MidyearReport2006_Sulzer_e

Midyear Report20062Key FiguresSulzer Midyear Report 2006Key FiguresJanuary—Junein millions CHF20062005Order intake 1654.81304.7Sales1336.61157.8Operating incomeEBIT 136.376.9Operating income – core divisions EBIT 129.180.5EBIT in % of sales – core divisionsROS9.7%7.0%Net income, attributable to shareholders of Sulzer Ltd104.358.9Equity, attributable to shareholders of Sulzer Ltd as of June 30/December 31 1507.81488.5Headcount as of June 30/December 31 number of employees96199656Cash flow from operating and investing activities 167.2–2.3Net liquidity 1)as of June 30/December 31401.1304.71)Cash, cash equivalents and marketable securities, less borrowingsSales by DivisionSulzer Pumps 50.2% 47.2%Sulzer Metco 22.4% 24.9%Sulzer Chemtech 18.1% 16.6%Sulzer Turbo Services 9.1% 10.5%Other0.2%0.8%20052006Sales by RegionEurope 37.7% 37.6%North America 28.1% 26.5%Latin America 6.5% 7.1%Asia, Australia 22.4% 22.5%Africa5.3%6.3%200520063Report by the Chairman of the Board and the CEO Sulzer Midyear Report 2006Report by the Chairman of the Board and the CEODear Shareholders,The first six months of 2006 developed very positively for Sulzer. Order intake, sales, and income were well above the values of 2005 in the corresponding period. Through its focus on operational excellence Sulzer fully benefited from active markets and achieved high organic growth.All four divisions increased their results. Sulzer Pumps and Sulzer Chemtech set new records. Sulzer Metco is on track to reach its prof-itability targets, while Sulzer Turbo Services also improved its result by successfully implementing restructuring measures in its European operation.Sulzer creates value by focusing on a strict three-step management approach: first operational excellence, second organic growth and third external growth. Sulzer has been able to accommodate significant increase in revenue with an essentially unchanged level of employ-ment since 2004. The dedication of our employees in striving for lean processes and pursuing market opportunities has led to this achieve-ment. Sulzer still has a lot to learn and improve; it is encouraging that each division has embarked on its own path to achieve operational excellence.Today, Sulzer enjoys strong positions in a variety of markets. Looking forward, we will seek to enhance our presence in both our current core markets and adjacent areas having differing cyclicalities. In this way,we will gain more stability in an ever-changing world. Along this line,Sulzer Chemtech is expanding its static mixing business through the acquisitions of Mixpac, Werfo, and Mold in Switzerland. This group of companies offers growth opportunities outside the oil and gas market,which also applies to our other recent acquisitions, namely Johnston/Crown, Ambeon, and OSU. MarketsSulzer’s main markets showed a steady upward trend in all regions during the past six months. Capital expenditures by the oil and gas industry were significant, leading to substantial growth rates in Sulzer Pumps and Sulzer Chemtech. In this industry, upstream demand was strong because high oil prices triggered investments in production. On the downstream side, the worldwide shortage of refining capacity also resulted in a considerable level of business for Sulzer. The power gen-eration market is increasingly recovering from its low level and is gen-erating new orders for Sulzer Pumps and Sulzer Metco. This effect has, however, been modest at Sulzer Turbo Services. The pulp and paper market was stable at a high level. More orders were recorded by Sulzer Metco from the rebounding aerospace industry, which is still at the start of its growth cycle. Due to Sulzer Metco’s leading tech-nology, demand from car manufacturers remained good.Financial ResultsIn the first half of 2006, order intake grew to CHF 1654.8 million, sur-passing the previous year’s level of CHF 1304.7 million by 26.8%.Longer lead times at both customers and suppliers caused extended delivery times. Consequently, sales grew at a slower rate than order intake, reaching CHF 1336.6 million, an increase of 15.4%. The order backlog as of end of June 2006 reached a new high of CHF 1277.5million.The operating income (EBIT) jumped from CHF 76.9 million in 2005 to CHF 136.3 million in 2006. This improvement is largely due to the combined effect of operational improvements and increased volumes.Non-recurring positive effects (divestiture gains at Sulzer Pumps) also added the result, whereas in the previous year Sulzer was burdened with non-recurring charges for restructurings and an operating loss of the fuel-cell venture Sulzer Hexis. All core divisions improved profitability, whereby Sulzer Pumps and Sulzer Chemtech performed particularly well. Sulzer is further closing the gap towards its long-term targeted returns.The improved operational performance in the first half