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Notes to the consolidated financial statements

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1 General information

Sulzer Ltd (the “companyˮ) 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, 2019, comprise the company and its subsidiaries (together referred to as the “groupˮ and individually as the “subsidiariesˮ) and the group’s interest in associates and joint ventures. The group specializes in pumping, agitation, mixing, separation and application technologies for fluids of all types. Sulzer was founded in 1834 in Winterthur, Switzerland, and employs around 16’500 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 17, 2020.

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 April 30, 2019, the group acquired 100% of the issued shares in GTC Technology US, LLC (“GTCˮ) for CHF 43.5 million. GTC is headquartered in Houston, Texas, US, and employs around 200 people. The company is offering proprietary processes and systems for the production of aromatics and other petrochemicals. GTC combines its specialized expertise in the licensing of process-based plant engineering with long-standing industry experience. The acquisition resulted in an increase in intangible assets of CHF 19.5 million at the date of acquisition (see note 4).
  • As of July 1, 2019, the group acquired 100% of the issued shares in Alba Power for CHF 54.4 million. Alba is headquartered in Scotland, UK, and employs around 80 people. The company is offering aeroderivative gas turbine services. The acquisition resulted in an increase in intangible assets of CHF 38.2 million at the date of acquisition (see note 4).
  • Sulzer has continued to streamline the organizational setup. In 2019, restructuring expenses were mainly associated with the consolidation of two production facilities in Germany. The group recognized restructuring expenses of CHF 23.1 million in 2019 (2018: CHF 13.1 million). Associated with restructuring initiatives, the group further recognized impairments on tangible and intangible assets of CHF 4.4 million (2018: CHF 4.4 million).
  • This is the first set of consolidated financial statements where IFRS 16 “Leasesˮ has been applied. The application of this new accounting standard resulted in an increase of total assets and total liabilities of CHF 107.3 million. 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

2019

2018

2019

2018

2019

2018

2019

2018

Order intake (unaudited) 1)

1’458.9

1’372.1

1’193.2

1’109.7

670.0

600.1

425.1

449.6

Nominal growth (unaudited)

6.3%

16.3%

7.5%

5.9%

11.6%

19.7%

–5.4%

5.4%

Currency-adjusted growth (unaudited)

8.3%

16.5%

10.7%

7.6%

12.8%

20.5%

–4.3%

4.2%

Organic growth 2) (unaudited)

8.0%

8.6%

8.6%

5.8%

6.5%

20.5%

–5.2%

0.3%

 

 

 

 

 

 

 

 

 

Order backlog as of December 31 (unaudited)

924.3

982.9

422.2

393.1

385.3

345.9

60.8

65.0

 

 

 

 

 

 

 

 

 

Sales recognized at a point in time

1’002.6

920.3

985.5

872.1

415.1

335.8

419.1

452.1

Sales recognized over time

474.3

363.8

181.6

191.6

248.8

227.4

1.5

1.7

Sales 3)

1’477.0

1’284.2

1’167.0

1’063.7

664.0

563.2

420.6

453.8

Nominal growth

15.0%

n/a

9.7%

n/a

17.9%

n/a

–7.3%

n/a

Currency-adjusted growth (unaudited)

17.2%

n/a

12.8%

n/a

19.0%

n/a

–6.4%

n/a

Organic growth 2) (unaudited)

17.0%

n/a

10.0%

n/a

12.7%

n/a

–7.4%

n/a

 

 

 

 

 

 

 

 

 

opEBITA (unaudited)

59.7

41.4

164.5

146.1

63.8

50.0

88.2

95.7

opROSA (unaudited)

4.0%

3.2%

14.1%

13.7%

9.6%

8.9%

21.0%

21.1%

 

 

 

 

 

 

 

 

 

Restructuring expenses

–5.2

–8.8

–2.6

–3.4

–0.8

1.1

–13.7

–1.6

Amortization

–30.0

–35.5

–8.1

–7.4

–6.2

–5.2

–19.0

–19.6

Impairments on tangible and intangible assets

–0.7

0.0

–1.0

–1.3

–3.7

Non-operational items (unaudited)

–12.6

–23.5

–1.6

–4.4

–1.9

–31.4

–14.1

–6.9

EBIT

11.9

–27.2

152.2

130.8

54.0

14.5

40.2

63.8

 

 

 

 

 

 

 

 

 

Depreciation

–34.8

–26.4

–28.2

–17.1

–13.8

–8.2

–22.9

–19.5

 

 

 

 

 

 

 

 

 

Operating assets

1’605.5

1’670.1

960.8

860.2

590.9

483.0

608.3

623.4

Unallocated assets

Total assets as of December 31

1’605.5

1’670.1

960.8

860.2

590.9

483.0

608.3

623.4

 

 

 

 

 

 

 

 

 

Operating liabilities

730.6

739.1

363.2

347.7

364.5

289.8

108.6

76.3

Unallocated liabilities

Total liabilities as of December 31

730.6

739.1

363.2

347.7

364.5

289.8

108.6

76.3

 

 

 

 

 

 

 

 

 

Operating net assets

874.9

931.0

597.6

512.5

226.4

193.1

499.7

547.1

Unallocated net assets

Total net assets as of December 31

874.9

931.0

597.6

512.5

226.4

193.1

499.7

547.1

 

 

 

 

 

 

 

 

 

Capital expenditure (2019 incl. lease assets)

–41.0

–32.6

–36.6

–23.1

–22.1

–6.6

–41.3

–31.5

 

 

 

 

 

 

 

 

 

Employees (number of full-time equivalents) as of December 31

5’759

5’713

4’900

4’721

3’803

3’063

1’821

1’864

1) Order intake from external customers.

