Notes to the consolidated financial statements

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, 2017, 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 14’700 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 27, 2018.

Details of the group’s accounting policies are included in note 34.

The financial position and performance of the group was particularly affected by the following events and transactions during the reporting period:

For a detailed discussion about the group’s performance and financial position please refer to the “Financial review.” 

Segment information by divisions

Segment information by divisions

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:

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 interdivisional order intake, sales, and 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 is based on the location of the customer.

Segment information by market segment

The following table shows the allocation of sales by market segments:

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. 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

Ensival Moret (EM)

On February 1, 2017, Sulzer acquired a 100% controlling interest of Ensival Moret (EM) for CHF 67.7 million. EM’s main manufacturing facilities are based in Saint Quentin, France, and Thimister, Belgium. EM employs approximately 730 employees and offers a wide range of industrial pumps with leading positions in a broad range of industrial applications such as fertilizers, sugar, mining, and chemicals. Through the acquisition, Sulzer closed specific product gaps in its general industry pumps portfolio, such as axial flow pumps. Combining the complementary product portfolios enables Sulzer to become a full line supplier in most industrial process applications. EM has been integrated into Sulzer's Pumps Equipment manufacturing network and the scope of the acquired business has therefore changed. 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 –0.9 million. Since the acquisition date, the acquire contributed order intake of CHF 72.7 million, sales of CHF 101.9 million, and net income of CHF –16.5 million to the group. 

Vessel Internal Electrostatic Coalescer (VIEC)

On February 1, 2017, Sulzer acquired 100% controlling interest of Vessel Internal Electrostatic Coalescer (VIEC) for CHF 4.4 million. VIEC is based in Anker, Norway, and employs 13 people. VIEC’s patented technology separates oil from water in a highly efficient manner and reduces operating costs due to its exclusive in-vessel design. This acquisition allows Sulzer to further extend its Chemtech upstream product portfolio for advanced oil and water separation applications. Transaction cost recognized in the income statement amount to CHF –0.1 million. Since the acquisition date, the acquire contributed order intake of CHF 3.8 million, sales of CHF 3.3 million, and net income of CHF –1.1 million to the group.

Rotec GT

On June 30, 2017, Sulzer acquired 51% of the business of Rotec GT, the gas turbine maintenance division of the Rotec Group, for CHF 15.4 million, of which CHF 15.0 million was paid in cash and CHF 0.4 million in shares of a subsidiary measured at fair value. Sulzer obtained control of the acquired business. Rotec GT is considered to be a related party to the group. Sulzer holds a call option to purchase 49%, and the Rotec Group holds a put option to sell 49%, after January 1, 2019. Sulzer recognized a liability of CHF 14.6 million against retained earnings, for the present value of the exercise price of the put option. The present value calculation is based on expected revenue, target EBITDA margin, and a predefined multiple. Remeasurements of the liability will be recognized against retained earnings. Sulzer did not recognize the call option, since the criteria as financial asset are not met.

Rotec GT is headquartered in Moscow, Russia, and has a service center for the refurbishment of gas turbine components in Ekaterinburg as well as an office for field service resources in St. Petersburg. With the service center in Ekaterinburg, Sulzer will have a strong local footprint. The business will be integrated into Sulzer’s Rotating Equipment Services division. The goodwill is attributable to synergies from combined solutions and shared services. None of the goodwill is expected to be deductible for tax purposes. Transaction cost recognized in the income statement of the group amount to CHF –0.6 million. Since the acquisition date, the acquired business contributed order intake of CHF 66.5 million, sales of CHF 42.4 million, and net income of CHF 4.5 million to the group.

Transcodent

On September 29, 2017, Sulzer acquired 100% controlling interest of Transcodent for CHF 75.6 million. Transcodent is based in Kiel, Germany, and employs 71 people. Transcodent is a leading provider of multiple dose and unit dose application systems, needles, tips, and capsules for the dental market. The acquisition further strengthens the Applicator Systems division of Sulzer in its dental segment, where Sulzer is already a global market leader. Transcodent has been integrated into Sulzer's Applicator Systems manufacturing network and the scope of the acquired business has therefore changed. 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 –0.1 million. Since the acquisition date, the acquire contributed order intake of CHF 4.6 million, sales of CHF 4.5 million, and net income of CHF –0.2 million to the group.  

Acquired receivables

The fair value of acquired trade accounts receivable is CHF 25.5 million. The gross contractual amount for trade account receivables due is CHF 26.2 million, of which CHF 0.7 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, 2017, management estimates that total net sales of the group would amount to CHF 3’093.0 million, and the consolidated net income would be CHF  89.6 million.