of 2006 was rounded off by a remarkable financial result stemming from the sale of our stake in the Voith Group. In total, net income attributable to the shareholders of Sulzer Ltd climbed to CHF 104.3 million or CHF 29.29per share, noticeably exceeding the previous year’s figure of CHF 58.9million or CHF 16.57 per share.The operations have generated a good cash flow during the first six months despite some net working capital requirements to accommo-date growth. Additional proceeds were received from divestitures of activities (Paco pumps) and of financial assets. Net liquidity rose from CHF 304.7 million at the beginning of the year to CHF 401.1 million at end of June.DivisionsThe positive trend at Sulzer Pumps continued. The division systemat-ically took advantage of the favorable market conditions and boosted its order intake (+28.9%) and sales (+22.7%). The backlog increased to CHF 836.1 million at the end of June, reflecting the high order intake and the longer delivery times. The integration of the business operations acquired in Houston, TX, USA, in 2004 progressed accord-ing to plan, contributing to the improved results. Operating income climbed by 59.4% to CHF 66.3 million corresponding to a return on sales (ROS) of 9.9% (7.6% in the previous year). Included in these results are non-recurring gains from disposals of the Paco business and of surplus facilities. The target of 8% set in 2003 was not only reached, but exceeded ahead of time.4Report by the Chairman of the Board and the CEOSulzer Midyear Report 2006Sulzer Metco further improved its operating performance in line with the plans launched in 2004. In particular, the progress in the Turbine Components unit is reassuring. Overall, growth in operating profit of 20.3% to CHF 21.9 million was proportionally higher than the volume increase. Orders received rose by 14.7% and sales also progressed (+3.7%). With a ROS of 7.3% (previous year 6.3%) the division is on its way to the aspired double-digit margin.The demand for Sulzer Chemtech products and services remained strong. The number of average- and large-sized projects grew, espe-cially in the refinery industry. Order intake for the first six months grew by 60.9% over the previous year. Both internal and external engineer-ing constraints have led to longer delivery times. Sales consequently lagged behind new orders, but still reached an impressive 25.7%growth. Operating income rose by 61.2% to CHF 31.6 million setting a record ROS of 13.1% in 2006 compared with 10.2% a year ago. The service businesses acquired last year from Cana-Tex, Houston,TX, USA, have been successfully incorporated and have contributed to the noteworthy operating result.The operating income at Sulzer Turbo Services improved significantly,reaching a 7.6% ROS. In a difficult market environment, the division continued to focus on streamlining its processes and achieving higher margins. Consequently, order intake declined by 4.0%. The results showed a varied regional picture; the US market developed satisfac-torily, while the market situation in the Middle East remained difficult.By rigorously concentrating on projects with attractive margins and on restructuring measures, Sulzer Turbo Services raised operating income to CHF 9.3 million (previous year CHF 1.1million after restruc-turing charges) on a sales increase of 0.7%.Sulzer Innotec,our central research and development unit profited from a strong demand for its services during the first half of the year.Real Estate again contributed positively to operating income by sell-ing a number of properties non-essential to our business.StrategyThrough consistent implementation of our management principles we were able to steadily improve our operating performance as reflected in the increased returns. In particular, Sulzer Metco and Sulzer Turbo Services have achieved a turnaround and improved results. The growth that can be generated with the help of simplified corporate structures and comprehensive lean management is underlined by the accom-plishments at Sulzer Pumps and Sulzer Chemtech. In the first half of 2006, both have grown more than 20% in sales after similar growth rates in the previous year. The businesses acquired in these divisions are also developing well.In the long term, the product portfolios of the core divisions will be expanded to cover new areas close to our established markets. The next step in the implementation of this strategy is to integrate the companies Mixpac, Werfo, and Mold into Sulzer Chemtech’s mixer business. Selective regional expansion will continue to be considered.Share PriceThe momentum built up last year in Sulzer’s share price carried over into 2006. During the first four months, the price rose by more than 48%,reaching a high of CHF 1,103 at the beginning of May. This above-average performance was subsequently corrected in the