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Notes to the consolidated financial statements

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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.
  • 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.” 

3 Segment information

Segment information by divisions

 

Pumps Equipment

Rotating Equipment Services

Chemtech

Applicator Systems

millions of CHF

2018

2017

2018

2017

2018

2017

2018

2017

Order intake (unaudited) 1)

1’372.1

1’180.2

1’109.7

1’047.7

600.1

501.5

449.6

426.3

Nominal growth (unaudited)

16.3%

10.6%

5.9%

6.2%

19.7%

6.3%

5.4%

56.4%

Currency adjusted growth (unaudited)

16.5%

9.6%

7.6%

5.0%

20.5%

5.8%

4.2%

55.7%

Organic growth 2) (unaudited)

8.6%

2.9%

5.8%

–0.9%

20.5%

5.0%

0.3%

6.0%

 

 

 

 

 

 

 

 

 

Order backlog as of December 31 (unaudited)

982.9

847.0

393.1

364.4

345.9

315.3

65.0

66.8

 

 

 

 

 

 

 

 

 

Sales recognized at a point in time

920.3

n/a

872.1

n/a

335.8

n/a

452.1

n/a

Sales recognized over time

363.8

n/a

191.6

n/a

227.4

n/a

1.7

n/a

Sales 3)

1’284.2

1’120.0

1’063.7

1’029.5

563.2

478.0

453.8

421.6

 

 

 

 

 

 

 

 

 

opEBITA (unaudited) 4)

41.4

–3.7

146.1

144.0

50.0

25.0

95.7

86.8

in % of sales (unaudited) 5)

3.2%

–0.3%

13.7%

13.9%

8.9%

5.2%

21.1%

20.5%

in % of average capital employed (unaudited)

5.8%

–0.6%

26.6%

28.4%

24.6%

11.3%

22.9%

22.7%

 

 

 

 

 

 

 

 

 

Restructuring expenses

–8.8

–15.0

–3.4

–3.8

1.1

–1.7

–1.6

–0.3

Amortization

–35.5

–23.2

–7.4

–6.8

–5.2

–5.6

–19.6

–17.0

Impairments on property, plant and equipment

–0.7

–10.5

0.0

–2.3

–2.6

–3.7

Non-operational items (unaudited)

–23.5

–9.3

–4.4

3.3

–31.4

–4.1

–6.9

–6.3

EBIT (Operating income)

–27.2

–61.7

130.8

134.4

14.5

11.0

63.8

63.2

 

 

 

 

 

 

 

 

 

Depreciation

–26.4

–23.7

–17.1

–17.6

–8.2

–9.2

–19.5

–20.8

 

 

 

 

 

 

 

 

 

Operating assets

1’670.1

1’445.6

860.2

880.6

483.0

463.7

623.4

655.3

Unallocated assets

Total assets as of December 31

1’670.1

1’445.6

860.2

880.6

483.0

463.7

623.4

655.3

 

 

 

 

 

 

 

 

 

Operating liabilities

739.1

685.3

347.7

319.8

289.8

234.1

76.3

71.5

Unallocated liabilities

Total liabilities as of December 31

739.1

685.3

347.7

319.8

289.8

234.1

76.3

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

583.8

 

 

 

 

 

 

 

 

 

Capital expenditure

–32.6

–21.9

–23.1

–19.2

–6.6

–10.0

–31.5

–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.

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

2018

2017

2018

2017

2018

2017

Order intake (unaudited) 1)

3’531.5

3’155.7

3’531.5

3’155.7

Nominal growth (unaudited)

11.9%

12.8%

n/a

n/a

11.9%

12.8%

Currency adjusted growth (unaudited)

12.5%

11.2%

n/a

n/a

12.5%

11.8%

Organic growth 2) (unaudited)

8.4%

2.2%

n/a

n/a

8.4%

2.2%

 

 

 

 

 

 

 

Order backlog as of December 31 (unaudited)

1’786.9

1’593.5

1’786.9

1’593.5

 

 

 

 

 

 

 

Sales recognized at a point in time

2’580.3

n/a

2’580.3

n/a

Sales recognized over time

784.6

n/a

784.6

n/a

Sales 3)

3’364.9

3’049.0

3’364.9

3’049.0

 

 

 

 

 

 

 

opEBITA (unaudited) 4)

