 26.7%. Higher sales, savings of CHF 45 million achieved from SFP and the contribution from acquisitions more than offset the negative margin and mix impact. OpEBITA increased organically by 18.1% compared with 2017. Operating expenses excluding amortization, impairment on property, plant and equipment, restructuring expenses, and other non-operational items increased by 1.6% because acquisition- related cost additions exceeded SFP savings. Operational ROSA (opROSA) increased to 9.5% compared with 8.4% in 2017. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Financial review Operational key performance ratios opROSA opROCEA 2018 (new accounting policies) 1) 2018 (previous accounting policies) 2) 9.6% 18.1% 9.5% 17.8% 1) According to IFRS 15, see financial review and note 34 of the consolidated financial statements for details. 2) Without consideration of IFRS 15, applying the same accounting policies as in the prior year. The divisions achieved the following profitability figures (opROSA): — — — Pumps Equipment: 3.1% (2017: –0.3%). The profitability increased from the strong sales growth in the new equipment business and in the water segment, which grew organically and from the JWC acquisition. Rotating Equipment Services: 13.7% (2017: 13.9%). Profitability reduced only slightly despite pressures from a very competitive power segment, which was broadly compensated by strong cost management. Chemtech: 8.7% (2017: 5.2%): The profitability increase was attributed to strong sales growth. In addition, last year’s profit included a CHF 10 million operational charge, relating to a meanwhile discontinued business activity in the Tower Field Service business unit. Excluding that charge, Chemtech’s 2017 opROSA would have been 7.3%. — Applicator Systems: 21.1% (2017: 20.5%). The profitability grew due to higher sales volume. Bridge from EBIT to operational EBITA millions of CHF EBIT Amortization Impairments on property, plant and equipment Restructuring expenses Non-operational items 3) opEBITA opROSA 2018 (new accounting policies) 1) 2018 (previous accounting policies) 2) 183.8 69.0 4.4 13.1 52.0 322.5 9.6% 183.6 69.0 4.4 13.1 52.0 322.2 9.5% 27 2017 8.4% 15.8% 2017 136.5 53.8 15.4 21.7 28.0 255.4 8.4% 1) According to IFRS 15, see financial review and note 34 of the consolidated financial statements for details. 2) Without consideration of IFRS 15, applying the same accounting policies as in the prior year. 3) 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. Non-operational costs impacted operating income As part of the SFP program, Sulzer has continued to adapt its global factory footprint and streamline its organizational setup. Restructuring expenses significantly decreased compared with 2017. In 2018, restructuring expenses were mainly associated with measures taken in Brazil, Germany, the US, France, the Netherlands and Belgium. In 2018, other non-operational items amounted to CHF 52.0 million (CHF 28.0 million in 2017). These included the following larger items; SFP-related expenses amounted to CHF 28.5 million (CHF 26.0 million in 2017) and acquisition-related expenses were CHF 8.8 million (CHF 8.0 million in 2017). CHF 6.5 million of costs incurred in relation to the US sanctions against Russia, mostly legal counsel and temporary disruption expenses. Sulzer incurred a CHF 30.1 million charge in Chemtech for a business activity in the Tower Field Service business unit, discontinued from the end of 2017. This report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Business review - Financial review 28 was broadly offset by a CHF 28.5 million profit from the sale of unquoted equity instruments related to affordable housing historically provided to Sulzer employees. The equity instruments had previously been measured at cost. Consequently, EBIT amounted to CHF 183.6 million, an increase of 36.8% compared with CHF 136.5 million in 2017. Return on sales (ROS) was 5.4% compared with 4.5% in 2017. Financial income: higher interest expenses Total financial expenses amounted to CHF 18.9 million compared with CHF 10.8 million in 2017. Interest expenses increased by CHF 5.1 million as a result of the higher borrowing volume. Other financial expenses amounted to CHF –1.5 million compared with CHF +0.3 million in 2017, mainly due to adverse currency revaluation effects and fair value changes. In 2018, Sulzer recorded a profit of CHF 0.7 million from a joint venture compared with a loss of CHF 0.3 million in the prior year. This relates to a joint venture in China for the service of gas turbines. Slightly lower adjusted effective tax rate Income tax expenses increased to CHF 49.3 million (2017: CHF 38.2 million) due to higher pre-tax income. The effective tax rate declined from 30.5% in 2017 to 29.8% in 2018. Adjusted for the effects of unrecognized deferred tax assets, restructuring expenses and the impact of the US tax reform, the effective income tax rate declined from 23.4% in 2017 to 23.1% in 2018. Higher core net income In 2018, net income amounted to CHF 116.1 million compared with CHF 87.2 million in the previous year. Core net income excluding the tax-adjusted effects of non-operational items totaled CHF 222.7 million compared with CHF 178.3 million in 2017. Basic earnings per share increased from CHF 2.44 in 2017 to CHF 3.54 in 2018. Improved balance sheet efficiency Total assets as of December 31, 2018 amounted to CHF 4’884.8 million, which is an increase of CHF 765.7 million from 2017. This was mainly the result of higher borrowings, increased business volume and acquisitions. Non-current assets increased by CHF 139.9 million to CHF 2’052.4 million mainly due to higher goodwill (CHF 91.6 million), other intangible assets (CHF 34.7 million), and property, plant and equipment (CHF 14.9 million), due to acquisitions and higher capital expenditure. Currency translation effects on non-current assets amounted to CHF –78.0 million. Current assets increased by CHF 793.8 million to CHF 2’832.4 million, mainly due to higher cash and cash equivalents (CHF 614.9 million) and higher working capital (CHF 152.0 million). Cash and cash equivalents also increased because of the higher borrowings. Working capital mainly increased due to the higher sales volume and backlog-related inventory increase, coupled with higher share of new equipment business in oil and gas. Currency translation effects on current assets amounted to CHF – 88.3 million. Total liabilities increased by CHF 880.5 million to CHF 3’222.3 million as of December 31, 2018, mainly due to an increase in borrowings (CHF 621.5 million) and other current and accrued liabilities (CHF 227.2 million). The latter was mainly due to non-interest-bearing payables to Sulzer’s main shareholder Renova, amounting to CHF 184.6 million. This consisted of CHF 108.6 million related to the purchase of five million own shares from Renova on April 8, 2018, subsequently sold on report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Financial review 29 September 18, 2018, and CHF 76.0 million related to the 2018 dividend payment. Currency translation effects on total liabilities amounted to CHF –73.1 million. Equity amounted to 1’662.4 million in 2018 compared with 1’702.4 million in 2017. This was mainly driven by the Sulzer dividend (CHF 119.1 million) and currency translation effects (CHF 90.6 million), which were partly offset by net income (CHF 116.1 million), and the remeasurement of the defined benefit obligation (CHF 55.9 million). Net debt increased slightly from CHF 225.0 million in 2017 to CHF 239.0 million in 2018. Net debt to EBITDA decreased from 0.81 in 2017 to 0.73, mainly due to the increase in EBITDA. Strong free cash flow Cash flow from operating activities amounted to CHF 260.8 million, compared with CHF 183.7 million in 2017. This increase was mainly due to the higher net income partly offset by a lower contribution from net working capital. Free cash flow amounted to CHF 173.9 million compared with CHF 127.0 million in the prior year. This was driven by the higher cash flow from operating activities, partly offset by higher capital expenditure. Cash-out from investing activities totaled CHF 297.4 million compared with CHF 230.8 million in the prior year. Cash-out for acquisitions amounted to CHF 218.7 million compared with CHF 162.5 million in 2017. Capital expenditure amounted to CHF 96.2 million, above the CHF 81.2 million in 2017. Cash flow from financing activities totaled CHF 669.1 million compared with CHF 106.3 million in 2017. This was largely due to additional borrowings of CHF 625.8 million (2017: CHF 239.3 million). Dividend payments amounted to CHF 43.1 million in 2018, compared with CHF 119.4 million in 2017. While the Sulzer dividend remained unchanged at CHF 3.50 per share, CHF 76.0 million of dividend payments to Sulzer’s main shareholder Renova could not be transferred as a result of the US sanctions on Russia. Exchange losses on cash amounted to CHF 26.1 million compared with a gain of CHF 0.1 million in 2017. Outlook 2019 Sulzer expects the positive momentum in the oil and gas market to continue in 2019. All other markets are also expected to grow, with the continued exception of power. The company’s early indicators do not show signs of an impending slowdown of the economy in its major markets. Sulzer therefore expects to continue its trend of organic growth and improved profitability. Sulzer delivered to date cumulative SFP savings of CHF 230 million, ahead of the previously communicated cumulative 2018 target of CHF 220 million. In 2019, Sulzer expects its SFP program to deliver incremental cost savings of approximately CHF 10 million. The company is therefore raising its cumulative savings target from the previously communicated CHF 230 million (from 2019 onwards) to CHF 240 million (from 2019 onwards). For the full year 2019, adjusted for currency effects, order intake is expected to grow organically by 2% to 5% and sales to grow organically by 3% to 5%. Sulzer expects to reach an opEBITA margin (opEBITA in percent of sales) of around 10%. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Financial review 30 Impact of IFRS 15 Sulzer has adapted its reporting to reflect the application of IFRS 15 “Revenue from Contracts with Customersˮ. It replaced IAS 18 “Revenueˮ, and IAS 11 “Construction Contractsˮ. IFRS 15 determines whether, how much and when to recognize sales from contracts with customers. In 2018, IFRS 15 had a negative effect on sales (CHF 39.6 million) and a positive effect on opEBITA (CHF 0.3 million). Consequently, the application of IFRS 15 increased opROSA by 0.1 percentage points. These differences are related to projects where sales, cost and profit were recognized over time according to the previous accounting standards. According to IFRS 15, sales, cost and profit of these projects are recognized later at a certain point in time. The information presented for 2017 has not been restated. For transparency, we are showing the figures for 2018 according to both the new and the old methods in the divisional business reviews. The changes in percent shown in the tables and mentioned in the text compare 2018 figures, according to the old method, with 2017 figures as previously reported. In the consolidated financial statements (note 34), a table summarizes the impact of the new accounting standards on the financial statements. Abbreviations EBIT: Operating income ROS: Return on sales (EBIT/sales) 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) EBITDA: Operating income before depreciation and amortization report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Business review - Business review Pumps Equipment 31 Growing order intake, sales and profitability Pumps Equipment recorded growing order intake and sales in 2018. Operational EBITA and operational ROSA increased significantly, bringing the division back to profitability. Sulzer completed its acquisition of JWC Environmental, LLC. As of January 1, 2019, Frédéric Lalanne was appointed as President of the Pumps Equipment division. Award-winning Internet of Things solution Sulzer continued to take its offering into the digital age. The company’s BLUE BOX™ platform for advanced remote analytics went live for Phillips 66, a major pipeline company in the US. Thanks to BLUE BOX, Phillips 66 can improve its energy efficiency and optimize management of its assets. In November 2018, the pioneering solution won the Gold Certificate Industry 4.0 at the Swiss Digital Economy Awards. We returned to profitability in 2018. I am excited to lead Pumps Equipment’s continued rebound in a market with solid momentum. Frédéric Lalanne, Division President Pumps Equipment (as of January 1, 2019) In January 2018, Sulzer completed its acquisition of JWC Environmental, LLC (JWC). JWC is a supplier to the North American wastewater market and employs around 230 people. As of January 1, 2019, Sulzer appointed Frédéric Lalanne, previously Chief Commercial and Marketing Officer, as President of the Pumps Equipment division. Michael Streicher stepped down from the Executive Committee to assume his new responsibilities as Global Head of the water pumps business. Order intake increased In 2018, Pumps Equipment reported increasing order intake. All market segments except for power contributed to growth. Bookings were particularly good in the oil and gas segment. The acquisition of JWC added orders totaling CHF 87 million. Regionally, order intake was strong in the Americas, particularly in the US where major pipeline orders have been booked. Orders in Europe, the Middle East and Africa (EMEA) remained stable, while orders in the Asia-Pacific region decreased. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Business review Pumps Equipment 32 Increase in sales and return to profitability Sales increased in 2018 by 15.5%. Sales grew in all of Sulzer’s key markets and were particularly strong in all segments of the oil and gas industry. Operational EBITA increased significantly compared with 2017, bringing the division back to profitability. This was supported by higher volumes in the water and industrial markets as well as a positive contribution from the JWC acquisition. Operational ROSA increased to 3.1%. Sales by (sub-)segment Sales by region 2018 2018 Safety performance in 2018 In 2018, Pumps Equipment reported a decrease in its accident frequency rate (AFR) to 2.7 cases per million working hours (2017: 2.8*). The accident severity rate (ASR) amounted to 107.3 lost days per million working hours (2017: 49.3*). The carryover of lost time from accidents that occurred in the previous year, but which did not close fully until 2018, contributed to the increase. In 2019, the division will focus on improving safety performance, particularly in the EMEA region, which saw an unusual rise in accidents in 2018. You can read more about the company’s health and safety efforts in the chapter “Social sustainability”. * Adjusted for acquisition effects. If not otherwise indicated, changes from the previous year are based on currency-adjusted figures. These are reported without consideration of IFRS 15, applying the same accounting policies as in the prior year. report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Business review - Business review Pumps Equipment 33 Key figures Pumps Equipment millions of CHF Order intake Order intake gross margin Order backlog as of December 31 Sales EBIT opEBITA opROSA opROCEA Employees (number of full-time equivalents) as of December 31 2018 (new accounting policies) 1) 2018 (previous accounting policies) 2) 1’372.1 26.3% 982.9 1’284.2 –27.2 41.4 3.2% 5.8% 5’713 1’372.1 26.3% 910.3 1’299.9 –29.0 39.7 3.1% 5.4% 5’713 2017 1’180.2 28.3% 847.0 1’120.0 –61.7 –3.7 –0.3% –0.6% 5’453 Change in +/–% 3) +/–% adjusted 4) +/–% organic 5) 16.5 15.5 n/a 8.6 7.5 n/a 16.3 7.5 16.1 53.0 n/a 4.8 1) According to IFRS 15, see financial review and note 34 of the consolidated financial statements for details. 2) Without consideration of IFRS 15, applying the same accounting policies as in the prior year. 3) Comparing 2018 (previous accounting policies) with 2017. 4) Adjusted for currency effects. Comparing 2018 (previous accounting policies) with 2017. 5) Adjusted for acquisition and currency effects. Comparing 2018 (previous accounting policies) with 2017. Abbreviations EBIT: Operating income 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) report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Business review Rotating Equipment Services 34 Top-line growth across all regions In 2018, order intake, sales and operational EBITA increased compared with the previous year. Operational ROSA was impacted by the power segment. By acquiring Brithinee Electric, Sulzer expanded its electromechanical services to Southern California and into wind power. Digitalizing service model and expanding into new markets Rotating Equipment Services continued to take its service model into the digital age. In 2018, the pumps spare parts manufacturing center in Leeds, UK, went fully paperless. This move has improved the speed of delivery of spare parts to customers and saved cost and effort. Furthermore, the parts manufacturing centers around the globe are ramping up their use of additive manufacturing to improve delivery time and sourcing flexibility. In 2018, our service business achieved an increased order intake across all regions. Taking our service model into the digital age will help us sustain growth for the future. Daniel Bischofberger, Division President Rotating Equipment Services In November 2018, Sulzer acquired Brithinee Electric, a leading independent electromechanical service provider targeting the wind market in Southern California, USA. In 2017, Brithinee recorded annual sales of about USD 10 million with a workforce of 46 employees. Increase in order intake In 2018, Rotating Equipment Services reported growing order intake. The increase stemmed largely from the oil and gas market rebound. Order intake in the power market decreased. Whilst orders were up in pumps services and electromechanical services, they declined in the turbo services business. Order intake increased in all regions compared with 2017. Growth was most pronounced in the Asia- Pacific region. Sales and operational EBITA increased Sales increased in 2018 compared with the previous year. The division reported growth across all regions. Operational EBITA increased, whereas operational ROSA showed a slight decrease. Higher sales volumes were offset by lower margins because of pricing erosion in the power segment, particularly in the Americas. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Business review Rotating Equipment Services 35 Sales by (sub-)segment Sales by region 2018 2018 Safety performance in 2018 In 2018, the accident frequency rate (AFR) increased slightly to 2.1 cases per million working hours (2017: 2.0), driven by a higher number of lost time accidents in Europe, the Middle East and Africa (EMEA). The accident severity rate increased to 53.7 (2017: 42.6) despite efforts to develop risk assessment and other safety-related competencies. Throughout 2019, the division will focus on pre- work planning, control of high-risk activities and root cause analyses. You can read more about the company’s health and safety efforts in the chapter “Social sustainability”. If not otherwise indicated, changes from the previous year are based on currency-adjusted figures. These are reported without consideration of IFRS 15, applying the same accounting policies as in the prior year. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Business review Rotating Equipment Services 36 Key figures Rotating Equipment Services millions of CHF Order intake Order intake gross margin Order backlog as of December 31 Sales EBIT opEBITA opROSA opROCEA 2018 (new accounting policies) 1) 2018 (previous accounting policies) 2) 1’109.7 37.7% 393.1 1’063.7 130.8 146.1 13.7% 26.6% 1’109.7 37.7% 368.2 1’087.4 133.5 148.8 13.7% 26.6% 2017 1’047.7 38.0% 364.4 1’029.5 134.4 144.0 13.9% 28.4% Change in +/–% 3) +/–% adjusted 4) +/–% organic 5) 5.9 1.1 5.6 –0.7 3.4 7.6 7.2 4.9 5.8 5.2 3.0 Employees (number of full-time equivalents) as of December 31 4’721 4’721 4’485 5.3 1) According to IFRS 15, see financial review and note 34 of the consolidated financial statements for details. 2) Without consideration of IFRS 15, applying the same accounting policies as in the prior year. 3) Comparing 2018 (previous accounting policies) with 2017. 4) Adjusted for currency effects. Comparing 2018 (previous accounting policies) with 2017. 5) Adjusted for acquisition and currency effects. Comparing 2018 (previous accounting policies) with 2017. Abbreviations EBIT: Operating income 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) report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Business review Chemtech 37 Order intake, sales and profitability increased In 2018, the Chemtech division reported growing order intake and sales. Operational EBITA and operational ROSA also increased. Sulzer expanded its cooperation with SGL group in the field of column internals and teamed up with Futerro and TechnipFMC to form the PLAnet™ initiative for the production of sustainable plastics from polylactic acid (PLA). Strategic collaboration for new products and solutions In January 2018, the Chemtech division extended its cooperation with SGL group in the field of column internals. The partners have now succeeded in making a complete family of column internals based on carbon fiber composite — a material that is very temperature- and corrosion-resistant. Chemtech achieved growing orders, sales volumes and profitability in 2018. Together with our partners we continue to develop new products, new sustainable materials and state-of-the-art processes to bring innovative solutions to the market. Torsten Wintergerste, Division President Chemtech In December 2018, Sulzer, Futerro and TechnipFMC teamed up to simplify the manufacture of bioplastics. The three major process technology and equipment specialists have formed the PLAnet™ initiative to promote the production of sustainable plastics made of polylactic acid (PLA). This strategic collaboration will support manufacturers interested in entering the bioplastic market by delivering integrated PLA technology packages. Most of the industrial PLA plants worldwide operate with Sulzer’s technology. Order intake increased In 2018, Chemtech reported a significant increase in order intake. The Separation Technology business unit was behind much of the growth. There were two large orders that particularly contributed to the increase: one for Sulzer’s patented VIEC technology and the other for the company’s distillation equipment, which supports the pioneering EU-funded project “Steelanol”. The project aims to turn carbon-rich industrial emissions into bioethanol fuels. Order intake grew across all market segments, with the most pronounced increase coming from oil and gas. Order intake was strong across all regions, particularly in Asia-Pacific and Europe, the Middle East and Africa (EMEA), where it was supported by the oil and gas market rebound. Increase in sales, operational EBITA and operational ROSA In line with the strong order intake increase, the division’s sales also grew significantly compared with 2017. Major sales drivers were the Asia-Pacific and Europe regions. Operational EBITA increased significantly in 2018, supported by higher volumes, increased productivity and a favorable product mix. Accordingly, operational ROSA rose significantly compared with the previous year. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Business review Chemtech 38 Sales by (sub-)segment Sales by region 2018 2018 Safety performance in 2018 In 2018, the accident frequency rate (AFR) at Chemtech increased to 1.8 cases per million working hours (2017: 1.5). The accident severity rate (ASR) improved to 80.4 lost days per million working hours (2017: 84.7). An increased number of safety walks and a stronger focus on safety for work in confined spaces supported the prevention of accidents involving confined space activities, one of the division’s highest risk activities. You can read more about the company’s safety and health efforts in the chapter “Social sustainability”. If not otherwise indicated, changes from the previous year are based on currency-adjusted figures. These are reported without consideration of IFRS 15, applying the same accounting policies as in the prior year. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Business review Chemtech 39 Key figures Chemtech millions of CHF Order intake Order intake gross margin Order backlog as of December 31 Sales EBIT opEBITA opROSA opROCEA 2018 (new accounting policies) 1) 2018 (previous accounting policies) 2) 600.1 31.3% 345.9 563.2 14.5 50.0 8.9% 24.6% 600.1 31.3% 323.2 563.4 13.3 48.8 8.7% 23.0% 2017 501.5 31.0% 315.3 478.0 11.0 25.0 5.2% 11.3% Change in +/–% 3) +/–% adjusted 4) +/–% organic 5) 19.7 2.5 17.9 21.0 94.8 20.5 20.5 18.6 94.6 18.6 94.7 Employees (number of full-time equivalents) as of December 31 3’063 3’063 2’878 6.4 1) According to IFRS 15, see financial review and note 34 of the consolidated financial statements for details. 2) Without consideration of IFRS 15, applying the same accounting policies as in the prior year. 3) Comparing 2018 (previous accounting policies) with 2017. 4) Adjusted for currency effects. Comparing 2018 (previous accounting policies) with 2017. 5) Adjusted for acquisition and currency effects. Comparing 2018 (previous accounting policies) with 2017. Abbreviations EBIT: Operating income 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) report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Business review Applicator Systems 40 Order intake, sales and profitability increased In 2018, Applicator Systems reported growing order intake and sales. Operational EBITA and operational ROSA also increased. Sulzer acquired Medmix Systems Ltd, strengthening its position as a state-of-the-art supplier of mixing and dispensing solutions in the healthcare market. Expanding portfolio of applicators In August 2018, Sulzer completed its acquisition of Medmix Systems Ltd. The Swiss company provides applicators for tissue treatment, bone repair, oral surgery and drug delivery. The acquisition expanded Applicator Systems’ portfolio of mixing and dispensing devices in the healthcare segment, complementing its leading positions in dental, adhesives and beauty. The acquisition of Medmix will help us gain ground in the growing healthcare market in addition to our already leading positions in the dental, adhesives and beauty segments. Amaury de Menthiere, Division President Applicator Systems To increase the capacity of its industrial adhesives business, Sulzer opened a new production plant in Wroclaw, Poland, in 2018. Moreover, the company established a new European distribution hub in Luxembourg for its adhesives products. Order intake increased on a currency-adjusted basis Order intake grew on a currency-adjusted basis and remained flat organically. Order intake in the adhesives, dental and healthcare segments together increased by 11.8% including acquisitions and by 4.8% organically. Order intake in the beauty segment was down by 5.4% organically because a major customer switched to a new-generation product, which resulted in a disruption of order intake and sales. Sales, operational EBITA and operational ROSA increased Sales increased compared with 2017, driven by the Transcodent acquisition and strong organic order intake in the dental segment. The acquisitions of Transcodent and Medmix had a positive impact, adding CHF 16 million to sales. Applicator Systems reported growing sales across all regions. The increase was most pronounced in Europe, the Middle East and Africa (EMEA). In 2018, operational EBITA increased, largely driven by higher volumes in the dental and adhesives segments. Operational ROSA also increased. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Business review Applicator Systems 41 Sales by (sub-)segment Sales by region 2018 2018 Safety performance in 2018 In 2018, the division reported an accident frequency rate (AFR) of 8.1 cases per million working hours (2017: 7.2). The accident severity rate (ASR) amounted to 73.2 lost days per million working hours (2017: 50.4). The increase stemmed from acquisitions and ongoing integration efforts. In 2019, the division will put renewed focus on safety ownership and culture. You can read more about the company’s health and safety efforts in the chapter “Social sustainability”. If not otherwise indicated, changes from the previous year are based on currency-adjusted figures. These are reported without consideration of IFRS 15, applying the same accounting policies as in the prior year. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Business review - Business review Applicator Systems 42 Key figures Applicator Systems millions of CHF Order intake Order intake gross margin Order backlog as of December 31 Sales EBIT opEBITA opROSA opROCEA 2018 (new accounting policies) 1) 2018 (previous accounting policies) 2) 449.6 45.9% 65.0 453.8 63.8 95.7 21.1% 22.9% 449.6 45.9% 65.0 453.8 63.8 95.7 21.1% 22.9% 2017 426.3 43.9% 66.8 421.6 63.2 86.8 20.5% 22.7% Change in +/–% 3) +/–% adjusted 4) +/–% organic 5) 5.4 –2.8 7.7 0.9 10.2 4.2 6.3 9.5 0.3 2.4 5.7 Employees (number of full-time equivalents) as of December 31 1’864 1’864 1’716 8.6 1) According to IFRS 15, see financial review and note 34 of the consolidated financial statements for details. 2) Without consideration of IFRS 15, applying the same accounting policies as in the prior year. 3) Comparing 2018 (previous accounting policies) with 2017. 4) Adjusted for currency effects. Comparing 2018 (previous accounting policies) with 2017. 5) Adjusted for acquisition and currency effects. Comparing 2018 (previous accounting policies) with 2017. Abbreviations EBIT: Operating income 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) report.sulzer.com/ar18 page break Sustainable development 44 Values and behaviors 46 Ecological sustainability 49 Social sustainability Sulzer Annual Report 2018 - Sustainable development - Values and behaviors 44 Values and behaviors at the heart of Sulzer’s success In 2017, Sulzer introduced a new set of simple and pragmatic values and behaviors that redefined the way the company and its employees operate. One year on, the company looks at how these values and behaviors are being brought to life. Voice of Sulzer In 2018, Sulzer launched a global employee survey with the aim of further strengthening the company’s culture and improving employee experience. The Voice of Sulzer, with its simple and accessible format, achieved a 73% participation rate. It returned insightful results that help Sulzer to gain a better understanding of how employees view the many different aspects of life at Sulzer. Since their introduction a little over a year ago, the Sulzer values and behaviors are gradually being integrated into various aspects of day-to-day life at our company. They represent a common anchor and reference point across the diverse areas of our business and will continue to shape our future direction. Armand Sohet, Chief Human Resources Officer At a global level, Sulzer employees are highly engaged. A full 93% of respondents would go the extra mile to help Sulzer succeed. And over 80% would recommend Sulzer as a good place to work. Compared with peers in the manufacturing industry, Sulzer equals or outperforms the benchmark in eight out of ten categories. Careful analysis of the results has given Sulzer detailed insight into employee experience, and has identified many areas where the company is performing well. The results have also revealed areas where there is room for improvement. The company will now be able to focus global efforts on these areas to further enhance the overall experience of each Sulzer employee. Read more about our values and behaviors at www.sulzer.com. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Sustainable development - Values and behaviors 45 Sulzer in Motion: healthy body, healthy mind In 2018, Sulzer built on and further expanded the employee health and well-being initiative – Sulzer in Motion. The aim of the initiative is to promote team spirit, collaboration and healthy habits to make Sulzer a more vibrant place to work. Following great feedback from the pilot in 2017, Sulzer successfully expanded participation in the Virgin Pulse Global Challenge in 2018. Almost 2’500 Sulzer employees from around the world formed 350 teams to join the challenge, tracking their movement and activity over the course of 100 days. The Sulzer teams covered a combined total distance of 2’001’336 km, the equivalent of walking around the world 50 times! The 2018 Global Challenge saw high level of engagement, with employees from all areas of Sulzer posting regular updates of their sporting achievements on our internal communication platform. For Sulzer, “Committed People” means happy, healthy and energized people – the health and well-being of employees remains a key focus for the company. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Sustainable development - Ecological sustainability 46 Decrease in water and energy consumption – less waste Sulzer is aware of its environmental responsibility as a leading global industrial company and continually focuses on designing products with high efficiency levels. In 2018, overall energy consumption decreased along with a large reduction in water consumption. Sulzer was also able to reduce its total waste production as well as the percentage of hazardous waste – allowing for more landfill conversion. Sulzer is aware that many of its industrial products can have a large energy footprint due to the sheer size and scale of the function they are delivering. Sulzer’s design teams recognize these issues and consistently work to develop more energy-efficient products and solutions. Serving our customers and the environment Sulzer believes strongly in doing its part to protect the environment while simultaneously helping our customers to find the most efficient solutions for their needs, saving them time, space and money. This is why Sulzer products have such a strong emphasis on efficiency. They use as little material as possible while conforming to the company’s high quality standards. Because it is not always necessary to replace your existing equipment, Sulzer offers revamps, retrofits and upgrades to increase efficiency and extend its lifetime – irrespective of the brand. The 12Cr welding option that Sulzer has developed for repairing geothermal steam turbines provides longer life than the original material – and saves our customers huge amounts on costly replacements (read the full story here). The new Sulzer HST 30 high-speed turbocompressor offers increased flow and pressure at a significantly higher level of efficiency than its predecessors. This translates into big savings in the energy consumed by low-pressure air compression, both in wastewater treatment and industrial processes. To achieve ideal efficiency levels throughout a product’s life cycle, Sulzer advises its customers on the safe and efficient installation, operation, maintenance and disposal of their equipment. Businesses with diverse footprints The company reports on its energy consumption, greenhouse gas emissions, waste production and water consumption, because Sulzer considers these as material for its operations. The company’s overall goal is to maintain, but ideally to improve, performance measured against working hours (whr) compared with the previous year. Sulzer’s products and services differ widely from one another; its portfolio encompasses pumps, separation equipment and applicators as well as services for rotating equipment or for turnaround projects. These businesses have different requirements and different ecological footprints. Thus, Sulzer follows a local approach to reducing its environmental impact. The business units and local sites evaluate their footprints and set their agendas individually. Comprehensive reporting system Sulzer has a comprehensive reporting system in place to collect financial and extra-financial data at site level. The company uses the number of total working hours as a reference. The total number of working hours remained steady because the reduction of working hours through restructuring measures was offset by additional working hours from newly acquired businesses. In 2018, 78.5% of total working hours reported on environmental data (2017: 76%). The number is slightly higher than in the previous year because the businesses acquired from Geka and Ensival Moret are now integrated into the environmental data collection process. The coverage of HR and occupational report.sulzer.com/ar18 Sulzer Annual Report 2018 - Sustainable development - Ecological sustainability 47 health and safety data is 100% (of total working hours). The organization collects extra-financial data according to two different reporting cycles and confirms the accuracy of the figures through regular internal audits: — — The reporting period for environmental data was October 1, 2017, to September 30, 2018. The reporting cycle for HR data and the health and safety performance was January 1, 2018, to December 31, 2018. Smaller environmental footprint due to less waste and reduced energy and water consumption In 2018, Sulzer was able to reduce its overall environmental impact. Overall energy use decreased slightly by 1.3%, and the rate of energy consumption per 1’000 working hours decreased by 4.2%. These reductions are largely a consequence of efficiency gains at all three main production sites of the Applicator Systems (APS) business. The decreases would have been even greater, but were somewhat offset by several large projects in the Pumps Equipment division using natural gas as an energy source. Energy consumption Hazardous waste GJ in 1'000 GJ/1'000 whr Tons t/1'000 whr 1'200 900 600 300 0 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 80 8'000 60 6'000 40 4'000 20 2'000 0 0 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 0.48 0.36 0.24 0.12 0 Total energy consumption in GJ GJ/1'000 working hours (whr) Total hazardous waste in t (metric) t/1'000 working hours (whr) In 2018, the total greenhouse gas (GHG) emissions in absolute terms decreased by 2.2%. Contributing factors included a reduction in emissions from purchased electricity (7%) and district heating (18%), resulting from the closure of two Sulzer plants in Europe. However, there was a slight increase of approximately 2% in air travel emissions. In total, the specific GHG footprint (per 1’000 working hours) decreased by 5.5%. This over-proportional reduction was mostly attributable to a change in emissions factors due to an improved energy mix. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Sustainable development - Ecological sustainability 48 The total waste produced by Sulzer decreased slightly to 0.8 tons per 1’000 whr. The share of waste converted to landfill increased significantly by 13 percentage points. This was partly driven by a reduction of hazardous waste requiring special treatment, which decreased by 5 percentage points. Sulzer’s use of water decreased by 20.1%, leading to a reduction in the water consumption rate of 23.0% per 1’000 whr. This is the second consecutive year with large reductions in water consumption. The majority of this reduction (86%) can be attributed to improved water management in the APS division, which is responsible for over half of all water used at Sulzer. The division put great emphasis on improved water management in its processes and facilities in 2018. Key figures Energy GJ 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 1 1) GHG scope 2 2) GHG scope 3 3) Waste Waste per working hours By treatment: Recycling Waste to landfill / incineration / other treatment By hazardousness: Non-hazardous waste Hazardous waste Water % % % % % % tons CO eq. 2 tons CO eq. per 2 1’000 whr tons CO eq. 2 tons CO eq. 2 tons CO eq. 2 Tons Tons per 1’000 whr % % % % m 3 Water consumption per working hours 3 m per 1’000 whr 2017 Change in +/–% –1.3 –4.2 –2.2 –5.5 –3.3 –6.5 –1.9 –4.7 –11.1 2018 860’753 38.3 58.1 27.3 10.4 1.1 3.2 <1 872’335 40.0 58.6 25.3 9.7 1.8 3.7 <1 113’764 116’338 5.1 18’979 55’998 38’797 18’142 0.8 45.3 54.7 82.6 17.4 5.4 18’366 59’934 38’038 19’029 0.9 58.4 41.6 77.5 22.5 930’530 41.4 1’163’905 53.8 –20.1 –23.0 1) Direct emissions from Sulzer stemming from primary energy sources such as natural gas and fuels used on-site. 2) Indirect emissions from secondary (converted) energy sources such as electricity and district heating. 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. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Sustainable development - Social sustainability 49 Fostering productivity in a safe work environment Safety is of the utmost importance to Sulzer. The company strives to create a positive and engaging working environment where employees can conduct their work in absolute safety. With the help of the Sulzer Safe Behavior Program, the company sets itself ambitious goals designed to continually challenge its standards and improve its safety performance. 2018 was a mixed year for safety in Sulzer. On the positive side, Sulzer confirms yet another year in which no one lost their life while working for the company. However, the company’s accident frequency rate (AFR) increased by 7.0%. Nevertheless, Sulzer’s overall accident rates still remain lower than the benchmark for general industries. The accident severity rate (ASR) also increased significantly by 50.1%. This can largely be attributed to a regulatory anomaly in a specific case. Nevertheless, a total of 97 workers (85 Sulzer employees and 12 contractors) still suffered lost-time accidents. Accidents Number of cases 100 75 50 25 0 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 AFR 6.0 4.5 3.0 1.5 0.0 Cases that last > 1 lost day due to occupational accidents, including acquisitions Cases that last > 1 lost day due to occupational accidents, excluding acquisitions AFR in cases per million working hours, including acquisitions AFR in cases per million working hours, excluding acquisitions report.sulzer.com/ar18 Sulzer Annual Report 2018 - Sustainable development - Social sustainability 50 Sulzer’s acquired businesses were unable to maintain the rates of reduction in accidents that were achieved in their first year of being integrated into the Sulzer safety program. However, given the scale of the initial improvements, this may be merely a reflection of stabilization. Several of Sulzer’s more mature businesses also suffered higher accident rates in 2018, with only the Pumps Equipment division recording a slight reduction in the total number of lost time accidents. None of the divisions reached their targets on the road towards reducing the accident frequency rates to below one lost time injury (LTI) per million working hours. Working towards an AFR of less than 1.0 In an effort to counter the trend, Sulzer launched several initiatives to increase the hazard awareness of employees, to encourage participation in the safety program and to foster the sharing of competence. Embedded within the Safe Behavior Program, Sulzer employees participated in more than 60’000 safety walks and observations during the year – an average of more than 2’000 safety conversations per million working hours. To increase transparency, Sulzer introduced the category of “significant incident” in its mandatory reporting requirements. These incidents include any event that could potentially have a life-changing outcome, even if in the actual incident the result was a near miss. Moreover, to foster the sharing of learnings and competence across all Sulzer businesses, Sulzer launched a global ESH competence network with the specific mandate to work and share good practices and available competence across divisional and business boundaries. These initiatives should help Sulzer return to its journey to reducing AFR to less than 1.0. Developing our employees In line with its renewed focus on creating on-the-job development and practice-oriented learning experiences, Sulzer sponsored and supported various internal and external programs throughout 2018. The Sulzer Management Training (SMT) program is offered to first-time line managers and focuses on creating a common understanding of the Sulzer approach to management. In 2018, 80 employees participated in this training. In addition, based on the successful pilot in 2017, Sulzer also conducted the Leadership Orientation program. This offered the opportunity for selected high performers to work in a diverse, global team in close interaction with the CEO and executive team. Sulzer continues to use the Learning Management System (LMS), a cloud-based learning platform. It allows us to manage and enable access to a range of virtual and e-enabled learning offerings. Assessing performance and potential Building on the momentum created in 2017, Sulzer is continuing to harmonize key people management processes globally, and going digital with them at every opportunity. The company has kept with the revised, simplified performance management process – from setting objectives to annual appraisal. The process now includes a strong focus on driving higher levels of performance within the organization, closely supported by capability-building initiatives like webinars to enable better performance and coaching discussions. Although Sulzer has made many changes in its cultural transformation, the company has maintained the possibility for employees to exceed objectives and be rewarded fully for delivering outstanding performance. In 2018, Sulzer introduced the first globally aligned approach to assessing potential for future growth. Based on a series of calibrated discussions, employees were assessed on standardized criteria across divisions and business areas. In addition to motivation and ability (performance), the Sulzer behaviors are also considered in assessing employees’ potential. The values and behaviors are strongly linked to driving a high-performance culture. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Sustainable development - Social sustainability 51 Geographical spread of employees 2018 Building on diversity, emphasizing inclusion Sulzer builds on the strengths and diversity of its people. All employees – regardless of their cultural backgrounds, nationalities, genders and ages – have unique skills to contribute. Sulzer is always stronger than the sum of its parts. To foster the exchange among them, employees have the possibility to participate in job rotation programs, internships and short-term assignments. Sulzer’s employees are deeply committed to personal responsibility, integrity and ethical behavior. Every employee signs Sulzer’s Code of Business Conduct (CoBC). The company’s compliance training sessions and CoBC refresher courses ensure that employees are fully aware of their ethical responsibilities and that they act accordingly. Read more in the “Corporate governance” section. Key figures Accident frequency rate (AFR) Accident severity rate (ASR) Health and safety training Voluntary attrition rate Share of women (of total workforce) Number of employees Cases per million working hours Lost days per million working hours Hours % % FTE 2018 2.9 81.1 117’599 7.4 18.0 15’572 2017 Change in +/–% 2.7 54.0 107’546 9.0 17.8 14’732 7.0 50.1 9.3 5.7 Find further sustainability data at www.sulzer.com/sustainability. report.sulzer.com/ar18 Corporate governance Corporate structure and shareholders 53 54 Capital structure 55 Board of Directors 63 Executive Committee 64 Shareholder participation rights 65 Takeover and defense measures 66 Auditors 67 Risk management Information policy 69 Sulzer Annual Report 2018 - Corporate governance - Corporate structure and shareholders 53 Corporate structure and shareholders 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. 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 application 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, 2018. Further information on corporate governance is published at www.sulzer.com/governance. The information in the following section is set out in the order defined by the SIX Swiss Exchange directive on information relating to corporate governance (RLCG), with subsections summarized as far as possible. Sulzer’s consolidated financial statements comply with International Financial Reporting Standards (IFRS), and in certain sections readers are referred to the Financial Reporting section in the Sulzer Annual Report 2018. Sulzer reports about the compensation of the Board of Directors and the Executive Committee in the Compensation Report. Corporate structure The operational corporate structure is shown in the graphic in the chapter “Board of Directors” of this Corporate Governance report and under note 3 to the “Consolidated financial statements” in the Financial Reporting section. 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, 2018, the market capitalization of all registered shares was CHF 2’674’177’979. Information on the major subsidiaries included in the consolidation can be found under note 36 to the “Consolidated financial statements.” The list comprises all consolidated direct subsidiaries of Sulzer Ltd as well as all further consolidated subsidiaries that are strategically relevant. Significant shareholders According to notifications of Sulzer shareholders, one shareholder held more than 3% of Sulzer Ltd’s share capital on December 31, 2018. As published on the SIX disclosure platform on May 29, 2018, Viktor Vekselberg held 48.82% of Sulzer shares. The shares are directly held by Tiwel Holding AG. For information on shareholders of Sulzer Ltd that have reported shareholdings of over 3% or a reduction of shareholdings below 3% in the financial year 2018, please refer to the website of the Disclosure Office of the SIX Swiss Exchange www.six-exchange-regulation.com/en/home/ publications/significant-shareholders.html. For the positions held by Sulzer and information on shareholders, see note 23 to the “Consolidated financial statements.” There are no cross- shareholdings where the capital or voting stakes on either side exceed the threshold of 3%. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Capital structure 54 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 is available at www.sulzer.com/governance (under “Articles of Association”). There were no changes of the share capital in the last three financial reporting years. 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 conditions: 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 commercial 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 entitled, beyond these limits, to enter shares of nominees with voting rights in the share register if the above-mentioned conditions are not met (see also paragraph 6a of the Articles of Association at www.sulzer.com/governance). On December 31, 2018, eight nominees holding a total of 1’612’821 shares (4.71% 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 restricted share units issued to the members of the Board of Directors (from 2009) as well as performance share and restricted share units issued to the members of the Executive Committee (in 2010 and yearly as from 2013) are set out under note 31 to the “Consolidated financial statements” and under note 11 to the “Financial statements of Sulzer Ltd.” report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Board of Directors 55 Board of Directors Members of the Board of Directors are elected individually for one-year terms. At the Annual General Meeting of April 4, 2018, Jill Lee and Thomas Glanzmann did not stand for reelection to the Board of Directors. Hanne Birgitte Breinbjerg Sørensen and Lukas Braunschweiler were newly elected. All other members were reelected, and Peter Löscher was reelected as Chairman of the Board of Directors. On May 25, 2018, Axel Heitmann resigned from the Board of Directors. As of this date, the Board consists of seven members. None of them has ever held an executive position at Sulzer. All members of the Board of Directors are non-executive. None of the members of the Board of Directors have ever belonged to the management of a Sulzer company 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. Until June 5, 2018, Marco Musetti had an employment/advisory relationship with an affiliate of Sulzer’s largest shareholder. During 2018, Mikhail Lifshitz indirectly held a 49% and Sulzer held a 51% stake of Sulzer Turbo Services RUS LLC, Russia. Sulzer acquired 100% of the share capital in December 2018. In addition, Mikhail Lifshitz is the Chairman of the Board and holds a 31% stake of Joint Stock Company ROTEC, Russia, which as of December 31, 2018, had sales with Sulzer companies in the total amount of approx. CHF 0.6 million. As of December 31, 2018, sales with related parties controlled by the major shareholder Renova Group amounted to CHF 3.1 million (2017: CHF 22.6 million). For further information, see note 32 to the “Consolidated financial statements.” 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. At the Annual General Meeting of April 4, 2018, Jill Lee and Thomas Glanzmann did not stand for reelection to the Board of Directors. Hanne Birgitte Breinbjerg Sørensen and Lukas Braunschweiler were newly elected and all other Board members were reelected to the Board of Directors, all for terms of one year. On May 25, 2018, Axel Heitmann resigned from the Board of Directors, which from then on consisted of seven members: two from Austria, one from Denmark, one from Italy, one from Russia, and two from Switzerland. Professional expertise and international experience played a key role in the selection of the members. The members of the Board of Directors 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 member reaches the age of 73. 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 Nomination and Remuneration Committee, who are elected by the Shareholders’ Meeting. There are currently three standing Board committees (for their constitutions, see below): report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Board of Directors 56 — — — the Audit Committee (AC) the Nomination and Remuneration Committee (NRC) the Strategy Committee (SC) The Board of Directors and Organization Regulations and the relevant Committee Regulations, which are published at www.sulzer.com/governance (under “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 distributed 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 five 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 per year. In 2018, the Board held five half-day meetings in February, May, July, October and December, and 11 shorter Board meetings. The latter lasted up to one and a half hours 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 investments and acquisitions). report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Board of Directors 57 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 meeting following the committee meeting, the Chairpersons 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 Entry Elected until Board AC NRC SC Attending meetings of the Peter Löscher Austria Matthias Bichsel Switzerland Hanne Birgitte Breinbjerg Sørensen 1) Denmark Chairman, Chairman SC Vice Chairman of the Board, member SC Chairwoman AC, member NRC March 2014 2019 March 2014 2019 April 2018 Lukas Braunschweiler 1) Switzerland Member SC April 2018 Thomas Glanzmann 2) Switzerland Chairman NRC, Chairman AC April 2012 Axel C. Heitmann 3) Germany Member AC April 2016 Jill Lee 2) Singapore Chairwoman AC, member NRC April 2016 Mikhail Lifshitz Russia Member SC April 2016 2019 2019 2018 2019 2018 2019 Marco Musetti Italy/ Switzerland Member NRC and AC 4) April 2011 2019 Gerhard Roiss Austria Chairman 1) NRC , 2) member SC 1) and AC April 2015 2019 AC = Audit Committee, NRC = Nomination and Remuneration Committee, SC = Strategy Committee 1) From April 4, 2018. 2) Until April 4, 2018. 3) Until May 25, 2018. 4) From May 25, 2018. 1 1 1 1 13 15 12 10 1 10 1 12 11 16 3 1 1 1 3 3 4 2 6 6 Additional mandates of members of the Board of Directors outside the Sulzer group According to Sulzer’s Articles of Association (published at www.sulzer.com/governance, under “Articles of Association”), the maximum number of additional mandates held by members of the Board of Directors outside the Sulzer group is ten (of which a maximum of four mandates may be with listed companies) (Art. 33). Exceptions (e.g. for mandates held at the request of Sulzer or mandates in charity organizations) are defined in the Articles of Association (Art. 33 paragraphs a, b and c). 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 statutory auditor, 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 management and compliance. The regulations of the Audit Committee can be viewed at www.sulzer.com/governance (under “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 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Board of Directors 58 committee) and the external auditor-in-charge, attend the meetings of the Audit Committee. In 2018, the Audit Committee held four meetings in February, July, September and December. The meetings lasted on average between two and three hours. The statutory auditor attended all of these meetings. Internal experts, such as the Group General Counsel and the Heads of Group Internal Audit, Group Treasury, Group Accounting, Group IT, Group Compliance and Risk Management, and Group Taxes gave presentations to the Audit Committee in 2018. In February, the Audit Committee is informed of compliance exposures as a result of periodic risk assessments, and it receives an overview of compliance cases under investigation. In September, the Audit Committee is briefed on the present state of risk management within the company and on the results of the risk management process – a process to systematically identify and evaluate significant risks and introduce countermeasures. In the same meeting, an update on Sulzer’s compliance approach, including the respective ongoing and planned activities, is provided. The major current compliance cases (if any) are reported to and discussed by the Audit Committee regularly. Nomination and Remuneration Committee The Nomination and Remuneration Committee (members listed above) 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 recommends 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 Willis 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/ governance (under “Regulations”). The CEO and the Chief Human Resources Officer (who is also the Secretary of this committee) attend the meetings of the Nomination and Remuneration Committee. In 2018, four regular meetings were held in January, July, September and December, taking on average between one and two hours. Furthermore, the NRC held two meetings by conference call (30 to 45 minutes). External experts from Mercer and Agnes Blust Consulting AG provided benchmarking services (see section “Method of determination of compensation: benchmarking and annual target- setting process” in chapter “Compensation governance and principles” of the Compensation Report) 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 above) 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/governance (under “Regulations”). In 2018, one meeting in September took place, taking three hours. The CEO and the CFO attended the meeting. 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 Obligations. These matters include corporate strategy, the approval of midterm planning and the annual budget, as well as key personnel decisions and the preparation of the Compensation Report. The same applies to acquisition and divestiture decisions involving an enterprise value exceeding CHF 30 million, 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, approval of research and development projects exceeding CHF 10 million, as well as report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Board of Directors 59 other matters relevant to the company, and decisions that must be made by law by the Board of Directors. 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/governance (under “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 rolling forecast for the current business year. 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 Chairs 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 with the CEO and other representatives of the Executive Committee. In addition, the Board of Directors receives a status update on investor relations on a regular basis. Group Internal Audit Group Internal Audit reports functionally directly to the Chair of the Audit Committee, but administratively to the CFO. Meetings between internal audit and the statutory auditor take place regularly. They are used to prepare for the meetings of the Audit Committee, to review the interim and final reports of the statutory auditor, to plan and coordinate internal and external audits, and to report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Board of Directors 60 prepare audit instructions for the attention of the statutory 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 49 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 entity receive a copy of the audit report. Significant findings and recommendations are also presented to and discussed with the Executive Committee and the Group General Counsel 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 internal 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, value- and risk-based compliance program that focuses on prevention, detection and response. It consists of the following main elements: Strong values and building up a strong ethical and compliance culture Sulzer puts a high priority on conducting its business with integrity, in compliance with all applicable laws and internal rules (“a clean deal or no deal”), and on accepting only reasonable risks. Sulzer follows a “zero tolerance” compliance approach. 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 successful and sustainable business. The ethical tone is set at the top, carried through to the middle, and is transmitted to the entire organization. Sulzer also fosters a speak-up culture and encourages employees to address potentially non-compliant behaviors. Retaliation against good faith whistleblowers will not be tolerated. Risk assessment As part of Sulzer’s integrated risk management process, compliance risks are assessed regularly and mitigated with appropriate and risk-based actions. The results are discussed both with the management and with the Audit Committee. The Audit Committee dedicates at least one full meeting per year to risk management and compliance. An overview of the main risks and corresponding mitigation measures is provided in the chapter “Risk management” of this corporate governance report. Internal rules and tools Sulzer has a Code of Business Conduct, which can be viewed in 18 languages at www.sulzer.com/ governance (under “Code of Business Conduct”). Every employee of the company (including employees of newly acquired businesses) 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 150 managers), the heads of the operating companies, the headquarters, regional and local compliance officers as well as the legal entity controllers must reconfirm this compliance commitment in writing annually. Furthermore, Sulzer joined the UN Global Compact initiative in 2010. The latest Communication on Progress Report was published on July 25, 2018, and can be downloaded from www.sulzer.com/sustainability or directly here. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Board of Directors 61 Rules Although Sulzer follows a behavior- and principle-based approach, compliance directives and processes have been implemented as elements of the governance framework. Sulzer focuses on the major compliance risks, e.g.: — Bribery and corruption risks: Sulzer has had a group-wide antibribery and anticorruption program in place since 2010. This program includes a Web-based process that addresses the due diligence of intermediaries, a corporate-wide directive for offering and receiving gifts and hospitalities, and an e-training (in 13 languages) to familiarize Sulzer employees with the requirements of the directive. — — Antitrust and anticompetition risks: Sulzer has an antitrust guideline and a directive addressing behaviors in trade associations in place. Export control risks: Employees involved in export activities have to comply with all applicable export and re-export laws and regulations. Sulzer rolled out and implemented its global Trade Control Directive in all legal entities concerned. Every exporting legal entity has an ICP (internal control program) in place which includes processes, defines responsibilities on export control matters and other requirements important to comply with export compliance laws and regulations. — Further risks (e.g. stock exchange laws and regulations; human-resource-related issues; intellectual property and know-how; privacy and data protection laws; product liability; environment, quality, safety 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. Local compliance officers performed 88 face-to-face compliance training sessions in 2018. Tools Sulzer has a compliance hotline and an incident reporting system that provides employees with one of many options for reporting (potential) violations of laws or internal rules. Reports can be made anonymously or openly via a free hotline or a dedicated website. The company has a directive that sets clear rules for internal investigations. 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 and standard clauses). Sulzer has a compliance risk assessment process in place to identify and assess potential compliance risks on a local entity level and to define appropriate measures. For newly acquired companies, Sulzer set up a post-merger integration process consisting of a systematic post-merger compliance risk analysis, which provides the foundation for risk-based mitigation actions. Organization Since 2013, Sulzer has had a “Legal, Compliance and Risk Management” group function (headed by the Group General Counsel). Within this organization, a line reporting structure is in place for the three regions: Americas (AME); Europe, the 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 addition, the headquartered Compliance and Risk Management team steers and runs the group-wide compliance program and all compliance investigations. The Head of Risk Management and Compliance also reports to the Group General Counsel. To ensure the consistent rollout of Group Compliance initiatives, the compliance organization uses direct reporting lines. 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 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Board of Directors 62 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 in the “Audit Committee” section above. Awareness building and trainings Sulzer puts substantial effort into training its employees. Training is carried out through e-learning programs (new programs are rolled out and existing programs are updated every year), in person or through Web conferences. In 2018, Sulzer employees completed over 22’400 e-learning courses. Controls and sanctions The Group Function Legal supports the audits done by Group Internal Audit following the same audit process. The Group Function Environment, Safety and Health (ESH) carried out eight audits and organized 16 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, internal investigations (triggered by reports from the compliance hotlines, e-mails, telephone calls or other avenues of communication) were carried out during 2018 and at least nine employees had to leave Sulzer because of violations of Sulzer’s Code of Business Conduct. Others received warnings or were transferred internally. However, most of the reports received concerned non-material issues. 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 process weakness. If that is found to be the case, the process will be improved and risk-mitigating measures will be set up. CVs of the members of the Sulzer Board of Directors can be found at www.sulzer.com/board. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Executive Committee 63 Executive Committee The Executive Committee consists of the Chief Executive Officer (CEO), the Chief Financial Officer (CFO), the Chief Human Resources Officer (CHRO), and three Division Presidents. Thomas Dittrich stepped down as CFO on March 18, 2018. Greg Poux-Guillaume took over as CFO ad interim until April 4, 2018. Jill Lee was appointed as CFO and member of the Executive Committee from April 5, 2018. From January 1, 2019, Frédéric Lalanne succeeded Michael Streicher as President of the Pumps Equipment division. The Chief Commercial and Marketing (CCMO) role that Frédéric Lalanne held no longer exists as such and has been replaced by a Head of Business Development role which is not part of the Executive Committee. The Board of Directors delegates executive management powers to the CEO. The CEO delegates the appropriate powers to the members of the Executive Committee. 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 (the regulations can be viewed at www.sulzer.com/ governance, under “Regulations”). 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 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 (Articles of Association, Art. 33; published at www.sulzer.com/ governance, under “Articles of Association”). Exceptions (e.g. for mandates held at the request of Sulzer or mandates in charity organizations) are defined in the Articles of Association (Art. 33, paragraphs a, b and c). CVs of the members of the Executive Committee can be found at www.sulzer.com/management. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Shareholder participation rights 64 Shareholder participation rights Restrictions and representation of voting rights Only nominees are subject to restrictions (see section “Capital structure” of this corporate governance report). 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 representative, 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 voting 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 decided 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). Convocation of the Shareholders’ Meeting and submission of agenda items The applicable regulations regarding requesting the convocation of an extraordinary Shareholders’ Meeting 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 registered in the share register on the record date stated in the invitation to the respective Shareholders’ Meeting. Independent proxy At the Annual General Meeting of April 4, 2018, Proxy Voting Services GmbH was elected as the independent proxy for a term of office extending until completion of the next Annual General Meeting. The Articles of Association do not contain rules on the granting of instructions to the independent proxy and the electronic participation in the Shareholders’ meeting which deviate from the default Swiss law. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Takeover and defense measures 65 Takeover and defense measures The Articles of Association contain no opting-out or opting-up clauses. If there is a change of control, all allocated restricted share units (RSU) are automatically vested. Also, the performance share units (PSU) are converted into shares on a pro rata basis and based on actual achievement of the performance targets, without being subject to blocking restrictions. A change of control includes an acquisition of, or a public takeover offer in relation to, more than 33.33% (RSU) or 50% or more (PSU) of the voting rights. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Auditors 66 Auditors The statutory auditor is elected at the Annual General Meeting for a one-year term of office. KPMG AG has been acting as the statutory auditor since 2013. 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 section “Audit Committee” in the chapter “Board of Directors” of this corporate governance report). The members of the Audit Committee receive summaries of audit findings and improvement proposals at least once a year. The external auditor-in-charge and his deputy were invited to attend meetings of the Audit Committee. In 2018, the statutory auditor was present at all four Audit Committee meetings. The Audit Committee or its Chairperson meets separately with the Head of Group Internal Audit and the statutory auditor at least once a year to assess (among other things) the independence of the internal and statutory auditors. The Audit Committee evaluates the work done by the statutory auditor based on the documents, reports and presentations provided by the statutory auditor, 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 internationally 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 under note 33 to the “Consolidated financial statements.” 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. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Risk management 67 Risk management At Sulzer, compliance risks are assessed regularly as part of the company’s integrated risk management process. The results are discussed with the management and the Audit Committee. Risk Risk exposure Main loss controls External and markets Market assessment Market developments that are assessed inappropriately could lead to missed business opportunities or losses. Geopolitical shocks 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. Strategic Innovation 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 Failure to attract, retain and develop people could lead to a lack of critical skills and knowledge, which hinders both daily operations and growth potential. Health and safety 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. — Continuous monitoring and assessment of market developments — Systematic midrange planning based on market developments and expectations — 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 — A phased process, technical risk manageability assessments and key performance indicators to ensure quality of the development — Product Development Council with strong focus on strategic plans and digitalization — Prototypes and own test beds to test and validate products before market release — Core Technology Council for research of basic technology — Focus on innovation with strategic customers — Innovation and ideation projects — Implementation of an expert development program for key critical resources — Ensuring that Sulzer’s people and performance efforts are anchored to the company’s values and behaviors — Ongoing feedback through employee opinion survey “Voice of Sulzer” — Robust internal communications strategy — Ongoing engagement in workshops and collaborative activities — Visibility and access to creating development experiences and opportunities — Consistent approach to salary grading and benchmarking — Health and safety directives, guidelines, programs (e.g. Safe Behavior Program) and training — OHSAS 18001 certifications — Monthly health and safety controlling and regular audits — Global network of health and safety officers Environmental Environmental damage could lead to harm to people and nature, reputational damage, fines as well as liability claims and could have a serious economic impact. — Mitigation in comprehensive environmental due diligence (EDD) projects for acquisitions and divestitures — Elimination of environmentally damaging substances through Prohibited Substances List report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Risk management 68 Compliance Non-compliant or unethical behavior could lead to reputational damage, fines and liability claims. Quality of products and services Failure of high-quality products and services could lead to repeated work, reputational damage or liability claims. — Active fostering of high ethical standards by tone from the top and middle management — Continuous monitoring and assessment of potential exposures — Sulzer Code of Business Conduct and a number of supporting regulations (e.g. anticorruption, antitrust, trade control) — Third-party due diligence process — 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 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. Security incidents could impact the IT infrastructure or systems, which could result in a business interruption. — Crisis and emergency management systems (at global and local level) — Risk management policy and guidelines — Global manufacturing footprint and global procurement — IT security standards, measures and incident response team — Disaster recovery plans in IT Financial Financial markets Credit Liquidity The unpredictability of financial markets may have a negative effect on Sulzer’s financial performance and its ability to raise or access capital. Credit risks arising from financial institutions and from customers could have a negative effect on Sulzer’s financial performance and ability to operate. Failure in liquidity risk management may have a negative effect on Sulzer’s financial performance and its ability to operate. — Group financial policy — Foreign exchange risk policy — Trading loss limits for financial instruments — 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 — Continuous liquidity monitoring — 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 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Corporate governance - Information policy 69 Information policy 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 the Compensation Report (including the respective references to the Financial Reporting 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 2019 — — — — — February 14: Annual results 2018 April 3: Annual General Meeting 2019 April 17: Order intake Q1 2019 July 24: Midyear results 2019 October 23: Order intake Q1–Q3 2019 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 (December 31, 2018) and the copy deadline for the Annual Report (February 12, 2019). report.sulzer.com/ar18 Compensation report 71 Letter to the shareholders 72 Compensation governance and principles 76 Compensation architecture 84 Compensation of the Board of Directors and the Executive Committee 90 Shareholdings of the Board of Directors and the Executive Committee 92 Auditor’s report Sulzer Annual Report 2018 - Compensation report - Letter to the shareholders 71 Pay for sustainable performance Winterthur, February 14, 2019 Dear Shareholder, I was honored this year to be given the chair of the Nomination and Remuneration Committee of Sulzer, succeeding Thomas Glanzmann who stepped down from the position. We are all grateful to Thomas for his many contributions and dedication to the committee. I was also pleased to welcome Hanne Birgitte Breinbjerg Sørensen as a new committee member. The committee will continue to ensure that the Sulzer compensation structure reflects best practice standards. The Sulzer compensation policy enables the company to attract, retain and motivate the talents that are key to the company’s performance and long-term success. To that end, our compensation programs have been designed to reward sustainable performance. During the reporting year, the Board of Directors and the Nomination and Remuneration Committee reviewed Sulzer’s compensation policy and programs to ensure that they are aligned with the company’s strategy and shareholders’ interests. We also reviewed our compliance with the regulatory requirements and concluded that no fundamental changes were necessary. Furthermore, the Nomination and Remuneration Committee performed its regular activities throughout the year such as the performance goal setting at the beginning of the year and the performance assessment at year end. We also reviewed the compensation of the members of the Board and of the Executive Committee and oversaw the preparation of the Compensation Report presented to the 2019 Annual General Meeting (AGM). We appointed Frédéric Lalanne, Chief Commercial and Marketing Officer (CCMO), as President, Pumps Equipment division to build on the many advances achieved in 2018 in our Pumps Equipment division. Frédéric replaced Michael Streicher who stepped down from the Executive Committee to assume his new responsibilities as Global Head, Water Pumps Business. On the following pages, you will find further information on our activities and on the Sulzer compensation system and governance. This Compensation Report will be submitted for a non- binding, consultative shareholders’ vote at the AGM in April 2019. Shareholders will also vote on the maximum aggregate compensation amount to the Board for the term from the 2019 AGM to the 2020 AGM and on the maximum aggregate Executive Committee compensation for 2020. Looking ahead, we are committed to regularly assess and review our compensation programs to ensure that they are effective. We will also continue the open dialogue with you, our shareholders, and your representatives. Sincerely, Gerhard Roiss Chairman of the Nomination and Remuneration Committee report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation governance and principles 72 Compensation governance and principles Compensation policies and plans at Sulzer reward performance, sustainable growth and long-term shareholder value creation. The compensation programs are competitive, internally equitable, straightforward and transparent. The Compensation Report is prepared in accordance with the Ordinance against Excessive Compensation in Listed Stock Corporations (Compensation Ordinance), the SIX Swiss Exchange Directive on Information relating to Corporate Governance (RLCG) and the principles of the Swiss Code of Best Practice for Corporate Governance. Nomination and Remuneration Committee The Articles of Association, the Board of Directors and Organization Regulations, and the Nomination and Remuneration Committee Regulations (please find them at www.sulzer.com/governance, under “Regulations”) define the functions of the Nomination and Remuneration Committee (NRC). The NRC supports the Board of Directors in nominating and assessing 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 proposals to the Shareholders’ Meeting on the maximum aggregate amounts of compensation for the Board of Directors and for the Executive Committee Determination of the target compensation for the CEO and for the Executive Committee positions Preparation of the Compensation Report The table below describes the levels of authority: report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation governance and principles 73 CEO NRC Selection criteria and succession planning for Board of Directors proposes Selection criteria and succession planning for Executive Committee proposes reviews Compensation policy and programs Aggregate maximum compensation amounts to be submitted to vote at the Annual General Meeting Individual compensation of the members of the Board of Directors Compensation of the CEO proposes proposes proposes proposes Individual compensation of the members of the Executive Committee proposes reviews Performance objectives and assessment of the CEO proposes Performance objectives and assessment of the Executive Committee proposes reviews Compensation Report proposes Board approves approves approves reviews approves approves approves approves approves approves Shareholders’ Meeting 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 2018 Annual General Meeting, Marco Musetti was reelected as member of the NRC, while Hanne Birgitte Breinbjerg Sørensen and Gerhard Roiss (Chairman) were newly elected as members of the NRC because previous members Thomas Glanzmann and Jill Lee did not stand for reelection. The NRC meets as often as the business requires, but at least twice a year. In 2018, the NRC held four regular meetings and two extraordinary conference calls that were attended by all members. Besides the standard agenda items, the NRC concentrated its efforts on the implementation of the new global job evaluation methodology, the impacts on the variable compensation models of the US sanctions and resulting short-term share price drop in April as well as executive and board compensation benchmarking processes (in cooperation with third-party providers). The CEO and the Chief Human Resources Officer, 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 in an advisory capacity, 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. 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, Mercer and Agnes Blust Consulting AG provided benchmarking services on compensation matters. They have 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 company regularly meets with shareholders and shareholder representatives to understand their perspectives. At the Annual General Meeting, shareholders approve the maximum report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation governance and principles 74 aggregate compensation amounts for the Board of Directors and for the Executive Committee in an annual binding vote. Further, the Articles of Association regulate the principles of compensation. They include the following provisions related to compensation (read the full version of the Articles of Association at www.sulzer.com/governance, under “Articles of Association”): — Principles of compensation: non-executive members of the Board of Directors receive fixed compensation only. 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 for the Board of Directors for the next term of office and the maximum aggregate amount of compensation for 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 approved 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; — 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 the compensation is delivered in the form of variable incentives based on company and individual performance. Ownership Part of the compensation is delivered in the form of company equity to foster ownership and to align the interests of executives with those of shareholders. Market competitiveness Compensation levels are competitive and in line with market practice 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. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation governance and principles 75 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, the Nomination and Remuneration Committee selected a peer group of international industrial companies headquartered in Switzerland based on their revenue and number of employees (see box “compensation benchmark”). Sulzer is positioned between the first quartile and median of the peer group. Compensation benchmark The comparison group reflects Sulzer’s ambitious business strategy: — — — — — — — — — — ABB Clariant Georg Fischer Lonza OC Oerlikon Rieter Schindler Sika Sonova Tetra Laval Group Actelion and Syngenta previously also formed part of the peer group but have now been removed after being taken over by investors and delisted from the stock exchange. Apart from these two removals, the peer group remained unchanged and no replacements were made, as the NRC considered the remaining peer group to continuously represent the most relevant and suitable group of companies for Sulzer’s compensation benchmarking. 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 variable 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 objectives after year-end and directly influences the variable incentive payouts. Details on the targets and on the performance assessment can be found in the chapter “Compensation architecture”. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation architecture 76 Compensation architecture Compensation of the Board of Directors The compensation of the Board of Directors is governed by a compensation regulation, is reviewed by the Nomination and Remuneration Committee (NRC) annually and, if necessary, 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 share unit (RSU) component with a fixed grant value. Each RSU represents a right to receive a Sulzer share free of charge after a certain period, as further detailed below. Further, Board members are entitled to a lump sum to cover business expenses. The RSU component strengthens 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 its independence from the Executive Committee, the compensation of the Board of Directors contains no performance- related elements and Board members are not entitled to pension benefits. The amount of compensation for the Chairman and for the other members of the Board of Directors is determined based on the relevant compensation benchmarks (see box “Compensation benchmark” in section “Compensation governance and principles” of this Compensation Report). The compensation reflects the responsibility and complexity of their respective function, the professional and personal requirements placed on them, and the expected time required to fulfill their duties. In 2018, an independent external third-party conducted a board compensation benchmark for Sulzer. Based on the resulting data, the NRC concluded that Sulzer’s Board compensation structure and amounts were broadly in line with Sulzer’s desired position in the market for the time being, however, it remains subject to review and potential adjustments in 2019. The ongoing Board compensation structure and amounts are described in the table below. Annual compensation of the Board of Directors1) in CHF Base fee for Board Chairmanship 2) Base fee for Board Vice Chairmanship Base fee for Board membership Additional committee fees: Committee Chairmanship Committee membership Cash component (net of social security contributions) Grant value of restricted share units (net of social security contributions) Lump-sum expenses 250’000 155’000 125’000 10’000 5’000 5’000 420’000 100’000 70’000 40’000 25’000 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. The members of the Board of Directors are remunerated for their service during their term of office (from AGM to AGM). The cash remuneration is paid in quarterly installments for Board members and monthly installments for the Chairman; the expense lump sum is paid out in December and the RSU are granted once a year. The number of RSU is determined by dividing the fixed grant value by the volume-weighted 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 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation architecture 77 grant), it then fluctuates with the share price during the vesting period, which means that the value at vesting can 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 and benefits plans. The compensation of the Executive Committee is reviewed by the NRC annually and, if necessary, adjusted and approved by decision 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) report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation architecture 78 Compensation elements for the members of the Executive Committee Base salary Benefits Short-term incentive plan (bonus plan) Long-term incentive plan (PSP 2018) Main parameters Function, level of role, profile of incumbent (skill 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 Link to compensation principles Competitive compensation Protection against risks, labor market Operational EBITA, sales, operational operating net cash flow (opONCF) Competitive compensation Pay for performance Vehicle Cash Pension and insurance plans, perquisites Cash Amount Fixed 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. Operational EBITA growth, operational return on average capital employed adjusted (opROCEA), relative total shareholder return (TSR) Sustainable growth and value creation Performance share units (PSU) settled in shares Variable. Grant value is defined based on the Global Grade and corresponds to CHF 1’440’000 for the CEO and between CHF 330’000 and CHF 400’000 for the other members of the Executive Committee (EC). Vesting payout percentage is capped at 250% and vesting value is capped at CHF 3’600’000 for the CEO and at CHF 825’000 to CHF 1’000’000 for the other members of the EC. Grant/payment date Monthly Monthly and/or annually March of the following year July 1, 2018 Performance period Vesting date – – – – 1 year (January 1, 2018–December 31, 2018) 3 years (January 1, 2018–December 31, 2020) – December 31, 2020 The PSP grant date was set to be July 1, 2018 in consideration of the share price collapse in April 2018. Further information can be found in the section “Performance share plan” below. 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 Mercer International Position Evaluation (IPE). The IPE is a proprietary global job evaluation methodology based on a series of business-related factors to determine internal job levels. Application of the IPE methodology provides an organizing framework based on a job’s value within the context of an organization and the wider commercial environment. The IPE implementation follows a simple process focusing on organization structure, the complexities of the business and the alignment of jobs to the business. The IPE serves as a basis to build the internal salary structure. In 2018, the IPE continued to be rolled out and implemented on a group-wide basis. Bonus (variable, performance-based, cash remuneration) The bonus rewards the financial performance of the company and/or its businesses, as well as the achievement of individual performance objectives over one calendar year. The target bonus is expressed as a percentage of annual base salary according to the level of the role in the IPE 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: report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation architecture 79 Category Weight Objectives Rationale Operational EBITA in % of sales Measure of profitability (bottom line) Financial performance 70% Sales Measure of growth (top line) Operational operating net cash flow (opONCF) Sulzer Full Potential initiatives (SFP) Individual performance 30% Growth initiatives Faster and better Measure of cash generated by the revenues Sulzer’s transformation into a truly market-oriented, globally operating and integrated company Include initiatives that support the growth of Sulzer, such as M&A projects, breaking into new markets or new accounts Initiatives focused on the profitability of Sulzer, with objectives linked to speed (“faster”) and quality (“better”) CEO/CFO/ CHRO/ CCMO Division President Sulzer Division Sulzer Division Sulzer Division 25% 25% 20% Individual 10% 7.5% 17.5% 7.5% 17.5% 6% 14% 10% Individual 10% 10% Individual 10% 10% Total 100% 100% The objectives are set within the annual target-setting process. For each financial objective, the following parameters are set upfront: — — — An expected level of performance (“target”), the achievement of which leads to a payout factor (on the respective performance metric) of 100%. A minimum level of performance (“threshold”) below which the respective payout factor is zero. A maximum level of performance (“cap”) above which the respective payout factor is capped at 200%. With respect to the financial objectives, a performance of 200% of the target figure is required to achieve a payout factor of 200%. Between threshold and target, as well as between target and cap, the payout factor is interpolated linearly. The weighted average of the resulting payout factors on each performance metric will be multiplied by the target bonus amount to derive the actual bonus which will be paid out in March of the following year. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation architecture 80 Sulzer strives for transparency in relation to pay for performance. However, disclosure of financial and individual objectives may create a competitive disadvantage to the company, because it renders sensitive insights into Sulzer’s strategy. To ensure transparency while avoiding competitive risk, Sulzer provides a general performance assessment at the end of the performance cycle (see section “Compensation of the Executive Committee” in chapter “Compensation of the Board of Directors and the Executive Committee”). Performance share plan (variable, performance-based, share-based remuneration) A PSU is a conditional right to a certain number of shares of the company, subject to ongoing employment and to the achievement of strategic/financial performance targets on a group level over the three-year performance period. The performance share plan (PSP) rewards selected participants based on the performance of the company over three years and aligns the interests of the participants with those of the shareholders by delivering a substantial portion of the compensation as company equity. This emphasizes and supports Sulzer’s focus on pay for performance and sustainable growth, with a long-term perspective and additional retention effect on employees. Furthermore, the actual delivery of shares is dependent on the achievement of strategic and financial targets on a group level, thus strengthening the group perspective and a shared perspective with investors and shareholders. The PSP is a plan with annual grants and is available exclusively to the members of the Executive Committee and of the Sulzer Management Group (defined by the job level in the IPE framework). The grant value is determined based on the level of the executive’s role. It amounts to CHF 1’440’000 for the CEO and to between CHF 330’000 and CHF 400’000 (determined by the Board of Directors) 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. The PSU grant date in 2018 was shifted to July 1, in line with the flexibility provided for by the PSP regulation, to allow the share price to stabilize after the important fluctuations triggered by the US sanctions applied in April on Sulzer’s reference shareholder Renova. This shift mitigated short-term volatility concerns by having the PSU grants based on a less volatile three-month average price, which also included the off-exchange share buyback of 5.00 million shares in the same period. The key performance criteria being measured over the three-year performance period of PSU are: — — — Operational EBITA growth, weighted with 25%; Average opROCEA, weighted with 25%; Relative total shareholder return (TSR) weighted with 50% and measured against two different peer groups: 75% of this part of the performance measurement is based on the performance against international peers measured as percentile ranking, and 25% is based on the performance against the companies of the Swiss Market Index Mid (SMIM) measured as a delta (see details in the box below). The Board of Directors deems these metrics to be the most relevant key performance indicators for the sustainable development of the Sulzer group, combining growth, profitability and shareholder return in comparison to the relevant peers and markets. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation architecture 81 Both peer groups did not change in the reporting year. The Board of Directors has the right to change the composition of the peer group in case of a merger or 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. There is a predefined successor list of companies to support the Board of Directors in the selection process. For each performance condition of the PSP, a threshold, target and cap performance level is determined, which in turn determines the achievement factor as follows: On the vesting date, the number of vested shares is calculated by multiplying the initial number of PSU granted by the weighted average of the achievement factor of each performance condition as follows: Number of PSU granted x [(achievement factor opEBITA growth x 25%) + (achievement factor opROCEA x 25%) + (achievement factor relative TSR x 50%)] = number of PSU vested For each vested PSU, a Sulzer share will be delivered free of charge to the employee. However, while the above mentioned performance assessment impacts the number of PSU vested and, consequently, the number of shares delivered, there might also be an increase in value per share over the three-year performance period, which may have a relevant impact on the actually delivered total value after three years. Therefore, the number of vested PSU is subject to an absolute value cap based on the level of the executive’s role in the IPE framework. The absolute vesting value cap amounts to CHF 3’600’000 for the CEO and between CHF 825’000 and CHF 1’000’000 (representing, in each case, 2.5 times the original grant value) for other Executive Committee members. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation architecture 82 Sulzer strives for transparency in relation to pay for performance. The target achievement levels of relative performance objectives are not considered confidential and are thus disclosed (see above). However, disclosure of internal financial and individual objectives may create a competitive disadvantage to the company because it renders sensitive insights into Sulzer’s strategy. To ensure transparency while 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: — — — Termination by the employer for cause: unvested PSU forfeit. Termination as a result of retirement: vesting and performance measurement of PSU continues according to plan, no early allocation of the shares. Termination of employment for any other reason: for Executive Committee members, the number of unvested PSU vest on a pro rata basis (number of months between grant date and termination date) according to the achievement factor at the end of the vesting period. There is no early allocation of the shares. Upon the occurrence of a change of control, PSU will vest immediately on a pro rata basis, subject to a performance assessment by the Board of Directors. In such a case, the Board of Directors may also determine a cash settlement of the awards. Furthermore, the Board of Directors may determine that an award is forfeited in full or in part (malus) or that a vested award will be recovered in full or in part (clawback) in situations of material misstatement of the financial results, an error in assessing a performance condition or in the information or assumptions on which the award was granted or vested, serious reputational damage to the company, gross negligence, or willful misconduct on the part of the participant. The PSP regulation in its article 15 allows for corrections in case of extreme market situations or in the event of activities or decisions of large Sulzer shareholders which have a significant impact on Sulzer’s TSR. The US sanctions targeting Renova in April 2018 was deemed to be such an extraordinary event, given its dramatic mid-term impact on the share price of Sulzer and this despite sustained strong operational performance and positive strategic developments. Consequently, the Board decided in May 2018 to add a TSR performance floor to the ongoing measurement of the PSP 2016 and PSP 2017, protecting the performance measurement mechanism against undue distortion. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation architecture 83 The introduction of the floor led to a step-up in the market valuation of the respective PSU, which is duly disclosed in the compensation tables of this report. Further information on share-based compensation can be found in note 11 to the “Financial Statements of Sulzer Ltd.” 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 146’629 per 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 age- related 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 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-competition agreements with a time limit of one year and with a maximum total compensation of one annual target compensation. There are no contractual shareholding requirements for Executive Committee members or other employees. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation of the Board of Directors and the Executive Committee 84 Compensation of the Board of Directors and the Executive Committee In view of the specific compensation-related challenges in 2018, and aiming for enhanced transparency also by means of a clearly structured Compensation Report, this section will contain the following chapters: 1. Compensation of the Board of Directors for 2018 (incl. audited table) 2. Compensation of the Executive Committee for 2018 (incl. audited table) 3. Pay-for-performance assessment 1. Compensation of the Board of Directors for 2018 In 2018, the Board of Directors received a total compensation of CHF 2’637’654 (previous year: CHF 2’694’962). Of this total, CHF 1’225’730 was in the form of cash fees (previous year: CHF 1’271’869); CHF 1’155’000 was in RSU (previous year: CHF 1’155’000) and CHF 256’923 was in the form of social security contributions (previous year: CHF 268’093). This is a decrease of 2.1% from the previous year, which was due to changes to the members of the Board in 2018. The structure and level of the Board compensation remained unchanged compared with the previous year. The portion of compensation delivered in RSU amounts to 56% of the cash compensation for the Chairman, and to between 106% and 165% for the other active members of the Board of Directors. The RSU are subject to a staged three-year vesting period. Compensation of the Board of Directors (audited) 2018 thousands of CHF Cash Fees 8) Restricted share unit (RSU) plan 9) Social security contri- butions 10) Cash Fees 8) Total Restricted share unit (RSU) plan Social security contri- butions 10) Board of Directors 1’226 1’155 257 2’638 1’272 1’155 268 Peter Löscher, Chairman 1) Matthias Bichsel, Vice Chairman Hanne Birgitte Breinbjerg Sørensen 2) Lukas Braunschweiler 3) Mikhail Lifshitz Marco Musetti Gerhard Roiss 4) Axel C. Heitmann 5) Thomas Glanzmann 6) Jill Lee 7) 446 133 108 76 102 117 132 40 40 32 250 155 125 125 125 125 125 125 0 0 69 33 27 25 27 28 16 23 4 4 765 322 260 226 253 270 273 187 44 36 446 133 – – 102 102 100 102 144 144 250 155 – – 125 125 125 125 125 125 69 33 – – 27 27 25 27 30 30 1) Chairman of the Board of Directors and Chairman of the Strategy Committee. 2) Member of the Board of Directors and Chairwoman of the Audit Committee since April 4, 2018. 3) Member of the Board of Directors since April 4, 2018. 4) Member of the Board of Directors since April 1, 2015. Chairman of the Nomination and Remuneration Committee since April 4, 2018. 5) Member of the Board of Directors until May 25, 2018. 6) Chairman of the Nomination and Remuneration Committee until April 4, 2018. 2017 Total 2’695 765 322 – – 253 253 250 253 299 299 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation of the Board of Directors and the Executive Committee 85 7) Chairwoman of the Audit Committee until December 11, 2017. Member of the Board of Directors until April 4, 2018. 8) Disclosed gross. 9) RSU awards granted in 2018 had a fair value of CHF 124.43 at grant date. The amount represents the full fair value of grants made in 2018. 10) The amount includes mandatory social security contributions on the cash fees and estimated contributions on the RSU (based on their fair value at grant) and includes both the employer and employee contributions paid by the company on behalf of the Board members. At the 2018 and 2017 AGM respectively, shareholders approved a maximum aggregate compensation amount of CHF 2’984’000 for the Board of Directors for the period of office from the 2018 AGM until the 2019 AGM and of CHF 2’897’000 for the period of office from the 2017 AGM until the 2018 AGM. The table below shows the reconciliation between the compensation that is/will be paid out for the two periods of office and the maximum aggregate compensation amounts approved by the shareholders. Reconciliation between the reported Board compensation and the amount approved by the shareholders at the Annual General Meeting Compensation earned during financial year as reported (A) Minus compensation earned from Jan to AGM of financial year (B) Plus compensation accrued from Jan to AGM of year following financial year (C) Total compensation earned for the period from AGM to AGM (A-B+C) Amount approved by shareholders at respective AGM Ratio between compensation earned for the period from AGM to AGM versus amount approved by shareholders 2018 Jan 1, 2018 to 2018 AGM Jan 1, 2019 to 2019 AGM 2018 AGM to 2019 AGM 2018 AGM 2018 AGM 2’637’654 387’961 366’336 2’616’029 2’984’000 87.7% 2017 Jan 1, 2017 to 2017 AGM Jan 1, 2018 to 2018 AGM 2017 AGM to 2018 AGM 2017 AGM 2017 AGM 2’694’962 390’292 388’062 2’692’732 2’897’000 92.9% AGM 2018–AGM 2019 Board (total) AGM 2017–AGM 2018 Board (total) As of December 31, 2017 and December 31, 2018, there were no outstanding loans or credits granted to the members of the Board of Directors, former members of the Board of Directors or related parties (audited). In 2017 and 2018, no compensation was granted to former members of the Board of Directors or related parties (audited). 2. Compensation of the Executive Committee for 2018 In 2018, the Executive Committee received a total compensation of CHF 16’703’113 (previous year: CHF 13’956’248). Of this total, CHF 7’773’076 was in cash (previous year: CHF 8’109’048); CHF 4’462’417 was in PSU (previous year: CHF 3’785’036); CHF 2’066’420 was in pension and social security contributions (previous year: CHF 1’783’861), and CHF 2’401’200 was in other payments (previous year: CHF 278’302). report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation of the Board of Directors and the Executive Committee 86 Compensation of the Executive Committee (audited) thousands of CHF Executive Committee 1) thereof highest single compensation, G. Poux- Guillaume, CEO Base salary 4’090 Bonus 2) 3’683 Other 3) 2’401 Pension and social security contributions 5) Performance share plan (PSP) 4) 4’462 2’066 2018 Total 16’703 1’021 1’375 1’081 1’841 528 5’846 thousands of CHF Executive Committee 1) Base salary 4’367 thereof highest single compensation, G. Poux- Guillaume, CEO 1’009 1’259 Bonus 2) Other 3) 3’742 278 147 Pension and social security contributions 5) Performance share plan (PSP) 4) 3’785 1’784 2017 Total 13’956 1’531 420 4’367 1) The total Executive Committee compensation 2017 and 2018 includes the compensation of Greg Poux-Guillaume, CEO since December 1, 2015; Thomas Dittrich, CFO until March 2018; Jill Lee, CFO since April 2018; César Montenegro, Division President Pumps Equipment until December 2017; Michael Streicher, Division President Pumps Equipment since January 2018; Daniel Bischofberger, Division President Rotating Equipment Services since September 2016; Oliver Bailer, Division President Chemtech until June 2016; Torsten Wintergerste, Division President Chemtech since June 2016; Armand Sohet, Chief Human Resources Officer since March 2016; Frédéric Lalanne, Chief Commercial and Marketing Officer since June 2016. 2) Expected bonus for the performance years 2018 and 2017 respectively, that is paid out in the following year (accrual principle). Includes pro rata short-term incentive (STI) payments for EC members whose employment contracts started or were terminated during the year. 3) Other consists of housing allowances, schooling allowances, private use of company car, tax services, holiday compensation, and child allowances. For 2018, this category also includes the step-up in fair value of outstanding PSU (PSP 2016 and PSP 2017) resulting from the Board’s decision to set TSR floors reflecting the exceptional market conditions and share price collapse following the US sanctions against Russia and the collateral damages to Sulzer. Further information in this respect can be found in the section “Performance share plan” of the Compensation Report. The step-up in fair value per PSU was CHF 40.62 under the PSP 2016 and CHF 18.91 under the PSP 2017 (based on a third-party fair value calculation), and it incurred at the time of the respective Board decision in May 2018. 4) Represents the full fair value of the PSU granted under the PSP 2018 and PSP 2017 respectively. PSU granted in 2018 had a fair value of CHF 146.62 at grant date, based on a third-party fair value calculation. While the share price to convert the grant value into a number of granted PSU is based on the three-month weighted average share price before the grant date (CHF 112.33 per PSU for July 2018 grants, which also includes the off-stock-exchange share buyback in the same period), the disclosed fair values are calculated on the grant dates by using sophisticated market value approaches, which typically leads to minor differences between the original grant value according to the compensation architecture and the disclosed fair market values. 