generally declining equity markets. With a rise in price of 31.6% by midyear, the Sulzer share has thus outperformed the SMI (+0.9%) and SPI (+3.7%)indices. The closing price on August 15, 2006 was CHF 940.OutlookThe high level of project activity and the positive trend of the markets are expected to continue. As a result, order intake is likely to remain strong during the second half of the year and a further increase of sales is expected. Capacity constraints and procurement issues on the part of the suppliers are the main challenges. The operating per-formance improvements and the economy-of-scale effects from vol-ume growth will continue to drive the operating and net income. In 2006, both are expected to be substantially above 2005.We are committed to meeting the targets of Sulzer and look forward to the exciting challenges that await us over the coming months.Yours faithfully,Leonardo E. Vannotti Ulf Berg Chairman of the BoardCEO5Financial Commentary Sulzer Midyear Report 2006Financial CommentaryAccounting, acquisition, divestiture, and currency effects During the first six months of 2006 there were no significant accounting changes. Therefore, comparability with the previous year is possible.The net effect of the activities of Cana-Tex (Sulzer Chemtech), acquired in mid-2005, and of the Paco business (Sulzer Pumps), divested at the end of February 2006, was a slight decline in sales of around CHF 11 million. The divestiture, however, led to a capital gain in the single-digit millions.During the period from January to June 2006, the average exchange rates of the principal currencies, in particular the US dollar, were above those applicable to the same period in the previous year. This devel-opment had a slightly positive impact on sales and income expressed in Swiss Francs.Income statementSales grew by 15.4% from CHF 1157.8 million in the first half of 2005to CHF 1336.6 million. Organic growth was slightly lower at 12.3%,mainly as a result of the currency effect. The much sharper rise in order intake (+26.8%, +23.4% adjusted) generated a further increase in the order backlog to CHF 1277.5 million (end of 2005: CHF 1004.1million). This is expected to result in a rise of sales in the second half of the year and, in addition, is already laying the foundations for an improved billing in 2007. Delivery times for Sulzer products have lengthened, as both customers and divisions have had to adapt to changed market conditions (high demand, deterioration in procure-ment times).The growth in sales as well as the savings from the improvement measures resulted in a significant rise in profitability. The operating income (EBIT) of the core divisions increased by 60.4% from CHF 80.5 million to 129.1 million compared to the same period in the pre-vious year. The return on sales rose from 7.0% to 9.7%. This includes non-recurring income of around CHF 6 million at Sulzer Pumps, mainly from the sale of the Paco business. The previous-year figures were negatively impacted by restructuring costs of around CHF 9 million,largely relating to a unit of Sulzer Turbo Services in the Netherlands.Apart from the core divisions higher operating income of CHF 7.2 mil-lion was also recorded under “Other” (previous year: loss of CHF 3.6million). In addition to the Corporate Center, “Other” includes oper-ationally non-essential real estate, the Sulzer Innotec development center and the fuel cell venture Sulzer Hexis, which was discontinued in the second half of 2005. This venture caused an ordinary operating loss of CHF 9.1 million during the first six months of 2005 but had no further negative influence in the year under review. In addition, a good level of earnings – well above the previous year – was achieved from the sale and rental operations with real estate properties.Financial income reached CHF 9.8 million. While in the previous year (CHF 4.3 million) securities income in particular had a positive impact,in the year under review a book profit of CHF 11million was recorded from the sale of our equity participations in the German Voith Group.In absolute and relative terms, the rise in profit resulted in an increase in the income tax charge, which doubled from CHF 20.1 million to CHF 40.3 million. Net earnings per share attributable to Sulzer share-holders increased by 77% to CHF 29.29, up from CHF 16.57 as at June 2005. This earnings growth is due to the combined effect of improved performance by the core divisions, fewer restructuring costs and no further expenditure relating to Sulzer Hexis, as well as the increase in financial income.Cash flowCash flow generation in the first half of 2006 was good. Gross cash flow (EBITDA) showed a marked year-on-year increase from CHF 120.9million to CHF 175.6 million. In view of the growth in volume, the capital tied up in net current assets grew further following a pattern