333.2

252.1

–10.7

3.3

322.5

255.4

in % of sales (unaudited) 5)

9.9%

8.2%

n/a

n/a

9.6%

8.4%

in % of average capital employed (unaudited)

17.7%

14.8%

n/a

n/a

18.1%

15.8%

 

 

 

 

 

 

 

Restructuring expenses

–12.7

–20.8

–0.4

–0.9

–13.1

–21.7

Amortization

–67.8

–52.6

–1.3

–1.2

–69.0

–53.8

Impairments on property, plant and equipment

–4.4

–15.4

–4.4

–15.4

Non-operational items (unaudited)

–66.3

–16.4

14.3

–11.6

–52.0

–28.0

EBIT (Operating income)

181.8

146.9

2.0

–10.4

183.8

136.5

 

 

 

 

 

 

 

Depreciation

–71.2

–71.3

–0.5

–0.4

–71.7

–71.7

 

 

 

 

 

 

 

Operating assets

3’636.6

3’445.2

–26.7

–9.4

3’610.0

3’435.8

Unallocated assets

1’288.4

681.5

1’288.4

681.5

Total assets as of December 31

3’636.6

3’445.2

1’261.7

672.1

4’898.3

4’117.3

 

 

 

 

 

 

 

Operating liabilities

1’452.9

1’310.7

79.7

106.6

1’532.5

1’417.3

Unallocated liabilities

1’724.7

997.6

1’724.7

997.6

Total liabilities as of December 31

1’452.9

1’310.7

1’804.4

1’104.2

3’257.3

2’414.9

 

 

 

 

 

 

 

Operating net assets

2’183.8

2’134.5

–106.4

–116.0

2’077.4

2’018.5

Unallocated net assets

–436.4

–316.1

–436.4

–316.1

Total net assets as of December 31

2’183.8

2’134.5

–542.7

–432.1

1’641.0

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:

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.

Non-current assets by region

millions of CHF

2018

2017

Europe, Middle East, Africa – thereof:

1’289.4

1’392.6

Germany

326.4

360.0

Sweden

222.2

261.9

Switzerland

161.4

158.1

United Kingdom

150.7

164.2

Netherlands

123.7

128.7

other countries

305.0

319.7

 

 

 

Americas – thereof:

479.3

294.5

USA

437.1

247.1

Brazil

19.7

22.9

Canada

11.5

12.3

other countries

11.0

12.2

 

 

 

Asia-Pacific – thereof:

134.5

141.3

China

60.7

66.6

India

27.7

23.2

Australia

26.0

30.2

other countries

20.0

21.3

 

 

 

Total

1’903.2

1’828.4

Sales by region

 

2018

millions of CHF

Pumps Equipment

Rotating Equipment Services

Chemtech

Applicator Systems

Total Sulzer

Europe, Middle East, Africa – thereof:

554.6

458.9

190.0

265.4

1’468.9

Germany

51.0

50.4

23.9

94.5

219.8

United Kingdom

27.7

108.5

4.5

29.1

169.8

Russia

30.3

79.8

15.4

1.7

127.2

Saudi Arabia

43.8

23.4

26.9

0.0

94.1

other countries

401.9

196.8

119.4

140.1

858.0

 

 

 

 

 

 

Americas – thereof:

383.2

453.1

128.0

143.2

1’107.6

USA

267.8

346.4

70.2

128.5

812.9

Brazil

32.4

22.9

27.2

9.8

92.3

Canada

43.6

25.4

12.8

1.4

83.1

Argentina

1.5

16.3

5.8

0.8

24.4

other countries

37.9

42.2

12.0

2.7

94.8

 

 

 

 

 

 

Asia-Pacific – thereof:

346.4

151.6

245.1

45.3

788.4

China

230.1

35.6

145.3

16.1

427.1

India

25.9

6.7

30.2

0.4

63.3

Australia

14.7

37.9

4.4

1.2

58.2

South Korea

13.8

15.4

22.3

4.2

55.7

other countries

61.8

56.0

42.9

23.4

184.1

 

 

 

 

 

 

Total

1’284.2

1’063.7

563.2

453.8

3’364.9

 

2017

millions of CHF

Pumps Equipment

Rotating Equipment Services

Chemtech

Applicator Systems

Total Sulzer

Europe, Middle East, Africa – thereof:

595.1

426.8

150.9

238.8

1’411.6

Germany

61.2

42.1

20.2

81.1

204.7

United Kingdom

27.7

109.0

4.3

23.2

164.3

Russia

38.4

64.8

10.4

2.2

115.8

Saudi Arabia

29.3

20.9

36.5

0.1

86.8

other countries

438.4

190.0

79.5

132.1

840.0

 

 

 

 

 

 

Americas – thereof:

273.1

455.9

137.0

137.6

1’003.5

USA

167.1

346.5

78.5

121.4

713.6

Brazil

34.6

21.9

22.9

11.0

90.4

Canada

29.6

26.3

20.8

1.2

77.9

Argentina

0.5

19.0

0.9

0.4

20.7

other countries

41.4

42.2

13.8

3.5

100.9

 

 

 

 

 

 

Asia-Pacific – thereof:

251.8

146.8

190.1

45.2

633.9

China

103.4

26.2

83.2

13.3

226.1

India

25.1

8.7

30.0

0.2

64.0

Australia

15.7

39.3

12.1

0.7

67.8

South Korea

13.3

12.9

20.2

3.6

50.1

other countries

94.2

59.7

44.7

27.4

225.9

 

 

 

 

 

 

Total

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

 

2018

millions of CHF

Pumps Equipment

Rotating Equipment Services

Chemtech

Applicator Systems

Total Sulzer

Oil and gas

368.8

430.2

469.2

1’268.1

General industry

321.5

178.9

18.2

518.6

Water

445.6

28.9

0.7

475.3

Power

115.4

340.0

4.2

459.6

Adhesives, dental, healthcare

274.1

274.1

Chemical processing industry

32.9

85.7

71.0

189.6

Beauty

179.7

179.7

Total

1’284.2

1’063.7

563.2

453.8

3’364.9

 

2017

millions of CHF

Pumps Equipment

Rotating Equipment Services

Chemtech

Applicator Systems

Total Sulzer

Oil and gas

331.6

401.1

415.8

1’148.5

General industry

327.5

158.3

4.8

490.6

Water

312.3

25.0

1.9

339.2

Power

101.1

352.4

5.2

458.5

Adhesives, dental, healthcare

233.6

233.6

Chemical processing industry

47.5

92.8

50.3

190.6

Beauty

188.0

188.0

Total

1’120.0

1’029.5

478.0

421.6

3’049.0

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

JWC Environmental, LLC

Other

Total

Intangible assets

90.7

6.1

96.8

Property, plant and equipment

11.5

–0.3

11.1

Cash and cash equivalents

3.6

2.8

6.4

Trade accounts receivable

17.2

3.2

20.4

Other current assets

11.6

1.7

13.3

Other liabilities with third parties

–11.9

–2.2

–14.2

Deferred tax liabilities

–1.1

–1.1

Net identifiable assets

122.6

10.0

132.7

Goodwill recognized in balance sheet

88.7

88.7

Negative goodwill recognized in income statement

–0.6

–0.6

Total consideration

211.3

9.4

220.8

 

 

 

 

Purchase price paid in cash

211.3

9.4

220.8

Total consideration

211.3

9.4

220.8

JWC Environmental, LLC

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.

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

2018

2017

Cash consideration paid

–220.8

–162.7

Contingent consideration paid

–2.7

–2.2

Cash acquired

6.4

7.2

Payments for acquisitions in prior years

–0.4

–0.2

Total cash flow from acquisitions, net of cash acquired

–217.5

–157.9

Contingent consideration

millions of CHF

2018

2017

Balance as of January 1

5.1

9.5

Payment of contingent consideration

–2.7

–2.2

Release to other operating income

–1.5

–2.6

Currency translation differences

–0.1

0.4

Total contingent consideration as of December 31

0.9

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.

millions of CHF

Ensival Moret

VIEC

Rotec GT

Transcodent

Total

Intangible assets

52.9

5.2

11.0

42.1

111.2

Property, plant and equipment

16.9

0.5

5.9

4.7

28.0

Cash and cash equivalents

7.0

0.2

7.2

Trade accounts receivable

22.2

3.3

25.5

Other current assets

48.1

0.1

1.9

6.2

56.3

Borrowings

–6.3

–2.5

–8.8

Other liabilities with third parties

–75.1

–3.0

–78.1

Deferred tax liabilities

–16.2

–1.4

–2.2

–19.8

Net identifiable assets

49.5

4.4

16.6

51.0

121.5

Non-controlling interests

–8.3

–8.3

Fair value of 49% preexisting interest in Sulzer TS Russia

 