5) Includes the employer contribution to social security (including the expected employer contributions on equity awards), based on the fair value of all grants made in 2018 and 2017, respectively (PSP). The total compensation of CHF 16’703’113 awarded to the members of the Executive Committee for the 2018 financial year is within the maximum aggregate compensation amount of CHF 21’163’000 that was approved by the shareholders at the 2017 AGM. No severance payments to members of the Executive Committee were made during the reporting year. As of December 31, 2017 and December 31, 2018, there were no outstanding loans or credits granted to the members of the Executive Committee or former members of the Executive Committee (audited). In 2017 and 2018, no compensation was granted to former members of the Executive Committee or related parties except for the step-up in fair value on outstanding PSU of leavers, according to footnote 3 of the compensation table above. The additional compensation resulting from this step-up is included in the table above (audited). report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation of the Board of Directors and the Executive Committee 87 3. Compensation for the Executive Committee: pay-for-performance assessment In 2018, we continued our expansion and growth strategy by successfully completing three acquisitions: — — — January 2018: JWC Environmental LLC, USA September 2018: Medmix Systems AG, Switzerland November 2018: Brithinee Electric, USA The US sanctions against Russia did not impact ongoing operational performance, and we continue to proceed on a strong sustainable growth path. In the following, we elaborate further on how the relevant business performance impacted the variable compensation models of our Executive Committee. More detailed information about Sulzer’s operational and strategic performance in 2018 can be found in the financial report. a) Total compensation and pay ratio Executive Committee 2018 In 2018, the Executive Committee received a total compensation of CHF 16’703’113 (previous year: CHF 13’956’248). This is an overall increase of 19.7% from the previous year. The main reason for this increase is the reevaluation of the outstanding PSU fair value, incurred in 2018, resulting from the added TSR floors in the PSP 2016 and 2017. For the entire Executive Committee, the variable component represented 129% of the fixed component (base salary, other – however without one-time step-up in value on outstanding PSU – pension and social security contributions). This pay ratio reflects Sulzer’s high-performance orientation. Further, it represents the company’s strong emphasis on aligning the interests of the report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation of the Board of Directors and the Executive Committee 88 Executive Committee and the shareholders to create long-term shareholder value and profitable growth. On a like-for-like basis (EC members employed in both 2018 and 2017), the base salaries of the EC members increased by 1.8% on average. Regarding cash bonus payments and LTI amounts, see the following paragraphs. b) Short-term incentive (cash bonus payouts) In 2018, Sulzer again made good progress towards its transformation goals. Financial targets were exceeded despite an unsupportive energy market environment, and operational performance was not hit by the US sanctions against Russia in April 2018. We grew through acquisitions but also organically in all divisions. The financial component of the bonus ranged from 98% to 129% of targeted payout (on average 118%) and significant progress on our transformation path led to a high level of achievement of individual objectives. This translated into an overall bonus payout factor ranging from 96% to 150% (on average 124%) for the members of the Executive Committee. c) Long-term incentive (PSP) On a like-for-like basis, the value of long-term incentives (LTI) newly granted in 2018 remained unchanged compared with the previous year, which corresponds to the ongoing operational performance and growth of the company. Thus, no changes to the grant values were required. The protection of a fair performance measurement by means of the introduction of the pre-April minimum TSR target achievement level in May 2018 resulted in a one-time step-up in value of outstanding PSU (PSP 2016 and PSP 2017) as disclosed in the audited compensation tables. No further adjustments are planned. The PSP 2016 vested on December 31, 2018. The relevant key performance indicators were opEBITA growth, opROCEA and relative TSR over the three-year period from 2016 to 2018. Operational performance in this period was very good, even beyond expectations. The result was a total payout factor of 191% for the PSP 2016, which fairly reflects the extraordinary growth and performance, both against budget targets and against market peers, in the three-year period from 2016 to 2018. The PSP 2015 vested on December 31, 2017. As the final payout calculation was made based on the volume-weighted average share price of the three months following vesting date (January to March 2018), the vesting level could not yet be disclosed in the 2017 Compensation Report. For these awards, the peer group had to be updated, with the newly merged TechnipFMC (former peer group company Technip) being replaced by Xylem, chosen out of a proposal of three companies from the predefined successor list of companies. The overall vesting of the PSP 2015 amounted to 164%. Overall, the PSP vesting levels fairly reflected the extraordinary operational performance, also against direct peers, over the respective three-year performance cycles, so Sulzer fully achieved the desired report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Compensation of the Board of Directors and the Executive Committee 89 strong link between sustainable company performance and competitive long-term incentive payouts. In a nutshell, the resulting overall vesting levels can be summarized as follows: PSP 2015 PSP 2016 Vesting level, based on performance achievement Corrections due to vesting value cap Total effect: delivered shares per PSU award 164% 191% Not required Not required 1.64 1.91 The vesting level of the PSP 2017 will be shown in the Compensation Report for 2019. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Shareholdings of the Board of Directors and the Executive Committee 90 Shareholdings of the Board of Directors and the Executive Committee Shareholdings of the Board of Directors As of the end of 2017 and 2018, the members of the Board of Directors held the following shares in the company: Shareholdings at December 31, 2018 Restricted share units (RSU) Total share awards and shares 2018 16’516 4’647 2’884 1’005 1’005 2’325 2’325 2’325 54’630 19’254 8’125 1’005 1’005 3’774 8’547 12’920 2017 Restricted share units (RSU) Total share awards and shares 23’483 5’244 3’253 2’625 2’243 2’625 2’243 2’625 2’625 54’527 5’244 6’877 9’466 2’769 7’945 2’769 7’542 11’915 Sulzer shares 38’114 14’607 5’241 – – 1’449 6’222 10’595 Sulzer shares 31’044 – 3’624 6’841 526 5’320 526 4’917 9’290 Board of Directors Peter Löscher Matthias Bichsel Hanne Birgitte Breinbjerg Sørensen Lukas Braunschweiler Mikhail Lifshitz Marco Musetti Gerhard Roiss Shareholdings at December 31, 2017 Board of Directors Peter Löscher Matthias Bichsel Thomas Glanzmann Axel C. Heitmann Jill Lee Mikhail Lifshitz Marco Musetti Gerhard Roiss report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Shareholdings of the Board of Directors and the Executive Committee 91 Shareholdings of the Executive Committee As of the end of 2017 and 2018, the members of the Executive Committee held the following shares in the company: Shareholdings at December 31, 2018 Sulzer shares 34’035 21’381 – 2’237 7’945 – 764 1’708 Sulzer shares 46’835 9’682 – 21’000 Restricted share units (RSU) Total share awards and shares Performance share units (PSU) 2016 Performance share units (PSU) 2017 Performance share units (PSU) 2018 2018 3’513 – – 3’513 – – – – 37’548 21’381 – 5’750 7’945 – 764 1’708 28’852 18’641 1’424 2’314 – 3’560 1’942 971 26’667 13’196 3’024 3’024 – 3’024 1’375 3’024 31’071 12’820 2’938 2’938 3’561 2’938 2’938 2’938 2017 Restricted share units (RSU) Total share awards and shares Performance share units (PSU) 2015 Performance share units (PSU) 2016 Performance share units (PSU) 2017 22’546 15’121 – 0 – 7’026 14’844 – 1’309 – – 399 69’381 24’803 – 21’000 7’026 14’844 – 1’708 6’594 942 – 2’826 – 2’826 – – 37’266 18’641 1’424 5’178 2’314 5’178 3’560 971 32’624 13’196 3’024 3’666 3’024 3’666 3’024 3’024 Executive Committee Greg Poux-Guillaume Daniel Bischofberger Frédéric Lalanne Jill Lee Armand Sohet Michael Streicher Torsten Wintergerste Shareholdings at December 31, 2017 Executive Committee Greg Poux-Guillaume Daniel Bischofberger Thomas Dittrich Frédéric Lalanne César Montenegro Armand Sohet Torsten Wintergerste report.sulzer.com/ar18 Sulzer Annual Report 2018 - Compensation report - Auditor's report 92 We have audited the Compensation Report of Sulzer Ltd for the year ended December 31, 2018. The audit was limited to the information according to articles 14 – 16 of the Ordinance against Excessive compensation in Stock Exchange Listed Companies (Ordinance) contained in the tables and sections labeled “audited” in the chapter “Compensation of the Board of Directors and the Executive Committee” 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 (Ordinance). The Board of Directors is also responsible for designing the remuneration system and defining individual remuneration packages. Auditor’s Responsibility Our responsibility is to express an opinion on the 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 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 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, 2018 of Sulzer Ltd complies with Swiss law and articles 14 – 16 of the Ordinance. KPMG AG François Rouiller Licensed Audit Expert Auditor in Charge Zurich, February 12, 2019 report.sulzer.com/ar18 Simon Niklaus Licensed Audit Expert Sulzer Annual Report 2018 - Compensation report - Auditor's report 93 KPMG AG, Badenerstrasse 172, PO Box, CH-8036 Zurich KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. report.sulzer.com/ar18 Financial reporting 96 Consolidated financial statements 96 Consolidated income statement 97 Consolidated statement of comprehensive income 98 Consolidated balance sheet 99 Consolidated statement of changes in equity 100 Consolidated statement of cash flows 101 Notes to the consolidated financial statements 174 Auditor’s report 180 Five-year summaries Income statement of Sulzer Ltd 183 Financial statements of Sulzer Ltd 183 Balance sheet of Sulzer Ltd 184 185 Statement of changes in equity of Sulzer Ltd 186 Notes to the financial statements of Sulzer Ltd 190 Proposal of the Board of Directors for the appropriation of the available profit 191 Auditor’s report Notes to the consolidated financial statements 101 01 | General information 101 02 | Significant events and transactions during the reporting period 103 03 | Segment information 108 04 | Acquisitions of subsidiaries 110 05 | Critical accounting estimates and judgments 112 06 | Financial risk management 118 07 | Corporate risk management 119 08 | Personnel expenses 119 09 | Employee benefit plans 124 10 | Research and development expenses 124 11 | Other operating income and expenses 125 12 | Financial income and expenses 125 13 | Income taxes 129 14 | Intangible assets 131 15 | Property, plant and equipment 132 16 | Associates 133 17 | Other financial assets 133 18 | Inventories 134 19 | Assets and liabilities related to contracts with customers 135 20 | Trade accounts receivable 137 21 | Other current receivables and prepaid expenses 137 22 | Cash and cash equivalents 137 23 | Share capital 139 24 | Earnings per share 139 25 | Borrowings 141 26 | Provisions 142 27 | Other current and accrued liabilities 142 28 | Derivative financial instruments 143 29 | Other financial commitments 143 30 | Contingent liabilities 143 31 | Share participation plans 146 32 | Transactions with members of the Board of Directors, Executive Committee and related parties 147 33 | Auditor remuneration 147 34 | Key accounting policies and valuation methods 169 35 | Subsequent events after the balance sheet date 170 36 | Major subsidiaries Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Consolidated income statement 96 Consolidated income statement Notes 3 10 11 12 12 12 16 13 24 24 2018 3’364.9 –2’386.6 978.3 –354.4 –384.4 –86.4 30.8 183.8 2.9 –20.3 –1.5 0.7 165.6 –49.2 116.5 113.7 2.8 3.56 3.53 2017 3’049.0 –2’112.4 936.6 –337.2 –362.7 –81.0 –19.2 136.5 4.1 –15.2 0.3 –0.3 125.4 –38.2 87.2 83.2 4.0 2.44 2.42 January 1 – December 31 millions of CHF Sales Cost of goods sold Gross profit 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 and loss of associates Income before income tax expenses Income tax expenses 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 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Consolidated statement of comprehensive income 97 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 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 Total other comprehensive income Total comprehensive income for the period attributable to shareholders of Sulzer Ltd attributable to non-controlling interests Notes 28 9 2018 116.5 –2.2 –90.6 –92.8 55.9 55.9 –36.9 79.6 78.2 1.4 2017 87.2 4.5 54.6 59.1 91.8 91.8 150.9 238.1 233.9 4.2 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Consolidated balance sheet 98 Consolidated balance sheet Notes 14 14 15 16 17 13 18 19 20 21 22 23 25 13 13 9 26 25 13 26 19 27 2018 923.4 439.4 527.0 13.4 9.4 6.2 138.9 2’057.7 658.9 29.0 79.9 205.1 622.3 150.2 1’095.2 2’840.6 4’898.3 0.3 1’629.5 1’629.9 11.2 1’641.0 1’316.3 89.5 2.3 160.9 74.4 3.6 1’646.8 18.0 32.0 139.6 256.4 521.8 – 642.6 1’610.4 3’257.3 4’898.3 2017 865.7 420.8 531.6 10.3 13.6 8.8 139.7 1’990.5 488.0 27.2 84.7 – 901.8 136.3 488.8 2’126.8 4’117.3 0.3 1’679.8 1’680.1 22.3 1’702.4 458.7 104.8 2.3 239.1 77.6 17.6 900.1 255.1 24.8 158.5 – 433.8 210.1 432.5 1’514.8 2’414.9 4’117.3 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 Current income tax receivables Advance payments to suppliers Contract assets Trade accounts receivable Other current receivables and prepaid expenses Cash and cash equivalents Total current assets Total assets Equity Share capital Reserves Equity attributable to shareholders of Sulzer Ltd Non-controlling interests 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 Contract liabilities Trade accounts payable Advance payments from customers Other current and accrued liabilities Total current liabilities Total liabilities Total equity and liabilities report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Consolidated statement of changes in equity 99 Consolidated statement of changes in equity Attributable to shareholders of Sulzer Ltd Notes Share capital Retained earnings Treasury shares Cash flow hedge reserve Currency translation adjustment Non- controlling interests Total Total equity 0.3 2’024.2 –16.9 –11.0 –415.4 1’581.2 9.8 1’591.0 28 9 23 31 23 23 34 34 28 9 23 23 31 23 23 83.2 91.8 91.8 – 175.0 – –14.6 –6.6 10.8 –119.4 6.6 –11.8 4.5 4.5 4.5 83.2 4.5 91.8 54.4 150.7 54.4 54.4 54.4 233.9 – –14.6 0.0 –11.8 10.8 –119.4 0.3 2’069.4 –22.1 –6.5 –361.0 1’680.1 –6.6 –21.9 –6.6 –1.2 –23.1 0.3 2’040.9 –22.1 –6.5 –362.2 1’650.4 113.7 55.9 55.9 – 169.6 – 11.7 –7.0 12.6 15.1 –119.1 7.0 –563.8 544.8 –2.2 –2.2 –2.2 113.7 –2.2 55.9 –89.2 –35.5 –89.2 –89.2 –89.2 78.2 11.7 –10.6 – –563.8 557.4 15.1 –119.1 0.3 2’123.6 –34.0 –8.6 –451.4 1’629.9 4.0 0.2 0.2 4.2 9.8 –1.5 22.3 –0.1 22.2 2.8 –1.3 –1.3 1.4 –1.9 11.2 87.2 4.5 91.8 54.6 150.9 238.1 9.8 –14.6 0.0 –11.8 10.8 –120.9 1’702.4 –6.6 –23.1 1’672.6 116.5 –2.2 55.9 –90.6 –36.9 79.6 1.1 – –563.8 557.4 15.1 –121.0 1’641.0 January 1 – December 31 millions of CHF Equity as of January 1, 2017 Comprehensive income for the period: 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 period Transactions with owners of the company: Changes in ownership in subsidiaries Put option liability Allocation of treasury shares to share plan participants Acquisition of treasury shares Share-based payments Dividends Equity as of December 31, 2017 Adjustment on initial application of IFRS 9, net of tax Adjustment on initial application of IFRS 15, net of tax Equity as of January 1, 2018 Comprehensive income for the period: 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 period Transactions with owners of the company: Changes of non-controlling interests without a change in control Allocation of treasury shares to share plan participants Treasury shares acquired Treasury shares sold Share-based payments Dividends Equity as of December 31, 2018 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Consolidated statement of cash flows 100 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 property, plant and equipment Changes in inventories Changes in advance payments to suppliers Changes in contract assets Changes in trade accounts receivable Changes in advance payments from customers Changes in contract liabilities 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 Dividends from associates Divestitures of subsidiaries Purchase of financial assets Sale of financial assets Total cash flow from investing activities Dividend Dividend paid to non-controlling interests Purchase of treasury shares Sale of treasury shares 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 losses on cash and cash equivalents Net change in cash and cash equivalents Notes 12 12 13 14,15 11,15 14 15 11, 15 4 16 16 17 17 23 23 4 25 25 25 25 2018 488.8 116.5 –2.9 20.3 49.2 145.1 –5.8 –98.4 6.1 –11.0 19.9 – –23.7 106.2 –2.8 –21.3 20.8 17.6 2.9 –12.2 –65.6 260.8 –6.9 –89.3 16.6 –217.5 –1.2 0.1 0.7 –0.6 0.6 –297.4 –43.1 –1.9 –454.9 557.4 –14.3 859.4 –1.1 426.4 –658.9 669.1 –26.1 606.4 Cash and cash equivalents as of December 31 22 1’095.2 report.sulzer.com/ar18 2017 429.5 87.2 –4.1 15.2 38.2 140.9 –4.4 –35.7 –0.5 – 36.4 10.5 – 12.2 –1.0 –30.9 –8.6 –7.9 4.0 –8.0 –59.8 183.7 –2.6 –78.6 12.8 –157.9 –4.6 – – –0.3 0.4 –230.8 –119.4 –1.5 –11.8 – –0.3 0.5 –1.7 534.6 –294.1 106.3 0.1 59.3 488.8 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 101 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, 2018, 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, service solutions for rotating equipment, separation and mixing, and applicator technology. Sulzer was founded in 1834 in Winterthur, Switzerland, and employs around 15’500 people. The company serves clients in over 180 production and service sites around the world. Sulzer Ltd is listed on the SIX Swiss Exchange in Zurich, Switzerland (symbol: SUN). The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). They were authorized for issue by the Board of Directors on February 12, 2019. Details of the group’s accounting policies are included in note 34. 2 Significant events and transactions during the reporting period The financial position and performance of the group was particularly affected by the following events and transactions during the reporting period: — As of January 10, 2018, the group acquired 100% of the issued shares in JWC Environmental, LLC (“JWCˮ) for CHF 211.3 million. JWC is headquartered in Santa Ana, California, US, and employs around 230 people. The company is a leading provider of highly engineered, mission- critical solids reduction and removal products such as grinders, screens and dissolved air flotation systems for municipal, industrial and commercial wastewater applications. The acquisition resulted in an increase in property, plant and equipment of CHF 11.5 million and the recognition of goodwill (CHF 88.7 million) and other intangible assets (CHF 90.7 million) at the date of acquisition (see note 4). — On April 11, 2018, Sulzer purchased five million treasury shares from Renova. The purchase price for the five million shares Sulzer acquired came to CHF 109.13 per share for a transaction value of CHF 545.7 million. On September 18, Sulzer placed the five million treasury shares with domestic and international investors. The placement price of CHF 112 per share results in a capital gain of CHF 12.6 million (CHF 14.3 million before transaction costs) which increases Sulzer’s equity (see note 23). — On July 6, 2018, Sulzer issued two new bonds via dual tranches of CHF 400 million in total. The first tranche of CHF 110 million has a term of two years, carries a coupon of 0.25% and has an effective interest rate of 0.37%. The second tranche of CHF 290 million has a term of five years, carries a coupon of 1.3% and has an effective interest rate of 1.35%. On October 22, 2018, Sulzer issued two new bonds via dual tranches of CHF 460 million in total. The first tranche of CHF 210 million has a term of three years, carries a coupon of 0.625% and has an effective interest rate of 0.71%. The second tranche of CHF 250 million has a term of six years, carries a coupon of 1.6% and has an effective interest rate of 1.62%. For more information refer to note 25. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 102 — As part of the Sulzer Full Potential (SFP) program, Sulzer has continued to adapt its global manufacturing footprint and streamline the organizational setup. In 2018, restructuring expenses were mainly associated with measures taken in Brazil, Germany, the US, France, the Netherlands and Belgium. The group recognized restructuring expenses of CHF 13.1 million (2017: CHF 21.7 million). Associated with restructuring initiatives, the group further recognized impairments on property, plant and equipment of CHF 4.4 million (2017: CHF 15.4 million). For more information refer to note 26. — This is the first set of consolidated financial statements where IFRS 9 “Financial Instrumentsˮ and IFRS 15 “Revenue from Contracts with Customersˮ have been applied. The application of these new accounting standards resulted in an increase in allowance for doubtful trade accounts receivable and also impacted recognition of sales, costs of goods sold and gross profit for some construction contracts. Details and changes of the group’s accounting policies are described in note 34. For a detailed discussion about the group’s performance and financial position please refer to the “Financial review.” report.sulzer.com/ar18 millions of CHF Order intake (unaudited) 1) Nominal growth (unaudited) Currency adjusted growth (unaudited) 2) Organic growth (unaudited) Order backlog as of December 31 (unaudited) Sales recognized at a point in time Sales recognized over time Sales 3) opEBITA (unaudited) 4) in % of sales (unaudited) 5) in % of average capital employed (unaudited) Restructuring expenses Amortization Impairments on property, plant and equipment Non-operational items (unaudited) EBIT (Operating income) Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 103 3 Segment information Segment information by divisions Pumps Equipment Rotating Equipment Services Chemtech Applicator Systems 2018 2017 2018 2017 2018 1’372.1 1’180.2 1’109.7 1’047.7 600.1 16.3% 10.6% 16.5% 8.6% 9.6% 2.9% 5.9% 7.6% 5.8% 6.2% 5.0% 19.7% 20.5% –0.9% 20.5% 2017 501.5 6.3% 5.8% 5.0% 2018 449.6 5.4% 4.2% 0.3% 2017 426.3 56.4% 55.7% 6.0% 982.9 847.0 393.1 364.4 345.9 315.3 65.0 66.8 920.3 363.8 1’284.2 41.4 3.2% n/a n/a 1’120.0 872.1 191.6 1’063.7 n/a n/a 1’029.5 –3.7 146.1 144.0 –0.3% 13.7% 13.9% 335.8 227.4 563.2 50.0 8.9% n/a n/a 478.0 25.0 5.2% 452.1 1.7 453.8 95.7 n/a n/a 421.6 86.8 21.1% 20.5% 5.8% –0.6% 26.6% 28.4% 24.6% 11.3% 22.9% 22.7% –8.8 –35.5 –0.7 –23.5 –27.2 –15.0 –23.2 –10.5 –9.3 –61.7 –3.4 –7.4 0.0 –4.4 –3.8 –6.8 –2.3 3.3 130.8 134.4 Depreciation –26.4 –23.7 –17.1 –17.6 Operating assets Unallocated assets Total assets as of December 31 Operating liabilities Unallocated liabilities Total liabilities as of December 31 1’670.1 1’445.6 – – 1’670.1 1’445.6 739.1 – 739.1 685.3 – 685.3 860.2 – 860.2 347.7 – 347.7 880.6 – 880.6 319.8 – 319.8 1.1 –5.2 – –31.4 14.5 –8.2 483.0 – 483.0 289.8 – 289.8 –1.7 –5.6 –2.6 –4.1 11.0 –9.2 463.7 – 463.7 234.1 – 234.1 –1.6 –19.6 –3.7 –6.9 63.8 –19.5 623.4 – 623.4 76.3 – 76.3 –0.3 –17.0 – –6.3 63.2 –20.8 655.3 – 655.3 71.5 – 71.5 Operating net assets 931.0 760.3 512.5 560.8 193.1 229.6 547.1 583.8 Unallocated net assets Total net assets as of December 31 – – – – – – – 931.0 760.3 512.5 560.8 193.1 229.6 547.1 Capital expenditure –32.6 –21.9 –23.1 –19.2 –6.6 –10.0 –31.5 – 583.8 –28.9 Employees (number of full-time equivalents) as of December 31 5’713 5’453 4’721 4’485 3’063 2’878 1’864 1’716 1) Order intake from external customers. Adjusted prior-year comparatives accordingly. 2) Adjusted for currency and acquisition effects. 3) Sales from external customers. Adjusted prior-year comparatives accordingly. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 104 4) Operating income before restructuring, amortization, impairments and non-operational items. 5) Return on sales before restructuring, amortization, impairments and non-operational items (opEBITA/sales). Segment information by divisions Total Divisions Others 6) Total Sulzer millions of CHF Order intake (unaudited) 1) Nominal growth (unaudited) Currency adjusted growth (unaudited) Organic growth (unaudited) 2) 2018 3’531.5 11.9% 12.5% 8.4% 2017 3’155.7 12.8% 11.2% 2.2% Order backlog as of December 31 (unaudited) 1’786.9 1’593.5 Sales recognized at a point in time Sales recognized over time Sales 3) opEBITA (unaudited) 4) in % of sales (unaudited) 5) in % of average capital employed (unaudited) Restructuring expenses Amortization Impairments on property, plant and equipment Non-operational items (unaudited) EBIT (Operating income) Depreciation Operating assets Unallocated assets Total assets as of December 31 Operating liabilities Unallocated liabilities Total liabilities as of December 31 Operating net assets Unallocated net assets Total net assets as of December 31 2’580.3 784.6 3’364.9 333.2 9.9% 17.7% –12.7 –67.8 –4.4 –66.3 181.8 n/a n/a 3’049.0 252.1 8.2% 14.8% –20.8 –52.6 –15.4 –16.4 146.9 –71.2 –71.3 3’636.6 3’445.2 – – 3’636.6 3’445.2 1’452.9 1’310.7 – – 1’452.9 1’310.7 2’183.8 2’134.5 – – 2’183.8 2’134.5 2018 2017 2018 3’531.5 11.9% 12.5% 8.4% 2017 3’155.7 12.8% 11.8% 2.2% 1’786.9 1’593.5 – n/a n/a n/a – – – – –10.7 n/a n/a –0.4 –1.3 – 14.3 2.0 –0.5 –26.7 1’288.4 1’261.7 79.7 1’724.7 1’804.4 –106.4 –436.4 –542.7 – n/a n/a n/a – – – – 3.3 n/a n/a –0.9 –1.2 – –11.6 –10.4 2’580.3 784.6 3’364.9 322.5 9.6% 18.1% –13.1 –69.0 –4.4 –52.0 183.8 –0.4 –71.7 –9.4 681.5 672.1 106.6 997.6 1’104.2 –116.0 –316.1 –432.1 3’610.0 1’288.4 4’898.3 1’532.5 1’724.7 3’257.3 2’077.4 –436.4 1’641.0 n/a n/a 3’049.0 255.4 8.4% 15.8% –21.7 –53.8 –15.4 –28.0 136.5 –71.7 3’435.8 681.5 4’117.3 1’417.3 997.6 2’414.9 2’018.5 –316.1 1’702.4 Capital expenditure –93.8 –80.0 –2.4 –1.2 –96.2 –81.2 Employees (number of full-time equivalents) as of December 31 15’361 14’532 211 200 15’572 14’732 1) Order intake from external customers. Adjusted prior-year comparatives accordingly. 2) Adjusted for currency and acquisition effects. 3) Sales from external customers. Adjusted prior-year comparatives accordingly. 4) Operating income before restructuring, amortization, impairments and non-operational items. 5) Return on sales before restructuring, amortization, impairments and non-operational items (opEBITA/sales). 6) The most significant activities under “Others” relate to Corporate Center. Information about reportable segments Operating segments are determined based on the reports reviewed by the Chief Executive Officer that are used to measure 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: report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 105 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 its derivates, (b) supply, treatment and transport of water as well as wastewater collection, (c) fossil-fired, nuclear and renewable power generation, and (d) specific general industries, e.g. pulp and paper, fertilizers and other markets. 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 industrial gas and steam turbines, turbocompressors, generators and motors, and pumps. Chemtech—separation, mixing and service solutions: This division offers products and services for separation, extraction, reaction, polymer application and mixing technology. The market focus is on separation solutions and tower field services. Applicator Systems—systems for liquid applications: The division offers products for liquid applications and for mixing technologies. The market focus is on mixing and dispenser systems and liquid application systems for the dental, healthcare and cosmetics markets. Others: Certain expenses related to the Corporate Center are not attributable to a particular segment and are reviewed as a whole across the group. Also included are the eliminations for operating assets and liabilities. The Chief Executive Officer primarily uses a measure of adjusted earnings before interest, tax and amortization (operational EBITA) to assess the performance of the operating segments. However, the Chief Executive Officer also receives information about the segments’ order intake and backlog, revenue, and operating assets and liabilities on a monthly basis. Operational EBITA (opEBITA) excludes amortization, restructuring expenses, and impairments when the impairment 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, expenses related to the Sulzer Full Potential program, or amendments to the pension plans. Revenue from external customers reported to the Chief Executive Officer is measured in a manner consistent 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 from external customers is based on the location of the customer. report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 106 2018 1’289.4 326.4 222.2 161.4 150.7 123.7 305.0 479.3 437.1 19.7 11.5 11.0 134.5 60.7 27.7 26.0 20.0 2017 1’392.6 360.0 261.9 158.1 164.2 128.7 319.7 294.5 247.1 22.9 12.3 12.2 141.3 66.6 23.2 30.2 21.3 1’903.2 1’828.4 Pumps Equipment Rotating Equipment Services Chemtech Applicator Systems 554.6 51.0 27.7 30.3 43.8 401.9 383.2 267.8 32.4 43.6 1.5 37.9 346.4 230.1 25.9 14.7 13.8 61.8 458.9 50.4 108.5 79.8 23.4 196.8 453.1 346.4 22.9 25.4 16.3 42.2 151.6 35.6 6.7 37.9 15.4 56.0 190.0 23.9 4.5 15.4 26.9 119.4 128.0 70.2 27.2 12.8 5.8 12.0 245.1 145.3 30.2 4.4 22.3 42.9 265.4 94.5 29.1 1.7 0.0 140.1 143.2 128.5 9.8 1.4 0.8 2.7 45.3 16.1 0.4 1.2 4.2 23.4 2018 Total Sulzer 1’468.9 219.8 169.8 127.2 94.1 858.0 1’107.6 812.9 92.3 83.1 24.4 94.8 788.4 427.1 63.3 58.2 55.7 184.1 1’284.2 1’063.7 563.2 453.8 3’364.9 Non-current assets by region millions of CHF Europe, Middle East, Africa – thereof: Germany Sweden Switzerland United Kingdom Netherlands other countries Americas – thereof: USA Brazil Canada other countries Asia-Pacific – thereof: China India Australia other countries Total Sales by region millions of CHF Europe, Middle East, Africa – thereof: Germany United Kingdom Russia Saudi Arabia other countries Americas – thereof: USA Brazil Canada Argentina other countries Asia-Pacific – thereof: China India Australia South Korea other countries Total report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 107 millions of CHF Europe, Middle East, Africa – thereof: Germany United Kingdom Russia Saudi Arabia other countries Americas – thereof: USA Brazil Canada Argentina other countries Asia-Pacific – thereof: China India Australia South Korea other countries Total Pumps Equipment Rotating Equipment Services 426.8 42.1 109.0 64.8 20.9 190.0 455.9 346.5 21.9 26.3 19.0 42.2 Chemtech 150.9 20.2 4.3 10.4 36.5 79.5 137.0 78.5 22.9 20.8 0.9 13.8 146.8 190.1 26.2 8.7 39.3 12.9 59.7 83.2 30.0 12.1 20.2 44.7 2017 Total Sulzer 1’411.6 204.7 164.3 115.8 86.8 840.0 1’003.5 713.6 90.4 77.9 20.7 100.9 633.9 226.1 64.0 67.8 50.1 225.9 Applicator Systems 238.8 81.1 23.2 2.2 0.1 132.1 137.6 121.4 11.0 1.2 0.4 3.5 45.2 13.3 0.2 0.7 3.6 27.4 595.1 61.2 27.7 38.4 29.3 438.4 273.1 167.1 34.6 29.6 0.5 41.4 251.8 103.4 25.1 15.7 13.3 94.2 1’120.0 1’029.5 478.0 421.6 3’049.0 Segment information by market segment The following table shows the allocation of sales from external customers by market segments: Sales by market segment Pumps Equipment Rotating Equipment Services Chemtech Applicator Systems 368.8 321.5 445.6 115.4 – 32.9 – 430.2 178.9 28.9 340.0 – 85.7 – 1’284.2 1’063.7 469.2 18.2 0.7 4.2 – 71.0 – 563.2 – – – – 274.1 – 179.7 453.8 Pumps Equipment Rotating Equipment Services 331.6 327.5 312.3 101.1 – 47.5 – 401.1 158.3 25.0 352.4 – 92.8 – 1’120.0 1’029.5 Chemtech 415.8 4.8 1.9 5.2 – 50.3 – 478.0 Applicator Systems – – – – 233.6 – 188.0 421.6 2018 Total Sulzer 1’268.1 518.6 475.3 459.6 274.1 189.6 179.7 3’364.9 2017 Total Sulzer 1’148.5 490.6 339.2 458.5 233.6 190.6 188.0 3’049.0 millions of CHF Oil and gas General industry Water Power Adhesives, dental, healthcare Chemical processing industry Beauty Total millions of CHF Oil and gas General industry Water Power Adhesives, dental, healthcare Chemical processing industry Beauty Total report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 108 4 Acquisitions of subsidiaries Acquisitions in 2018 The following table summarizes the recognized amounts of assets acquired and liabilities assumed at the date of acquisition, including the resulting goodwill and the total consideration paid. If new information obtained within one year of the date of acquisition about facts and circumstances that existed at the date of acquisition identifies adjustments to the amounts recognized below, then the accounting for the acquisition will be revised. Net assets acquired millions of CHF Intangible assets Property, plant and equipment Cash and cash equivalents Trade accounts receivable Other current assets Other liabilities with third parties Deferred tax liabilities Net identifiable assets Goodwill recognized in balance sheet Negative goodwill recognized in income statement Total consideration Purchase price paid in cash Total consideration JWC Environmental, LLC JWC Environmental, LLC Other 90.7 11.5 3.6 17.2 11.6 –11.9 – 122.6 88.7 – 211.3 211.3 211.3 6.1 –0.3 2.8 3.2 1.7 –2.2 –1.1 10.0 – –0.6 9.4 9.4 9.4 Total 96.8 11.1 6.4 20.4 13.3 –14.2 –1.1 132.7 88.7 –0.6 220.8 220.8 220.8 On January 10, 2018, Sulzer acquired a 100% controlling interest of JWC Environmental, LLC (“JWC”) for CHF 211.3 million. The headquarters of JWC is located in Santa Ana, California, US. JWC employs approximately 230 employees and is a leading provider of highly engineered, mission- critical solids reduction and removal products such as grinders, screens and dissolved air flotation system for municipal, industrial and commercial wastewater applications. The transaction allows Sulzer to grow its wastewater treatment offering through complementary equipment as well as to improve its access to the municipal and industrial wastewater market in North America. Furthermore, Sulzer intends to strongly pursue and support JWC’s geographic expansion into markets in EMEA and Asia. Significant sales synergies are expected through growth in JWC’s markets outside North America. JWC will operate as part of Sulzer’s Pumps Equipment division. The goodwill is attributable to significant synergies by leveraging scale and cross-selling opportunities. None of the goodwill is expected to be deductible for tax purposes. Transaction cost recognized in the income statement amount to CHF –1.4 million. Since the acquisition date, JWC contributed order intake of CHF 87.1 million, sales of CHF 84.6 million, and net income of CHF –2.9 million to the group. Other Medmix Systems AG On August 31, 2018, Sulzer acquired 100% controlling interest of Medmix Systems AG (“Medmix”) for CHF 4.2 million. Medmix is based in Rotkreuz, Switzerland, and employs 12 people. The acquisition of Medmix extends the Applicator Systems division’s portfolio of mixing and dispensing devices, adding a healthcare segment to leading positions in dental, adhesives and beauty. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 109 Brithinee Electric On November 5, 2018, Sulzer acquired 100% controlling interest of Brithinee Electric for CHF 5.2 million. Brithinee Electric is based in Colton, California, US, and employs 46 people. Through this acquisition, Sulzer expands its electromechanical services business into Southern California and gains access to the Californian wind, cement and water markets with established offerings and customers. Rotec During 2017, Sulzer acquired 51% of the business of Rotec GT, the gas turbine maintenance division of the Rotec Group. Sulzer obtained control of the acquired business. Rotec GT is considered to be a related party to the group (controlled by the major shareholder). During 2018, Sulzer acquired the outstanding 49% of Sulzer Turbo Services Rus LLC (formerly the gas turbine maintenance division of the Rotec Group) for CHF 14.3 million, after the seller exercised its put option. The transaction was priced on an arm’s length basis and was settled in cash prior to December 31, 2018. Acquired receivables The fair value of acquired trade accounts receivable is CHF 20.4 million. The gross contractual amount for trade account receivables due is CHF 21.0 million, of which CHF 0.6 million is expected to be uncollectible at the date of acquisition. Pro forma revenue and profit contribution Had all above acquisitions occurred on January 1, 2018, management estimates that total net sales of the group would amount to CHF 3’379.3 million, and the consolidated net income would be CHF 117.5 million. 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 Contingent consideration millions of CHF Balance as of January 1 Payment of contingent consideration Release to other operating income Currency translation differences Total contingent consideration as of December 31 2018 –220.8 –2.7 6.4 –0.4 –217.5 2018 5.1 –2.7 –1.5 –0.1 0.9 2017 –162.7 –2.2 7.2 –0.2 –157.9 2017 9.5 –2.2 –2.6 0.4 5.1 As of December 31, 2018, there was a decrease of CHF 1.5 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. Acquisitions in 2017 The following table summarizes the recognized amounts of assets acquired and liabilities assumed at the date of acquisition, including the resulting goodwill and the total consideration paid. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 110 millions of CHF Intangible assets Property, plant and equipment Cash and cash equivalents Trade accounts receivable Other current assets Borrowings Other liabilities with third parties Deferred tax liabilities Net identifiable assets Non-controlling interests Fair value of 49% preexisting interest in Sulzer TS Russia Goodwill Total consideration Purchase price paid in cash Paid in shares of Sulzer TS Russia Total consideration Ensival Moret VIEC Rotec GT Transcodent Total 52.9 16.9 7.0 22.2 48.1 –6.3 –75.1 –16.2 49.5 – 18.2 67.7 67.7 67.7 5.2 0.5 – – 0.1 – – –1.4 4.4 – – 4.4 4.4 4.4 11.0 5.9 – – 1.9 – – –2.2 16.6 –8.3 –0.4 7.5 15.4 15.0 0.4 15.4 42.1 111.2 4.7 0.2 3.3 6.2 –2.5 28.0 7.2 25.5 56.3 –8.8 –3.0 –78.1 – –19.8 51.0 121.5 – –8.3 –0.4 24.6 50.3 75.6 163.1 75.6 162.7 0.4 75.6 163.1 5 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 circumstances. The group makes estimates and assumptions that relate to the future. By their nature, these estimates 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. 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 increases, 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 and note 34. Income taxes The group is obliged to pay income taxes in numerous jurisdictions. Assumptions are required in order to determine income tax provisions. There are 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 differences 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 income-tax-related uncertainties are adequate. Further details are disclosed in note 13. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 111 Goodwill and other 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 with the terminal growth rate, the discount rate, and the projected cash flows as the main variables. Information about assumptions and estimation uncertainties that have significant risk of resulting in a material adjustment in the year ending December 31, 2018, are disclosed in note 14. The accounting policies are disclosed in note 34. Sales At contract inception, the group assesses the goods or services promised in a contract with a customer and identifies each promise to transfer to the customer as a performance obligation. The group considers the terms of the contract and all other relevant facts, including the economic substance of the transaction. Judgment is needed to determine whether there is a single performance obligation or multiple separate performance obligations. In typical engineering contracts, engineering, production and installation are treated as one single performance obligation. If the consideration promised in a contract includes a variable amount (e.g. expected liquidated damages, early payment discounts, volume discounts), the group estimates the amount of consideration to which the group will be entitled in exchange for transferring the promised goods or services to a customer. The amount of the variable consideration is estimated by using either of the following methods, depending on which method the group expects to better predict the amount of consideration to which it will be entitled: the expected value or the most likely amount. The method selected is applied consistently throughout the contract and to similar types of contracts when estimating the effect of uncertainty on the amount of variable consideration to which the group is entitled. Depending on the outcome of the respective transactions, actual payments may differ from these estimates. To allocate the transaction price to each performance obligation on a relative standalone selling price basis, the group determines the standalone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocates the transaction price in proportion to those standalone selling prices. If the standalone selling price is not directly observable, then the group estimates the amount with the expected cost plus margin method. The group is recognizing sales either over time or at a point in time. Sales are recognized over time if any of the conditions described in note 34 is met. To determine the method, the right to payment condition is the one with the most critical estimates. The group estimates if an enforceable right to payment (including reasonable profit margin) for performance up to date exists in case the customer terminates the contract for convenience. For this estimate the group reviews the contracts and considers relevant laws, legal precedents and customary business practice. Applying the over time method requires the group to estimate the proportional sales and costs. To measure the stage of completion, generally the cost-to-cost method is applied. Work progress of sub-suppliers is considered to determine the stage of completion. If circumstances arise that may change the original estimates of sales, costs or extent of progress toward completion, estimates are revised. These revisions may result in increases or decreases in estimated sales or costs and are reflected in income in the period in which the circumstances that give rise to the revision become known by management. Further details are disclosed in note 19 and note 34. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 112 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 26 and note 34. 6 Financial risk management 6.1 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 overall 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 instruments to hedge certain risk exposures. Risk management is carried out by a central treasury department (Group Treasury). Group Treasury identifies, 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. a) Market risk (I) Foreign exchange risk 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. Presently, most of the contracts are designated as cash flow hedges. External foreign exchange 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 2018 and 2017 related to foreign exchange risk of financial instruments. The volatility used for the calculation is the one-year historic volatility on December 31 for the relevant currency pair and year. For 2018, the currency pair with the most significant exposure and inherent risk was the EUR versus the RUB. If, on December 31, 2018, the EUR had increased by 13.3% against the RUB with all other variables held constant, profit after tax for the year would have been CHF 1.1 million lower mainly due to foreign exchange losses on EUR-denominated financial liabilities. A decrease of the rate would have caused a gain of the same amount. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 113 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/RUB USD/INR USD/ARS EUR/ZAR 2018 –12.1 13.3% –1.1 1.1 18.0 6.6% 0.8 –0.8 4.1 27.4% 0.8 –0.8 –7.1 14.4% –0.7 0.7 2017 EUR/BRL USD/INR EUR/ZAR EUR/USD –12.2 14.1% –1.2 1.2 19.8 4.4% 0.6 –0.6 –5.2 15.5% –0.6 0.6 –7.4 7.3% –0.4 0.4 The following tables show the hypothetical influence on equity for 2018 and 2017 related to foreign exchange risk of financial instruments for the most important currency pairs as per December 31 of the respective 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. Hypothetical impact of foreign exchange risk on equity millions of CHF Currency pair Exposure Volatility Effect on equity, net of taxes (rate increase) Effect on equity, net of taxes (rate decrease) millions of CHF Currency pair Exposure Volatility Effect on equity, net of taxes (rate increase) Effect on equity, net of taxes (rate decrease) (II) Price risk USD/BRL USD/MXN GBP/USD USD/CHF EUR/USD EUR/RUB EUR/BRL 2018 42.5 15.6% 4.6 –4.6 –34.6 13.1% –3.2 3.2 48.0 8.2% 2.8 –2.8 –37.9 6.5% –1.7 1.7 33.8 7.2% 1.7 –1.7 17.8 13.3% 1.7 –1.7 –8.7 15.2% –0.9 0.9 2017 GBP/USD USD/CHF USD/MXN EUR/USD EUR/CHF USD/INR EUR/INR 50.2 8.9% 3.1 –3.1 –53.1 7.1% –2.6 2.6 –30.9 12.2% –2.6 2.6 34.3 7.3% 1.7 –1.7 –42.3 4.9% –1.4 1.4 –27.8 4.4% –0.9 0.9 –15.4 7.2% –0.8 0.8 As of December 31, 2018, the group was not exposed to significant price risk related to investments in equity securities. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 114 (III) Interest rate sensitivity The group’s interest rate risk arises from interest-bearing assets and liabilities. Assets and liabilities at variable rates expose the group to cash flow interest rate risk. Assets and liabilities at fixed rates only expose the group to fair value interest rate risk in the case of debt instruments that are classified as at fair value through profit or loss. 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 group’s non-current interest-bearing liabilities mainly comprise six bonds with a fixed interest rate. 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, USD, CHF, EUR, CNY and GBP, increasing interest rates would have had a positive impact on the income statement, since the value of variable-interest-bearing assets (comprising mainly cash and cash equivalents) exceed the value of variable-interest-bearing liabilities. Hypothetical impact of interest rate risk on income statement millions of CHF 2018 Impact on post-tax profit Variable-interest-bearing assets (net) Amount Sensitivity in basis points rate increase rate decrease USD CHF EUR CNY GBP millions of CHF Variable-interest-bearing assets (net) USD CHF CNY EUR INR 294.8 265.4 262.6 66.8 40.1 Amount –150.1 127.8 49.9 45.7 38.9 100 100 100 100 100 2.1 1.9 1.8 0.5 0.3 –2.1 –1.9 –1.8 –0.5 –0.3 2017 Sensitivity in basis points rate increase rate decrease Impact on post-tax profit 100 100 100 100 100 –1.0 0.9 0.3 0.3 0.3 1.0 –0.9 –0.3 –0.3 –0.3 On December 31, 2018, if the interest rates on USD-denominated assets net of liabilities had been 100 basis points higher with all other variables held constant, post-tax profit for the year would have been CHF 2.1 million higher, as a result of higher interest income on USD-denominated assets. A decrease of interest rates on USD-denominated assets net of liabilities would have caused a loss of the same amount. As of December 31, 2017, if the interest rates had been 100 basis points higher with all other variables held constant, post-tax profit for the year would have been CHF 1.0 million lower, mainly as a result of higher interest expenses on short-term borrowings, because at this time the USD-denominated liabilities exceeded the assets. 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 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 115 receivables, contract assets and committed transactions. The maximum exposure to credit risk per class of financial assets is outlined in the fair value table in note 6.3. Not exposed to credit risks are equity securities. Credit risks of banks and financial institutions are monitored and managed centrally. Generally, only independently rated parties with a strong credit rating are accepted, and the total volume of transactions is split among several banks to reduce the individual risk with one bank. 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 contract assets, please refer to note 19 and on the credit risk out of trade accounts receivable, please refer to note 20. c) Liquidity risk 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 2017, the second of the two one-year extension options of the syndicated credit line of CHF 500 million was executed, and thus the credit line was extended to 2022. If special needs arise, financing will be reviewed case by case. The following table analyzes the group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed 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. Maturity profile of financial liabilities millions of CHF Borrowings Trade accounts payable Other current and non-current liabilities (including derivative liabilities) millions of CHF Borrowings Trade accounts payable Other current and non-current liabilities (including derivative liabilities) 6.2 Capital risk management Carrying amount 1’334.3 521.8 249.5 Carrying amount 713.8 433.8 88.7 <1 year 1–5 years >5 years Total 2018 30.9 521.8 245.9 975.0 – 18.3 – 0.1 380.1 1’386.0 <1 year 1–5 years >5 years 263.8 433.8 71.1 340.1 – 17.3 129.8 – 0.3 521.8 264.3 2017 Total 733.7 433.8 88.7 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 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 116 2017 –225.0 277.4 0.81 2017 713.8 1’680.1 0.42 maintain an optimal capital structure to reduce the cost of capital. In this respect, the group aims at maintaining an investment grade credit rating, either as a perceived rating or an external rating issued by a credit rating agency. 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. The following table shows the net debt/EBITDA ratio as at December 31, 2018 and 2017. Net debt/EBITDA ratio millions of CHF Net debt EBITDA Net debt/EBITDA 2018 –239.0 329.0 0.73 Another important ratio for the group is the gearing ratio (debt-to-equity ratio), which is calculated as total financial debt divided by equity attributable to shareholders of Sulzer Ltd. The equity capital as shown in the balance sheet corresponds to the managed equity capital. The increase in the gearing ratio during 2018 resulted mainly from the increase in borrowings. As of December 31, 2018 and 2017, the gearing ratio was as follows: Gearing ratio millions of CHF Borrowings Equity attributable to shareholders of Sulzer Ltd Borrowings-to-equity ratio (gearing) 6.3 Fair value estimation 2018 1’334.3 1’629.9 0.82 The following tables present the carrying amounts and fair values of financial assets and liabilities as of December 31, 2018 and 2017, 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 carrying 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 the outstanding bonds, 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. Fair values measured using unobservable inputs are categorized within level 3 of the fair value hierarchy. This applies particularly to contingent considerations in business combinations. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 117 Contingent considerations are linked to the fulfillment of certain parameters, mainly related to earn- out clauses and technology transfer. For more information please refer to note 4. December 31, 2018 Fair value Level 1 Level 2 Level 3 – 6.4 6.4 – 0.2 8.4 – 8.7 – – 6.6 – 6.6 – – – 0.9 0.9 – – Fair value table millions of CHF Financial assets measured at fair value Other financial assets (at fair value) Derivative assets – current Total financial assets measured at fair value Financial assets not measured at fair value Other financial assets (at amortized cost) Non-current receivables (excluding non-current derivative assets) Contract assets Trade accounts receivable Other current receivables (excluding current derivative assets and other taxes) 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 bonds Other non-current borrowings Other current borrowings and bank loans Other non-current liabilities Trade accounts payable Other current liabilities (excluding current derivative liabilities, other taxes and contingent considerations) Notes 17 21, 28 17 19 20 21 22 28 27, 28 4 25 25 25 Carrying amount 6.8 6.4 13.1 2.7 6.2 205.1 622.3 24.3 1’095.2 1’955.7 0.2 8.4 0.9 9.6 6.8 6.4 13.1 0.2 – 0.2 – 0.2 8.4 0.9 9.6 – – – – – 1’308.7 1’312.6 1’312.6 7.6 18.0 3.6 521.8 211.3 Total financial liabilities not measured at fair value 2’070.9 1’312.6 1’312.6 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 118 Fair value table millions of CHF Financial assets measured at fair value Derivative assets – non-current Derivative assets – current Total financial assets measured at fair value Financial assets not measured at fair value Loans and receivables Available-for-sale financial assets Non-current receivables (excluding non-current derivative assets) Trade accounts receivable Other current receivables (excluding current derivative assets and other taxes) Cash and cash equivalents Total financial assets not measured at fair value Financial liabilities measured at fair value Derivative liabilities – current Contingent considerations Put option liability Total financial liabilities measured at fair value Financial liabilities not measured at fair value Outstanding bonds Other non-current borrowings Other current borrowings and bank loans Other non-current liabilities (excluding put option liability) Trade accounts payable Other current liabilities (excluding current derivative liabilities, other taxes and contingent considerations) Notes 28 21, 28 17 17 20 21 22 28 4 4 25 25 25 Carrying amount Fair value Level 1 Level 2 Level 3 December 31, 2017 – – – – – – – – 0.2 7.3 7.5 0.2 7.3 7.5 9.4 4.2 8.6 901.8 27.0 488.8 1’439.8 – 6.8 5.1 14.6 26.5 456.0 456.0 6.8 5.1 14.6 26.5 450.4 8.3 255.1 3.0 433.8 23.9 0.2 7.3 7.5 – – – – – 6.8 – – 6.8 – – – 5.1 14.6 19.7 – – Total financial liabilities not measured at fair value 1’174.5 456.0 456.0 7 Corporate risk management Sulzer maintains 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 matrix, 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. Key risks are assessed on business unit level and consolidated on group level. The business units together with the divisions 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) additional 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 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 119 current risks and risk mitigation as well as of the progress toward achieving major risk objectives. The assessment of risk management processes is included within the charter and scope of Group Internal Audit. 8 Personnel expenses millions of CHF Salaries and wages Defined contribution plan expenses Defined benefit plan expenses Cost of share-based payment transactions Social benefit costs Other personnel costs Total personnel expenses 2018 889.4 25.7 21.8 15.1 141.2 36.5 2017 853.1 25.7 18.7 10.8 137.2 32.7 1’129.7 1’078.2 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 turnover 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. Reconciliation of the amount recognized in the balance sheet as of December 31 millions of CHF Funded plans Switzerland Funded plans United Kingdom Funded plans USA Funded plans Others Unfunded plans Present value of funded defined benefit obligation –1’106.0 –511.0 Fair value of plan assets (funded plans) 1’116.6 Overfunding / (underfunding) Present value of unfunded defined benefit obligation Adjustment to asset ceiling Asset / (liability) recognized in the balance sheet – thereof as liabilities under defined benefit obligation – thereof as other current receivables and prepaid expenses 10.6 – –0.9 9.7 –2.6 12.3 432.5 –78.5 – – –78.5 –78.5 –60.8 44.5 –16.3 – – –16.3 –16.3 –78.5 63.9 –14.6 – – –14.6 –14.7 – – – –48.8 – –48.8 –48.8 – – 0.1 – 12.4 Funded plans Switzerland Funded plans United Kingdom Funded plans USA Funded plans Others Unfunded plans –634.4 502.3 –132.1 – – –132.1 –132.1 –65.4 45.9 –19.5 – – –19.5 –19.5 –79.5 65.5 –14.0 – – –14.0 –14.1 – – – –50.9 – –50.9 –50.9 –1’218.3 1’210.6 –7.7 – –1.6 –9.3 –22.5 13.2 – – 0.1 – 13.3 millions of CHF Present value of funded defined benefit obligation Fair value of plan assets Overfunding / (underfunding) Present value of unfunded defined benefit obligation Adjustment to asset ceiling Asset / (liability) recognized in the balance sheet – thereof as liabilities under defined benefit obligation – thereof as other current receivables and prepaid expenses report.sulzer.com/ar18 2018 Total –1’756.3 1’657.5 –98.8 –48.8 –0.9 –148.5 –160.9 2017 Total –1’997.6 1’824.3 –173.3 –50.9 –1.6 –225.8 –239.1 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 120 Sulzer operates major funded defined benefit pension plans in Switzerland, UK 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 (investment) risk. 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 predefined 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. The average discount rate slightly increased in 2018 compared to 2017 (from 0.7% to 0.9% for active employees and from 0.4% to 0.6% for pensioners). More active plan participants and fewer retirees resulted in a lower defined benefit obligation in 2018 compared to 2017. The plan assets decreased compared to 2017 due to less return on plan assets. The total expenses recognized in the income statement in 2018 were CHF 15.2 million (2017: CHF 15.3 million). In the UK, the plan is a final salary plan and provides benefits linked to salary at closure to future accrual adjusted for inflation to retirement or earlier date of leaving service. The scheme is fully closed to new entrants and future accruals. The scheme is managed by six trustees forming the Board. The plan is a multi-employer scheme with Sulzer (UK) Holding being the principal sponsor. The discount rate increased by 0.5 percentage points to 3.0% (2017: 2.5%). The net pension liabilities decreased from CHF 132.1 million in 2017 to CHF 78.5 million, due to changes in financial and demographic assumptions. The total expenses recognized in the income statement in 2018 were CHF 3.4 million compared to CHF 5.1 million in 2017. In the USA, Sulzer operates non-contributory defined benefit retirement plans. 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 for new entrants. In 2018, an expense of CHF 0.7 million was recognized in the income statement (2017: CHF 0.9 million). The discount rate increased to 4.2% in 2018 (2017: 3.6%). The amount recognized in other comprehensive income (OCI) in 2018 was CHF –3.0 million (2017: CHF –1.1 million). In Germany, Sulzer operates a range of different defined benefit 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 defined benefit 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 defined benefit plans continued to be eligible for these defined benefit 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 defined benefit plans. The different defined benefit plans offer retirement pension, disability pension, and survivor’s pension benefits. report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 121 Employee benefit plans millions of CHF Reconciliation of effect of asset ceiling Adjustment to asset ceiling at January 1 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 income / (expense) recognized in the income statement Defined benefit income / (expense) recognized in OCI Employer contribution Acquired through business combination Currency translation differences Asset / (liability) recognized at December 31 Components of defined benefit income / (expense) in the income statement Current service cost (employer) Interest expense Interest income on plan assets Past service cost Effects of curtailments and settlement Other administrative cost Income / (expense) recognized in the income statement – thereof charged to personnel expenses – thereof charged to financial expense Components of defined benefit gain / (loss) 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 gain / (loss) recognized in OCI 1) 1) The tax effect on defined benefit cost recognized in OCI amounted to CHF –12.8 million (2017: CHF –21.8 million). 2018 –1.6 0.7 –0.9 –225.8 –26.7 68.7 27.4 – 7.9 –148.5 –21.3 –25.0 20.1 –0.7 1.0 –0.8 –26.7 –21.8 –4.9 140.8 –73.0 0.8 0.1 68.7 2017 –2.3 0.7 –1.6 –329.9 –25.7 113.6 29.8 –2.7 –10.9 –225.8 –18.2 –27.4 20.4 –0.1 0.2 –0.6 –25.7 –18.7 –7.0 29.4 83.4 0.7 0.1 113.6 report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 122 Employee benefit plans millions of CHF Reconciliation of defined benefit obligation Defined benefit obligation as of January 1 Interest expense Current service cost (employer) Contributions by plan participants Past service cost Benefits paid/deposited Effects of curtailments and settlement Acquired through business combination Other administrative cost Actuarial gain / (loss) Currency translation differences 2018 2017 –2’048.5 –2’110.9 –25.0 –21.3 –9.7 –0.7 124.0 2.8 – –0.8 140.8 33.3 –27.4 –18.2 –9.7 –0.1 139.7 0.2 –13.5 –0.6 29.4 –37.4 Defined benefit obligation as of December 31 1) –1’805.1 –2’048.5 Reconciliation of the fair value of plan assets Fair value of plan assets as of January 1 Interest income on plan assets Employer contribution Contributions by plan participants Benefits paid/deposited Effects of curtailments and settlement Acquired through business combination 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 Debt instruments Real estate funds Investment funds Others 1’824.3 20.1 27.4 9.6 –124.0 –1.8 – –73.0 –25.1 1’657.5 49.1 539.7 476.2 41.0 3.8 79.0 1’783.3 20.4 29.8 9.7 –139.7 –0.2 10.8 83.4 26.8 1’824.3 94.5 623.0 513.4 32.7 3.4 76.3 Total assets at fair value – quoted market price as of December 31 1’188.8 1’343.3 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 Best estimate of contributions for upcoming financial year 280.7 188.0 468.7 272.0 209.0 481.0 Contributions by the employer 26.2 26.0 1) The defined benefit obligation 2018 includes the funded part (CHF 1’756.3 million) and the unfunded part (CHF 48.8 million). report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 123 Employee benefit plans millions of CHF Components of defined benefit obligation, split Defined benefit obligation for active members Defined benefit obligation for pensioners Defined benefit obligation 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 demographic 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 Maturity profile of defined benefit obligation 2018 2017 –318.5 –1’193.5 –293.1 –1’805.1 104.7 50.2 –14.1 140.8 –32.6 257.8 225.2 –354.7 –1’325.0 –368.8 –2’048.5 –7.1 19.6 16.9 29.4 – 453.9 453.9 Weighted average duration of defined benefit obligation in years 13.2 13.8 Since the defined benefit obligation for the Swiss and UK pension plans represents 92% (2017: 91%) of the group, the following significant actuarial assumptions apply exclusively to these two countries: Principal actuarial assumptions as of December 31 2018 2017 Funded plans Switzerland Funded plans United Kingdom Funded plans Switzerland Funded plans United Kingdom Discount rate for active employees Discount rate for pensioners Future salary increases Future pension increases Life expectancy at retirement age (male/female) in years 0.9% 0.6% 1.0% 0.0% 23/25 3.0% 3.0% 0.0% 2.7% 22/23 0.7% 0.4% 1.0% 0.0% 23/25 Sensitivity analysis of defined benefit obligation millions of CHF Discount rate (decrease 0.25 percentage points) Discount rate (increase 0.25 percentage points) Future salary growth (decrease 0.25 percentage points) Future salary growth (increase 0.25 percentage points) Life expectancy (decrease 1 year) Life expectancy (increase 1 year) 2018 –58.3 55.7 5.2 –1.5 89.0 –85.5 2.5% 2.5% 0.0% 2.5% 22/24 2017 –71.7 67.5 3.1 –3.2 105.5 –104.2 report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 124 10 Research and development expenses A breakdown of the research and development expenses per division is shown in the table below: millions of CHF Pumps Equipment Rotating Equipment Services Chemtech Applicator Systems Others Total 11 Other operating income and expenses millions of CHF Income from release of contingent consideration Gain from sale of property, plant and equipment Operating currency exchange gains, net Other operating income Total other operating income Restructuring expenses Impairments of property, plant and equipment Cost for mergers and acquisitions Loss from sale of property, plant and equipment Total other operating expenses Total other operating income and expenses, net 2018 45.1 1.1 17.2 22.5 0.5 86.4 2018 1.5 6.0 2.2 40.2 49.9 –13.1 –4.4 –1.4 –0.2 –19.1 30.8 2017 39.0 1.4 16.3 23.8 0.5 81.0 2017 2.6 4.6 1.3 13.7 22.2 –21.7 –15.4 –4.1 –0.2 –41.4 –19.2 During 2018, the group reassessed the achievement of the earn-out targets related to contingent consideration arrangements. The reassessment resulted in an income of CHF 1.5 million (2017: CHF 2.6 million). Other operating income includes income from litigation cases, government grants and incentives, and recharges to third parties not qualifying as sales from customers. During 2018, the group sold unquoted equity instruments previously measured at cost to Sulzer Vorsorgeeinrichtung, Sulzer’s pension fund in Switzerland. The transaction price was CHF 31.7 million and the resulting profit CHF 28.5 million. The transaction was priced on an arm’s length basis and was settled in cash prior to December 31, 2018. As part of the Sulzer Full Potential (SFP) program, Sulzer has continued to adapt its global manufacturing footprint and streamline the organizational setup. In 2018, restructuring expenses were mainly associated with measures taken in Brazil, Germany, the US, France, the Netherlands and Belgium. The group recognized restructuring provisions of CHF 14.9 million (2017: CHF 21.7 million). Associated with restructuring initiatives, the group further recognized impairments on property, plant and equipment of CHF 4.4 million (2017: CHF 15.4 million). For more details refer to note 15. The functional allocation of the total restructuring expenses and impairments is as follows: Cost of goods sold CHF –4.1 million (2017: CHF –20.0 million), selling and distribution expenses CHF – report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 125 1.8 million (2017: CHF –3.7 million), general and administrative expenses CHF –11.1 million (2017: CHF –13.4 million) and research and development expenses CHF –0.5 million (2017: CHF 0.0 million). 12 Financial income and expenses millions of CHF Interest and securities income Total interest and securities income Interest expenses Interest expenses on employee benefit plans Total interest expenses Total interest income and expenses, net Income from investments and other financial assets Fair value changes Other financial expenses Currency exchange gains/losses, net Total other financial income and expenses, net Total financial income and expenses, net – thereof fair value changes on financial assets at fair value through profit and loss – thereof other income from financial assets at fair value through profit and loss – thereof interest income on financial assets at amortized costs – thereof other financial expenses – thereof currency exchange gains/losses, net – thereof interest expenses on borrowings – thereof interest expenses on employee benefit plans 2018 2.9 2.9 –15.4 –4.9 –20.3 –17.4 0.5 8.6 –2.0 –8.7 –1.5 –18.9 8.6 0.5 2.9 –2.0 –8.7 –15.4 –4.9 Interest expenses increased mainly due to the higher level of borrowings under the syndicated credit facility. Total interest expenses on bonds increased to CHF 5.4 million (2017: CHF 2.2 million). Interest expenses related to other borrowings increased to CHF 10.0 million (2017: CHF 6.0 million) due to the higher levels of other borrowings and increased borrowing rates. 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 and 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 2018 –69.4 20.3 –49.2 The weighted average tax rate results from applying each subsidiary’s statutory income tax rate to the income before taxes. Since the group operates in countries that have differing tax laws and rates, the consolidated weighted average effective tax rate will vary from year to year according to variations in income per country and changes in applicable tax rates. report.sulzer.com/ar18 2017 4.1 4.1 –8.2 –7.0 –15.2 –11.1 0.8 1.2 –1.2 –0.5 0.3 –10.8 1.2 0.8 4.1 –1.2 –0.5 –8.2 –7.0 2017 –55.4 17.2 –38.2 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 126 2017 125.4 22.8% –28.6 6.1 –4.6 –4.3 –4.8 –2.0 –38.2 30.5% 2017 16.5 2.0 51.9 – –44.3 1.0 27.1 2.3 24.8 Reconciliation of income tax expenses millions of CHF Income 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 Effect of changes in tax rates and legislation Prior year items and others Total income tax expenses Effective income tax rate 2018 165.6 22.0% –36.4 5.9 –7.9 –5.8 –3.7 –1.3 –49.2 29.7% The effective income tax rate for 2018 is 29.7% (2017: 30.5%). The effect of tax loss carryforwards and allowances for deferred income tax assets in the amount of CHF 7.9 million is mainly related to restructuring expenses in China and expenses in the UK with no corresponding tax effect. The effect of changes in tax rates and legislation of CHF 3.7 million is mainly related to final US Tax Reform adjustments in the amount of CHF 2.7 million. Excluding these one-time effects, the effective income tax rate for 2018 would have been 23.1%. The effective income tax rate for 2017 of 30.5% was impacted by the enacted US Tax Reform and various restructuring expenses with no corresponding tax effects. Excluding these extraordinary effects, the effective income tax rate in 2017 would have 2018 27.1 0.3 35.5 –1.6 –25.7 –1.3 34.3 2.3 32.0 been 23.4%. Income tax liabilities millions of CHF Balance as of January 1 Acquired through business combination Additions Released as no longer required Utilized Currency translation differences Total income tax liabilities as of December 31 – thereof non-current – thereof current report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 127 Summary 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 Assets Liabilities 12.4 6.2 4.5 17.6 34.1 14.5 20.4 22.6 27.4 32.3 0.6 –96.1 –12.0 –0.0 –12.7 –10.1 –2.2 –0.1 –0.8 –9.2 – – Tax assets/liabilities 192.7 –143.3 2018 Net –83.7 –5.8 4.5 4.9 24.0 12.3 20.3 21.8 18.2 32.3 0.6 49.4 Assets Liabilities 0.5 7.4 0.2 22.1 19.7 16.7 35.4 22.9 28.5 38.0 0.7 –107.7 –10.9 –0.1 –4.5 –18.6 –2.5 –0.3 –3.7 –8.9 – – 192.1 –157.2 2017 Net –107.2 –3.5 0.1 17.6 1.1 14.2 35.1 19.2 19.6 38.0 0.7 34.9 Offset of assets and liabilities –53.8 53.8 – –52.4 52.4 – Net recorded deferred income tax assets and liabilities 138.9 –89.5 49.4 139.7 –104.8 34.9 Cumulative deferred income taxes recorded in equity as of December 31, 2018, amounted to CHF 13.8 million (2017: CHF 25.9 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 Recognized in profit or loss Recognized in other comprehensive income Acquisition of subsidiaries Currency translation differences Balance as of December 31 2018 20.0 –1.4 4.3 –12.0 14.4 –1.4 –1.5 3.4 –1.0 –4.3 –0.1 20.3 – – – – 0.6 – –12.8 – – – – –0.7 – – –0.4 – – – – – – – –12.1 –1.1 4.2 –0.9 – –0.2 –0.8 –0.5 –0.5 –0.8 –0.4 –1.4 – –1.3 –83.7 –5.8 4.5 4.9 24.0 12.3 20.3 21.8 18.2 32.3 0.6 49.4 Balance as of January 1 –107.2 –3.5 0.1 17.5 9.8 14.2 35.1 19.2 19.6 38.0 0.7 43.6 The deferred income tax assets and liabilities as of January 1, 2018, have been adjusted by CHF 8.7 million due to the new accounting standards IFRS 9 “Financial Instrumentsˮ and IFRS 15 “Revenue from Contracts with Customersˮ. Further details are provided in note 34. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 128 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 Tax loss carryforwards (TLCF) 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 Balance as of January 1 Recognized in profit or loss Recognized in other comprehensive income Acquisition of subsidiaries Currency translation differences –98.6 –10.8 –0.7 17.7 15.6 15.0 59.9 25.0 9.4 28.8 0.7 62.0 10.5 7.4 1.9 –0.1 –14.2 –1.0 –4.1 –5.5 10.1 12.2 – 17.2 – – –1.1 – – – –21.8 – – – – –19.1 –0.1 – –0.6 – – – – – – – –22.9 –19.8 – – – 0.6 –0.3 0.2 1.1 –0.3 0.1 –3.0 – –1.6 Amount Potential tax assets Valuation allowance Carrying amount 13.6 50.2 200.3 264.0 2.0 10.8 37.4 50.2 –0.1 –4.5 –13.3 –17.9 1.9 6.2 24.1 32.3 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 Potential tax assets Valuation allowance Carrying amount 3.9 92.3 160.4 256.6 0.9 21.1 34.0 56.0 –0.1 –3.1 –14.8 –18.0 0.8 18.0 19.2 38.0 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 in the amount of CHF 110.3 million (2017: CHF 86.2 million). 2017 Balance as of December 31 –107.2 –3.5 0.1 17.6 1.1 14.2 35.1 19.2 19.6 38.0 0.7 34.9 2018 TLCF 0.6 14.1 95.6 110.3 2017 TLCF 0.5 14.3 71.4 86.2 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 129 14 Intangible assets millions of CHF Acquisition cost Goodwill Trademarks and licenses Research and development Computer software Customer relationship Balance as of January 1 1’205.7 180.8 11.7 Acquired through business combination Additions Disposals Currency translation differences Balance as of December 31 Accumulated amortization Balance as of January 1 Additions Disposals Currency translation differences Net book value As of January 1 As of December 31 millions of CHF Acquisition cost 88.7 – – –31.0 1’263.4 40.9 0.1 –3.2 –4.6 – 0.3 – 1.9 214.0 13.8 340.0 119.0 – – – 15.5 –3.1 –3.4 865.7 923.4 61.8 85.9 4.4 1.9 – 2.0 8.3 7.3 5.6 47.8 0.3 6.5 –1.6 –1.0 52.1 42.6 2.7 –1.5 –0.8 43.0 5.2 9.1 543.5 55.6 – –0.6 –24.1 574.4 197.0 48.9 –0.6 –9.7 235.6 346.5 338.8 Goodwill Trademarks and licenses Research and development Computer software Customer relationship Balance as of December 31 340.0 128.1 Balance as of January 1 1’120.1 149.3 Acquired through business combination Additions Disposals Currency translation differences 50.3 – – 35.3 25.9 0.1 –0.3 5.8 8.7 2.2 0.5 – 0.3 Balance as of December 31 1’205.7 180.8 11.7 Accumulated amortization Balance as of January 1 Additions Disposals Currency translation differences 340.0 105.0 – – – 11.8 –0.3 2.5 Balance as of December 31 340.0 119.0 780.1 865.7 44.3 61.8 Net book value As of January 1 As of December 31 report.sulzer.com/ar18 2.5 1.8 – 0.1 4.4 6.2 7.3 48.1 0.1 1.9 –3.0 0.7 47.8 43.0 2.5 –3.0 0.1 42.6 5.1 5.2 433.0 83.0 0.1 – 27.4 543.5 153.3 37.7 – 6.0 197.0 279.7 346.5 2018 Total 1’989.5 185.5 6.9 –5.4 –58.8 2’117.7 703.0 69.0 –5.3 –11.9 754.9 1’286.5 1’362.8 2017 Total 1’759.2 161.5 2.6 –3.3 69.5 1’989.5 643.8 53.8 –3.3 8.7 703.0 1’115.4 1’286.5 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 130 Goodwill impairment test millions of CHF Pumps Equipment Rotating Equipment Services – region EMEA Rotating Equipment Services – region APAC Rotating Equipment Services – region AME Chemtech – Separation Technology Chemtech – Tower Field Service Applicator Systems Total goodwill as of December 31 2018 2017 Growth rate residual value Goodwill Pre-tax discount rate Goodwill Growth rate residual value Pre-tax discount rate 394.0 139.2 7.9 71.9 18.6 70.3 221.5 923.4 2.0% 2.0% 2.0% 2.0% 1.0% 2.0% 1.0% 9.0% 10.7% 12.0% 10.8% 10.2% 9.8% 6.1% 320.7 2.0% 9.2% 146.7 2.0% 12.5% 8.6 72.8 71.7 19.4 2.0% 12.4% 2.0% 12.8% 2.0% 9.9% 1.0% 10.4% 225.8 1.0% 6.6% 865.7 Goodwill is allocated to the smallest cash-generating unit at which goodwill is monitored for internal management purposes (i.e. division, business units or areas). The recoverable amount of these units is determined over a five-year cash flow projection period. The calculation uses the budget for next year (2019), the three-year strategic plan for subsequent two periods (2020–2021), and a management calculation for the next two periods (2022–2023). The budget has been reviewed by the Board of Directors. Cash flows beyond the planning period are extrapolated using a terminal value including the growth rates as stated above. Sensitivity analyses The recoverable amount from cash-generating units is measured on the basis of value-in-use calculations significantly impacted by the terminal growth rate used to determine the residual value, the discount rate, and the projected cash flows. The table below shows the amount which the estimated recoverable amount of the CGU is exceeding its carrying amount (headroom). Management has identified that for some CGUs a reasonably possible change in two key assumptions could cause the carrying amount to exceed the recoverable amount. The table shows the amount by which these two assumptions would need to change individually for the estimated recoverable amount to be equal to the carrying amount. Blank fields indicate that the field is not meaningful (not reasonably possible). 