typical for the first six months of a year. Including change in the balance of pro-visions, this resulted in a funding requirement of CHF 37.5 million as compared to CHF 74.9 million in the same period in 2005. At CHF 41.8 million, slightly more was invested than depreciated for tangible fixed assets over the first six months of 2006. These were largely financed by asset sales (CHF 36.1 million). The sale of the Paco activ-ities and the Voith shares resulted in a cash inflow of around CHF 100million. Due to these non-recurring effects and the improved genera-tion of cash flow from operations, net cash flow increased strongly compared to the first six months of the previous year, rising from CHF –2.3 million in 2005 to CHF 167.2 million in 2006. The substan-tially higher dividend (CHF 50.0 million) had a marked impact on the application of funds in the period under review. Around CHF 200 mil-lion was spent on the repayment of borrowings, which consequently amounted to only CHF 47 million at the end of June. The Corpora-tion’s cash position has therefore fallen from CHF 501.1 million to CHF 393.4 million since the beginning of the year.Financing, consolidated balance sheetThe balance sheet total as at June 30, 2006, amounted to CHF 2697.3million, showing a decrease compared to the level of CHF 2844.3million at the end of 2005, mainly due to the repayment of debts. The financial situation remains very strong and is characterized by an equity to total assets ratio of more than 50% and a net liquidity of CHF 401.1 million. The number of treasury shares held has increased since the end of the previous year from 71288 to 79886.6Sulzer Midyear Report 2006From the DivisionsFrom the DivisionsSulzer Pumps ResultsSulzer Pumps continued to perform strongly in the first six months of 2006. Although the divestiture of the Paco pumps business negatively affected the order intake and sales, the division posted record results in order intake of CHF 877.0 million, an increase of 28.9% (adjusted 27.1%). Sales also rose strongly by 22.7% (adjusted 21.2%) to CHF 670.9 million. Operating income (EBIT) was improved by 59.4% to CHF 66.3 million (previous year: CHF 41.6 million). Return on sales (ROS) was 9.9%, a significant rise compared to last year (7.6%). The gain from the Paco sale and the focus on operational excellence contributed to the excellent mid-year results.MarketsThe results were driven by strong global development in all markets.Particularly activities in Asia, the Americas, and the Middle East reached high levels and maintained further momentum. The order vol-ume in power generation increased, and the hydrocarbon processing industry was booming in the overall robust oil and gas market. Also in the pulp and paper, food, metal and fertilizer industries, the demand was good.StrategySulzer Pumps divested the Paco pumps business to Grundfos Group,Denmark, in order to concentrate on the activities in its core markets.Also, in its third year, the restructuring program reached further mile-stones, and the relocation of the facilities within Brazil and China were completed. Thus, Sulzer Pumps has now modern production facilities available in these countries. The focus on operational excellence will continue. Furthermore, initiatives in the service business will lead to higher profitability and continued organic growth. OutlookThe year 2006 started stronger than expected and has so far outper-formed the good results of the same period in 2005. Due to high levels of activities in all regions and market segments, Sulzer Pumps expects order intake, order backlog, sales, and operating income to clearly exceed the full-year levels of 2005.Sulzer Metco ResultsSulzer Metco performed solidly throughout the first six months, con-tinuing the improvement projects of the previous year. Compared to the same period the previous year, order intake rose by 14.7% (adjusted 12.2%) to CHF 332.6 million. Sales grew to CHF 298.9 million, 3.7%(adjusted 1.6%) higher than in the first half of 2005. Sales grew less than order intake because some large systems will no be delivered until the second half of the year. The pass-through of raw material price rises also contributed to the revenues. Operating income (EBIT)rose by 20.3% to CHF 21.9 and return on sales (ROS) from 6.3% to 7.3%. The increase was largely carried by operational improvements.MarketsThe demand for Sulzer Metco products and services strengthened in all regions. Activities in Asia, in particular, increased, with the division opening a new production facility there in spring 2006. Orders in the power generation market rose and an upswing in the aerospace seg-ment contributed to the good result. The automotive industry showed,as expected, moderate development. Particularly encouraging was the trend in the Turbine Components unit in the Netherlands, where the restructuring