– Business review – Financial review

Strong sales and record profitability

Note: If not otherwise indicated, changes from the previous year are based on currency-adjusted figures and relate to continuing operations only. For balance sheet items and cash flow KPIs, the influence of discontinued operations is specifically outlined.

Order intake increased by 3.6% including acquisitions and 0.9% organically. Sales increased by 6.0% and by 3.5% excluding acquisitions, despite headwinds from supply chain disruptions. Operational profitability in all divisions reached new heights, leading to a record 9.3% operational profitability for Sulzer. Solid free cash flow amounted to CHF 238.7 million, including CHF 28.2 million from discontinued operations.

Strong order intake with positive mix

Order intake increased by 3.6% compared with 2020 to CHF 3’167.6 million, fueled by organic growth of 0.9% and CHF 82.9 million from acquisitions. Currency translation effects had a positive impact on order intake of CHF 8.8 million. Order intake gross margin increased nominally by 0.5 percentage points to 33.1%, influenced by a better mix.

Once again, Sulzer successfully delivered strong results despite the continuing challenging environment in 2021. Our proactive measures to mitigate the anticipated drop in Energy proved to be successful, and we were agile in pushing growth in the other businesses. Our focused execution enabled us to achieve strong growth, record-high profitability and another year of robust free cash flow.”

Jill LeeChief Financial Officer

Order intake growth in Water and Industry within Flow Equipment more than offset the expected drop in Energy, leading to an increase of 1.8% (–3.9% organically) in the division. Water orders increased significantly by 29.9%, equally driven by 11.4% organic growth and CHF 73.6 million from the Nordic Water acquisition. Orders in Industry were up 6.9%, while the Energy market segment declined by 22.6% due to softer market conditions and continued order selectivity. Order intake in the Services division grew by 2.8%, supported by organic growth of 2.0% and CHF 9.3 million from acquisitions. All regions grew except Asia-Pacific (APAC), where pandemic-related restrictions remained most pronounced. Chemtech’s order intake increased by 8.8%, on strong increases in the US and China and the growing commercial success in the Renewables market segment, which now accounts for 13.6% of the division’s order intake.

As of December 31, 2021, the order backlog amounted to CHF 1’724.1 million (December 31, 2020: CHF 1’676.8million). Currency translation effects added CHF 27.5 million.

Orders

Robust sales growth in all divisions

Sales increased by 6.0% compared to 2020, reaching CHF 3’155.3 million. Organic growth amounted to 3.5%, with acquisitions adding CHF 71.7 million and positive currency translation effects amounting to CHF 11.0 million.

The Flow Equipment division increased its sales by 6.9% (2.0% organically). Sales in Water increased strongly by 22.7%, including the contribution from the Nordic Water acquisition of CHF 63.6 million and solid organic growth of 7.0%. The Industry market segment also grew strongly, reaching 6.5% organic growth. The positive momentum in Water and Industry more than offset the sales decline in Energy (4.9%). Sales in Services grew in all regions except APAC, where pandemic containment measures muted the market. Despite this, Services achieved year-on-year sales growth of 3.5% (2.7% organically). In Chemtech, sales were significantly up by 8.4% on strong execution in China and a reduced impact from lockdowns compared to last year.

Higher gross profit margin

Gross profit margin increased to 30.0% (2020: 29.4%), thanks to operating leverage from higher sales volume, a larger share of high-margin business and the positive impact from implemented cost actions. Gross profit grew nominally CHF 74.5 million to CHF 946.9 million (2020: CHF 872.4 million).

Record operational profitability of 9.3%

Operational profit amounted to CHF 293.3 million compared with CHF 255.0 million in 2020, an increase of 14.1%. The higher gross profit from increased sales and a better mix was further supported by CHF 40 million savings from swift structural measures taken in the Energy-related businesses coupled with continued spending discipline.

Operational profitability from continuing operations reached a record high of 9.3% (2020: 8.6%), with all three divisions hitting new heights:

Bridge from EBIT to operational profit

Calculation of return on sales (ROS) and operational profitability

Return on sales of 7.0%

Sulzer incurred one-off expenses of CHF 21.4 million (2020: CHF 75.8 million). These were mainly related to the structural actions launched in early 2020 to resize Sulzer’s Energy-related footprint. EBIT amounted to CHF 221.8 million, increasing nominally by 67.4%, compared with CHF 132.5 million in 2020. Return on sales (ROS) was 7.0%, compared with 4.5% in 2020.

Financial income and expenses

Interest expenses on borrowings and lease liabilities increased to CHF 22.5 million (2020: CHF 20.6 million). As a result, total financial expenses increased to CHF 21.7 million (2020: CHF 20.5 million).