 

–0.4

 

–0.4

Goodwill

18.2

7.5

24.6

50.3

Total consideration

67.7

4.4

15.4

75.6

163.1

 

 

 

 

 

 

Purchase price paid in cash

67.7

4.4

15.0

75.6

162.7

Paid in shares of Sulzer TS Russia

 

 

0.4

 

0.4

Total consideration

67.7

4.4

15.4

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.

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.

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.

Hypothetical impact of foreign exchange risk on income statement

millions of CHF

2018

Currency pair

EUR/RUB

USD/INR

USD/ARS

EUR/ZAR

Exposure

–12.1

18.0

4.1

–7.1

Volatility

13.3%

6.6%

27.4%

14.4%

Effect on profit after tax (rate increase)

–1.1

0.8

0.8

–0.7

Effect on profit after tax (rate decrease)

1.1

–0.8

–0.8

0.7

millions of CHF

2017

Currency pair

EUR/BRL

USD/INR

EUR/ZAR

EUR/USD

Exposure

–12.2

19.8

–5.2

–7.4

Volatility

14.1%

4.4%

15.5%

7.3%

Effect on profit after tax (rate increase)

–1.2

0.6

–0.6

–0.4

Effect on profit after tax (rate decrease)

1.2

–0.6

0.6

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

2018

Currency pair

USD/BRL

USD/MXN

GBP/USD

USD/CHF

EUR/USD

EUR/RUB

EUR/BRL

Exposure

42.5

–34.6

48.0

–37.9

33.8

17.8

–8.7

Volatility

15.6%

13.1%

8.2%

6.5%

7.2%

13.3%

15.2%

Effect on equity, net of taxes (rate increase)

4.6

–3.2

2.8

–1.7

1.7

1.7

–0.9

Effect on equity, net of taxes (rate decrease)

–4.6

3.2

–2.8

1.7

–1.7

–1.7

0.9

millions of CHF

2017

Currency pair

GBP/USD

USD/CHF

USD/MXN

EUR/USD

EUR/CHF

USD/INR

EUR/INR

Exposure

50.2

–53.1

–30.9

34.3

–42.3

–27.8

–15.4

Volatility

8.9%

7.1%

12.2%

7.3%

4.9%

4.4%

7.2%

Effect on equity, net of taxes (rate increase)

3.1

–2.6

–2.6

1.7

–1.4

–0.9

–0.8

Effect on equity, net of taxes (rate decrease)

–3.1

2.6

2.6

–1.7

1.4

0.9

0.8

(II) Price risk

As of December 31, 2018, the group was not exposed to significant price risk related to investments in equity securities.

(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

Variable-interest-bearing assets (net)

Amount

Sensitivity in basis points

Impact on post-tax profit

rate increase

rate decrease

USD

294.8

100

2.1

–2.1

CHF

265.4

100

1.9

–1.9

EUR

262.6

100

1.8

–1.8

CNY

66.8

100

0.5

–0.5

GBP

40.1

100

0.3

–0.3

millions of CHF

2017

Variable-interest-bearing assets (net)

Amount

Sensitivity in basis points

Impact on post-tax profit

rate increase

rate decrease

USD

–150.1

100

–1.0

1.0

CHF

127.8

100

0.9

–0.9

CNY

49.9

100

0.3

–0.3

EUR

45.7

100

0.3

–0.3

INR

38.9

100

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 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

 

2018

millions of CHF

Carrying amount

<1 year

1–5 years

>5 years

Total

Borrowings

1’334.3

30.9

975.0

380.1

1’386.0

Trade accounts payable

521.8

521.8

521.8

Other current and non-current liabilities (including derivative liabilities)

249.5

245.9

18.3

0.1

264.3

 

2017

millions of CHF

Carrying amount

<1 year

1–5 years

>5 years

Total

Borrowings

713.8

263.8

340.1

129.8

733.7

Trade accounts payable

433.8

433.8

433.8

Other current and non-current liabilities (including derivative liabilities)

88.7

71.1

17.3

0.3

88.7

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, 2018 and 2017.