measures implemented during the previous year are now bearing fruit and the market is also showing signs of an upturn.StrategySulzer Metco’s strategy to focus on operational excellence by globally implementing lean business processes and accelerating innovation is showing results. Next, Sulzer Metco will improve productivity to ensure that delivery times and output meet market needs. In addition,the division will increase its focus on innovation in new products and services. It will also continue to expand geographically in emerging markets with local subsidiaries in China and India.OutlookThe prospects for the business fields of Sulzer Metco remain good.Order intake and sales are set to continue the current trend. The growth, combined with internal productivity improvements, will lead to an increase in operating income and higher margins for the full-year results.7Sulzer Midyear Report 2006From the Divisions Sulzer Chemtech ResultsSulzer Chemtech started 2006 in excellent form. The division reported CHF 322.1 million in orders received, outperforming the same period of the previous year by 60.9% (adjusted 48.7%). Strong markets worldwide generated a considerable volume of average size orders and a continued high number of large projects. This demand led to high capacity utilization at all production and engineering sites. Sales climbed by 25.7% (adjusted 15.6%) to CHF 241.4 million and had a significant impact on operating income. It rose by 61.2% to CHF 31.6million and generated an excellent return on sales (ROS) of 13.1%(previous year:10.2%). MarketsInvestment activities in the refinery sector remained at a high level.Interesting opportunities arose in the form of new plants for gas as well as petrochemical applications. Demand is growing steadily for biofuels which are based on nonoil sources as raw materials (sugar cane, corn, and palm oil fruits). The separation columns unit particu-larly benefited from these trends. Development in the static mixer busi-ness lagged behind, as there have been no major large projects so far.In the field service business, the integration of Cana-Tex, Houston, TX,USA, is going well and in line with plans.StrategySulzer Chemtech is currently concentrating on three core areas. First,the forthcoming acquisitions in Switzerland will substantially reinforce and expand the global market position in static mixing. Integrating the companies Mixpac, Werfo, and Mold, establishing global organi-zational structures and processes, and capturing new growth oppor-tunities through innovation are primary goals. Second, the focus on the integration of Cana-Tex and the global expansion of its field service offering will continue. Third, Sulzer Chemtech will further optimize the effectiveness of operations in order to cope with the strong growth.For this reason, the division is expanding engineering and operation capacities at various locations on an ongoing basis. OutlookSulzer Chemtech expects broad-based demand to continue in the near future. Recent high levels of investment activity should continue throughout the year. Thus, order intake, sales, and operating income for the second half of 2006 are expected to continue with the strong showing of the first six months of the year.Sulzer Turbo Services ResultsThe activities of Sulzer Turbo Services developed in a modest manner in the first half of 2006. The progress made by the European sites was encouraging; the American operations maintained the satisfactory orders and result levels of last year. However, the situation at the Indonesian company deteriorated due to a reorganization of the power generation sector in the region. Overall, against the background of a difficult market environment, the division concentrated on improving its processes and on only pursuing projects that offered attractive margins. Order intake for the first half of 2006, at CHF 118.6 million,therefore, fell below the figure for the previous year (–4.0%, adjusted –7.4%). Sales rose by 0.7% to CHF 122.2 million. In contrast to these volume trends, however, the clear focus had a positive impact on operating income, which recovered to CHF 9.3 million (previous year including restructuring costs: CHF 1.1 million), with a much improved return on sales (ROS) of 7.6%.MarketsIn North America, business has developed positively. The markets in the Middle East and Europe were more restrained. Competitive pric-ing pressure in the Middle East has continued. A major order has been received for the new parts manufacturing unit with deliveries sched-uled from 2006 through 2008.StrategyOver the next few months, Sulzer Turbo Services will continue to devote attention to its operational excellence program. In particular,the company in the Netherlands will carry on with the rigorous restruc-turing measures initiated in the previous year. This plan should enable it to face up