2018 Terminal growth rate: Change required for carrying amount to equal recoverable amount Pre-tax discount rate: Change required for carrying amount to equal recoverable amount –1.8% 1.5% 2017 Pre-tax discount rate: Change required for carrying amount to equal recoverable amount Terminal growth rate: Change required for carrying amount to equal recoverable amount –2.5% 2.1% Headroom 250.9 454.5 193.3 329.6 486.3 52.4 1’608.8 3’375.8 Headroom 217.6 717.0 109.0 401.1 671.6 30.3 1’750.0 3’896.6 millions of CHF Pumps Equipment Rotating Equipment Services – region EMEA Rotating Equipment Services – region APAC Rotating Equipment Services – region AME Chemtech – Separation Technology Chemtech – Tower Field Service Applicator Systems Total headroom as of December 31 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 131 15 Property, plant and equipment millions of CHF Acquisition cost Balance as of January 1 Acquired through business combination Additions Disposals Reclassifications Currency translation differences Balance as of December 31 Accumulated depreciation Balance as of January 1 Additions Disposals Impairments Currency translation differences Balance as of December 31 Net book value As of January 1 As of December 31 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 Land and buildings Machinery and technical equipment Other non- current assets Assets under construction 402.5 9.0 7.4 –22.3 2.5 –12.7 386.4 178.2 13.4 –15.4 - –5.1 171.0 224.3 215.4 6.6 0.8 5.8 6.5 750.0 2.1 30.3 –48.3 19.9 –26.5 727.5 512.3 46.4 –44.9 4.3 –18.6 499.0 237.7 228.5 2.0 0.4 1.6 1.8 182.6 0.0 11.9 –6.0 4.5 –7.6 185.6 149.0 11.9 –5.6 0.1 –6.1 149.7 33.6 35.9 0.5 0.2 0.3 0.3 36.0 - 39.6 - –26.9 –1.3 47.3 - - - - - - 36.0 47.3 - - - - 2018 Total 1’371.1 11.1 89.3 –76.6 - –48.1 1’346.8 839.5 71.7 –66.0 4.4 –29.8 819.7 531.6 527.0 9.1 1.4 7.7 8.6 The group performed impairment tests on the related production machines and facilities, resulting in impairments of CHF 4.4 million as of December 31, 2018 (December 31, 2017: CHF 15.4 million), all of which were charged to other operating expenses. In 2018 the group sold property, plant and equipment with a book value of CHF 10.7 million for CHF 16.6 million resulting in a net gain of CHF 5.8 million (2017: book value of CHF 8.4 million sold for CHF 12.8 million resulted in a net gain of CHF 4.4 million). report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 132 Land and buildings Machinery and technical equipment Other non- current assets Assets under construction 383.6 10.5 7.0 –12.4 7.7 6.1 402.5 164.8 13.4 –6.9 4.4 2.5 178.2 218.8 224.3 7.0 0.7 6.3 6.7 713.0 15.0 30.8 –45.1 19.8 16.5 750.0 488.6 47.3 –42.6 8.8 10.2 512.3 224.4 237.7 1.5 0.2 1.3 1.2 32.6 1.0 32.1 – –29.8 0.1 36.0 – – – – – – 32.6 36.0 – – – – 187.2 1.5 8.7 –20.5 2.3 3.4 182.6 152.0 11.0 –20.1 2.2 3.9 149.0 35.2 33.6 0.3 0.3 – – 2018 10.3 2.4 0.7 –0.1 0.1 13.4 2017 Total 1’316.4 28.0 78.6 –78.0 – 26.1 1’371.1 805.4 71.7 –69.6 15.4 16.6 839.5 511.0 531.6 8.8 1.2 7.6 7.9 2017 5.8 4.6 –0.3 – 0.2 10.3 millions of CHF Acquisition cost Balance as of January 1 Acquired through business combination Additions Disposals Reclassifications Currency translation differences Balance as of December 31 Accumulated depreciation Balance as of January 1 Additions Disposals Impairments Currency translation differences Balance as of December 31 Net book value As of January 1 As of December 31 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 16 Associates millions of CHF Balance as of January 1 Additions Share of profit/loss of associates Dividend payments received Currency translation differences Total investments in associates as of December 31 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 133 17 Other financial assets millions of CHF Balance as of January 1 Additions Disposals 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 Financial assets at fair value through profit and loss Financial assets at amortized costs 9.3 0.6 –3.1 - 6.8 4.3 - –0.6 –1.0 2.7 Available-for-sale Loans and receivables 4.5 - –0.4 0.1 4.2 8.6 0.3 - 0.5 9.4 The group reviewed its financial assets as of December 31, 2017, considering the new measurement categories provided under IFRS 9. The financial assets classified as “loans and receivables” have been classified as “financial assets at amortized costs”. The “available-for-sale financial assets” have been classified as “financial assets at fair value through profit and loss”. Financial assets that belong to the categories “financial assets at fair value through profit and loss” include investments in equity securities. There is an exemption from measurement at fair value of such assets if its fair value cannot be measured reliably. The exemption applies to equity instruments that do not have a quoted price in an active market. The group therefore measures some of its fair value assets at cost. During 2018, the group sold unquoted equity instruments previously measured at cost to Sulzer Vorsorgeeinrichtung, Sulzer’s pension fund in Switzerland. The transaction price was CHF 31.7 million and the resulting profit CHF 28.5 million. The transaction was priced on an arm’s length basis and was settled in cash prior to December 31, 2018. 18 Inventories millions of CHF Raw materials, supplies and consumables Work in progress Finished products and trade merchandise Total inventories as of December 31 2018 240.0 303.5 115.4 658.9 In 2018, Sulzer recognized write-downs of CHF 17.7 million (2017: CHF 13.0 million) in the income statement. Total accumulated write-downs on inventories amounted to CHF 74.3 million as of December 31, 2018 (2017: CHF 70.1 million). Material expenses in 2018 amounted to CHF 1’223.4 million (2017: CHF 1’102.6 million). report.sulzer.com/ar18 2018 Total 13.6 0.6 –3.8 –1.0 9.4 2017 Total 13.1 0.3 –0.4 0.6 13.6 2017 199.0 178.0 111.0 488.0 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 134 2018 431.4 353.2 784.6 2’580.3 3’364.9 291.1 1.1 –330.2 –270.6 –600.8 –1’785.8 –2’386.6 101.2 82.6 183.8 794.5 978.3 638.7 – 0.1% –0.3 –433.3 205.1 229.8 459.9 –433.3 256.4 1’786.9 1’661.6 125.3 19 Assets and liabilities related to contracts with customers millions of CHF Sales recognized over time related to ongoing performance obligations Sales recognized over time related to satisfied performance obligations Sales recognized over time Sales recognized at a point in time Sales – thereof sales recognized included in the contract liability balance at the beginning of the period – thereof sales recognized from performance obligations satisfied (or partially satisfied) in previous periods Cost of goods sold recognized over time related to ongoing performance obligations Cost of goods sold recognized over time related to satisfied performance obligations Cost of goods sold recognized over time Cost of goods sold recognized at a point in time Cost of goods sold Gross profit recognized over time related to ongoing performance obligations Gross profit recognized over time related to satisfied performance obligations Gross profit recognized over time Gross profit recognized at a point in time Gross profit Contract assets from sales recognized over time relating to ongoing performance obligations Assets recognized from costs incurred to obtain a contract Expected loss rate Allowance for expected losses Netting with contract liabilities Contract assets Advance payments from customers relating to point in time contracts Advance payments from customers relating to over time contracts Netting with contract assets Contract liabilities Order backlog (aggregate amount of transaction price allocated to unsatisfied performance obligations) – thereof expected to be recognized as revenue within 12 months – thereof expected to be recognized in more than 12 months The group has applied IFRS 15 “Revenue from contracts with customers” as of January 1, 2018, using the cumulative effect method. Accordingly, the information for 2017 is not presented. The contract assets as of January 1, 2018 have been restated by CHF 201.1 million and the contract liabilities by CHF 291.1 million. Further details are provided in note 34. Contract liabilities decreased by CHF 34.7 million due to less advance payments from customers relating to point in time contracts of CHF 32.9 million, more advance payments from customers relating to over time contracts of CHF 86.2 million and higher netting with contract liabilities of CHF 88.0 million (compared to the restated opening balance, see note 34). report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 135 20 Trade accounts receivable Aging structure of trade accounts receivable 2018 millions of CHF Expected loss rate Gross amount Allowance Net book value Calculated loss rate Gross amount Allowance 2017 Net book value Not past due 0.1% 408.6 –0.5 408.1 0.1% 657.1 –0.4 656.7 – thereof receivables resulting from construction contracts Past due 1–30 days 31–60 days 61–120 days >120 days Total trade accounts receivable as of December 31 – – – – – 244.2 – 244.2 0.6% 1.8% 7.3% 86.9 35.3 30.3 –0.5 –0.6 –2.2 40.3% 109.1 –44.0 86.4 34.7 28.1 65.1 0.8% 1.5% 2.5% 41.3% 101.8 41.0 35.3 118.0 –0.8 –0.6 –0.9 –48.7 101.0 40.4 34.4 69.3 670.2 –47.9 622.3 953.2 –51.4 901.8 Allowance for doubtful trade accounts receivable millions of CHF Balance as of January 1 Additions Released as no longer required Utilized Currency translation differences Balance as of December 31 2018 60.4 12.8 –19.2 –4.6 –1.6 47.9 2017 52.3 12.0 –7.5 –6.7 1.3 51.4 Approximately 39% (2017: 31%) of the gross amount of trade accounts receivable were past due, and an allowance of CHF 47.9 million (2017: CHF 51.4 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 from individual customers of the group is limited. The allowance for doubtful trade accounts receivable is based on expected credit losses. Further details are provided in note 34. The receivables from construction contracts have been adjusted to the new balance sheet position “contract assets” as of January 1, 2018, due to the new accounting standard IFRS 15 “Revenue from Contracts with Customersˮ. Further details are provided in note 34. The allowance for doubtful trade accounts receivable as of January 1, 2018 has been adjusted by CHF 8.9 million due to the new accounting standard IFRS 9 “Financial Instrumentsˮ. Further details are provided in note 34. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 136 Accounts receivable by geographical region 2018 311.2 59.1 42.5 24.2 21.5 20.6 18.9 14.9 14.0 13.4 13.1 12.8 11.1 10.2 34.9 148.6 108.1 19.3 8.9 6.7 5.6 162.6 107.4 23.9 9.8 7.7 7.5 6.2 622.3 2017 492.9 123.8 66.7 40.3 39.7 28.5 32.0 17.3 12.8 14.0 15.0 16.8 17.3 33.6 35.1 194.0 136.2 19.0 10.9 20.1 7.8 214.9 117.0 44.1 13.5 17.8 12.6 9.9 901.8 millions of CHF Europe, Middle East, Africa – thereof United Kingdom – thereof Germany – thereof France – thereof Spain – thereof Russia – thereof South Africa – thereof Switzerland – thereof Saudi Arabia – thereof Italy – thereof Belgium – thereof Finland – thereof Netherlands – thereof United Arab Emirates – thereof other countries Americas – thereof USA – thereof Brazil – thereof Canada – thereof Mexico – thereof other countries Asia-Pacific – thereof China – thereof India – thereof Australia – thereof Singapore – thereof Indonesia – thereof other countries Total as of December 31 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 137 21 Other current receivables and prepaid expenses millions of CHF Taxes (VAT, withholding tax) Derivative financial instruments Other current receivables Total other current receivables as of December 31 Prepaid contributions to employee benefit plans Other prepaid expenses Total prepaid expenses as of December 31 2018 68.8 6.4 24.3 99.4 12.4 38.4 50.8 2017 54.5 7.3 27.0 88.8 13.3 34.2 47.5 Total other current receivables and prepaid expenses as of December 31 150.2 136.3 For further details on the position “Derivative financial instruments,” refer to note 28. Other current receivables and prepaid expenses 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 2018 1’029.7 65.5 1’095.2 2017 450.9 37.9 488.8 As of December 31, 2018, the group held restricted cash and cash equivalents of CHF 24.7 million (2017: CHF 23.7 million). 23 Share capital thousands of CHF 2018 2017 Number of shares Share capital Number of shares 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 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, 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 its 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 accounts 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/governance). report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 138 Shareholders holding more than 3% Viktor Vekselberg (direct shareholder: Tiwel Holding AG) Renova Group Retained earnings Dec 31, 2018 Dec 31, 2017 Number of shares 16’728’414 in % 48.82 Number of shares - - - 21’728’914 in % - 63.42 The retained earnings include prior years’ undistributed income of consolidated companies and all remeasurements of the net liability for defined benefit plans. Treasury shares The total number of shares held by Sulzer Ltd as of December 31, 2018, amounted to 311’871 treasury shares (December 31, 2017: 219’277 shares). On April 11, 2018, Sulzer purchased five million Sulzer shares from Renova. Renova thereafter reduced its shareholding to 48.82%. The purchase price for the five million shares Sulzer acquired, based on the volume-weighted average share price of the Sulzer shares as quoted on the SIX Swiss Exchange for the period from April 9, 2018, to (and including) April 13, 2018, came to CHF 109.13 per share for a transaction value of CHF 545.7 million (thereof CHF 108.9 million unpaid and recognized as “other current and accrued liabilitiesˮ in the balance sheet, see note 27). On September 18, Sulzer placed the five million treasury shares with domestic and international investors. The placement price of CHF 112 per share results in a capital gain of CHF 12.6 million (CHF 14.3 million before transaction costs) which increases Sulzer’s equity. The remaining amount of 311’871 treasury shares are mainly held for the purpose of issuing shares under the management share-based payment programs. 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 the income statement. Currency translation reserve The currency translation reserve comprises all foreign exchange differences arising on the translation of the financial statements of controlled entities, whose functional currency differs from the reporting currency of the group. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. Dividends On April 4, 2018, the Annual General Meeting approved an ordinary dividend of CHF 3.50 (2017: ordinary dividend of CHF 3.50) per share to be paid out of reserves. The dividend was paid to shareholders on April 10, 2018. The total amount of the dividend is CHF 119.1 million (2017: CHF 119.4 million), thereof paid dividends of CHF 43.1 million (2017: CHF 119.4 million) and unpaid dividends of CHF 76.0 million (2017: CHF 0.0 million). The unpaid dividends are reflected in the balance sheet position “other current and accrued liabilitiesˮ (see note 27). The Board of Directors decided to propose to the Annual General Meeting 2019 a dividend for the year 2018 of CHF 3.50 per share (2017: CHF 3.50). report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 139 24 Earnings per share Net income attributable to shareholders of Sulzer Ltd (millions of CHF) Issued number of shares Adjustment for the average treasury shares held Average number of shares outstanding as of December 31 Adjustment for share participation plans Average number of shares for calculating diluted earnings per share as of December 31 Earnings per share, attributable to a shareholder of Sulzer Ltd (in CHF) as of December 31 Basic earnings per share Diluted earnings per share 25 Borrowings 2018 113.7 34’262’370 –2’327’911 31’934’459 329’591 32’264’050 3.56 3.53 millions of CHF Non-current borrowings Current borrowings Balance as of January 1 Additions Repayments Reclassifications Currency translation differences Total borrowings as of December 31 458.7 859.4 –1.1 –0.5 –0.2 1’316.3 255.1 426.4 –658.9 0.5 –5.1 18.0 millions of CHF Non-current borrowings Current borrowings Balance as of January 1 Acquired through business combination Additions Repayments Reclassifications Currency translation differences Total borrowings as of December 31 458.3 6.7 0.5 –1.7 –4.9 –0.2 458.7 7.1 2.1 534.6 –294.1 4.9 0.5 255.1 2017 83.2 34’262’370 –178’237 34’084’133 267’021 34’351’154 2.44 2.42 2018 Total 713.8 1’285.9 –659.9 – –5.3 1’334.3 2017 Total 465.4 8.8 535.1 –295.8 - 0.3 713.8 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 140 Borrowings by currency CHF EUR INR USD BRL Other millions of CHF 1’309.9 17.5 4.0 0.8 – 2.1 2018 in % Interest rate millions of CHF 98.2 1.3 0.3 0.1 – 0.2 0.8% 4.7% 5.4% 2.1% – – – 451.3 19.9 6.0 224.9 4.5 7.2 2017 Interest rate 0.5% 2.9% 8.1% 2.0% 8.0% – – in % 63.2 2.8 0.9 31.5 0.6 1.0 Total as of December 31 1’334.3 100.0 713.8 100.0 During 2017, the CHF 500 million syndicated credit facility was extended for another year until May 2022. The facility is 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. As of December 31, 2018, the facility was not used, while at the end of 2017, CHF 224.6 million of the facility was used. Outstanding bonds millions of CHF 0.375% 07/2016–07/2022 0.875% 07/2016–07/2026 0.250% 07/2018–07/2020 1.300% 07/2018–07/2023 0.625% 10/2018–10/2021 1.600% 10/2018–10/2024 Total as of December 31 2018 Amortized costs Nominal Amortized costs 325.3 125.0 109.8 289.3 209.5 249.8 325.0 125.0 110.0 290.0 210.0 250.0 325.4 125.0 – – – – 2017 Nominal 325.0 125.0 – – – – 1’308.7 1’310.0 450.4 450.0 On July 6, 2018, Sulzer issued two new bonds via dual tranches of total CHF 400 million. The first tranche of CHF 110 million has a term of two years, carries a coupon of 0.25% and has an effective interest rate of 0.37%. The second tranche of CHF 290 million has a term of five years, carries a coupon of 1.3% and has an effective interest rate of 1.35%. On October 22, 2018, Sulzer issued two new bonds via dual tranches of total CHF 460 million. The first tranche of CHF 210 million has a term of three years, carries a coupon of 0.625% and has an effective interest rate of 0.71%. The second tranche of CHF 250 million has a term of six years, carries a coupon of 1.6% and has an effective interest rate of 1.62%. All the outstanding bonds are traded at the SIX Swiss Exchange. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 141 26 Provisions millions of CHF Balance as of January 1 Acquired through business combination Additions Released as no longer required Utilized Reclassifications Currency translation differences Total provisions as of December 31 – thereof non-current – thereof current millions of CHF Balance as of January 1 Acquired through business combination Additions Released as no longer required Utilized Reclassifications Currency translation differences Total provisions as of December 31 – thereof non-current – thereof current Other employee benefits Warranties/ liabilities Restructuring Environmental Other 55.9 – 8.9 –4.0 –10.3 – –1.1 49.4 37.1 12.3 92.3 1.4 21.0 –10.6 –22.2 0.8 –3.8 78.9 4.8 74.1 18.6 0.3 14.9 –1.8 –21.5 0.5 –0.8 10.1 4.2 5.9 15.4 – 0.1 – –0.2 – –0.2 15.1 15.1 – 53.9 0.1 31.0 –4.3 –18.1 –1.3 –0.8 60.5 13.3 47.2 Other employee benefits Warranties/ liabilities Restructuring Environmental Other 47.4 0.5 10.7 –2.4 –4.1 3.7 0.1 55.9 36.8 19.1 76.6 7.0 36.4 –4.8 57.6 0.1 22.0 –0.3 –27.6 –59.0 – 4.7 92.3 6.1 86.2 –0.1 –1.7 18.6 3.4 15.2 15.2 – 0.2 – – –0.2 0.2 15.4 15.4 – 53.1 4.4 19.6 –4.0 –14.5 –3.4 –1.3 53.9 15.9 38.0 2018 Total 236.1 1.8 75.9 –20.7 –72.4 – –6.8 213.9 74.4 139.5 2017 Total 249.9 12.0 88.9 –11.5 –105.2 – 2.0 236.1 77.6 158.5 The category “Other employee benefits” includes provisions for jubilee gifts, early retirement of senior managers and other obligations to employees. The additions and utilizations in “Other employee benefits” provision are mainly related to medical insurances of employees of the US entities. The category “Warranties/liabilities” includes provisions for warranties, customer claims, penalties, litigation and legal cases relating to goods delivered or services rendered. As part of the Sulzer Full Potential (SFP) program, Sulzer has continued to adapt its global manufacturing footprint and streamline the organizational setup. In 2018, restructuring expenses were mainly associated with measures taken in Brazil, Germany, the US, France, the Netherlands and Belgium. The group recognized restructuring provisions of CHF 14.9 million (2017: CHF 22.0 million). The remaining provision as of December 31, 2018, is CHF 10.1 million, of which CHF 5.9 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, report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 142 Sulzer is of the opinion that the resolution of the open cases will not have material effects on its liquidity or financial condition. Although Sulzer expects a large part of the category “Other” to be realized in 2019, by their nature the amounts and timing of any cash outflows are difficult to predict. 2017 – – 29.4 6.8 – 29.0 65.2 112.6 96.4 32.1 126.2 367.3 432.5 2017 Fair value 6.8 6.8 6.8 0.0 27 Other current and accrued liabilities millions of CHF Liability related to the purchase of treasury shares Outstanding dividend payments Taxes (VAT, withholding tax) Derivative financial instruments Notes payable Other current liabilities Total other current liabilities as of December 31 Contract-related costs Salaries, wages and bonuses Vacation and overtime claims Other accrued liabilities Total accrued liabilities as of December 31 Total other current and accrued liabilities as of December 31 2018 108.9 76.0 25.3 8.4 0.4 26.9 245.9 130.6 101.1 31.8 133.3 396.7 642.6 The liability related to the purchase of treasury shares of CHF 108.9 million (2017: CHF 0 million) and the outstanding dividend payments of CHF 76.0 million (2017: CHF 0 million) are explained in note 23. 28 Derivative financial instruments 2018 Derivative assets Derivative liabilities Derivative assets Derivative liabilities Notional value Fair value Notional value Fair value Notional value Fair value Notional value 633.5 633.5 633.3 0.1 6.4 6.4 6.4 0.0 442.5 442.5 437.3 5.2 8.7 8.7 8.4 0.2 546.3 546.3 540.5 5.8 7.5 7.5 7.3 0.2 540.1 540.1 540.0 0.1 millions of CHF Forward exchange contracts Total as of December 31 – thereof due in <1 year – thereof due in 1–2 years The notional value and the fair value of derivative assets and liabilities include current and also non- current derivative financial instruments. The cash flow hedges of the expected future sales were assessed as highly effective. As at December 31, 2018, a net cumulative unrealized loss of CHF 11.3 million (2017: loss of CHF 8.6 million) with a deferred tax asset of CHF 2.7 million (2017: CHF 2.1 million) relating to these cash flow hedges were included in the Cash Flow Hedge Reserve. In 2018, a loss of CHF 2.4 million (2017: a gain of CHF 3.2 million) cash flow hedge reserve was recognized in profit or loss. There was no ineffectiveness that arose from cash flow hedges in 2018 (2017: 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. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 143 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, 2018, 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 (five to ten 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, 2018, the amount subject to such netting arrangements was CHF 2.9 million (2017: CHF 3.5 million). Considering the effect of these agreements the amount of derivative assets would reduce from CHF 6.4 million to CHF 3.5 million (2017: from CHF 7.5 million to CHF 4.0 million), and the amount of derivative liabilities would reduce from CHF 8.7 million to CHF 5.8 million (2017: from CHF 6.8 million to CHF 3.3 million). 29 Other financial commitments millions of CHF Maturity <1 year Maturity 1–5 years Maturity >5 years Operating lease as of December 31 Rented premises 23.8 61.1 15.4 100.3 Other 14.9 11.0 1.1 27.0 2018 Total 38.7 72.1 16.5 127.3 Rented premises 17.9 46.1 14.5 78.5 Other 7.8 11.8 1.4 21.0 2017 Total 25.7 57.9 15.9 99.5 Contractual commitments for property, plant and equipment as of December 31 3.8 2.7 6.5 - 2.4 2.4 30 Contingent liabilities millions of CHF Guarantees in favor of third parties Total contingent liabilities as of December 31 2018 10.0 10.0 As of December 31, 2018, guarantees provided to third parties regarding certain environmental matters related to disposed business amounted to CHF 10 million. The guarantees will expire in 2022. 31 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 report.sulzer.com/ar18 2018 1.0 14.1 15.1 2017 10.0 10.0 2017 2.2 8.6 10.8 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 144 Restricted share unit plan settled in Sulzer shares This long-term incentive plan covers the Board of Directors and until 2015 the members of the Sulzer Management Group. 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 government bonds for the duration of the vesting period. Participants are not entitled to dividends declared during the vesting period. Consequently, the grant date fair value of the RSU is reduced by the present value of the dividends expected to be paid during the vesting period. Restricted share units Grant year 2018 2017 2016 2015 2014 Total Outstanding as of December 1, 2017 Granted Exercised Forfeited Outstanding as of December 31, 2017 Outstanding as of January 1, 2018 Granted Exercised Forfeited Outstanding as of December 31, 2018 – – – – – – 9’288 –144 –861 8’283 – 21’603 63’712 19’621 11’001 – – – –4’859 –30’388 –19’527 – – 11’001 16’744 – –884 32’440 11’001 16’744 32’440 – – – –6’049 –9’950 –32’440 – 4’952 – 6’794 – – 104’936 11’001 –54’774 –978 60’185 60’185 9’288 –48’583 –861 20’029 –94 – – – – – – Average fair value at grant date in CHF 118.20 98.00 72.61 102.18 122.00 Performance share plan settled in Sulzer shares This long-term incentive plan covers the members of the Executive Committee and since 2016 also the members of the Sulzer Management Group. Performance share units (PSU) are granted annually depending on the organizational position of the employee. Vesting of the PSU is subject to continuous employment and to the achievement of performance conditions over the performance period. Participants are not entitled to dividends declared during the vesting period. Vesting of the performance share plan (PSP) 2018, 2017 and 2016 is based on three performance conditions: operational EBITA growth over the performance period (weighted 25%), average operational ROCEA (weighted 25%), and on Sulzer’s total return to shareholders (TSR), compared to a selected group of ten peer companies and the SMIM Index (weighted 50%). Vesting of the PSP 2015 is based on two equally weighted performance conditions: cumulated operational EBITA and on Sulzer’s total return to shareholders (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 exercise price of the PSU is zero. The following inputs were used to determine the fair value of the PSU at grant date using a Monte Carlo simulation: report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 145 Grant year Fair value at grant date Share price at grant date Expected volatility Risk-free interest rate 2018 143.62 120.60 29.12% –0.42% 2017 116.02 104.80 25.10% –0.56% 2016 118.05 98.50 25.46% –0.73% 2015 193.97 107.00 28.07% –0.72% 2014 206.63 121.50 32.25% 0.09% The expected volatility of the Sulzer share, the peer group companies, and the SMIM Index is determined by the historical volatility. The zero yield curves of those countries in which the companies and indices are listed were used as the relevant risk-free rates. Historical data was used to arrive at an estimate for the correlation between Sulzer, the peer companies, and the SMIM Index. For the TSR calculation, it is assumed that all the dividends are reinvested immediately. This has the same economic implication as waiving the payment of dividends. Accordingly, the expected dividend yield is zero. Performance share units – terms of awards Grant year Number of awards granted Grant date 2018 2017 2016 2015 74’467 76’818 116’472 21’665 2014 15’965 July 1, 2018 April 1,17 August 1,16 April 1,15 April 1,14 Performance period for cumulative EBIT 01/18–12/20 01/17–12/19 01/16–12/18 01/15–12/17 01/14–12/16 Performance period for TSR Fair value at grant date in CHF 01/18–12/20 01/17–12/19 01/16–12/18 04/15–03/18 04/14–03/17 143.62 116.02 118.05 193.97 206.63 Performance share units Grant year 2018 2017 2016 Outstanding as of January 1, 2017 Granted Exercised Forfeited Outstanding as of December 31, 2017 Outstanding as of January 1, 2018 Granted Exercised Forfeited Outstanding as of December 31, 2018 – – – – – – 74’467 – – 74’467 – 108’866 76’818 –191 –497 76’130 – –4’169 –6’902 97’795 76’130 97’795 – –2’395 –4’976 68’759 – –4’762 –2’043 90’990 2015 8’996 – 2014 5’245 1’523 –2’002 –6’768 –400 6’594 6’594 – –6’594 – – – – – – – – – Total 123’107 78’341 –13’130 –7’799 180’519 180’519 74’467 –13’751 –7’019 234’216 The Board of Directors decided in May 2018 to set TSR floors reflecting the exceptional market conditions and share price collapse following the US sanctions against Russia and the collateral damages to Sulzer. The introduction of the floor led to a step-up in the market valuation of the respective PSU, which is the difference between the fair value of the modified PSU granted and the original PSU, both measured as at the date of the modification. The step-up in the fair value of CHF 40.62 per PSU for the PSP 2016 and CHF 18.91 per PSU for the PSP 2017 is expensed over the remaining vesting period of the affected plans. The fair value was measured using the same pricing model as for the grant date fair value. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 146 32 Transactions with members of the Board of Directors, Executive Committee and related parties Key management compensation thousands of CHF Short-term benefits Equity-based compensation Pension and social security contributions Board of Directors 1’226 1’155 257 2018 Total 2’638 Short-term benefits Equity-based compensation Pension and social security contributions 1’272 802 268 2017 Total 2’342 Executive Committee 10’175 4’462 2’066 16’703 8’387 5’746 1’784 15’917 Equity-based compensation for 2018 is based on the full fair value of the PSU granted under the PSP 2018. Equity-based compensation for 2017 is valued according to the requirements of 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. Related parties As of December 31, 2018, sales with related parties controlled by the major shareholder amounted to CHF 3.1 million (2017: CHF 22.6 million) with open receivables of CHF 0.4 million (2017: CHF 17.3 million). Open payables of CHF 185.1 million (2017: CHF 0.4 million) were recognized (thereof CHF 108.9 million related to the purchase of treasury shares and CHF 76.0 million outstanding dividend payments, see note 23 and note 27). The income from released provisions for loss/unprofitable contracts/warranties/guarantees/liquidated damages recognized in the income statement amounted to CHF 0.6 million (2017: expense CHF 1.3 million). Sales with associates in 2018 amounted to CHF 11.4 million (2017: CHF 6.1 million) with open receivables of CHF 0.1 million (2017: CHF 2.0 million). Open payables with associates amounted to CHF 0.0 million (2017: CHF 1.3 million). The income from released provisions for loss/unprofitable contracts/warranties/guarantees/liquidated damages recognized in the income statement amounted to CHF 1.6 million (2017: expense CHF 2.5 million). Income for services with associates amounted to CHF 0.1 million (2017: CHF 0.1 million). Expenses for services from associates amounted to CHF 0.5 million (2017: CHF 0.0 million). During 2018, the group sold unquoted equity instruments previously measured at cost to Sulzer Vorsorgeeinrichtung, Sulzer’s pension fund in Switzerland. The transaction price was CHF 31.7 million and the resulting profit CHF 28.5 million. The transaction was priced on an arm’s length basis and was settled in cash prior to December 31, 2018. During 2017, Sulzer acquired 51% of the business of Rotec GT, the gas turbine maintenance division of the Rotec Group. Sulzer obtained control of the acquired business. Rotec GT is considered to be a related party to the group (controlled by the major shareholder). During 2018, Sulzer acquired the outstanding 49% of Sulzer Turbo Services Rus LLC (formerly the gas turbine maintenance division of the Rotec Group) for CHF 14.3 million, after the seller exercised its put option. The transaction was priced on an arm’s length basis and was settled in cash prior to December 31, 2018. For more information please refer to note 4. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 147 33 Auditor remuneration Fees for the audit services by KPMG as the appointed group auditor amounted to CHF 4.0 million (2017: CHF 2.9 million). Additional services provided by the group auditor amounted to a total of CHF 1.7 million (2017: CHF 1.0 million). This amount includes CHF 1.1 million (2017: CHF 0.7 million) for tax and legal advisory services and CHF 0.6 million for other consulting services (2017: CHF 0.3 million). 34 Key accounting policies and valuation methods 34.1 Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) using the historical cost convention except for the following: — — financial assets at fair value through profit and loss and financial assets at fair value through other comprehensive income, and net position from defined benefit plans, where plan assets are measured at fair value and the plan liabilities are measured at the present value of the defined benefit obligation (see note 34.19 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 accounting 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 assumptions and estimates are significant to the consolidated financial statements are disclosed in note 5 “Critical accounting estimates and judgments.” Rounding Due to rounding, numbers presented throughout the consolidated financial statements may not add up precisely to the totals provided. All ratios, percentages and variances are calculated using the underlying amount rather than the presented rounded amount. Tables Within tables, blank fields generally indicate that the field is not applicable or not meaningful, or that information is not available as of the relevant date or for the relevant period. Dashes (–) generally indicate that the respective figure is zero on an actual or rounded basis. 34.2 Change in accounting policies a) Standards, amendments and interpretations which are effective for 2018 The group has initially adopted IFRS 9 “Financial Instrumentsˮ and IFRS 15 “Revenue from Contracts with Customersˮ from January 1, 2018. A number of other new standards are effective from January 1, 2018, but they do not have a material effect on the group’s financial statements. The effect of initially applying these standards is mainly attributed to the following: — — An increase in the allowance for doubtful trade accounts receivable. A different timing in the recognition of sales, costs of goods sold and gross profit for some construction contracts. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 148 The following table summarizes the impact of the two new accounting standards on the consolidated balance sheet as of January 1, 2018. December 31, 2017, as originally presented Adjustment IFRS 9 Adjustment IFRS 15 January 1, 2018, adjusted 865.7 420.8 531.6 10.3 13.6 8.8 139.7 1’990.5 488.0 27.2 84.7 – 901.8 136.3 488.8 2’126.8 4’117.3 0.3 1’679.8 1’680.1 22.3 1’702.4 458.7 104.8 2.3 239.1 77.6 17.6 900.1 255.1 24.8 158.5 – 433.8 210.1 432.5 1’514.8 2’414.9 4’117.3 865.7 420.8 531.6 10.3 13.6 8.8 148.2 1’999.0 575.4 27.2 89.3 201.1 648.8 136.3 488.8 2’166.9 4’165.9 0.3 1’650.1 1’650.4 22.2 1’672.6 458.7 104.6 2.3 239.1 77.6 17.6 899.9 255.1 24.8 158.5 291.1 433.8 – 430.1 1’593.4 2’493.3 4’165.9 6.4 6.4 87.4 4.6 201.1 –244.1 49.0 55.4 –23.1 –23.1 –0.1 –23.1 2.1 2.1 –8.9 –8.9 –6.8 –6.6 –6.6 –6.6 –0.2 –0.2 – 291.1 –210.1 –2.4 78.6 78.6 55.4 – –0.2 –6.8 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 Current income tax receivables Advance payments to suppliers Contract assets Trade accounts receivable Other current receivables and prepaid expenses Cash and cash equivalents Total current assets Total assets Equity Share capital Reserves Equity attributable to shareholders of Sulzer Ltd Non-controlling interests 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 Contract liabilities Trade accounts payable Advance payments from customers Other current and accrued liabilities Total current liabilities Total liabilities Total equity and liabilities report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 149 IFRS 9 “Financial Instrumentsˮ IFRS 9 sets out requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 “Financial Instruments: Recognition and Measurementˮ. The group has adopted IFRS 9 using the simplified approach to providing for expected credit losses by using the lifetime expected loss provision for all trade receivables. The table above (combined table IFRS 9 and IFRS 15) summarizes the impact of the new accounting standards on the balance sheet as of January 1, 2018. IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVTPL). The standard eliminated the IAS 39 categories of held to maturity, loans and receivables, and available for sale. The group has reviewed its financial assets and financial liabilities as of December 31, 2017. The financial assets classified as loans and receivables as well as the financial liabilities valued at amortized costs have been classified as financial instruments at amortized costs. The fair values of forward foreign exchange contracts not used for hedge accounting have been classified as financial instruments at fair value through profit or loss. The accounting for financial liabilities is unchanged, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the group does not have any such liabilities. The new hedge accounting rules aligned the accounting for hedging instruments more closely with the group’s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduced a more principles-based approach. However, the group has not identified new hedge relationships. The group’s hedge relationships as of December 31, 2017 qualify as continuing hedges upon the adoption of IFRS 9. As a consequence, there is no significant impact on the accounting for these hedging relationships. The new impairment model requires the recognition of impairment provisions based on expected credit losses rather than only incurred credit losses as was the case under IAS 39. It applies to financial assets classified at amortized cost such as trade accounts receivable and contract assets. Based on this impairment methodology, the allowance for doubtful trade accounts receivable increased (see table above). There is no impact for contract assets or other financial assets. IFRS 15 “Revenue from Contracts with Customersˮ IFRS 15 establishes a comprehensive framework for determining if, when and how much sales are recognized. It replaced IAS 18 “Revenueˮ, IAS 11 “Construction Contractsˮ and IFRIC 13 “Customer Loyalty Programsˮ. The group has applied IFRS 15 “Revenue from contracts with customers” as of January 1, 2018, using the cumulative effect method (cumulative catch-up effect in retained earnings). Accordingly, the information presented for 2017 has not been adjusted – i.e. it is presented as previously reported under IAS 18, IAS 11 and related interpretations. The table above (combined table IFRS 9 and IFRS 15) summarizes the impact of the new accounting standards on the balance sheet as of January 1, 2018. report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 150 The details of the new accounting policies and the nature of the changes to previous accounting policies are set out below. Under IFRS 15, sales are recognized when a customer obtains control of the goods or services. Determining the timing of the transfer of control requires judgment. There are two ways to recognize sales, costs of goods sold and the corresponding profit margin: — — Point in time method: Sales recognition when the performance obligation is satisfied at a certain point in time. Over time method (previous accounting policies: Percentage of completion method, POC): Sales, costs and profit margin recognition in line with the progress of the project. The core principle of IFRS 15 is that an entity should recognize sales as a 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. New balance sheet items Following the adoption of IFRS 15, the group discloses two new balance sheet items, which are defined as follows: — Contract assets: Represent the group’s right to consideration in exchange for goods or services before the final customer invoice has been issued. When the group performs services or transfers goods in advance of receiving consideration, the group recognizes a contract asset. If the final invoice has been issued and the right to consideration depends only on the passage of time, contract assets are reclassified to “trade accounts receivableˮ. According to the previous accounting policies, the group disclosed contract assets (receivables resulting from construction contracts) as “trade accounts receivableˮ. — Contract liabilities: Represent the group’s obligation to transfer goods or services to a customer for which the group has received consideration (or the amount is due) from the customer. A contract liability applies if the group receives consideration in advance of performance. According to the previous accounting policies, the group disclosed such liabilities as “advance payments from customersˮ. Because of this change in presentation in the balance sheet, the positions “trade accounts receivableˮ and “advance payments from customersˮ decreased after applying IFRS 15. Change from over time method to point in time method The significant part of the adjustments (besides the new balance sheet positions as described above) results from limitations in applying the over time method. This is mainly due to construction contracts without right to payment clauses in cases of termination for convenience. For some construction contracts for which the group recognized sales and profit over time according to the previous accounting standards, these limitations led to point in time sales, costs and profit recognition under IFRS 15. With these changes, sales, costs and profit recognition generally occurs later for such contracts. Sales, costs of goods sold and the corresponding profit margin of ongoing construction contracts without right to payment clauses have been reversed as of January 1, 2018 and will be recognized at point in time (or have already been recognized during the period). The change from the over time method to the point in time method leads to the following main impacts: report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 151 — — — Lower receivables from construction contracts (disclosed as “trade accounts receivableˮ according to the previous accounting policies and as “contract assetsˮ under IFRS 15). Higher inventories. Lower netting between receivables from construction contracts and advance payments from customers leads to higher receivables from construction contracts and higher advance payments from customers. Explanation of balance sheet impact As a result of the aforementioned impacts (new balance sheet items and change from over time method to point in time method), the significant adjustments for IFRS 15 are as follows (see also tables below): — — — — — Inventories: Lower receivables from construction contracts leads to higher inventories. Contract assets: Different disclosure of receivables from construction contracts in the balance sheet leads to this new balance sheet item under IFRS 15. Trade accounts receivable: Separate disclosure of receivables from construction contracts in the balance sheet leads to lower accounts receivable under IFRS 15. The change from the over time to the point in time method leads to lower receivables from construction contracts under IFRS 15. Lower netting between receivables from construction contracts and advance payments from customers leads to higher receivables from construction contracts. Contract liabilities: Different disclosure of advance payments from customers in the balance sheet leads to this new balance sheet item under IFRS 15. Advance payments from customers: Lower netting between receivables from construction contracts and advance payments from customers leads to higher advance payments from customers. Different disclosure of advance payments from customers as contract liabilities leads to zero advance payments from customers under IFRS 15. Impacts of adopting IFRS 15 The following tables summarize the impacts of adopting IFRS 15 on the group’s consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet and consolidated statement of cash flows as of December 31, 2018. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 152 Notes 3 10 11 12 12 12 16 13 24 24 2018 (as reported) Adjustments 3’364.9 –2’386.6 978.3 –354.4 –384.4 –86.4 30.8 183.8 2.9 –20.3 –1.5 0.7 165.6 –49.2 116.5 113.7 2.8 3.56 3.53 39.7 –39.9 –0.3 – – – 0.0 –0.3 – – – – –0.3 –0.1 –0.4 –0.7 0.3 –0.02 –0.02 2018 (amounts without adoption of IFRS 15) 3’404.5 –2’426.5 978.0 –354.4 –384.4 –86.4 30.8 183.6 2.9 –20.3 –1.5 0.7 165.4 –49.3 116.1 113.0 3.1 3.54 3.50 Notes 2018 (as reported) Adjustments 2018 (amounts without adoption of IFRS 15) 116.5 –0.4 116.1 28 9 –2.2 –90.6 –92.8 55.9 55.9 –36.9 79.6 78.2 1.4 – – – – – – –0.4 –0.4 – –2.2 –90.6 –92.8 55.9 55.9 –36.9 79.2 77.8 1.4 Consolidated income statement January 1 – December 31 millions of CHF Sales Cost of goods sold Gross profit 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 and loss of associates Income before income tax expenses Income tax expenses 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 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 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 Total other comprehensive income Total comprehensive income for the period attributable to shareholders of Sulzer Ltd attributable to non-controlling interests report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 153 Notes 2018 (as reported) Adjustments 2018 (amounts without adoption of IFRS 15) 14 14 15 16 17 13 18 19 20 21 22 23 25 13 13 9 26 25 13 26 27 923.4 439.4 527.0 13.4 9.4 6.2 138.9 2’057.7 658.9 29.0 79.9 205.1 622.3 150.2 1’095.2 2’840.6 4’898.3 0.3 1’629.5 1’629.9 11.2 1’641.0 1’316.3 89.5 2.3 160.9 74.4 3.6 1’646.8 18.0 32.0 139.6 256.4 521.8 – 642.6 1’610.4 3’257.3 4’898.3 – – – – – – –5.4 –5.4 –114.6 – – –205.1 311.5 – – –8.1 –13.5 – 21.1 21.1 0.3 21.4 – 0.9 – – – – 0.9 – – – –256.4 – 219.7 0.9 –35.8 –34.9 –13.5 923.4 439.4 527.0 13.4 9.4 6.2 133.6 2’052.4 544.3 29.0 79.9 – 933.8 150.2 1’095.2 2’832.4 4’884.8 0.3 1’650.6 1’651.0 11.5 1’662.4 1’316.3 90.4 2.3 160.9 74.4 3.6 1’647.7 18.0 32.0 139.6 – 521.8 219.7 643.6 1’574.6 3’222.3 4’884.8 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 Current income tax receivables Advance payments to suppliers Contract assets Trade accounts receivable Other current receivables and prepaid expenses Cash and cash equivalents Total current assets Total assets Equity Share capital Reserves Equity attributable to shareholders of Sulzer Ltd Non-controlling interests 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 Contract liabilities Trade accounts payable Advance payments from customers Other current and accrued liabilities Total current liabilities Total liabilities Total equity and liabilities report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 154 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 property, plant and equipment Changes in inventories Changes in advance payments to suppliers Changes in contract assets Changes in trade accounts receivable Changes in advance payments from customers Changes in contract liabilities 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 Dividends from associates Divestitures of subsidiaries Purchase of financial assets Sale of financial assets Total cash flow from investing activities Dividend Dividend paid to non-controlling interests Purchase of treasury shares Sale of treasury shares 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 losses on cash and cash equivalents Net change in cash and cash equivalents Notes 2018 (as reported) Adjustments 2018 (amounts without adoption of IFRS 15) 12 12 13 14,15 11,15 14 15 11, 15 4 16 16 17 17 23 23 25 25 25 25 488.8 116.5 –2.9 20.3 49.2 145.1 –5.8 –98.4 6.1 –11.0 19.9 – –23.7 106.2 –2.8 –21.3 20.8 17.6 2.9 –12.2 –65.6 260.8 –6.9 –89.3 16.6 –217.5 –1.2 0.1 0.7 –0.6 0.6 –297.4 –43.1 –1.9 –454.9 557.4 –14.3 859.4 –1.1 426.4 –658.9 669.1 –26.1 606.4 – –0.4 – – 0.1 – – 32.4 –4.4 11.0 –79.7 18.6 23.7 – – – –1.4 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 488.8 116.1 –2.9 20.3 49.3 145.1 –5.8 –66.0 1.7 – –59.8 18.6 – 106.2 –2.8 –21.3 19.3 17.6 2.9 –12.2 –65.6 260.8 –6.9 –89.3 16.6 –217.5 –1.2 0.1 0.7 –0.6 0.6 –297.4 –43.1 –1.9 –454.9 557.4 –14.3 859.4 –1.1 426.4 –658.9 669.1 –26.1 606.4 1’095.2 Cash and cash equivalents as of December 31 22 1’095.2 report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 155 b) Standards, amendments and interpretations issued but not yet effective which the group has decided not to early adopt in 2018 The group has not early adopted any new or amended standards in preparing these consolidated financial statements. IFRS 16 “Leases” IFRS 16, 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. The group is required to adopt IFRS 16 from January 1, 2019. The group has assessed the estimated impact that initial application will have on its consolidated financial statements, as described below. The actual impacts of adopting the standard may change because the group has not finalized the validation of the results of the assessments. The group will recognize new assets and liabilities for its operating leases of buildings and equipment. The nature of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. The undiscounted operating lease commitments as of December 31, 2018 amounted to CHF 127.3 million (see note 29). This includes short-term leases as well as low-value asset leases that will be recognized on a straight-line basis as expense in the income statement. For the remaining lease commitments, the group expects to recognize lease liabilities and leased assets in the range of CHF 105 to CHF 120 million. This does not include leased assets and lease liabilities on finance lease agreements of CHF 8.6 million (see note 15) and CHF 7.7 million, respectively. No significant impact is expected for the group’s finance leases. The group has no significant sub-leases and is therefore not acting as a lessor. The group plans to apply IFRS 16 initially on January 1, 2019, using the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 will be recognized as an adjustment to the opening balance, with no restatement of comparative information. IFRIC 23 “Uncertainty over Income Tax Treatmentsˮ IFRIC 23, published in June 2017, clarifies how the recognition and measurement requirements of IAS 12 are applied where there is uncertainty over income tax treatments. IFRIC 23 is effective for periods beginning on or after January 1, 2019. The group has reviewed its uncertain tax positions and has adapted its procedures accordingly. The estimated impact of the application of the clarification of the standard is assessed to be not significant on the amount of reported tax provisions for uncertain tax positions. Other IFRS standards and interpretations There are no other IFRS standards or interpretations not yet effective that would be expected to have a material impact on the group. report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 156 34.3 Consolidation a) Business combinations The group accounts for business combinations using the acquisition method when control is transferred to the group (see 34.3 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 34.6 a). Any gain on a bargain purchase is recognized in the income statement 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 the income statement. 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 determination 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. b) Subsidiaries 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. 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. c) Non-controlling interests 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 recognized in the income statement. Any interest retained in the former subsidiary is measured at fair value when control is lost. d) Associates and joint ventures 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 indirectly, 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 report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 157 unanimous consent for strategic, financial and operating decisions. Associates and joint ventures are accounted for using the equity method and are initially recognized at cost. e) Transactions eliminated on consolidation 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 eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. 34.4 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. 34.5 Foreign currency translation a) Functional and presentation currency 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). The following table shows the major currency exchange rates for the reporting periods 2018 and 2017: CHF 1 EUR 1 GBP 1 USD 100 CNY 100 INR Average rate 1.16 1.31 0.98 14.80 1.43 2018 Year-end rate 1.13 1.25 0.99 14.32 1.41 Average rate 1.11 1.27 0.98 14.58 1.51 2017 Year-end rate 1.17 1.32 0.98 14.99 1.53 b) Transactions and balances 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 denominated in foreign currencies are recognized in the income statement. c) Subsidiaries The results and balance sheet positions 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 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 158 comprehensive 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. 34.6 Intangible assets 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 impairment 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 accumulated 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. b) Trademarks and licenses Trademarks, licenses and similar rights acquired from third parties are stated at acquisition cost. Such assets are amortized over their expected useful life, generally not exceeding ten years. c) Research and development Expenditure on research activities is recognized in the income statement as incurred. Development costs for major projects are capitalized only if the expenditure can be measured reliably, the product or process is technically 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 the income statement 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). report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 159 e) Customer relationships 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. 34.7 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 derecognized. 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 20 – 50 years Machinery 5 – 15 years Technical equipment 5 – 10 years Other non-current assets 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. 34.8 Impairment of property, plant and equipment and intangible assets 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 appropriate 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). 34.9 Financial assets Financial assets are classified into the following three categories: — — — financial assets at fair value through profit or loss (FVTPL), financial assets at fair value through other comprehensive income (FVOCI), financial assets measured at amortized cost. The classification depends on the business model for managing the financial assets and the contractual terms of the cash flows. For assets measured at fair value, gains and losses will either be recorded in profit or loss or OCI. For investments in equity instruments that are not held for trading, this will depend on whether the group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 160 (FVOCI). The group reclassifies debt investments when and only when its business model for managing those assets changes. Debt instruments Financial assets at fair value through profit or loss (FVTPL) Assets that do not meet the criteria for amortized cost or FVOCI are measured at FVTPL. A gain or loss on a debt investment that is subsequently measured at FVTPL is recognized in profit or loss and presented within other operating income and expenses or other financial income and expenses, depending on the nature of the investment, in the period in which it arises. Financial assets at fair value through other comprehensive income (FVOCI) Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest income and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss and recognized in other gains/(losses). Interest income from these financial assets is included in finance income using the effective interest rate method. Foreign exchange gains and losses are presented in other gains/(losses) and impairment expenses are presented as separate line item in the statement of profit or loss. Financial assets measured at amortized cost Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss and presented in other gains/ (losses) together with foreign exchange gains and losses. Impairment losses are presented as separate line item in the statement of profit or loss. Equity instruments The group subsequently measures all equity investments at fair value. Where the group’s management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognized in profit or loss as other income when the group’s right to receive payments is established. A gain or loss on an equity investment that is subsequently measured at FVTPL is recognized in profit or loss and presented within other operating income and expenses or other financial income and expenses, depending on the nature of the investment, in the period in which it arises. There is an exemption from measurement at fair value of such assets if its fair value cannot be measured reliably. The exemption applies to equity instruments that do not have a quoted price in an active market. The group therefore measures some of its fair value assets at cost. 34.10 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. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 161 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. The group applies hedge accounting to secure the foreign currency risks of 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 balance 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 subsequently be recorded on the balance sheet, the adjustments accumulated under “other comprehensive 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 transaction 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 comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the income 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. 34.11 Offsetting financial assets and liabilities 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. 34.12 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. 34.13 Trade receivables Trade and other accounts receivable are recognized initially at fair value and subsequently measured at amortized cost, less allowances for doubtful trade accounts receivable. The allowance for doubtful trade accounts receivable is based on expected credit losses. These are based on historical observed default rates over the expected life of the trade receivables and are adjusted for forward-looking information such as development of gross domestic product (GDP) and oil price development. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 162 34.14 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 overdrafts are reported within borrowings in the current liabilities. 34.15 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 repurchased, 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 subsequently, 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. 34.16 Trade payables Trade payables and other payables are stated at face value. The respective value corresponds approximately to the amortized cost. 34.17 Borrowings Financial debt is stated at fair value when initially recognized, after recognition of transaction costs. In subsequent periods, it is valued at amortized cost. Any difference between the amount borrowed (after deduction 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. 34.18 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 management 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 carrying 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 comprehensive income. Deferred tax assets are recognized for unused tax losses and deductible temporary differences to the extent 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 associated 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. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 163 34.19 Employee benefits a) Defined benefit plans The group’s net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting 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 projected 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, consideration 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, excluding 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 the income statement. 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 the income statement. 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 contributions 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 Switzerland, Sulzer makes provisions for jubilee benefits based on a Swiss local directive. The provisions are reported in the category “Other employee benefits” (note 26). 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 “Restructuring provisions.” report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 164 34.20 Share-based compensation Sulzer operates two equity-settled share-based payment plans. A performance share plan (PSP) covers the members of the Executive Committee and starting 2016 also the members of the Sulzer Management Group. A restricted share plan (RSP) covers the members of the Board of Directors and until 2015 also covered the members of the Sulzer Management Group. a) Performance share plan (PSP) 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 recognizes the impact of the reassessment of original estimates, if any, in the income statement, and a corresponding 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. b) Restricted share plan (RSP) 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 closing share price at grant date, 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. 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. 34.21 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 can be 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. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 165 34.22 Sales Sales 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. This includes standard products (off the rack) as well as configured and engineered or tailor-made products. Sales are shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the group. The core principle is that sales are recognized at an amount that reflects the consideration to which the group expects to be entitled in exchange for transferring goods or services to a customer. Sales are recognized when (or as) the group satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. A customer obtains control of a good or service if it has the ability to direct the use of, and obtain substantially all of the remaining benefits from, that good or service (e.g. use, consume, sale, hold). A customer could have the future right to direct the use of the asset and obtain substantially all of the benefits from it (for example, upon making a prepayment for a specified product). There are two methods to recognize sales: — — Over time method: Sales, costs and profit margin recognition in line with the progress of the project. Point in time method: Sales recognition when the performance obligation is satisfied at a certain point in time. The group determines at contract inception, whether control of each performance obligation transfers to a customer over time or at a point in time. Arrangements where the performance obligations are satisfied over time are not limited to services arrangements. The assessment of whether control transfers over time or at a point in time is critical to the timing of revenue recognition. Over time method (OT) Sales are recognized over time if any of the following is met: — — — Customer simultaneously receives/consumes as the group performs The group creates/enhances an asset and customer controls it during this process Created asset has no alternative use for the customer and the group has enforceable right to payment (including reasonable profit margin) for performance up to date if the customer terminates the contract for convenience. The group has construction contracts without right to payment clauses in cases of termination for convenience by the customer. The group applies the point in time method to recognize sales for such contracts. The over time method is based on the percentage of costs to date compared with the total estimated contract costs (cost-to-cost method). In rare cases, other methods, such as a milestones method, may be used for a particular project assuming that the stage of completion can be better estimated than by applying the cost-to-cost method. Work progress of sub-suppliers is considered to determine the stage of completion. If circumstances arise that may change the original estimates of sales, costs or extent of progress toward completion, estimates are revised. These revisions may report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 166 result in increases or decreases in estimated sales or costs, and are reflected in income in the period in which the circumstances that give rise to the revision become known by management. The income statement contains a share of sales, including an estimated share of profit. The balance sheet includes the corresponding contract assets if the assets exceed the advance payments from the customer of the project. 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. Point in time method (PIT) A performance obligation is satisfied at a point in time if none of the criteria for satisfying a performance obligation over time is met. Sales are recognized when (or as) the customer obtains control of that asset (depending on incoterms). The following points indicate that a customer has obtained control of an asset: — — — — — The entity has a present right to payment The customer has legal title The customer has physical possession The customer has the significant risks and rewards of ownership The customer has accepted the asset For contracts applying the point in time method, the transfer of risks and rewards of ownership (depending on international commercial terms) typically depicts the transfer in control most appropriately. Contract classification per division Sales are measured based on the consideration specified in a contract with a customer. Sales are recognized over time if any of the conditions above is met. If none of the criteria for satisfying a performance obligation over time is met, sales are recognized at a point in time. The following table provides information about the nature and timing of the satisfaction of performance obligations in contracts with customers, and the related revenue recognition method. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 167 Contract classification Characteristics Typical sales recognition method Created asset has no alternative use for the customer and the group has enforceable right to payment (including reasonable profit margin) for performance up to date if the customer terminates the contract for convenience Created asset has alternative use for the customer or the group has no enforceable right to payment (including reasonable profit margin) for performance up to date if the customer terminates the contract for convenience Pumps Equipment Standard business — Standard products made to stock n/a — New pumps — Spare parts Configured business — Preconfigured products OT — Assembled and packaged on customer order Engineered business — Highly customized products OT Rotating Equipment Services Repair Parts — Engineered to order according to customer’s specifications OT OT — Turbo — Electromechanical — Pumps — Gas turbines components — Coils — Pumps spares — Retrofits — Off-the-shelf articles or manufactured on customer order — Others (tool container, remote monitoring, other spare parts) Services — Overhaul / field service OT Chemtech Rush orders Components — Site setup — Disassembly / reassembly — Installation / commissioning — Technical support — Refurb / retrofit — Relocation — Long-term service agreement (LTSA) / long-term parts agreement (LTPA) — Customized services according to customer’s specifications — Off-the-shelf articles of stock n/a OT materials — Articles purchased for sale — Standard configured to customer’s requirements — Tailor made to customer’s requirements — Replacement of components — Standard mechanical engineering — Supervision — Installation workforce — Combined order for Separation Technology (ST) & Tower Field Services (TFS) PIT PIT PIT PIT PIT PIT OT for field services (asset that the customer controls) PIT PIT Services / Engineered solutions — Studies OT — Engineering — Site project management — Supervision — Key equipment — Installation — Procurement of equipment, spare parts PIT OT for certain service contracts where the customer simultaneously receives the service — Off-the-shelf articles of stock materials (production to stock) n/a PIT Applicator Systems Rush orders report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 168 Disaggregation of sales In note 3 sales are disaggregated by: — — — — Divisions (group’s reportable segments) Timing of sales recognition (sales recognition method: over time, point in time) and divisions Market segments and divisions Geographical regions and divisions Payment terms The group’s general terms and conditions of supply require payments within 30 days after the invoice date. If the group’s general terms and conditions apply for a contract, the group is entitled to issue the invoices as follows: for one-third of the contract value within five days after effective date (date when the purchase order has been accepted by the supplier, or the date of the latest signing), for one-third after expiration of half of the delivery time, and for one-third within 45 days prior to delivery. Payments for prices calculated on a time basis are invoiced on a bi-weekly basis or after completion of the scope of supply, whichever occurs first. Other payment terms may apply if otherwise defined in the customer contract, the purchase order, the respective change order or the quotation. Variable considerations If the consideration promised in a contract includes a variable amount (e.g. liquidated damages, early payment discount, volume discounts), the group estimate the amount of consideration to which the group will be entitled in exchange for transferring the promised goods or services to a customer. The amount of the variable consideration is estimated by using either of the following methods, depending on which method the group expect to better predict the amount of consideration to which it will be entitled: the expected value method or the most likely amount method. The method selected is applied consistently throughout the contract and to similar types of contracts when estimating the effect of uncertainty on the amount of variable consideration to which the group is entitled. The group’s general terms and conditions of supply foresee the following warranty periods. Except in cases where the scope of supply is limited to services only, the warranty period ends on the earliest of the dates below: — — — After 12 months from the initial operation of the scope of supply After 18 months from delivery of the scope of supply In the event that delivery is delayed or impeded for reasons beyond the supplier’s control, after 18 months from the date of the supplier’s notification that the scope of supply is ready for dispatch Where the scope of supply is limited to services only, the warranty period ends six months after completion of such services. If the group fails to meet the delivery date for more than two calendar weeks due to reasons for which the group is directly responsible, and provided that the purchase order expressly provides liquidated damages for such failure, the purchaser is entitled to demand that the group pays liquidated damages at the rate stated in the purchase order. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 169 The group’s obligation for warranties, liquidated damages and other obligations is accounted for as a variable consideration in the sales and recognized as a provision. Allocation of the transaction price To allocate the transaction price to each performance obligation on a relative stand-alone selling price basis, the group determines the stand-alone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocates the transaction price in proportion to those stand-alone selling prices. If the stand-alone selling price is not directly observable, then the group estimates the amount with the expected cost plus margin method. 34.23 Assets and disposal groups held for sale A non-current asset or a group of assets is classified as “held for sale” 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. 34.24 Dividend distribution Dividend distribution to the shareholders of Sulzer Ltd is resolved upon decision at the Annual General Meeting and will be paid in the same reporting period. 35 Subsequent events after the balance sheet date The Board of Directors authorized these consolidated financial statements for issue on February 12, 2019. They are subject to approval at the Annual General Meeting, which will be held on April 3, 2019. 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. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 170 36 Major subsidiaries December 31, 2018 Sulzer ownership and voting rights Registered capital (including paid- in capital in the USA and Canada) Direct participation by Sulzer Ltd Research and development Production and engineering Sales Service Subsidiary Europe Switzerland Belgium Germany Denmark Finland France Sulzer Chemtech AG, Winterthur 100% CHF 10’000’000 Sulzer Mixpac AG, Haag 100% CHF 100’000 Sulzer Markets and Technology AG, Winterthur Sulzer Management AG, Winterthur 100% CHF 4’000’000 100% CHF 500’000 Tefag AG, Winterthur 100% CHF 500’000 Sulzer International AG, Winterthur Medmix Systems AG , Rotkreuz 1) Sulzer Pumps Wastewater Belgium N.V./S.A., St. Stevens-Woluwe Ensival Moret International SA, Thimister-Clermont Ensival Moret Belgium SA, Thimister-Clermont Sulzer Pumpen (Deutschland) GmbH, Bruchsal Sulzer Pumps Wastewater Germany GmbH, Bonn Sulzer Chemtech GmbH, Linden Sulzer APS Deutschland Holding GmbH, Bechhofen 100% CHF 100’000 100% CHF 178’572 100% EUR 123’947 100% EUR 9’400’000 100% EUR 7’400’000 100% EUR 3’000’000 100% EUR 300’000 100% EUR 300’000 100% EUR 870’000 Geka GmbH, Bechhofen 100% EUR 878’600 Transcodent GmbH & Co. KG, Kiel Sulzer Mixpac Denmark A/S, Farum Sulzer Pumps Denmark A/S, Farum Sulzer Pumps Finland Oy, Kotka Sulzer Pompes France SASU, Buchelay Ensival Moret France SASU, Saint-Quentin 100% EUR 2’000 100% DKK 500’000 100% DKK 500’000 100% EUR 16’000’000 100% EUR 6’600’000 100% EUR 10’000’000 Great Britain Sulzer Pumps (UK) Ltd., Leeds 100% GBP 9’610’000 Sulzer Chemtech (UK) Ltd., Stockton on Tees Sulzer Electro Mechanical Services (UK) Ltd., Birmingham Sulzer (UK) Holdings Ltd., Leeds Sulzer Mixpac (UK) Ltd., Hungerford 100% GBP 100’000 100% GBP 48’756 100% GBP 6’100’000 100% GBP 1’000’000 report.sulzer.com/ar18 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 171 Sulzer Pump Solutions Ireland Ltd., Wexford Sulzer Finance (Ireland) Limited, Wexford Sulzer Italy S.r.l., Casalecchio di Reno Sulzer Pumps Wastewater Norway A/S, Sandvika Sulzer Pumps Norway A/S, Klepp Stasjon 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 100% EUR 2’222’500 100% EUR 100 100% EUR 600’000 100% NOK 502’000 100% NOK 500’000 100% EUR 15’882 100% EUR 1’134’451 100% EUR 18’000 100% EUR 18’000 100% EUR 18’000 100% EUR 444’704 100% EUR 10’010’260 Sulzer Capital B.V., Breda 100% EUR 50’000 Sulzer Austria GmbH, Wiener Neudorf Sulzer Turbo Services Poland Sp. z o.o., Lublin Sulzer Pumps Wastewater Poland Sp. z o.o., Warsaw Sulzer Mixpac Poland Sp. z o.o., Nowa Wies Wroclawska ZAO Sulzer Pumps, St. Petersburg Sulzer Pumps Rus LLC, Moscow Sulzer Turbo Services Rus LLC, Moscow Sulzer Chemtech LLC, Serpukhov Sulzer Pumps Sweden AB, Vadstena Sulzer Pumps Spain S.A., Madrid 100% EUR 350’000 100% PLN 2’427’000 100% PLN 800’000 100% PLN 5’000 100% RUB 8’000’000 100% RUB 6’000’600 100% RUB 14’705’882 100% RUB 55’500’000 100% SEK 3’000’000 100% EUR 1’750’497 Sulzer Pumps Wastewater Spain S.A., Rivas Vaciamadrid 100% EUR 2’000’000 Sulzer Pumps (Canada) Inc., Burnaby Sulzer Chemtech Canada Inc., Edmonton Sulzer Rotating Equipment Services (Canada) Ltd., Edmonton JWC Environmental Canada ULC , Burnaby 1) Sulzer Pumps (US) Inc., Houston, Texas 100% CAD 2’771’588 100% CAD 1’000’000 100% CAD 7’000’000 100% CAD 1’832’816 100% USD 40’381’108 • • • • • • • • • • • • • • • • • Ireland Italy Norway The Netherlands Austria Poland Russia Sweden Spain North America Canada USA report.sulzer.com/ar18 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 172 Sulzer Pumps Solutions Inc., Easley, South Carolina Sulzer Pump Services (US) Inc., Houston, Texas Sulzer Chemtech USA, Inc., Tulsa, Oklahoma Sulzer Mixpac USA Inc., Salem, New Hampshire 100% USD 27’146’250 100% USD 1’000 100% USD 47’895’000 100% USD 100 Sulzer Turbo Services Houston Inc., La Porte, Texas 100% USD 18’840’000 Sulzer Turbo Services New Orleans Inc., Belle Chasse, Louisiana Sulzer Electro-Mechanical Services (US) Inc., Pasadena, Texas Sulzer US Holding Inc., Houston, Texas Geka Manufacturing Corporation, Elgin JWC Environmental Inc. , Santa Ana 1) Sulzer Pumps México, S.A. de C.V., Cuautitlán Izcalli 100% USD 4’006’122 100% USD 12’461’286 100% USD 200’561’040 100% USD 603’719 100% USD 220’818’520 100% MXN 4’887’413 Sulzer Chemtech, S. de R.L. de C.V., Cuautitlán Izcalli 100% MXN 231’345’500 Mexico Central and South America Argentina Sulzer Turbo Services Argentina S.A., Buenos Aires 100% ARS 9’730’091 Brazil Sulzer Brasil S.A., Jundiaí 100% BRL 81’789’432 Sulzer Pumps Wastewater Brasil Ltda., Jundiaí 100% BRL 37’966’785 Sulzer Services Brasil, Triunfo 100% BRL 40’675’856 Geka do Brasil Indústria e Comércio de Embalagens Ltda., Sao Paulo Sulzer Bombas Chile Ltda., Vitacura 100% BRL 15’009’794 100% CLP 46’400’000 Sulzer Pumps Colombia S.A.S., Cota 100% COP 7’142’000’000 Sulzer Pumps (Venezuela) S.A., Barcelona 100% VES 2’000 Chile Colombia Venezuela Africa South Africa Sulzer Pumps (South Africa) (Pty) Ltd., Elandsfontein 75% ZAR 100’450’000 Sulzer (South Africa) Holdings (Pty) Ltd., Elandsfontein Sulzer Maroc S.A.R.L. A.U., Ain Sebaa 100% ZAR 16’476 100% MAD 3’380’000 Sulzer Pumps (Nigeria) Ltd., Lagos 100% NGN 10’000’000 Sulzer Zambia Ltd., Chingola 100% ZMK 15’000’000 Morocco Nigeria Zambia Middle East United Arab Emirates Sulzer Pumps Middle East FZCO, Dubai Sulzer Rotating Equipment FZE, Dubai 100% AED 500’000 100% USD 272’000 Saudi Arabia Sulzer Saudi Pump Company Limited, Riyadh 75% SAR 44’617’000 report.sulzer.com/ar18 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Notes to the consolidated financial statements 173 Bahrain Asia India Indonesia Sulzer Chemtech Middle East S.P.C., Al Seef 100% BHD 50’000 Sulzer Pumps India Pvt. Ltd., Navi Mumbai 99% INR 25’000’000 Sulzer India Pvt. Ltd., Pune 100% INR 34’500’000 Sulzer Tech India Pvt. Ltd., Navi Mumbai PT. Sulzer Indonesia, Purwakarta 100% INR 100’000 95% IDR 28’234’800’000 Japan Sulzer Daiichi K.K., Tokyo 60% JPY 30’000’000 Sulzer Japan Ltd., Tokyo 100% JPY 30’000’000 Sulzer Pumps Wastewater Malaysia Sdn. Bhd., Selangor Darul Ehsan Sulzer Singapore Pte. Ltd., Singapore 100% MYR 500’000 100% SGD 1’000’000 Malaysia Singapore South Korea Sulzer Korea Ltd., Seoul 100% KRW 222’440’000 Thailand Sulzer Chemtech Co., Ltd., Rayong 100% THB 25’000’000 People’s Republic of China Sulzer Dalian Pumps & Compressors Ltd., Dalian 100% CHF 21’290’000 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 100% CNY 82’069’324 100% USD 5’760’000 100% CNY 61’432’607 100% USD 1’550’000 Sulzer Australia Pty Ltd., Brisbane Sulzer Australia Holding Pty Ltd., Brendale 100% AUD 5’308’890 100% AUD 34’820’100 Australia 1) Acquired in 2018. • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Auditor's report 174 Opinion We have audited the consolidated financial statements of Sulzer Ltd and its subsidiaries (the Group), which comprise the “Consolidated balance sheet” as at December 31, 2018 and the “Consolidated income statement”, “Consolidated statement of comprehensive income”, “Consolidated statement of changes in equity” and “Consolidated statement of cash flows” for the year then ended, and “Notes to the consolidated financial statements”, including a summary of significant accounting policies. In our opinion the accompanying consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at December 31, 2018, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. Basis for Opinion We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISAs) and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Auditor's report 175 Customer contracts – accuracy of revenue recognition, valuation of contract assets, work in progress (WIP), trade accounts receivable and accuracy of contract liabilities Key Audit Matter Our response As per December 31, 2018, revenue from customer contracts Our procedures included, among others, obtaining an amounts to CHF 3,364.9 million, contract assets amount to understanding of the project execution processes and relevant CHF 205.1 million, contract liabilities to CHF 256.4 million, the controls relating to the accounting for customer contracts. balance of work in progress (WIP) amounts to CHF 303.5 million and trade accounts receivable amount to CHF 622.3 million. With regard to the implementation of IFRS 15 we verified management’s conclusion from assessing different types of contracts and the accuracy of the Group’s revised accounting Following the first-time application of the new revenue policies in light of the industry specific circumstances and our recognition standard (IFRS 15, Revenue from Contracts with understanding of the business. We tested the appropriateness Customers), the Group adopted its accounting policies and of the accounting treatment on a sample basis and adjusted its opening balances as at January 1, 2018, applying recalculated the resulting adjustments recorded in the opening the cumulative effect method with no restatement of the balance. In addition, we verified the accuracy of IFRS 15 comparative period. related disclosures. Under IFRS 15 revenue is recognised when a performance For the revenue recognized throughout the year, we tested obligation is satisfied by transferring control over a promised selected key controls, including results reviews by good or service. management, for their operating effectiveness and performed procedures to gain sufficient audit evidence on the accuracy of Revenue and related costs from long-term customer orders the accounting for customer contracts and related financial (construction and service contracts) are recognized over time statement captions. (OT), provided they fulfill the criteria of International Financial Reporting Standards, specifically having the right for payment These procedures included reading significant new contracts in case of termination for convenience. The OT method allows to understand the terms and conditions and their impact on recognizing revenues by reference to the stage of completion revenue recognition. We performed enquiries with of the contract. The application of the OT method is complex management to understand their project risk assessments and and requires judgments by management when estimating the inspected meeting minutes from project reviews performed by stage of completion, total project costs and the costs to management to identify relevant changes in their assessments complete the work. Incorrect assumptions and estimates can and estimates. We challenged these estimates and judgments lead to revenue being recognized in the wrong reporting period made for OT projects including comparing estimated project or in amounts inadequate to the actual stage of completion, financials between reporting periods and assessed the and therefore to an incorrect result for the period. historical accuracy of these estimates. During order fulfillment, contractual obligations may need to be On a sample basis, we reconciled revenue to the supporting reassessed. In addition, change orders or cancelations have to documentation, validated estimates of costs to complete, be considered. As a result, total estimated project costs may tested the mathematical accuracy of calculations and the exceed total contract revenues and therefore require write-offs adequacy of project accounting. We also examined costs of contract assets, receivables and the immediate recognition included within contract assets on a sample basis by verifying of the expected loss as a provision. the amounts back to source documentation and tested their recoverability through comparing the net realizable values as Regarding the projects recognized at a point in time (PIT), the per the agreements with estimated cost to complete. risks include inappropriate revenue recognition from revenue being recorded in the wrong accounting period or at amounts We further performed testing for PIT projects on a sample not justified as well as overstated WIP that requires impairment basis to confirm the appropriate application of revenue adjustments. report.sulzer.com/ar18 recognition policies and to verify valuation of WIP balances. This included reconciling accounting entries to supporting documentation. When doing this, we specifically put emphasis on those transactions occurring close before or after the balance sheet date to obtain sufficient evidence over the accuracy of cut-off. page break Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Auditor's report 176 For further information on customer contracts – accuracy of revenue recognition, valuation of contract assets, work in progress (WIP), trade accounts receivable and accuracy of contract liabilities refer to the following: — Note 19 to the consolidated financial statements Accounting for warranties and other cost to fulfil contract obligations Key Audit Matter Our response As per December 31, 2018, provisions in the amount of CHF Based on our knowledge gained through contract and project 78.9 million are held on the balance sheet to cover expected reviews, we assessed the need for and the accuracy of costs arising from product warranties. Additional expected provisions and deductions in revenue for variable costs to fulfil contract obligations and for onerous contracts consideration for expected liquidated damages. are recorded as other provisions. Sulzer is exposed to claims from customers for not meeting assessments by enquiries, inspection of meeting minutes and contractual obligations. Remedying measures, addressing review of correspondence with customers where available. We further challenged management’s contract risk technical shortcomings or settlement negotiations with clients may take several months and cause additional costs. The assessment of these costs to satisfy order related obligations contains management assumptions with a higher risk of material misjudgment. Where milestones or contract specifications were not met, we challenged the recognition and appropriateness of variable consideration and provisions by recalculating the amounts, obtaining written management statements and evidence from supporting documents such as correspondence with clients or legal assessments of external counsels where available. We also took into account the historical accuracy of estimates made by management through retrospective reviews. In order to gain a complete and clear understanding of legal matters we further performed enquiry procedures with the office of Sulzer’s General Counsel and reviewed relevant documents. For further information on accounting for warranties and other cost to fulfil contract obligations to the following: — Note 26 to the consolidated financial statements report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Auditor's report 177 Valuation of goodwill Key Audit Matter Our response As at December 31, 2018, Sulzer’s balance sheet included As a first step, we assessed the appropriateness of the CGUs goodwill amounting to CHF 923.4 million. identified. Our audit procedures then included, amongst others, evaluating the methodical and mathematical accuracy Goodwill has to be assessed for impairment on a yearly basis of the model used for the impairment testing, the by management using a discounted cash flow model to individually determine the value in use of goodwill balances. This requires the use of a number of key assumptions and appropriateness of the assumptions, and the methodology used by management to prepare its cash flow forecasts. We involved our own valuation specialists to support our judgments, including the estimated future cash flows, long- procedures. term growth rates, profitability levels and discount rates applied as well as the determination of the cash generating We thereby focused on those CGUs with the most significant units (“CGUs” for the goodwill impairment testing. goodwill balances or where reasonably possible changes of key assumptions would lead to an impairment and performed The goodwill balance is significant compared to total assets the following procedures amongst others: and there are a number of judgments involved in performing the impairment test. Furthermore, the economic conditions continue to be challenging in some of Sulzer’s key markets, specifically the oil and gas sector. With half of its business within this market segment, Sulzer’s financial performance is significantly affected by the low oil prices and the resulting subdued demand and price pressure from its oil and gas customers. • gaining an understanding and assessing the reasonableness of business plans by comparing them to prior year’s assumptions; • comparing business plan data against budgets and two- year plans as approved by management; • recalculating the value in use calculations; • challenging the robustness of the key assumptions used to determine the value in use, including the allocation of goodwill to the adequate CGUs, cash flow forecasts, long- term growth rates and the discount rates based on our understanding of the commercial prospects of the related CGUs and by comparing them with publicly available data, where possible; • conducting sensitivity analysis, taking into account the historical forecasting accuracy; and • comparing the sum of calculated values in use to the market capitalization of the Group. We also considered the appropriateness of disclosures in the consolidated financial statements. For further information on valuation of goodwill refer to the following: — Note 14 to the consolidated financial statements Other Information in the Annual Report The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements of the Company, the compensation report and our auditor’s reports thereon. Our opinion on the consolidated financial statements does not cover the other information in the annual report and we do not express any form of assurance conclusion thereon. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Auditor's report 178 In connection with our audit of the consolidated financial statements, our responsibility is to read the other information in the annual report and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibility of the Board of Directors for the Consolidated Financial Statements The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS and the provisions of Swiss law, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law, ISAs and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Swiss law, ISAs and Swiss Auditing Standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: — Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. — — — Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made. Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. — Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Auditor's report 179 — Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the Board of Directors or its relevant committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Board of Directors or its relevant committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Board of Directors or its relevant committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report, unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on Other Legal and Regulatory Requirements In accordance with article 728a para. 1 item 3 CO and the 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 François Rouiller Licensed Audit Expert Auditor in Charge Zurich, February 12, 2019 Simon Niklaus Licensed Audit Expert KPMG AG, Badenerstrasse 172, PO Box, CH-8036 Zurich KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Five-year summaries 180 Five-year summaries of key financial data Key figures from consolidated income statement and statement of cash flows millions of CHF Order intake Order intake gross margin Order backlog Sales Operating income Operational EBITA Operational EBITA margin (operational EBITA/sales) EBIT opEBITA opROSA Return on capital employed (operational EBITA in % of average capital employed) opROCEA ROE EPS Net income attributable to shareholders of Sulzer Ltd – in percentage of equity attributable to shareholders of Sulzer Ltd Reported EPS Depreciation Amortization Impairments of tangible and intangible assets Research and development expenses Personnel expenses Capital expenditure Free cash flow FCF conversion (free cash flow/net income) Employees (number of full-time equivalents) as of December 31 2018 1) 3’531.5 33.3% 1’786.9 3’364.9 183.8 322.5 9.6% 18.1% 113.7 7.0% 3.56 –71.7 –69.0 –4.4 –86.4 2017 2016 2015 3’155.7 34.4% 1’593.5 3’049.0 136.5 255.4 8.4% 15.8% 83.2 5.0% 2.44 –71.7 –53.8 –15.4 –81.0 2’797.5 34.0% 1’439.1 2’876.7 115.3 238.9 8.3% 15.7% 59.0 3.7% 1.73 –69.5 –47.3 –18.4 –71.4 2’895.8 33.8% 1’510.7 2’971.0 120.9 254.1 8.6% 17.0% 73.9 3.3% 2.17 –74.1 –42.3 –13.0 –73.4 2014 3’160.8 33.5% 1’699.6 3’212.1 –69.0 302.9 9.4% 17.1% 275.0 11.3% 8.09 –79.2 –43.3 –0.4 –76.2 –1’129.7 –1’078.2 –971.1 –1’020.8 –1’046.2 –96.2 173.9 1.49 –81.2 127.0 1.46 –74.9 200.5 3.34 –73.7 155.8 2.08 –96.0 98.0 0.35 15’572 14’732 14’005 14’253 15’494 1) According to IFRS 15, see financial review and note 34 of the consolidated financial statements for details. Key figures from consolidated balance sheet millions of CHF Non-current assets 2018 1) 2017 2016 2015 2’057.7 1’990.5 1’809.9 1’574.0 – thereof property, plant and equipment 527.0 531.6 511.0 491.4 Current assets 2’840.6 2’126.8 1’926.0 2’680.8 – thereof cash and cash equivalents and marketable securities Total assets Equity attributable to shareholders of Sulzer Ltd Non-current liabilities – thereof long-term borrowings Current liabilities – thereof short-term borrowings Net liquidity 2) Equity ratio 3) Borrowings-to-equity ratio (gearing) 2014 1’681.9 530.7 2’971.1 1’301.5 4’653.0 2’435.4 994.5 510.3 1’095.2 4’898.3 1’629.9 1’646.8 1’316.3 1’610.4 488.8 4’117.3 1’680.1 900.1 458.7 429.5 3’735.9 1’581.2 980.3 458.3 1’217.3 4’254.8 2’224.7 472.1 7.2 1’514.8 1’164.6 1’548.5 1’216.5 18.0 255.1 7.1 514.4 17.7 –239.0 33.3% 0.82 –225.0 40.8% 0.42 –35.9 42.3% 0.29 695.7 52.3% 0.23 773.5 52.4% 0.22 1) According to IFRS 15, see financial review and note 34 of the consolidated financial statements for details. 2) Cash and cash equivalents and marketable securities, less short-term and long-term borrowings. 3) Equity attributable to shareholders of Sulzer Ltd in relation to total assets. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Five-year summaries 181 Five-year summaries by division Order intake Sales millions of CHF 2018 1) 2017 2016 2015 2014 2018 1) 2017 2016 2015 2014 Pumps Equipment 1’372.1 1’180.2 1’066.8 1’152.8 1’377.1 1’284.2 1’120.0 1’155.3 1’276.8 1’405.5 Rotating Equipment Services 1’109.7 1’047.7 986.4 1’034.1 1’065.3 1’063.7 1’029.5 1’003.4 1’024.6 1’065.2 Chemtech Applicator Systems 600.1 449.6 501.5 426.3 471.8 272.6 525.7 183.2 538.3 180.0 563.2 453.8 478.0 421.6 446.0 272.0 486.2 183.4 563.6 177.8 Total 3’531.5 3’155.7 2’797.5 2’895.8 3’160.8 3’364.9 3’049.0 2’876.7 2’971.0 3’212.1 Order backlog Employees 2) millions of CHF Pumps Equipment Rotating Equipment Services Chemtech Applicator Systems Divisions Others Total 2018 1) 2017 2016 2015 2014 2018 1) 2017 2016 2015 982.9 393.1 345.9 65.0 847.0 364.4 315.3 66.8 697.4 378.7 304.9 58.0 998.0 1’209.4 205.0 307.7 0.0 212.2 282.0 0.0 5’713 4’721 3’063 1’864 5’453 4’485 2’878 1’716 5’156 4’541 2’570 1’562 6’996 3’538 3’539 0 2014 7’365 3’709 4’287 0 1’786.9 1’593.5 1’439.0 1’510.7 1’703.6 15’361 14’532 13’829 14’073 15’361 –0.0 0.0 0.1 0.0 –4.0 211 200 176 180 133 1’786.9 1’593.5 1’439.1 1’510.7 1’699.6 15’572 14’732 14’005 14’253 15’494 Operational EBITA Operational capital employed millions of CHF Pumps Equipment 2018 1) 41.4 2017 –3.7 Rotating Equipment Services 146.1 144.0 139.5 Chemtech Applicator Systems Divisions Others Total 50.0 95.7 333.2 –10.7 322.5 2016 2015 2014 2018 1) 2017 2016 2015 2014 13.0 118.1 160.6 25.0 86.8 18.0 64.1 70.8 67.4 0.0 64.5 93.6 0.0 717.7 548.2 203.1 418.2 617.3 506.5 221.5 382.5 760.6 400.6 223.8 220.0 746.3 422.0 406.3 0.0 1’115.6 408.7 342.6 0.0 252.1 234.6 256.3 318.7 1’887.3 1’727.8 1’605.0 1’574.6 1’866.9 3.3 4.3 –2.2 –15.8 –110.6 –113.0 –85.1 –76.8 –99.6 255.4 238.9 254.1 302.9 1’776.8 1’614.8 1’519.9 1’497.8 1’767.3 1) According to IFRS 15, see financial review and note 34 of the consolidated financial statements for details. 2) Number of full-time equivalents as of December 31. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Consolidated financial statements - Five-year summaries 182 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 Europe, Middle East, Africa Americas Asia-Pacific Total Capital employed (average) by company location millions of CHF Europe, Middle East, Africa Americas Asia-Pacific Total Employees by company location2) millions of CHF Europe, Middle East, Africa Americas Asia-Pacific Total 2018 1) 1’535.9 1’297.1 698.5 2017 2016 2015 1’422.1 1’038.2 695.4 1’254.8 949.8 592.9 1’303.7 1’065.3 526.8 3’531.5 3’155.7 2’797.5 2’895.8 2018 1) 1’468.9 1’107.6 788.4 2017 2016 2015 1’411.6 1’003.5 633.9 1’271.8 1’041.9 563.0 1’214.0 1’134.9 622.1 3’364.9 3’049.0 2’876.7 2’971.0 2018 1) 2017 1’155.3 1’061.5 456.9 164.5 384.5 168.8 2016 941.8 391.8 186.3 2015 875.5 415.8 206.5 2014 1’305.5 1’165.4 689.9 3’160.8 2014 1’264.7 1’177.4 770.0 3’212.1 2014 1’152.4 406.6 208.3 1’776.8 1’614.8 1’519.9 1’497.8 1’767.3 2018 1) 7’462 4’374 3’737 2017 7’279 3’911 3’542 2016 6’804 3’822 3’379 2015 6’504 4’139 3’610 2014 6’607 4’545 4’342 15’572 14’732 14’005 14’253 15’494 1) According to IFRS 15, see financial review and note 34 of the consolidated financial statements for details. 2) Number of full-time equivalents as of December 31. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Financial statements of Sulzer Ltd - Balance sheet of Sulzer Ltd 183 Balance sheet of Sulzer Ltd December 31 millions of CHF Current assets Cash and cash equivalents Accounts receivable from subsidiaries Prepaid expenses and other current accounts receivable Total current assets Non-current assets Loans to subsidiaries Financial assets Investments in subsidiaries Total non-current assets Total assets Current liabilities Current interest-bearing liabilities Current interest-bearing liabilities with subsidiaries Current liabilities with subsidiaries Current liabilities with shareholders Accrued liabilities and other current liabilities Current provisions Total current liabilities Non-current liabilities Non-current interest-bearing liabilities Non-current liabilities with subsidiaries Non-current provisions Total non-current liabilities Total liabilities Equity Registered share capital Legal capital reserves Reserves from capital contribution Voluntary retained earnings – Free reserves – Retained earnings – Net profit for the year Treasury shares Total equity Total equity and liabilities report.sulzer.com/ar18 Notes 3 4 6 5 5 2018 334.3 190.6 2.3 527.2 648.1 6.6 2’106.5 2’761.2 3’288.4 – 10.4 1.7 184.9 10.6 4.6 212.2 1’308.7 – 37.2 1’345.9 1’558.1 0.3 205.5 201.0 1’185.5 37.8 134.2 –34.0 1’730.3 3’288.4 2017 125.8 44.4 2.7 172.9 652.6 9.1 1’785.6 2’447.3 2’620.2 224.6 38.0 45.1 – 13.0 4.7 325.4 450.4 79.1 38.2 567.7 893.1 0.3 205.5 - 1’386.5 67.6 89.3 –22.1 1’727.1 2’620.2 Sulzer Annual Report 2018 - Financial reporting - Financial statements of Sulzer Ltd - Income statement of Sulzer Ltd 184 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 expenses Investment and loan expenses Other expenses Direct taxes Total expenses Net profit for the year Notes 9 10 8 9 2018 125.1 57.2 64.7 247.0 45.5 14.3 49.0 2.4 1.6 112.8 134.2 2017 122.9 45.2 37.3 205.4 61.8 13.5 36.8 3.9 0.1 116.1 89.3 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Financial statements of Sulzer Ltd - Statement of changes in equity of Sulzer Ltd 185 Statement of changes in equity of Sulzer Ltd January 1–December 31 millions of CHF Share capital Legal reserves Reserves from capital contribution Free reserves Retained earnings Net income Treasury shares Total Equity as of January 1, 2017 0.3 205.5 - 1’486.5 82.2 4.8 –16.9 1’762.4 Dividend Allocation of net income Net profit for the year Change in treasury shares –119.4 –119.4 –100.0 –14.6 114.6 89.3 –5.2 – 89.3 –5.2 Equity as of December 31, 2017 0.3 205.5 - 1’386.5 67.6 89.3 –22.1 1’727.1 Dividend Allocation of net income Net profit for the year Change in treasury shares Allocation to reserves from capital contribution 201.0 –201.0 –29.8 –119.1 29.8 134.2 –119.1 – 134.2 –11.9 – –11.9 Equity as of December 31, 2018 0.3 205.5 201.0 1’185.5 37.8 134.2 –34.0 1’730.3 report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Financial statements of Sulzer Ltd - Notes to the financial statements of Sulzer Ltd 186 1 General information Sulzer Ltd, Winterthur, Switzerland (the Company), is the parent company of the Sulzer Group. Its 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. 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 accepted valuation principles. Non-current interest-bearing liabilities Non-current interest-bearing liabilities are recognized in the balance sheet at amortized cost. Discounts and issue costs for bonds are amortized on a straight-line basis over the bond’s maturity period. Share-based payments Sulzer Ltd operates a share-based payment program that covers the Board of Directors. Restricted share units (RSU) are granted annually. 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. Awards automatically vest with the departure from the Board. The fair value of the Sulzer share at vesting 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 accounting standard (IFRS), it has decided to forego presenting additional information on audit fees and interest-bearing liabilities in the notes as well as a cash flow statement in accordance with the law. 3 Cash and cash equivalents Sulzer Ltd arranged a CHF 500 million syndicated credit facility with maturity date May 2020 with two one-year extension options. During 2017 the facility was extended for another year until May 2022. The facility is 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. As of December 31, 2018, the facility was not used, while at the end of 2017, CHF 224.6 million of the facility was used. 4 Investments in subsidiaries A list of the major subsidiaries held directly or indirectly by Sulzer Ltd is included in note 36 of the consolidated financial statements. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Financial statements of Sulzer Ltd - Notes to the financial statements of Sulzer Ltd 187 5 Registered share capital 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. Shareholders holding more than 3% Viktor Vekselberg (direct shareholder: Tiwel Holding AG) Renova Group Treasury shares held by Sulzer Ltd millions of CHF Balance as of January 1 Purchase Sale Share-based remuneration Balance as of December 31 Dec 31, 2018 Dec 31, 2017 Number of shares 16’728’414 in % 48.82 Number of shares - - - 21’728’914 in % - 63.42 2018 2017 Number of shares Total transaction amount Number of shares Total transaction amount 219’277 5’159’149 –5’000’000 –66’555 311’871 22.1 563.7 –544.8 –7.0 34.0 177’461 109’720 – –67’904 219’277 16.9 11.8 – –6.6 22.1 The total number of treasury shares held by Sulzer Ltd as of December 31, 2018, amounted to 311’871 (December 31, 2017: 219’277 shares), which are mainly held for the purpose of issuing shares under the management share-based payment programs. 6 Non-current interest-bearing liabilities millions of CHF 0.375% 07/2016–07/2022 0.875% 07/2016–07/2026 0.250% 07/2018–07/2020 1.300% 07/2018–07/2023 0.625% 10/2018–10/2021 1.600% 10/2018–10/2024 Total as of December 31 2018 2017 Book value Nominal Book value Nominal 325.3 125.0 109.8 289.3 209.5 249.8 325.0 125.0 110.0 290.0 210.0 250.0 325.4 125.0 – – – – 325.0 125.0 – – – – 1’308.7 1’310.0 450.4 450.0 On July 6, 2018, Sulzer issued two bonds via dual tranches of CHF 400 million in total. The first tranche of CHF 110 million has a term of two years and carries a coupon of 0.25% and has an effective interest rate of 0.37%. The second tranche of CHF 290 million has a term of five years and carries a coupon of 1.3% and has an effective interest rate of 1.35%. On October 22, 2018, Sulzer issued two bonds via dual tranches of CHF 460 million in total. The first tranche of CHF 210 million has a term of three years and carries a coupon of 0.625% % and has an effective interest rate of 0.71%. The second tranche of CHF 250 million has a term of six years and carries a coupon of 1.6% and has an effective interest rate of 1.62%. All the outstanding bonds are traded at the SIX Swiss Exchange. report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Financial statements of Sulzer Ltd - Notes to the financial statements of Sulzer Ltd 188 7 Contingent liabilities millions of CHF 2018 2017 1’393.4 268.8 251.1 10.0 1’923.3 2017 2.3 59.5 61.8 Guarantees, sureties and comfort letters for subsidiaries – to banks and insurance companies – to customers – to others Guarantees for third parties Total contingent liabilities as of December 31 1’336.1 252.6 527.3 10.0 2’126.0 As of December 31, 2018, CHF 321.3 million (2017: CHF 342.0 million) of guarantees, sureties and comfort letters for subsidiaries to banks and insurance companies were utilized. 8 Administrative expenses millions of CHF Compensation of Board of Directors Other administrative expenses Total administrative expenses 2018 2.6 42.9 45.5 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 program. 9 Investment income and investment and loan expenses In 2018, the investment income contains ordinary and extraordinary dividend payments from subsidiaries amounting to CHF 125.1 million (2017: CHF 122.9 million). The investment and loan expenses contain allowances on investments and loans amounting to CHF 49.0 million (2017: CHF 36.8 million). 10 Other income During 2018, the company sold unquoted equity instruments previously measured at cost to Sulzer Vorsorgeeinrichtung, Sulzer’s pension fund. The transaction price was CHF 31.7 million and the resulting profit CHF 28.5 million. The transaction was priced on an arm’s length basis and was settled in cash prior to December 31, 2018. The income from trademark license amounts to CHF 36.2 million (2017: CHF 36.7 million). 11 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 RSU 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 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 Sulzer Ltd. 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. report.sulzer.com/ar18 page break Sulzer Annual Report 2018 - Financial reporting - Financial statements of Sulzer Ltd - Notes to the financial statements of Sulzer Ltd 189 Board of Directors Peter Löscher Matthias Bichsel Hanne Birgitte Breinbjerg Sørensen Lukas Braunschweiler Mikhail Lifshitz Marco Musetti Gerhard Roiss Executive Committee Greg Poux-Guillaume Daniel Bischofberger Frédéric Lalanne Jill Lee Armand Sohet Michael Streicher Torsten Wintergerste Sulzer shares 38’114 14’607 5’241 – – 1’449 6’222 10’595 34’035 21’381 – 2’237 7’945 – 764 1’708 1) Restricted share units assigned by Sulzer. 2) The average fair value of one performance share unit 2016 at grant date amounted to CHF 118.05. 3) The average fair value of one performance share unit 2017 at grant date amounted to CHF 116.02. 4) The average fair value of one performance share unit 2018 at grant date amounted to CHF 143.62. Restricted share units (RSU) 1) Performance share units (PSU) 2016 2) Performance share units (PSU) 2017 3) Performance share units (PSU) 2018 4) 2018 16’516 4’647 2’884 1’005 1’005 2’325 2’325 2’325 3’513 – – 3’513 – – – – – – – – – – – – 28’852 18’641 1’424 2’314 – 3’560 1’942 971 – – – – – – – – 26’667 13’196 3’024 3’024 – 3’024 1’375 3’024 – – – – – – – – 31’071 12’820 2’938 2’938 3’561 2’938 2’938 2’938 2017 Restricted share units (RSU) 1) Performance share units (PSU) 2015 2) Performance share units (PSU) 2016 3) Performance share units (PSU) 2017 4) Sulzer shares 31’044 – 3’624 6’841 526 5’320 526 4’917 9’290 46’835 9’682 – 21’000 23’483 5’244 3’253 2’625 2’243 2’625 2’243 2’625 2’625 22’546 15’121 – – – 7’026 14’844 – 1’309 – – 399 – – – – – – – – – 6’594 942 – 2’826 – 2’826 – – – – – – – – – – – 37’266 18’641 1’424 5’178 2’314 5’178 3’560 971 – – – – – – – – – 32’624 13’196 3’024 3’666 3’024 3’666 3’024 3’024 Board of Directors Peter Löscher Matthias Bichsel Thomas Glanzmann Axel C. Heitmann Jill Lee Mikhail Lifshitz Marco Musetti Gerhard Roiss Executive Committee Greg Poux-Guillaume Daniel Bischofberger Thomas Dittrich Frédéric Lalanne César Montenegro Armand Sohet Torsten Wintergerste report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Financial statements of Sulzer Ltd - Notes to the financial statements of Sulzer Ltd 190 1) Restricted share units assigned by Sulzer. 2) The average fair value of one performance share unit 2015 at grant date amounted to CHF 193.97. 3) The average fair value of one performance share unit 2016 at grant date amounted to CHF 118.05. 4) The average fair value of one performance share unit 2017 at grant date amounted to CHF 116.02. Granted Sulzer shares to members of the Board of Directors Allocated to members of the Board of Directors 9’288 1’155’710 11’001 1’156’119 2018 2017 Quantity Value in CHF Quantity Value in CHF 12 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. Proposal of the Board of Directors for the appropriation of the available profit in CHF Net profit for the year Unallocated profit carried forward from previous year Total available profit Ordinary dividend 2018 134’200’000 37’838’775 172’038’775 2017 89’300’000 67’624’595 156’924’595 –118’826’747 –119’150’826 Balance carried forward 53’212’028 37’773’769 Distribution per share CHF 0.01 Gross dividend less 35% withholding tax Net payment 3.50 1.23 2.27 3.50 1.23 2.27 The Board of Directors proposes the payment of a dividend of CHF 3.50 per share to the Annual General Meeting on April 3, 2019. The company will not pay a dividend on treasury shares held by Sulzer Ltd or one of its subsidiaries. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Financial statements of Sulzer Ltd - Auditor's report 191 Opinion We have audited the financial statements of Sulzer Ltd, which comprise the “Balance sheet of Sulzer Ltd” as at December 31, 2018, the “Income statement of Sulzer Ltd”, the “Statement of changes in equity of Sulzer Ltd” for the year then ended, and the “Notes to the financial statements of Sulzer Ltd”, including a summary of significant accounting policies. In our opinion the financial statements for the year ended December 31, 2018 comply with Swiss law and the company’s articles of incorporation. Basis for Opinion We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the entity in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Report on Key Audit Matters based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. We have determined that there are no key audit matters to communicate in our report. Responsibility of the Board of Directors for the Financial Statements The Board of Directors is responsible for the preparation of the financial statements in accordance with the provisions of Swiss law and the company’s articles of incorporation, and for such internal control as the Board of Directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Board of Directors is responsible for assessing the entity’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Financial statements of Sulzer Ltd - Auditor's report 192 that an audit conducted in accordance with Swiss law and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Swiss law and Swiss Auditing Standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: — Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. — — — Obtain an understanding of internal control relevant to the audit 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 internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made. Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the entity to cease to continue as a going concern. We communicate with the Board of Directors or its relevant committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Board of Directors or its relevant committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Board of Directors or its relevant committee, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report, unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on Other Legal and Regulatory Requirements In accordance with article 728a para. 1 item 3 CO and the 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. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Financial reporting - Financial statements of Sulzer Ltd - Auditor's report 193 We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved. KPMG AG François Rouiller Licensed Audit Expert Auditor in Charge Zurich, February 12, 2019 Simon Niklaus Licensed Audit Expert KPMG AG, Badenerstrasse 172, PO Box, CH-8036 Zurich KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Investor contacts 194 Investor contacts Head of Investor Relations Christoph Ladner Head of Investor Relations Sulzer Ltd Neuwiesenstrasse 15 8401 Winterthur Switzerland Phone +41 52 262 30 22 Contact form | Route report.sulzer.com/ar18 Sulzer Annual Report 2018 - Imprint 195 Imprint Published by: Sulzer Ltd, Winterthur, Switzerland, © 2019 Concept/Layout: wirDesign, Berlin Braunschweig, Germany Publishing system: ns.wow by mms solutions AG, Zurich, Switzerland Photographs: — — — — — — — Sulzer Ltd, Winterthur, Switzerland Geri Krischker, Zurich, Switzerland Adobe Stock/aninna Adobe Stock/andrei310 Adobe Stock/Monstar Studio Adobe Stock/Kostadin Luchansky cinema4design/Envato Market Pty Ltd. report.sulzer.com/ar18 Sulzer Annual Report 2018 - Disclaimer 196 Disclaimer This report may contain forward-looking statements, including, but not limited to, projections of financial developments and future performance of materials and products, containing risks and uncertainties. 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. Rounding Due to rounding, numbers presented throughout this report may not add up precisely to the totals provided. All ratios, percentages and variances are calculated using the underlying amount rather than the presented rounded amount. Tables Within tables, blank fields generally indicate that the field is not applicable or not meaningful, or that information is not available as of the relevant date or for the relevant period. Dashes (–) generally indicate that the respective figure is zero on an actual or rounded basis. Languages Parts of the Sulzer Annual Report 2018 are also available in German (i.e. Letter to the shareholders, Sulzer at a glance, Focus, Business review and Sustainable development). The original version is in English. report.sulzer.com/ar18