Net debt/EBITDA ratio

millions of CHF

2018

2017

Net debt

–239.0

–225.0

EBITDA

329.0

277.4

Net debt/EBITDA

0.73

0.81

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

2018

2017

Borrowings

1’334.3

713.8

Equity attributable to shareholders of Sulzer Ltd

1’629.9

1’680.1

Borrowings-to-equity ratio (gearing)

0.82

0.42

6.3 Fair value estimation

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.

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

 

December 31, 2018

millions of CHF

Notes

Carrying amount

Fair value

Level 1

Level 2

Level 3

Financial assets measured at fair value

 

 

 

 

 

 

Other financial assets (at fair value)

17

6.8

6.8

0.2

6.6

Derivative assets – current

21, 28

6.4

6.4

6.4

Total financial assets measured at fair value

 

13.1

13.1

0.2

6.4

6.6

 

 

 

 

 

 

 

Financial assets not measured at fair value

 

 

 

 

 

 

Other financial assets (at amortized cost)

17

2.7

 

 

 

 

Non-current receivables (excluding non-current derivative assets)

 

6.2

 

 

 

 

Contract assets

19

205.1

 

 

 

 

Trade accounts receivable

20

622.3

 

 

 

 

Other current receivables (excluding current derivative assets and other taxes)

21

24.3

 

 

 

 

Cash and cash equivalents

22

1’095.2

 

 

 

 

Total financial assets not measured at fair value

 

1’955.7

 

 

 

 

 

 

 

Financial liabilities measured at fair value

 

 

 

 

 

 

Derivative liabilities – non-current

28

0.2

0.2

0.2

Derivative liabilities – current

27, 28

8.4

8.4

8.4

Contingent considerations

4

0.9

0.9

0.9

Total financial liabilities measured at fair value

 

9.6

9.6

8.7

0.9

 

 

 

 

 

 

 

Financial liabilities not measured at fair value

 

 

 

 

 

 

Outstanding bonds

25

1’308.7

1’312.6

1’312.6

Other non-current borrowings

25

7.6

 

 

 

 

Other current borrowings and bank loans

25

18.0

 

 

 

 

Other non-current liabilities

 

3.6

 

 

 

 

Trade accounts payable

 

521.8

 

 

 

 

Other current liabilities (excluding current derivative liabilities, other taxes and contingent considerations)

 

211.3

 

 

 

 

Total financial liabilities not measured at fair value

 

2’070.9

1’312.6

1’312.6

Fair value table

 

December 31, 2017

millions of CHF

Notes

Carrying amount

Fair value

Level 1

Level 2

Level 3

Financial assets measured at fair value

 

 

 

 

 

 

Derivative assets – non-current

28

0.2

0.2

0.2

Derivative assets – current

21, 28

7.3

7.3

7.3

Total financial assets measured at fair value

 

7.5

7.5

7.5

 

 

 

 

 

 

 

Financial assets not measured at fair value

 

 

 

 

 

 

Loans and receivables

17

9.4

 

 

 

 

Available-for-sale financial assets

17

4.2

 

 

 

 

Non-current receivables (excluding non-current derivative assets)

 

8.6

 

 

 

 

Trade accounts receivable

20

901.8

 

 

 

 

Other current receivables (excluding current derivative assets and other taxes)

21

27.0

 

 

 

 

Cash and cash equivalents

22

488.8

 

 

 

 

Total financial assets not measured at fair value

 

1’439.8

 

 

 

 

 

 

 

Financial liabilities measured at fair value

 

 

 

 

 

 

Derivative liabilities – current

28

6.8

6.8

6.8

Contingent considerations

4

5.1

5.1

5.1

Put option liability

4

14.6

14.6

14.6

Total financial liabilities measured at fair value

 

26.5

26.5

6.8

19.7

 

 

 

 

 

 

 

Financial liabilities not measured at fair value

 

 

 

 

 

 

Outstanding bonds

25

450.4

456.0

456.0

Other non-current borrowings

25

8.3

 

 

 

 

Other current borrowings and bank loans

25

255.1

 

 

 

 

Other non-current liabilities (excluding put option liability)

 

3.0

 

 

 

 