Lower effective tax rate

Income tax expenses increased to CHF 57.2 million (2020: CHF 39.8 million) due to higher pre-tax income. The effective tax rate decreased to 28.9% in 2021, from 35.8% in 2020, due to lower restructuring expenses with no corresponding tax effects and a slightly different geographical spread of profit before tax.

Higher core net income

In 2021, net income from continuing operations amounted to CHF 140.7 million compared with CHF 71.5 million in the previous year. Core net income from continuing operations excluding the tax-adjusted effects of non-operational items totaled CHF 195.3 million compared with CHF 165.6 million in 2020. Basic earnings per share from continuing operations increased from CHF 2.00 in 2020 to CHF 4.10 in 2021.

Bridge from net income from continuing operations to core net income from continuing operations

medmix spin-off

On September 20, 2021, the shareholders of Sulzer Ltd at their Extraordinary General Meeting approved the proposed 100% spin-off of the Applicator Systems division (later renamed medmix) through a 1:1 share split, granting Sulzer shareholders one medmix share in addition to each Sulzer share held. medmix’ shares started trading in an oversubscribed offering on September 30, 2021, on the SIX Swiss Exchange.

Sulzer has separated in its annual report the group’s reported data for the current and prior years into “continuing” and “discontinued” operations. Discontinued operations include the operational results from the Applicator Systems division and certain corporate activities attributable to the Applicator Systems division prior to the spin-off on September 20, 2021.

The shareholder approval to spin off the Applicator Systems division required the recognition of a distribution liability, measured at the fair value of the Applicator Systems division, and represented a deduction of retained earnings.

Net income from discontinued operations amounted to CHF 1’278.3 million, comprising a net income from discontinued business activities of CHF 23.2 million for the year up to the spin-off date and a gain on net assets derecognized of CHF 1’255.1million. The gain on net assets derecognized is mainly the difference between the distribution liability of the Applicator Systems division of CHF 1’485.6 million and the division’s net assets of CHF 244.2 million on the spin-off date. In the balance sheet, the equity is increased by the net income from discontinued operations of CHF 1’278.3 million and offset by the derecognition of the spin-off related distribution liability of CHF 1’485.6 million. The details pertaining to the income statement, segment information and balance sheet of the discontinued operations are presented in note 7 to the consolidated financial statements.

Bridge from net income from continuing operations to net income

Key balance sheet positions after medmix spin-off

Note: Contrary to the prior paragraphs relating to orders and the income statement, both balance sheet and cash flow movements are influenced by discontinued operations. The respective amounts are specifically mentioned when significant, and further details are described in note 7 to the consolidated financial statements.

Total assets as of December 31, 2021, amounted to CHF 5’010.4 million, a decrease of CHF 356.5 million from December 31, 2020. Non-current assets decreased by CHF 445.7 million to CHF 1’834.2 million, whereof the medmix spin-off accounts for CHF 632.7 million. The most notable reductions attributable to the discontinued medmix operations are CHF 265.4 million in goodwill, CHF 143.9 million in other intangible assets, CHF 165.0 million in property, plant and equipment and CHF 51.6 million in lease assets. For continuing operations, the acquisitions undertaken in 2021 led to an increase in goodwill of CHF 56.6 million as well as CHF 79.7 million in other intangible assets. Other increases in continuing operations included property, plant and equipment (CHF 13.7 million) and lease assets (CHF 19.5 million).

Inventories decreased by CHF 39.5 million (of which CHF 71.8 million was medmix related), contract assets increased by CHF 84.5 million and trade accounts receivables decreased by CHF 49.9 million (CHF 40.7 million due to the medmix spin-off), whereas other current receivables and prepaid expenses decreased by CHF 7.8 million.

Cash and cash equivalents increased overall by CHF 382.2 million. Besides regular cash flow generation and acquisition-related cash-out, this was affected by the repayments of borrowings in the amount of CHF 430.2 million by medmix, CHF 85.9 million of cash and cash equivalents that were transferred to medmix, a decrease in current financial assets of CHF 278.4 million and a reduction in borrowings of CHF 213.0 million.

Total liabilities decreased by CHF 218.7 million to CHF 3’731.1 million as of December 31, 2021. Current and non-current borrowings combined reduced by CHF 213.0 million, mostly due to the repayment of a bond. Other drivers were the reduction of lease liabilities by CHF 30.9 million (of which CHF 51.1 million medmix related), an increase in undistributed dividends (CHF 43.5 million), an increase in accrued liabilities (CHF 64.8 million) and contract liabilities (CHF 24.0 million), a decrease in trade accounts payable (CHF 34.0 million, mainly medmix related) and a decrease in defined benefit obligations (CHF 47.3 million). An aggregate CHF 81.0 million reduction in current liabilities can be attributed to the medmix spin-off.