2) Adjusted for currency and acquisition effects.

3) Sales from external customers.

Segment information by divisions

 

Total divisions

Others 4)

Total Sulzer

millions of CHF

2019

2018

2019

2018

2019

2018

Order intake (unaudited) 1)

3’747.2

3’531.5

3’747.2

3’531.5

Nominal growth (unaudited)

6.1%

11.9%

6.1%

11.9%

Currency-adjusted growth (unaudited)

8.2%

12.5%

8.2%

12.5%

Organic growth 2) (unaudited)

6.3%

8.4%

6.3%

8.4%

 

 

 

 

 

 

 

Order backlog as of December 31 (unaudited)

1’792.6

1’786.9

1’792.6

1’786.9

 

 

 

 

 

 

 

Sales recognized at a point in time

2’822.3

2’580.3

2’822.3

2’580.3

Sales recognized over time

906.2

784.6

906.2

784.6

Sales 3)

3’728.5

3’364.9

3’728.5

3’364.9

Nominal growth

10.8%

n/a

10.8%

n/a

Currency-adjusted growth (unaudited)

13.0%

n/a

13.0%

n/a

Organic growth 2) (unaudited)

10.8%

n/a

10.8%

n/a

 

 

 

 

 

 

 

opEBITA (unaudited)

376.2

333.2

–4.9

–10.7

371.3

322.5

opROSA (unaudited)

10.1%

9.9%

n/a

n/a

10.0%

9.6%

 

 

 

 

 

 

 

Restructuring expenses

–22.2

–12.7

–1.0

–0.4

–23.1

–13.1

Amortization

–63.4

–67.8

–1.1

–1.3

–64.5

–69.0

Impairments on tangible and intangible assets

–2.3

–4.4

–2.1

–4.4

–4.4

Non-operational items (unaudited)

–30.1

–66.3

–8.2

14.3

–38.3

–52.0

EBIT

258.3

181.8

–17.3

2.0

241.0

183.8

 

 

 

 

 

 

 

Depreciation

–99.6

–71.2

–3.0

–0.5

–102.6

–71.7

 

 

 

 

 

 

 

Operating assets

3’765.5

3’636.6

35.6

–26.7

3’801.1

3’610.0

Unallocated assets

1’308.4

1’288.4

1’308.4

1’288.4

Total assets as of December 31

3’765.5

3’636.6

1’344.0

1’261.7

5’109.5

4’898.3

 

 

 

 

 

 

 

Operating liabilities

1’566.9

1’452.9

135.8

79.7

1’702.7

1’532.5

Unallocated liabilities

1’812.9

1’724.7

1’812.9

1’724.7

Total liabilities as of December 31

1’566.9

1’452.9

1’948.7

1’804.4

3’515.6

3’257.3

 

 

 

 

 

 

 

Operating net assets

2’198.6

2’183.8

–100.2

–106.4

2’098.4

2’077.4

Unallocated net assets

–504.5

–436.4

–504.5

–436.4

Total net assets as of December 31

2’198.6

2’183.8

–604.7

–542.7

1’593.9

1’641.0

 

 

 

 

 

 

 

Capital expenditure (2019 incl. lease assets)

–140.9

–93.8

–1.2

–2.4

–142.1

–96.2

 

 

 

 

 

 

 

Employees (number of full-time equivalents) as of December 31

16’284

15’361

222

211

16’506

15’572

1) Order intake from external customers.

2) Adjusted for currency and acquisition effects.

3) Sales from external customers.

4) The most significant activities under “Others” relate to Corporate Center.

For the definition of opEBITA, opROSA and adjustments for currency and acquisition effects, reference is made to the “Supplementary information” and for the reconciliation statements to the “Financial review”.

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

The Pumps Equipment division specializes in pumping solutions specifically engineered for the processes of its customers. The division provides pumps, agitators, compressors, grinders and screens developed through intensive research and development in fluid dynamics and advanced materials. The focus is on pumping solutions for water, oil and gas, power, chemicals and most industrial segments.

Rotating Equipment Services

Through a network of over 100 service sites around the world, the Rotating Equipment Services division provides cutting-edge parts as well as maintenance and repair solutions for pumps, turbines, compressors, motors and generators. The division services Sulzer original equipment, but also all associated third-party rotating equipment run by the customers, maximizing its sustainability and life cycle cost-effectiveness. The division’s technology-based solutions, fast execution and expertise in complex maintenance projects are available at its customers’ doorstep. 

Chemtech

The Chemtech division focuses on innovative mass transfer, static mixing and polymer solutions for petrochemicals, refining, LNG, biopolymers and biofuels. The division’s product offering ranges from process components to complete separation process plants, including licensing. Customer support covers engineering services and field services to tray and packing installation, tower maintenance, welding and plant turnaround projects.

Applicator Systems

Through its Mixpac, Cox, Transcodent and Geka brands, the Applicator Systems division develops and delivers innovative fluid applicators for the dental, adhesives, healthcare and beauty markets. The division’s IP-protected applicator solutions leverage its expertise in plastic-injection molding, micro-brushes and two-component mixing to make the customers’ products precise, safe, unique and more sustainable.

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 opEBITA to assess the performance of the operating segments. However, the Chief Executive Officer also receives information about the segments’ order intake and backlog, sales, and operating assets and liabilities on a monthly basis.