Cash flow from acquisitions of subsidiaries

Contingent consideration

As of December 31, 2017, there was a decrease of CHF 2.6 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.

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.

Contingent considerations

As of December 31, 2017, total contingent considerations resulting from business combinations amounted to CHF 5.1 million (December 31, 2016: CHF 9.5 million). The total payments under contingent considerations arrangements could be up to CHF 12.4 million (December 31, 2016: CHF 15.0 million). The estimated amounts are the expected payments, determined by considering the possible scenarios of forecast sales and other performance criteria, probabilities of occurrence, and the use of simulation models. The estimates could change substantially over time as new facts emerge and scenarios develop.

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.

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.

Goodwill and other intangible assets

As of December 31, 2017, total goodwill amounted to CHF 865.7 million (December 31, 2016: CHF 780.1 million). In accordance with the accounting policies set forth in section 34.6 “Intangible assets,” the group carries out an annual impairment test on goodwill in the fourth quarter of the year, or when indications of a potential impairment exist. The recoverable amount from cash-generating units is measured on the basis of value-in-use calculations 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, 2017, are disclosed in note 14.

Revenue recognition

The group uses the percentage of completion method (POC) in accounting for major long-term construction contracts. The use of the POC method requires the group to estimate the proportional revenue and costs. If circumstances arise that may change the original estimates of revenues, costs, or extent of progress toward completion, estimates are revised. These revisions may result in increases or decreases in estimated revenues or costs and are reflected in income in the period in which the circumstances that give rise to the revision become known by management. Revenue from the application of the POC method recognized in the year 2017 amounted to CHF 568.8 million (2016: CHF 597.2 million). Further details are disclosed in note 19.

Provisions

Provisions are made, among other reasons, for warranties, disputes, litigation, and restructuring. A provision is recognized in the balance sheet when the group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. The nature of these costs is such that judgment has to be applied to estimate the timing and amount of cash outflows. Depending on the outcome of the respective transactions, actual payments may differ from these estimates. Further details are disclosed in note 26.

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 2017 and 2016 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 2017, the currency pair with the most significant exposure and inherent risk was the EUR versus the BRL. If, on December 31, 2017, the EUR had increased by 14.1% against the BRL with all other variables held constant, profit after tax for the year would have been CHF 1.2 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.

Hypothetical impact of foreign exchange risk on income statement

The following tables show the hypothetical influence on equity for 2017 and 2016 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 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

(II) Price risk

As of December 31, 2017, the group was not exposed to significant price risk related to investments in equity securities either classified as “available-for-sale” or at “fair value through profit or loss.”

(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 two 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 USD, increasing interest rates would have had a negative impact on the income statement, since the value of variable- interest-bearing liabilities would exceed the value of variable-interest-bearing assets. For the other most significant currencies, CHF, CNY, EUR, and INR, 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) would exceed the value of variable-interest-bearing liabilities.

Hypothetical impact of interest rate risk on income statement

On December 31, 2017, if the interest rates on USD-denominated liabilities net of assets 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. A decrease of interest rates on USD-denominated assets net of liabilities would have caused a gain of the same amount. As of December 31, 2016, 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 1.4 million higher, because at this time the USD-denominated assets exceeded the liabilities.

b) Credit risk

Credit risk arises from cash and cash equivalents, derivative financial instruments, and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The maximum exposure to credit risk per class of financial assets is outlined in the fair value table in note 6.3. Not exposed to credit risks are equity securities classified as available-for-sale.

Credit risks of banks and financial institutions are monitored and managed centrally. Generally, only 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 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

6.2 Capital risk management

The group’s objectives when managing capital are to safeguard the group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In this respect, the group aims at maintaining an 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, 2017 and 2016. The increase of net debt in 2017 is particularly due to the additional borrowings needed mainly to finance the acquisitions.

Net debt/EBITDA ratio

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 2017 resulted mainly from the increase in borrowings.

As of December 31, 2017 and 2016, the gearing ratio was as follows:

Gearing ratio

6.3 Fair value estimation

The following tables present the carrying amounts and fair values of financial assets and liabilities as of December 31, 2017 and 2016, 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.

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.

Fair value table

Fair value table

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. In order to reflect the organizational changes towards a more market-oriented approach, the risk management process was adapted accordingly. Key risks were 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 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.