Equity decreased by CHF 137.8 million to CHF 1’279.3 million. This was mainly driven by a dividend distribution (CHF 137.4 million, of which CHF 2.1 million was for non-controlling interests), and the acquisition of non-controlling interests (CHF 17.3 million). Other equity changes comprised net income including discontinued operations of CHF 1’418.9 million, offset by the derecognition of a spin-off related distribution liability of CHF 1’485.6 million and the remeasurement of defined benefit plans (CHF 88.7 million).

Net debt decreased from CHF 414.5 million in 2020 to CHF 66.8 million in 2021, mainly due to higher cash and cash equivalents. Net debt to EBITDA decreased from 1.26 in 2020 to 0.15 in 2021, due to the increase in EBITDA and decrease in net debt.

Continued solid free cash flow

Cash flow from operating activities amounted to CHF 315.9 million, compared with CHF 368.7 million in 2020. The contribution of discontinued operations was CHF 49.0 million (2020: CHF 50.6 million). Cash flow from operating activities was improved by higher net income of CHF 76.7 million (before gain on net assets derecognized) and favorable changes in current trade assets (CHF 18.8m net positive impact from change in accounts receivables, accounts payables, advances to suppliers and other net current assets). Due to sales growth, cash flow was impacted by higher inventories (CHF 20.8 million increase in 2021, compared with CHF 29.7 million of volume-related decrease in 2020), higher changes in net contract assets (CHF 29.0 million) as well as increased tax payments (CHF 14.9 million). The impact from the changes in provisions also reduced cash flow by CHF 50.3 million (mainly due to the build-up of restructuring provisions in 2020 for the energy-related resizing activities). Free cash flow amounted to CHF 238.7 million (thereof CHF 28.2 million from discontinued operations) compared with CHF 272.1 million in the prior year. The bridge from cash flow from operating activities to free cash flow is shown in the table below.

Bridge from cash flow from operating activities to free cash flow

The reported cash flow from investing activities (CHF +432.3 million, compared with CHF –461.8 million in the prior year) and cash flow from financing activities (CHF –382.5 million, compared with CHF +236.5 million in 2020) were significantly impacted by the intercompany debt split as part of the medmix spin-off and should therefore be seen in this context. Overall, this included repayments of borrowings in the amount of CHF 430.2 million by medmix, CHF 85.9 million of cash and cash equivalents that were transferred to medmix, a decrease in current financial assets by CHF 278.4 million and the repayment of a bond of CHF 210.0 million.

As for items unrelated to the medmix intercompany debt split, cash-out for acquisitions amounted to CHF 123.9 million, compared with CHF 108.2 million in 2020. Net capital expenditure for property, plant and equipment (including disposal of assets) amounted to CHF 70.5 million, below the CHF 89.1 million in 2020.

Dividend payments amounted to CHF 91.9 million, compared with CHF 92.6 million in 2020. Payments of lease liabilities amounted to CHF 41.1 million (2020: CHF 39.2 million). Exchange gains on cash amounted to CHF 16.5 million, compared with a loss of CHF 55.7 million in 2020. Overall, CHF 9.7 million (2020: CHF 4.4 million) of cash flow from investing activities and CHF 9.7 million (2020: CHF –42.9 million) cash flow from financing activities can be attributed to discontinued operations.

Outlook for 2022

We expect continued growth in our markets, despite uncertainties linked to the pandemic, bottlenecks in supply and logistics, increased input costs, monetary tightening and a volatile macro environment. Against this background, Sulzer has started the year with a high order backlog and strong commercial momentum, fueled by our focus on growing Water and Industry in Flow Equipment, expanding our Services business and boosting Chemtech’s leadership in Renewables.

For 2022, Sulzer expects orders to grow organically by 3 to 5%. Excluding Energy, we expect sales to grow organically by 4 to 6%. Year on year, sales are expected to grow organically by 2 to 4% (as Energy, which saw an order decline of 23% in 2021, will impact sales by a negative 2 percentage points). Operational profitability is expected to continue on its upwards trajectory to reach close to 10% of sales.

Abbreviations

EBIT: Earnings before interest and taxes

ROS: Return on sales

EBITDA: Earnings before interest, taxes, depreciation and amortization

FCF: Free cash flow

For the definition of the alternative performance measures, please refer to “Supplementary information”

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