Sales from external customers reported to the Chief Executive Officer are 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 sales.

Operating assets and liabilities are assets or liabilities related to the operating activities of an entity and contributing to the EBIT.

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

2019

2018

Europe, Middle East, Africa

1’346.7

1’289.4

– thereof Germany

275.4

326.4

– thereof Switzerland

234.1

161.4

– thereof United Kingdom

222.4

150.7

– thereof Sweden

192.9

222.2

– thereof Netherlands

124.1

123.7

 

 

 

Americas

524.0

479.3

– thereof USA

479.3

437.1

 

 

 

Asia-Pacific

148.0

134.5

– thereof China

60.1

60.7

 

 

 

Total

2’018.7

1’903.2

Sales by region

 

2019

millions of CHF

Pumps Equipment

Rotating Equipment Services

Chemtech

Applicator Systems

Total Sulzer

Europe, Middle East, Africa

576.7

534.7

195.4

232.7

1’539.6

– thereof Germany

60.2

50.5

36.9

91.5

239.1

– thereof United Kingdom

26.5

142.1

6.7

19.6

194.8

– thereof Russia

42.1

75.5

13.8

1.3

132.7

– thereof Saudi Arabia

60.2

39.9

22.5

0.1

122.7

– thereof France

35.0

28.0

5.0

27.0

94.9

 

 

 

 

 

 

Americas

511.3

480.6

173.4

156.0

1’321.3

– thereof USA

345.3

377.1

103.4

139.9

965.8

 

 

 

 

 

 

Asia-Pacific

389.0

151.6

295.2

31.8

867.7

– thereof China

211.2

25.0

169.7

14.9

420.8

 

 

 

 

 

 

Total

1’477.0

1’167.0

664.0

420.6

3’728.5

 

2018

millions of CHF

Pumps Equipment

Rotating Equipment Services

Chemtech

Applicator Systems

Total Sulzer

Europe, Middle East, Africa

554.6

458.9

190.0

265.4

1’468.9

– thereof Germany

51.0

50.4

23.9

94.5

219.8

– thereof United Kingdom

27.7

108.5

4.5

29.1

169.8

– thereof Russia

30.3

79.8

15.4

1.7

127.2

– thereof Saudi Arabia

43.8

23.4

26.9

0.0

94.1

– thereof France

13.9

31.8

7.3

28.6

81.5

 

 

 

 

 

 

Americas

383.2

453.1

128.0

143.2

1’107.6

– thereof USA

267.8

346.4

70.2

128.5

812.9

 

 

 

 

 

 

Asia-Pacific

346.4

151.6

245.1

45.3

788.4

– thereof China

230.1

35.6

145.3

16.1

427.1

 

 

 

 

 

 

Total

1’284.2

1’063.7

563.2

453.8

3’364.9

Segment information by market segment

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

Sales by market segment

 

2019

millions of CHF

Pumps Equipment

Rotating Equipment Services

Chemtech

Applicator Systems

Total Sulzer

Oil and gas

355.8

422.3

217.7

995.8

Chemicals

232.9

198.2

414.8

845.9

General industry

340.4

195.7

23.4

559.5

Water

432.7

38.2

0.9

471.8

Power

115.2

312.6

7.2

435.1

Adhesives, dental, healthcare

274.1

274.1

Beauty

146.5

146.5

Total

1’477.0

1’167.0

664.0

420.6

3’728.5

 

2018 1)

millions of CHF

Pumps Equipment

Rotating Equipment Services

Chemtech

Applicator Systems

Total Sulzer

Oil and gas

238.7

304.2

194.1

737.0

Chemicals

162.9

211.7

346.0

720.7

General industry

336.7

178.9

18.2

533.8

Water

430.4

28.9

0.7

460.0

Power

115.4

340.0

4.2

459.6

Adhesives, dental, healthcare

274.1

274.1

Beauty

179.7

179.7

Total

1’284.2

1’063.7

563.2

453.8

3’364.9

1) 2018 numbers are adjusted to reflect changes in the market segment definition.

4 Acquisitions of subsidiaries

Acquisitions in 2019

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

GTC Technology US, LLC

Alba Power

Other

Total

Intangible assets

19.5

38.2

5.3

63.1

Property, plant and equipment

4.0

3.9

8.0

Lease assets

5.7

0.1

5.8

Cash and cash equivalents

12.6

3.2

15.9

Trade accounts receivable

9.3

4.4

13.7

Other current assets

0.8

1.4

2.2

Borrowings

–0.4

–0.4

Lease liabilities

–5.7

–0.1

–5.8

Provisions

–0.7

–0.7

Other liabilities

–6.9

–4.1

–0.7

–11.7

Deferred tax liabilities

–2.3

–5.4

–7.7

Net identifiable assets

36.8

41.1

4.6

82.4

Goodwill recognized in balance sheet

6.8

13.3

0.7

20.8

Total consideration

43.5

54.4

5.3

103.2

 

 

 

 

 

Purchase price paid in cash

39.9

54.4

94.3

Purchase price not yet paid

5.3

5.3

Contingent consideration

3.6

3.6

Total consideration

43.5

54.4

5.3

103.2

GTC Technology US, LLC

On April 30, 2019, Sulzer acquired a 100% controlling interest of GTC Technology US, LLC (“GTCˮ) for CHF 43.5 million, of which CHF 39.9 million was paid in cash and CHF 3.6 million arose from a contingent consideration agreement. The headquarters of GTC are located in Houston, Texas, USA. GTC employs 200 people and is a technology company offering proprietary processes and systems for the production of aromatics and other petrochemicals. This acquisition strengthens Sulzer Chemtech’s leadership in petrochemical processes and expands its revenue base to process licensing and associated proprietary equipment and chemicals. The goodwill is attributable to synergies by leveraging cross-selling opportunities. None of the goodwill is expected to be deductible for tax purposes. Transaction costs recognized in the income statement amount to CHF 0.3 million. Since the acquisition date, GTC contributed order intake of CHF 37.9 million, sales of CHF 35.4 million and net income of CHF 0.1 million to the group.