Trade accounts payable

 

433.8

 

 

 

 

Other current liabilities (excluding current derivative liabilities, other taxes and contingent considerations)

 

23.9

 

 

 

 

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 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

2018

2017

Salaries and wages

889.4

853.1

Defined contribution plan expenses

25.7

25.7

Defined benefit plan expenses

21.8

18.7

Cost of share-based payment transactions

15.1

10.8

Social benefit costs

141.2

137.2

Other personnel costs

36.5

32.7

Total personnel expenses

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

 

2018

millions of CHF

Funded plans Switzerland

Funded plans United Kingdom

Funded plans USA

Funded plans Others

Unfunded plans

Total

Present value of funded defined benefit obligation

–1’106.0

–511.0

–60.8

–78.5

–1’756.3

Fair value of plan assets (funded plans)

1’116.6

432.5

44.5

63.9

1’657.5

Overfunding / (underfunding)

10.6

–78.5

–16.3

–14.6

–98.8

Present value of unfunded defined benefit obligation

–48.8

–48.8

Adjustment to asset ceiling

–0.9

–0.9

Asset / (liability) recognized in the balance sheet

9.7

–78.5

–16.3

–14.6

–48.8

–148.5

– thereof as liabilities under defined benefit obligation

–2.6

–78.5

–16.3

–14.7

–48.8

–160.9

– thereof as other current receivables and prepaid expenses

12.3

0.1

12.4

 

2017

millions of CHF

Funded plans Switzerland

Funded plans United Kingdom

Funded plans USA

Funded plans Others

Unfunded plans

Total

Present value of funded defined benefit obligation

–1’218.3

–634.4

–65.4

–79.5

–1’997.6

Fair value of plan assets

1’210.6

502.3

45.9

65.5

1’824.3

Overfunding / (underfunding)

–7.7

–132.1

–19.5

–14.0

–173.3

Present value of unfunded defined benefit obligation

–50.9

–50.9

Adjustment to asset ceiling

–1.6

–1.6

Asset / (liability) recognized in the balance sheet

–9.3

–132.1

–19.5

–14.0

–50.9

–225.8

– thereof as liabilities under defined benefit obligation

–22.5

–132.1

–19.5

–14.1

–50.9

–239.1

– thereof as other current receivables and prepaid expenses

13.2

0.1

13.3

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.

Employee benefit plans

millions of CHF

2018

2017

Reconciliation of effect of asset ceiling

 

 

Adjustment to asset ceiling at January 1

–1.6

–2.3

Change in effect of asset ceiling excl. interest income / (expense)

0.7

0.7

Adjustment to asset ceiling at December 31

–0.9

–1.6

 

 

 

Reconciliation of asset / (liability) recognized in the balance sheet

 

 

Asset / (liability) recognized at January 1

–225.8

–329.9

Defined benefit income / (expense) recognized in the income statement

–26.7

–25.7

Defined benefit income / (expense) recognized in OCI

68.7

113.6

Employer contribution

27.4

29.8

Acquired through business combination

–2.7

Currency translation differences

7.9

–10.9

Asset / (liability) recognized at December 31

–148.5

–225.8

 

 

 

Components of defined benefit income / (expense) in the income statement

 

 

Current service cost (employer)

–21.3

–18.2

Interest expense

–25.0

–27.4

Interest income on plan assets

20.1

20.4

Past service cost

–0.7

–0.1

Effects of curtailments and settlement

1.0

0.2

Other administrative cost

–0.8

–0.6

Income / (expense) recognized in the income statement

–26.7

–25.7

– thereof charged to personnel expenses

–21.8

–18.7

– thereof charged to financial expense

–4.9

–7.0

 

 

 

Components of defined benefit gain / (loss) in OCI

 

 

Actuarial gain / (loss) on defined benefit obligation

140.8

29.4

Return on plan assets excl. interest income

–73.0

83.4

Change in effect of asset ceiling excl. interest expense / (income)

0.8

0.7

Return on reimbursement right excl. interest income

0.1

0.1

Defined benefit gain / (loss) recognized in OCI 1)

68.7

113.6

1) The tax effect on defined benefit cost recognized in OCI amounted to CHF –12.8 million (2017: CHF –21.8 million).