to the strong competitive forces while reaching the mar-gin targets set. OutlookSulzer Turbo Services does not expect any change in the current mar-ket developments. Whereas new opportunities are forseen in North and South America as a result of the increasing investments in the oil and gas business and in power generation, the markets in Europe and the Middle East, especially the gas turbine power generation sector, will remain very competitive. For the year as a whole, Sulzer Turbo Services expects to achieve a clear increase in profits, while volume will likely be at the same level as the previous year.8Financial StatementsFinancial StatementsConsolidated Income Statement (condensed)January—Junein millions CHF 20062005Sales 1336.61157.8 Cost of goods sold –956.8–832.9 Gross profit 379.8324.9 Selling, administrative, and development expenses –243.5 –248.0 Operating income EBIT136.376.9 Financial income, net 9.8 4.3 Income before income tax expenses 146.181.2 Income tax expenses–40.3–20.1 Net income 105.861.1 Attributable to shareholders of Sulzer Ltd104.358.9 Attributable to minority interests 1.5 2.2Earnings per share, attributable to shareholders of Sulzer Ltd (in CHF)Basic earnings per share29.2916.57 Diluted earnings per share29.0116.44Consolidated Cash Flow Statement (condensed)January—Junein millions CHF 20062005 Cash and cash equivalents as of January 1501.1408.0Cash flow from operating activitiesOperating income 136.376.9 Depreciation39.344.0 Changes in net current assets/provisions –37.5–74.9 Interest received, interest payments and income tax paid –33.0–18.9 Reallocation of cash flow to investing activities1)–21.3–13.7 Total cash flow from operating activities83.813.4Cash flow from investing activitiesPurchase/sale of intangible assets and tangible assets1)–5.7–0.9 Acquisitions/divestitures 28.1–8.2 Purchase/sale of financial assets and marketable securities 61.0–6.6 Total cash flow from investing activities83.4–15.7Cash flow from operating and investing activities 167.2–2.3Cash flow from financing activitiesDividend (incl. minority interest) –50.0–33.9 Changes in borrowings and purchase/sale of treasury stock –223.724.5 Total cash flow from financing activities–273.7–9.4Exchange gains/losses on cash and cash equivalents–1.210.9 Net change in cash and cash equivalents–107.7–0.8 Cash and cash equivalents as of June 30393.4407.2 Net liquidity as of June 30/December 31401.1304.71)Including income from sale of real estateSulzer Midyear Report 20069Financial Statements Sulzer Midyear Report 2006Consolidated Balance Sheet (condensed)10NotesNotes to the Financial Statements1. Accounting PoliciesThis unaudited financial report has been prepared in accordance with International Financial Reporting Standards (IFRS) and with IAS 34 on Interim Financial Reporting and the accounting policies set out as outlined in the 2005 Sulzer Annual Report.2. Changes in Accounting PoliciesSulzer has adopted all applicable new IFRS rules and changed standards (IAS 19, IAS 21, IAS 39) effective from January 1, 2006. The changes did not have any material impact. The amendment of IAS 19 contains a new option of an alternative recognition approach for actuarial gains and losses. Sulzer has not changed the accounting policy for recognition of actuarial gains and losses, adoption of this amendment will only impact disclosure.The possibility to apply new standards (IFRS 7) and changes of standards (amendment of IAS 1) before their effective date has not been used.The Corporation is currently assessing the potential impacts of the new and revised standards that will become effective from January 1, 2007.3. Major Changes in the Scope of ConsolidationThe sale of the Paco pumps business to the Grundfos Group as announced on January10, 2006, was completed on February 28, 2006. Paco was part of Sulzer Pumps, recorded sales of about USD 46 million (approximately CHF 58 million) in 2005 and had around 225 employees in the USA and China. The selling price amounted to USD 23.5 million (approximately CHF 30 million). The appropriate assets in the USA as well as the Chinese operation have been fully deconsolidated.4. Major Currency Exchange Ratesin CHF Average rates Closing ratesJan.–June Jan.–June Jan.–Dec. June 30June 30 Dec.312006200520052006200520051 EUR 1.56 1.55 1.55 1.57 1.55 1.551 GBP 2.27 2.26 2.26 2.26 2.31 2.271 USD 1.27 1.20 1.25 1.23 1.28 1.315. Income Statement/Balance SheetThe commentary on the consolidated financial statements is included in the financial commentary on page 5.6. Segment ReportingInformation on segment reporting is included in “Segment Information by Divisions” (see next page). In 2005, Sulzer has ceased its engage-ment in the venture Sulzer Hexis. Its past results have been shifted to “Other and Consolidation”. The figures of 2006 are not affected by this divestiture.Sulzer Midyear Report 2006。