Contingent consideration

The contingent consideration is dependent on patents, technology and licensing, as well as order intake from the company’s product portfolio. The total liability is limited at CHF 3.6 million. The calculation of the contingent consideration is based on management assessments that the criteria will be achieved at a probability of 100%.

Acquired receivables

The fair value of acquired trade accounts receivable is CHF 9.3 million. The gross contractual amount for trade account receivables due is CHF 11.4 million, of which CHF 2.2 million is expected to be uncollectible at the date of acquisition.

Alba Power

On July 1, 2019, Sulzer acquired a 100% controlling interest of the Scottish aeroderivative gas turbine service provider Alba Power for CHF 54.4 million. The Alba Power facilities are located in Aberdeen (UK), Houston (US) and Ontario (CA). The company employs 80 people. Through this acquisition, Sulzer diversifies its gas turbine service business into distributed power and offshore as well as marine applications where there are sizable, active markets and numerous cross-selling synergies with its existing pump, motor, generator and turbo service customers. Founded in 2003, Alba Power offers a wide range of services to its clients including field service, inspection, repair and overhaul. None of the goodwill is expected to be deductible for tax purposes. Transaction costs recognized in the income statement amount to CHF 1.0 million. Since the acquisition date, Alba Power contributed order intake of CHF 13.4 million, sales of CHF 19.7 million and net income of CHF 2.3 million to the group.

Acquired receivables

The fair value of acquired trade accounts receivable is CHF 4.4 million. The gross contractual amount for trade account receivables due is CHF 6.9 million, of which CHF 2.5 million is expected to be uncollectible at the date of acquisition.

Pro forma sales and profit contribution

Had all above acquisitions occurred on January 1, 2019, management estimates that total net sales of the group would amount to CHF 3’756.0 million, and the consolidated net income would be CHF 156.9 million.

Cash flow from acquisitions of subsidiaries

millions of CHF

2019

2018

Cash consideration paid

–94.3

–220.8

Contingent consideration paid

–2.7

Cash acquired

15.9

6.4

Payments for acquisitions in prior years

–0.4

Total cash flow from acquisitions, net of cash acquired

–78.5

–217.5

Contingent consideration

millions of CHF

2019

2018

Balance as of January 1

0.9

5.1

Assumed in a business combination

3.6

Payment of contingent consideration

–2.7

Release to other operating income

–0.9

–1.5

Currency translation differences

–0.1

–0.1

Total contingent consideration as of December 31

3.5

0.9

Following a reassessment of the contingent consideration agreements in 2019, CHF 0.9 million of the contingent consideration was recognized in the income statement as the assumed probability-adjusted gross profit and EBITDA (earnings before interests, taxes, depreciation and amortization) was not achieved.

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.

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

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 first quarter of the year (after the budget and the three-year strategic plan have been approved by the Board of Directors in February), 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, 2019, are disclosed in note 14. The accounting policies are disclosed in note 34.

Lease assets and lease liabilities

The group has applied judgment to determine the lease term for lease contracts that include renewal and termination options. The assessment of whether the group is reasonably certain to exercise such options impacts the lease term, which significantly affects the amount of lease liabilities and lease assets recognized. This assessment is depending on economic incentives, such as removal and relocation costs.

Further details are disclosed in note 16 and 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 stand-alone selling price basis, the group determines the stand-alone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocates the transaction price in proportion to those stand-alone selling prices. If the stand-alone selling price is not directly observable, then the group estimates the amount with the expected cost plus margin method.

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 20 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 27 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. The group is exposed to transactional foreign currency risk to the extent that sales, purchases, license fees, borrowings and other balance sheet items are denominated in currencies other than the functional currencies of group companies. The functional currencies of group companies are primarily CHF, EUR, USD, CNY and GBP. 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. The group’s management policy is to apply the following hedge ratios:

Contractual FX-exposure
  • 90% – 100% of the exposure
Non-contractual FX-exposure
  • 100% of the forecasted exposure for the next 1–3 months
  • 60% of the forecasted exposure for the next 4–6 months
  • 40% of the forecasted exposure for the next 7–12 months

The group uses forward exchange contracts to hedge its currency risk, most with a maturity of less than one year from the reporting date. The contracts are generally designated for hedge accounting as cash flow hedges. The group determines the existence of an economic relationship between the hedging instruments and the hedged item based on the currency, amount and timing of the respective cash flows. For hedges of foreign currency purchases, the group enters into hedge relationships where the critical terms of the hedging instrument match exactly with the terms of the hedged item. The group therefore performs a qualitative assessment of effectiveness. If changes in circumstances affect the terms of the hedged item such that the critical terms no longer match exactly with the critical terms of the hedging instrument, the group uses the hypothetical derivative method to assess effectiveness. In hedges of foreign currency purchases, ineffectiveness may arise if the timing of the forecast transaction changes from what was originally estimated.