Employee benefit plans

millions of CHF

2018

2017

Reconciliation of defined benefit obligation

 

 

Defined benefit obligation as of January 1

–2’048.5

–2’110.9

Interest expense

–25.0

–27.4

Current service cost (employer)

–21.3

–18.2

Contributions by plan participants

–9.7

–9.7

Past service cost

–0.7

–0.1

Benefits paid/deposited

124.0

139.7

Effects of curtailments and settlement

2.8

0.2

Acquired through business combination

–13.5

Other administrative cost

–0.8

–0.6

Actuarial gain / (loss)

140.8

29.4

Currency translation differences

33.3

–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

1’824.3

1’783.3

Interest income on plan assets

20.1

20.4

Employer contribution

27.4

29.8

Contributions by plan participants

9.6

9.7

Benefits paid/deposited

–124.0

–139.7

Effects of curtailments and settlement

–1.8

–0.2

Acquired through business combination

10.8

Return on plan assets excl. interest income

–73.0

83.4

Currency translation differences

–25.1

26.8

Fair value of plan assets as of December 31

1’657.5

1’824.3

 

 

 

Total plan assets at fair value – quoted market price

 

 

Cash and cash equivalents

49.1

94.5

Equity instruments

539.7

623.0

Debt instruments

476.2

513.4

Real estate funds

41.0

32.7

Investment funds

3.8

3.4

Others

79.0

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)

280.7

272.0

Others

188.0

209.0

Total assets at fair value – non-quoted market price as of December 31

468.7

481.0

 

 

 

Best estimate of contributions for upcoming financial year

 

 

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).

Employee benefit plans

millions of CHF

2018

2017

Components of defined benefit obligation, split

 

 

Defined benefit obligation for active members

–318.5

–354.7

Defined benefit obligation for pensioners

–1’193.5

–1’325.0

Defined benefit obligation for deferred members

–293.1

–368.8

Total defined benefit obligation at December 31

–1’805.1

–2’048.5

 

 

 

Components of actuarial gain / (losses) on obligations

 

 

Actuarial gain / (loss) arising from changes in financial assumptions

104.7

–7.1

Actuarial gain / (loss) arising from changes in demographic assumptions

50.2

19.6

Actuarial gain / (loss) arising from experience adjustments

–14.1

16.9

Total actuarial gain / (loss) on defined benefit obligation

140.8

29.4

 

 

 

Components of economic benefit available

 

 

Economic benefits available in form of refund

–32.6

Economic benefits available in form of reduction in future contribution

257.8

453.9

Total economic benefit available

225.2

453.9

 

 

 

Maturity profile of defined benefit obligation

 

 

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

0.9%

3.0%

0.7%

2.5%

Discount rate for pensioners

0.6%

3.0%

0.4%

2.5%

Future salary increases

1.0%

0.0%

1.0%

0.0%

Future pension increases

0.0%

2.7%

0.0%

2.5%

Life expectancy at retirement age (male/female) in years

23/25

22/23

23/25

22/24

Sensitivity analysis of defined benefit obligation

millions of CHF

2018

2017

Discount rate (decrease 0.25 percentage points)

–58.3

–71.7

Discount rate (increase 0.25 percentage points)

55.7

67.5

Future salary growth (decrease 0.25 percentage points)

5.2

3.1

Future salary growth (increase 0.25 percentage points)

–1.5

–3.2

Life expectancy (decrease 1 year)

89.0

105.5

Life expectancy (increase 1 year)

–85.5

–104.2

10 Research and development expenses

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

millions of CHF

2018

2017

Pumps Equipment

45.1

39.0

Rotating Equipment Services

1.1

1.4

Chemtech

17.2

16.3

Applicator Systems

22.5

23.8

Others

0.5

0.5

Total

86.4

81.0

11 Other operating income and expenses

millions of CHF

2018

2017

Income from release of contingent consideration

1.5

2.6

Gain from sale of property, plant and equipment

6.0

4.6

Operating currency exchange gains, net

2.2

1.3

Other operating income

40.2

13.7

Total other operating income

49.9

22.2

 

 

 

Restructuring expenses

–13.1

–21.7

Impairments of property, plant and equipment

–4.4

–15.4

Cost for mergers and acquisitions

–1.4

–4.1

Loss from sale of property, plant and equipment

–0.2

–0.2

Total other operating expenses

–19.1

–41.4

 