In 2016, pension plan amendments in Switzerland had a positive impact of CHF 35.4 million to the income statement 2016 and were recorded as a reduction of defined benefit plan expenses. In 2017, no comparable effect was recognized.

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.

Sulzer operates major funded defined benefit pension plans in Switzerland, UK, Ireland, and the USA. Unfunded defined benefit plans relate to German pension benefit plans. The plans are exposed to actuarial risks, e.g. longevity risk, currency risk, interest rate risk, and the funded plans additionally to market (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 remained stable in 2017 compared to 2016. Fewer active plan participants and retirees resulted in a lower defined benefit obligation in 2017 compared to 2016. Despite having fewer active members and retirees the plan assets remained stable compared to 2016 due to a good return on plan assets. The total expenses recognized in the income statement in 2017 were CHF 15.3 million (2016: income of CHF 17.9 million, impacted by pension plan amendments). The Swiss Pension Fund Board decided in June 2016 to reduce the guaranteed pension conversion rate by 1.0 percentage points over four years, beginning January 1, 2018. The plan amendments, recognized as past service cost, have had a positive impact of CHF 35.4 million in the income statement 2016.

In the UK, Sulzer merged its two funded defined benefit plans into one funded defined benefit plan. 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 remained stable at 2.5% (2016: 2.5%). The net pension liabilities decreased from CHF 186.5 million in 2016 to CHF 132.1 million, due to changes in financial and demographic assumptions. The total expenses recognized in the income statement in 2017 were CHF 5.1 million compared to CHF 4.0 million in 2016.

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 2017, an expense of CHF 0.9 million was recognized in the income statement (2016: an expense of CHF 0.9 million). The discount rate decreased to 3.6% in 2017 (2016: 4.0%). The amount recognized in other comprehensive income (OCI) in 2017 was CHF –1.1 million (2016: CHF –0.6 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.

Employee benefit plans

Employee benefit plans

Employee benefit plans

Since the defined benefit obligation for the Swiss and UK pension plans represents more than 91% (2016: 94%) of the group, the following significant actuarial assumptions apply exclusively to these two countries:

A breakdown of the research and development expenses per division is shown in the table below:

During 2017, the group reassessed the achievement of the earn-out targets related to contingent consideration arrangements. The reassessment resulted in an income of CHF 2.6 million (2016: CHF 4.8 million).

Other operating income includes income from litigation cases, government grants and incentives, and recharges to third parties not qualifying as sales from customers.

As part of the Sulzer Full Potential (SFP) program, Sulzer has initiated several measures to adapt the global manufacturing capacities and streamline the organizational setup. In 2017, the group recognized restructuring costs of CHF 21.7 million (2016: CHF 57.0 million). Restructuring costs are mainly associated with measures started in France, China, Brazil, Switzerland, and Ireland. The group further performed impairment tests on the related production machines and facilities leading to impairments of CHF 15.4 million (2016: CHF 18.4 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 –20.0 million (2016: CHF –52.7 million), selling and distribution expenses CHF –3.7 million (2016: CHF –2.9 million), and general and administrative expenses CHF –13.4 million (2016: CHF –19.8 million).

The income on interest and securities decreased, and also interest expenses decreased compared with 2016, mainly due to lower coupon expenses on the CHF 450 million bond issued on July 11, 2016, replacing the matured CHF 500 million bond. Thus, total interest expenses on bonds in 2017 reduced to CHF 2.2 million from CHF 7.4 million in 2016. On the other hand, due to the increased level of other borrowings, interest expenses related to other borrowings increased from CHF 3.2 million in 2016 to CHF 6.0 million in 2017. The “Fair value changes” largely comprise the fair valuation of derivative financial instruments that are classified as financial assets or financial liabilities at fair value through profit or loss and that are used as hedging instruments with regard to foreign exchange risks.

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.

Reconciliation of income tax expenses

The effective income tax rate of 30.5% (2016: 36.9%) is mainly impacted by the enacted US Tax Reform and restructuring expenses in China with no corresponding tax effect. The negative effect of the US Federal Corporate Income Tax Rate reduction from 35.0% to 21.0% amounts to CHF 4.1 million due to the revaluation of deferred tax assets and the further combined effects of CHF 3.6 million. Excluding these one-time effects, the effective income tax rate would have been at 23.4%. The effective income tax rate for 2016 of 36.9% was impacted by various restructuring expenses with no corresponding tax effects. Excluding the restructuring expenses, the effective income tax rate would have been at 24.3%.

Income tax liabilities

Summary of deferred income tax assets and liabilities in the balance sheet