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 2019 and 2018 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 2019, the currency pair with the most significant exposure and inherent risk was the USD versus the CHF. If, on December 31, 2019, the USD had increased by 5.5% against the CHF with all other variables held constant, profit after tax for the year would have been CHF 0.6 million higher due to foreign exchange gains on USD-denominated financial assets. A decrease of the rate would have caused a loss of the same amount.

Hypothetical impact of foreign exchange risk on income statement

millions of CHF

2019

Currency pair

USD/CHF

USD/ARS

USD/CAD

EUR/USD

Exposure

14.9

3.4

9.4

–9.0

Volatility

5.5%

24.9%

5.1%

4.9%

Effect on profit after tax (rate increase)

0.6

0.6

0.4

–0.3

Effect on profit after tax (rate decrease)

–0.6

–0.6

–0.4

0.3

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

The following tables show the hypothetical influence on equity for 2019 and 2018 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

2019

Currency pair

USD/MXN

USD/BRL

GBP/USD

USD/INR

EUR/USD

USD/CHF

EUR/INR

Exposure

37.8

–20.8

31.1

–43.1

40.6

36.0

24.6

Volatility

8.7%

12.9%

8.2%

5.8%

4.9%

5.5%

6.8%

Effect on equity, net of taxes (rate increase)

2.4

–2.0

1.9

–1.9

1.5

1.5

1.2

Effect on equity, net of taxes (rate decrease)

–2.4

2.0

–1.9

1.9

–1.5

–1.5

–1.2

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

(II) Price risk

As of December 31, 2019, 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

2019

Variable-interest-bearing assets (net)

Amount

Sensitivity in basis points

Impact on post-tax profit

rate increase

rate decrease

USD

251.0

100

1.9

–1.9

CHF

217.1

100

1.6

–1.6

EUR

210.9

100

1.6

–1.6

CNY

108.7

100

0.8

–0.8

GBP

25.2

100

0.2

–0.2

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

On December 31, 2019, 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 1.9 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, 2018, 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 2.1 million higher, as a result of higher interest income on USD-denominated 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 20 and on the credit risk out of trade accounts receivable, please refer to note 21.

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

 

2019

millions of CHF

Carrying amount

<1 year

1–5 years

>5 years

Total

Borrowings

1’330.2

144.0

1’107.3

125.6

1’376.8

Lease liabilities

109.7

27.4

66.4

15.9

109.7

Trade accounts payable

522.4

522.4

522.4

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

293.4

287.2

5.6

0.6

293.4

Derivative liabilities

8.2

8.2

0.0

–0.0

8.2

– thereof outflow

 

434.6

0.4

0.0

435.0

– thereof inflow

 

426.4

0.4

0.0

426.8

 

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 (excluding derivative liabilities)

240.8

222.6

18.1

0.1

240.8

Derivative liabilities

8.7

8.4

0.2

8.7

– thereof outflow

 

445.7

5.4

451.1

– thereof inflow

 

437.3

5.2

442.5

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, 2019 and 2018.

Net debt/EBITDA ratio

millions of CHF

2019

2018

 

 

 

Cash and cash equivalents

–1’035.5

–1’095.2

Current financial assets

–57.5

Non-current borrowings

1’199.2

1’316.3

Non-current lease liabilities

82.3

Current borrowings

131.0

18.0

Current lease liabilities

27.4

Net debt as of December 31

346.9

239.0

 

 

 

EBIT

241.0

183.8

Depreciation

102.6

71.7

Impairments on tangible and intangible assets

4.4

4.4

Amortization

64.5

69.0

EBITDA

412.5

329.0

 

 

 

Net debt

346.9

239.0

EBITDA

412.5

329.0

Net debt/EBITDA ratio

0.84

0.73

The lease liabilities have been restated as of January 1, 2019, due to the first time application of IFRS 16 “Leasesˮ. Further details are provided in note 34. Without consideration of the lease liabilities, applying the same accounting policies as in the prior year, the net debt/EBITDA ratio would be 0.63.

Another important ratio for the group is the gearing ratio (borrowings-to-equity ratio), which is calculated as total borrowings and lease liabilities divided by equity attributable to shareholders of Sulzer Ltd. The equity capital as shown in the balance sheet corresponds to the managed equity capital.

As of December 31, 2019 and 2018, the gearing ratio was as follows:

Gearing ratio (borrowings-to-equity ratio)

millions of CHF

2019

2018

Non-current borrowings

1’199.2

1’316.3

Non-current lease liabilities

82.3

Current borrowings

131.0

18.0

Current lease liabilities

27.4

Total borrowings and lease liabilities

1’439.9

1’334.3

Equity attributable to shareholders of Sulzer Ltd

1’580.7

1’629.9

Gearing ratio (borrowings-to-equity ratio)

0.91

0.82

The lease liabilities have been restated as of January 1, 2019, due to the first time application of IFRS 16 “Leasesˮ. Further details are provided in note 34. Without consideration of the lease liabilities, applying the same accounting policies as in the prior year, the gearing ratio would be 0.84.

For the definition of net debt, EBITDA and gearing ratio, please refer to “Supplementary information”.