 

 

Total other operating income and expenses, net

30.8

–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 –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

2018

2017

Interest and securities income

2.9

4.1

Total interest and securities income

2.9

4.1

Interest expenses

–15.4

–8.2

Interest expenses on employee benefit plans

–4.9

–7.0

Total interest expenses

–20.3

–15.2

Total interest income and expenses, net

–17.4

–11.1

 

 

 

Income from investments and other financial assets

0.5

0.8

Fair value changes

8.6

1.2

Other financial expenses

–2.0

–1.2

Currency exchange gains/losses, net

–8.7

–0.5

Total other financial income and expenses, net

–1.5

0.3

 

 

 

Total financial income and expenses, net

–18.9

–10.8

– thereof fair value changes on financial assets at fair value through profit and loss

8.6

1.2

– thereof other income from financial assets at fair value through profit and loss

0.5

0.8

– thereof interest income on financial assets at amortized costs

2.9

4.1

– thereof other financial expenses

–2.0

–1.2

– thereof currency exchange gains/losses, net

–8.7

–0.5

– thereof interest expenses on borrowings

–15.4

–8.2

– thereof interest expenses on employee benefit plans

–4.9

–7.0

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

2018

2017

Current income tax expenses

–69.4

–55.4

Deferred income tax income

20.3

17.2

Total income tax expenses

–49.2

–38.2

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.

Reconciliation of income tax expenses

millions of CHF

2018

2017

Income before income tax expenses

165.6

125.4

Weighted average tax rate

22.0%

22.8%

Income taxes at weighted average tax rate

–36.4

–28.6

Income taxed at different tax rates

5.9

6.1

Effect of tax loss carryforwards and allowances for deferred income tax assets

–7.9

–4.6

Expenses not deductible for tax purposes

–5.8

–4.3

Effect of changes in tax rates and legislation

–3.7

–4.8

Prior year items and others

–1.3

–2.0

Total income tax expenses

–49.2

–38.2

Effective income tax rate

29.7%

30.5%

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 been 23.4%.

Income tax liabilities

millions of CHF

2018

2017

Balance as of January 1

27.1

16.5

Acquired through business combination

0.3

2.0

Additions

35.5

51.9

Released as no longer required

–1.6

Utilized

–25.7

–44.3

Currency translation differences

–1.3

1.0

Total income tax liabilities as of December 31

34.3

27.1

– thereof non-current

2.3

2.3

– thereof current

32.0

24.8

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

 

2018

2017

millions of CHF

Assets

Liabilities

Net

Assets

Liabilities

Net

Intangible assets

12.4

–96.1

–83.7

0.5

–107.7

–107.2

Property, plant and equipment

6.2

–12.0

–5.8

7.4

–10.9

–3.5

Other financial assets

4.5

–0.0

4.5

0.2

–0.1

0.1

Inventories

17.6

–12.7

4.9

22.1

–4.5

17.6

Other assets

34.1

–10.1

24.0

19.7

–18.6

1.1

Non-current provisions

14.5

–2.2

12.3

16.7

–2.5

14.2

Defined benefit plans

20.4

–0.1

20.3

35.4

–0.3

35.1

Current provisions

22.6

–0.8

21.8

22.9

–3.7

19.2

Other current liabilities

27.4

–9.2

18.2

28.5

–8.9

19.6

Tax loss carryforwards

32.3

32.3

38.0

38.0

Elimination of intercompany profits

0.6

0.6

0.7

0.7

Tax assets/liabilities

192.7

–143.3

49.4

192.1

–157.2

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

 

2018

millions of CHF

Balance as of January 1

Recognized in profit or loss

Recognized in other comprehensive income

Acquisition of subsidiaries

Currency translation differences

Balance as of December 31

Intangible assets

–107.2

20.0

–0.7

4.2

–83.7

Property, plant and equipment

–3.5

–1.4

–0.9

–5.8

Other financial assets

0.1

4.3

4.5

Inventories

17.5

–12.0

–0.4

–0.2

4.9

Other assets

9.8

14.4

0.6

–0.8

24.0

Non-current provisions

14.2

–1.4

–0.5

12.3

Defined benefit plans

35.1

–1.5

–12.8

–0.5

20.3

Current provisions

19.2

3.4

–0.8

21.8