6.3 Fair value estimation

The following tables present the carrying amounts and fair values of financial assets and liabilities as of December 31, 2019 and 2018, 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, 2019

 

 

Carrying amount

Fair value

millions of CHF

Notes

Fair value hedging instruments

Fair value through profit or loss

Financial assets at amortized cost

Other financial liabilities

Total carrying amount

Level 1

Level 2

Level 3

Total fair value

Financial assets measured at fair value

 

 

 

 

 

 

 

 

 

 

Other non-current financial assets (at fair value)

18

 

10.3

 

 

10.3

0.3

10.0

10.3

Derivative assets – non-current

29

0.1

 

 

 

0.1

0.1

0.1

Derivative assets – current

22, 29

6.7

 

 

 

6.7

6.7

6.7

Total financial assets measured at fair value

 

6.8

10.3

17.1

0.3

6.8

10.0

17.1

 

 

 

 

 

 

 

 

 

 

 

Financial assets not measured at fair value

 

 

 

 

 

 

 

 

 

 

Other non-current financial assets (at amortized cost)

18

 

 

2.4

 

2.4

 

 

 

 

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

 

 

 

6.2

 

6.2

 

 

 

 

Trade accounts receivable

21

 

 

645.9

 

645.9

 

 

 

 

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

22

 

 

87.9

 

87.9

 

 

 

 

Current financial assets (at amortized cost)

18

 

 

57.5

 

57.5

 

 

 

 

Cash and cash equivalents

23

 

 

1’035.5

 

1’035.5

 

 

 

 

Total financial assets not measured at fair value

 

1’835.3

1’835.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities measured at fair value

 

 

 

 

 

 

 

 

 

 

Derivative liabilities – non-current

29

0.0

 

 

 

0.0

0.0

0.0

Derivative liabilities – current

28, 29

8.2

 

 

 

8.2

8.2

8.2

Contingent considerations

4

 

3.5

 

 

3.5

3.5

3.5

Total financial liabilities measured at fair value

 

8.2

3.5

11.7

8.2

3.5

11.7

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities not measured at fair value

 

 

 

 

 

 

 

 

 

 

Outstanding non-current bonds

26

 

 

 

1’199.2

1’199.2

1’234.0

1’234.0

Other non-current liabilities (excluding non-current derivative liabilities)

 

 

 

 

6.2

6.2

 

 

 

 

Outstanding current bonds

26

 

 

 

109.9

109.9

110.3

110.3

Other current borrowings and bank loans

26

 

 

 

21.1

21.1

 

 

 

 

Trade accounts payable

 

 

 

 

522.4

522.4

 

 

 

 

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

28

 

 

 

257.8

257.8

 

 

 

 

Total financial liabilities not measured at fair value

 

2’116.7

2’116.7

 

 

 

 

Fair value table

 

 

December 31, 2018

 

 

Carrying amount

Fair value

millions of CHF

Notes

Fair value hedging instruments

Fair value through profit or loss

Financial assets at amortized cost

Other financial liabilities

Total carrying amount

Level 1

Level 2

Level 3

Total fair value

Financial assets measured at fair value

 

 

 

 

 

 

 

 

 

 

Other non-current financial assets (at fair value)

18

 

6.8

 

 

6.8

0.2

6.6

6.8

Derivative assets – current

22, 29

6.4

 

 

 

6.4

6.4

6.4

Total financial assets measured at fair value

 

6.4

6.8

 

 

13.1

0.2

6.4

6.6

13.1

 

 

 

 

 

 

 

 

 

 

 

Financial assets not measured at fair value

 

 

 

 

 

 

 

 

 

 

Other non-current financial assets (at amortized cost)

18

 

 

2.7

 

2.7

 

 

 

 

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

 

 

 

6.2

 

6.2

 

 

 

 

Trade accounts receivable

21

 

 

622.3

 

622.3

 

 

 

 

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

22

 

 

24.3

 

24.3

 

 

 

 

Cash and cash equivalents

23

 

 

1’095.2

 

1’095.2

 

 

 

 

Total financial assets not measured at fair value

 

1’750.7

1’750.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities measured at fair value

 

 

 

 

 

 

 

 

 

 

Derivative liabilities – non-current

29

0.2

 

 

 

0.2

0.2

0.2

Derivative liabilities – current

28, 29

8.4

 

 

 

8.4

8.4

8.4

Contingent considerations

4

 

0.9

 

 

0.9

0.9

0.9

Total financial liabilities measured at fair value

 

8.7

0.9

 

 

9.6

8.7

0.9

9.6

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities not measured at fair value

 

 

 

 

 

 

 

 

 

 

Outstanding non-current bonds

26

 

 

 

1’308.7

1’308.7

1’312.6

1’312.6

Other non-current borrowings

26

 

 

 

7.6

7.6

 

 

 

 

Other current borrowings and bank loans

26

 

 

 

18.0

18.0

 

 

 

 

Other non-current liabilities (excluding non-current derivative liabilities)

 

 

 

 

3.6

3.6

 

 

 

 

Trade accounts payable

 

 

 

 

521.8

521.8

 

 

 

 

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

 

 

 

 

211.3

211.3

 

 

 

 

Total financial liabilities not measured at fair value

 

 

 

 

2’070.9

2’070.9

 

 

 

 

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

2019

2018

Salaries and wages

949.4

889.4

Defined contribution plan expenses

29.0

25.7

Defined benefit plan expenses

16.0

21.8

Cost of share-based payment transactions

12.5

15.1

Social benefit costs

144.9

141.2

Other personnel costs

39.2

36.5

Total personnel expenses

1’191.1

1’129.7

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

 

2019

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

–1’109.5

–575.2

–69.3

–83.2

–1’837.2

Fair value of plan assets (funded plans)

1’140.7

463.3

46.4

65.0

1’715.4

Overfunding / (underfunding)

31.2

–111.9

–22.9

–18.2

–121.8

Present value of unfunded defined benefit obligation

–46.8

–46.8

Asset / (liability) recognized in the balance sheet

31.2

–111.9

–22.9

–18.2

–46.8

–168.6

– thereof as liabilities under defined benefit obligation

–0.9

–111.9

–22.9

–18.5

–46.8

–201.0

– thereof as other current receivables and prepaid expenses

32.1

0.3

32.4

 

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

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

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 decreased in 2019 compared to 2018 (from 0.9% to 0.3% for active employees and from 0.6% to 0.1% for pensioners). The plan assets increased compared to 2018 due to a higher return on plan assets. The total expenses recognized in the income statement in 2019 were CHF 15.3 million (2018: CHF 15.2 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 decreased by 0.9 percentage points to 2.1% (2018: 3.0%). The net pension liabilities increased from CHF 78.5 million in 2018 to CHF 111.9 million, due to changes in financial and demographic assumptions. The total expenses recognized in the income statement in 2019 were CHF 3.1 million compared to CHF 3.4 million in 2018.

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 2019, an expense of CHF 1.3 million was recognized in the income statement (2018: CHF 0.7 million). The discount rate decreased to 3.0% in 2019 (2018: 4.2%). The amount recognized in other comprehensive income (OCI) in 2019 was CHF –6.6 million (2018: CHF –3.0 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

2019

2018

Reconciliation of effect of asset ceiling

 

 

Adjustment to asset ceiling at January 1

–0.9

–1.6

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

0.9

0.7

Adjustment to asset ceiling at December 31

–0.9

 

 

 

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

 

 

Asset / (liability) recognized at January 1

–148.5

–225.8

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

–19.9

–26.7

Defined benefit income / (expense) recognized in OCI

–29.2

68.7

Employer contribution

23.4

27.4

Currency translation differences

5.6

7.9

Asset / (liability) recognized at December 31

–168.6

–148.5

 

 

 

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

 

 

Current service cost (employer)

–18.0

–21.3

Interest expense

–27.1

–25.0

Interest income on plan assets

23.3

20.1

Past service cost

–0.7

Effects of curtailments and settlement

3.4

1.0

Other administrative cost

–1.5

–0.8

Income / (expense) recognized in the income statement

–19.9

–26.7

– thereof charged to personnel expenses

–16.0

–21.8

– thereof charged to financial expense

–3.8

–4.9

 

 

 

Components of defined benefit gain / (loss) in OCI

 

 

Actuarial gain / (loss) on defined benefit obligation

–145.2

140.8

Return on plan assets excl. interest income

114.9

–73.0

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

0.9

0.8

Return on reimbursement right excl. interest income / (expenses)

0.2

0.1

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

–29.2

68.7

1) The tax effect on defined benefit cost recognized in OCI amounted to CHF 4.3 million (2018: CHF –12.8 million).

Employee benefit plans

millions of CHF

2019

2018

Reconciliation of defined benefit obligation

 

 

Defined benefit obligation as of January 1

–1’805.1

–2’048.5

Interest expense

–27.1

–25.0

Current service cost (employer)

–18.0

–21.3

Contributions by plan participants

–10.0

–9.7

Past service cost

–0.7

Benefits paid/deposited

120.9

124.0

Effects of curtailments and settlement

3.4

2.8

Other administrative cost

–1.5

–0.8

Actuarial gain / (loss)

–145.2

140.8

Currency translation differences

–1.4

33.3

Defined benefit obligation as of December 31 1)

–1’884.0

–1’805.1

 

 

 

Reconciliation of the fair value of plan assets

 

 

Fair value of plan assets as of January 1

1’657.5

1’824.3

Interest income on plan assets

23.3

20.1

Employer contribution

23.4

27.4

Contributions by plan participants

10.0

9.6

Benefits paid/deposited

–120.9

–124.0

Effects of curtailments and settlement

–1.8

Return on plan assets excl. interest income

114.9

–73.0

Currency translation differences

7.2

–25.1

Fair value of plan assets as of December 31

1’715.4

1’657.5

 

 

 

Total plan assets at fair value – quoted market price

 

 

Cash and cash equivalents

90.8

49.1

Equity instruments

587.2

539.7

Debt instruments

443.8

476.2

Real estate funds

36.7

41.0

Investment funds

4.1

3.8

Others

81.0

79.0

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

1’243.6

1’188.8

 

 

 

Total plan assets at fair value – non-quoted market price

 

 

Properties occupied by or used by third parties (real estate)

290.6

280.7

Others

181.2

188.0

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

471.8

468.7

 

 

 

Best estimate of contributions for upcoming financial year

 

 

Contributions by the employer

30.9

26.2

1) The defined benefit obligation includes the funded part and the unfunded part.

Employee benefit plans

millions of CHF

2019

2018

Components of defined benefit obligation, split

 

 

Defined benefit obligation for active members

–348.8

–318.5

Defined benefit obligation for pensioners

–1’180.4

–1’193.5

Defined benefit obligation for deferred members

–354.8

–293.1

Total defined benefit obligation at December 31

–1’884.0

–1’805.1

 

 

 

Components of actuarial gain / (losses) on obligations

 

 

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

–165.1

104.7

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

7.2

50.2

Actuarial gain / (loss) arising from experience adjustments

12.7

–14.1

Total actuarial gain / (loss) on defined benefit obligation

–145.2

140.8

 

 

 

Maturity profile of defined benefit obligation

 

 

Weighted average duration of defined benefit obligation in years

13.5

13.2

Since the defined benefit obligation for the Swiss and UK pension plans represents 89% (2018: 92%) of the group, the following significant actuarial assumptions apply exclusively to these two countries:

Principal actuarial assumptions as of December 31

 

2019

2018

 

Funded plans Switzerland

Funded plans United Kingdom

Funded plans Switzerland

Funded plans United Kingdom

Discount rate for active employees

0.3%

2.1%

0.9%

3.0%

Discount rate for pensioners

0.1%

2.1%

0.6%

3.0%

Future salary increases

1.0%

0.0%

1.0%

0.0%

Future pension increases

0.0%

2.6%

0.0%

2.7%

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

23/25

21/23

23/25

22/23

Sensitivity analysis of defined benefit obligation

millions of CHF

2019

2018

Discount rate (decrease 0.25 percentage points)

–64.4

–58.3

Discount rate (increase 0.25 percentage points)

62.1

55.7

Future salary growth (decrease 0.25 percentage points)

5.0

5.2

Future salary growth (increase 0.25 percentage points)

–3.6

–1.5

Life expectancy (decrease 1 year)

97.7

89.0

Life expectancy (increase 1 year)

–95.1

–85.5

10 Research and development expenses

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

millions of CHF

2019

2018

Pumps Equipment

43.3

45.1

Rotating Equipment Services

1.1

1.1

Chemtech

18.0

17.2

Applicator Systems

22.9

22.5

Others

0.4

0.5

Total

85.6

86.4

11 Other operating income and expenses

millions of CHF

2019

2018

Income from release of contingent consideration

0.9

1.5

Gain from sale of property, plant and equipment

0.7

6.0

Operating currency exchange gains, net

2.2

Other operating income

18.0

40.2

Total other operating income

19.6

49.9

 

 

 

Restructuring expenses

–23.1

–13.1

Impairments on tangible and intangible assets

–4.4

–4.4

Cost for mergers and acquisitions

–2.1

–1.4

Loss from sale of property, plant and equipment

–0.3

–0.2

Operating currency exchange losses, net

–1.1

Total other operating expenses

–31.1

–19.1

 

 

 

Total other operating income and expenses, net

–11.5

30.8

During 2019, the group reassessed the achievement of the earn-out targets related to contingent consideration arrangements. The reassessment resulted in an income of CHF 0.9 million (2018: CHF 1.5 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.

Sulzer has continued to streamline the organizational setup. For 2019, the group recognized restructuring costs of CHF 23.4 million (2018: CHF 14.9 million), partly offset by released restructuring provisions of CHF 0.2 million (2018: CHF 1.8 million). Restructuring costs are mainly associated with the consolidation of two production facilities in Germany. The group further performed impairment tests on the related production machines and facilities leading to impairments of CHF 2.1 million (2018: CHF 4.4 million). For more details refer to note 15.

Impairments on other intangible assets amounted to CHF 2.3 million (2018: CHF 0.0 million) and were mainly related to computer software (see also note 14).

The functional allocation of the total restructuring expenses and impairments is as follows: Cost of goods sold CHF –11.4 million (2018: CHF –4.1 million), selling and distribution expenses CHF –1.5 million (2018: CHF –1.8 million), general and administrative expenses CHF –14.0 million (2018: CHF –11.1 million) and research and development expenses CHF –0.6 million (2018: CHF –0.5 million).

12 Financial income and expenses

millions of CHF

2019

2018

Interest and securities income

6.6

2.9

Total interest and securities income

6.6

2.9

Interest expenses on borrowings and lease liabilities

–21.1

–15.4

Interest expenses on employee benefit plans

–3.8

–4.9

Total interest expenses

–24.9

–20.3

Total interest income and expenses, net

–18.3

–17.4

 

 

 

Income from investments and other financial assets

0.0

0.5

Fair value changes

–2.6

8.6

Other financial expenses

–2.3

–2.0

Currency exchange gains/losses, net

–5.1

–8.7

Total other financial income and expenses, net

–10.0

–1.5

 

 

 

Total financial income and expenses, net

–28.3

–18.9

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

–2.6

8.6

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

0.0

0.5

– thereof interest income on financial assets at amortized costs

6.6

2.9

– thereof other financial expenses

–2.3

–2.0

– thereof currency exchange gains/losses, net

–5.1

–8.7

– thereof interest expenses on borrowings

–17.8

–15.4

– thereof interest expenses on lease liabilities

–3.3

-

– thereof interest expenses on employee benefit plans

–3.8

–4.9

In 2019, interest expenses increased to CHF 21.1 million (2018: CHF 15.4 million), mainly due to interest expenses on bonds issued in the second half of 2018 and interest expenses on lease liabilities which resulted from the first time application of IFRS 16 “Leasesˮ.

Total financial expenses increased to CHF 28.3 million (2018: CHF 18.9 million), mainly as a result of higher interest expenses and fair value changes on financial assets at fair value through profit and loss.

The “Fair value changesˮ are largely related to 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 to hedge foreign exchange risks.

13 Income taxes

millions of CHF

2019

2018

Current income tax expenses

–65.2

–69.4

Deferred income tax income

10.1

20.3

Total income tax expenses

–55.1

–49.2

The weighted average tax rate results from applying each subsidiary’s statutory income tax rate to the income before taxes. Since the group operates in countries that have differing tax laws and rates, the consolidated weighted average effective tax rate will vary from year to year according to variations in income per country and changes in applicable tax rates.

Reconciliation of income tax expenses

millions of CHF

2019

2018

Income before income tax expenses

212.8

165.6

Weighted average tax rate

22.5%