Group business review

The year 2017 was a period of profitable growth for Oerlikon, in which all Segments delivered improvements in the top line and operating profitability. The execution of strategic initiatives enabled the Group to capture the momentum and opportunities in its industrial and regional markets. That momentum was driven by improving global economic conditions that bred confidence and increased global trade, resulting in expanded investment in capital goods, machinery and services, which drove the demand for Oerlikon’s technologies and services.

Reflecting that progress and ongoing positive market conditions, the Oerlikon Group's order intake increased 24.5 % in 2017 to CHF 3 005 million (including a positive currency impact of 0.8 %) compared with CHF 2 413 million in 2016, while order backlog went up by 52.8 % to CHF 683 million at year-end 2017 versus CHF 447 million at year-end 2016. Group sales in 2017 grew 22.1 % to CHF 2 847 million (including a positive currency impact of 0.8 %) from CHF 2 331 million in 2016. The ratio of Group service sales to total Group sales was 33.7 % in 2017 versus 36.6 % in 2016.

Oerlikon Group achieved strong year-on-year growth in operating profitability in all four quarters and for the full year, as measured by both EBITDA and EBIT.

For the full year 2017, Group EBITDA increased 24.3 % to CHF 415 million, yielding a margin of 14.6 %. That compares with Group EBITDA of CHF 334 million and a margin of 14.3 % for the full year 2016. Full-year Group EBIT for 2017 increased 38.6 % to CHF 219 million, yielding a margin of 7.7 %, versus EBIT of CHF 158 million and an EBIT margin of 6.8 % in 2016.

Oerlikon Group was solidly profitable in 2017, with income from continuing operations of CHF 146 million compared with CHF 82 million in 2016, an increase of 78.0 %. After including net results of discontinued operations of CHF 6 million in 2017, net income totaled CHF 152 million in 2017, or earnings per share of CHF 0.44, versus CHF 388 million, including the positive impact from the divestment of the Vacuum Segment, or earnings per share of CHF 1.14 in 2016. The tax expense for 2017 was CHF 64 million, while in 2016, it was CHF 53 million.

Cash flow from operating activities before changes in net current assets increased 50.6 % to CHF 405 million in 2017 compared with CHF 269 million in 2016. The Group’s return on capital employed (ROCE) was 8.2 % in 2017 versus 5.7 % in 2016.

The Surface Solutions Segment remained the largest contributor to Oerlikon’s sales and profits in 2017, representing 48 % of total Group sales and 66% of total Group EBITDA. Its performance in 2017 demonstrates its central role in the Group and further validates Oerlikon’s strategy to become a global leader in advanced materials, surface solutions and materials processing. The Segment’s order intake increased 14.6 % in 2017 to CHF 1 417 million (including a positive currency impact of 0.3 %) compared to CHF 1 236 million in 2016. Order backlog climbed 55.0 % to CHF 124 million from CHF 80 million in the previous year. The Segment’s sales increased 11.2 % in 2017 to CHF 1 377 million (including a positive currency impact of 0.3 %) from CHF 1 238 million in 2016. Sales growth was seen in all regions and across industries, particularly notable in aerospace and general industries, as well as in Asia.

The Surface Solutions Segment achieved an EBITDA margin of 20.0 % for 2017, even after offsetting the Segment’s substantial investments especially in additive manufacturing during the year. For 2017, EBITDA for the Segment totaled CHF 276 million, which was roughly level with CHF 277 million in 2016. The EBITDA margin in 2016 was 22.2 %. The Segment’s EBIT in 2017 declined 7.5 % to CHF 149 million, or 10.8 % of Segment sales, from CHF 161 million, or 13.0 % of Segment sales, in 2016.

In 2017, the Segment completed four strategic acquisitions aimed at adding technologies and expertise in advanced materials and surface solutions, thereby expanding its business offering and gaining further market access. They included the assets of Recentis Advanced Materials, Canada, to strengthen its competency in high-temperature manufacturing; Scoperta, USA, for its computational software enabling rapid identification and development of innovative and disruptive material solutions; Primateria, Sweden, which is strengthening its foothold in the gear cutting market; and the assets of DiaPac LLC and Diamond Recovery Services (DRS), USA, for complementary knowledge in manufacturing, processing, application, recovery and recycling of advanced materials.

To intensify its focus on the additive manufacturing market, Oerlikon AM was established as a competence brand of the Surface Solutions Segment in 2017. In addition to acquisitions, the AM Business Unit moved forward in its strategy to play a leading role in the industrialization of that market in 2017 through initiatives such as partnerships with GE, TU Munich and Skoltech, as well as opening the Innovation & Technology Center for AM in Munich and moving forward with the construction of an R&D and production facility in Charlotte, North Carolina, USA.

The Manmade Fibers Segment saw a significant and positive turnaround in market demand in 2017 after two years of challenging conditions. The growth was mainly driven by a few key players in the China manmade fiber industry, but at the same time larger projects in Turkey and India could be secured as well. With its leading market position, among others, for POY and FDY filament equipment, the Segment was able to capture a healthy share of market opportunities.

For 2017, Segment order intake increased 40.4 % to CHF 810 million (including a positive currency impact of 1.0 %) compared with CHF 577 million in 2016. Segment order backlog increased 32.2 % to CHF 357 million at year-end 2017 versus CHF 270 million at year-end 2016. Sales jumped 53.8 % in 2017 to CHF 740 million (including a positive currency impact of 1.3 %) from CHF 481 million in 2016.

Segment profitability also improved substantially in 2017 with EBITDA more than tripling (up 256 %) to CHF 57 million, or 7.7 % of sales, versus CHF 16 million, or 3.3 % of sales, in 2016. There was a turnaround in EBIT in 2017, which totaled CHF 34 million, or 4.6 % of sales, compared with negative EBIT in 2016, which totaled minus CHF 3 million, or -0.6 % of sales.

In addition to recovery in the filament equipment market in 2017, the Segment’s growth was complemented by a notable increase in global demand for staple fibers machinery and in texturing, including the delivery of its first DTY machines eAFK HQ to a key customer in China. Good demand for bulked continuous filament (BCF) plant solutions for the production of carpet yarns was also seen in the USA and Turkey. In addition, a strong increase in sales was noted in polymer processing, driven mainly by Oerlikon's joint venture with Huitong in this market. To position itself for future growth, the Segment has been ramping up its production capacity in all business areas. Additionally, the Segment created a separate business unit to capture opportunities in the attractive and growing nonwovens market and entered into a partnership agreement with Teknoweb Materials in Italy to add disposable nonwoven solutions to its offering.

The Drive Systems Segment continued its noteworthy turnaround in 2017 as it further executed its repositioning strategy. Initiated in 2016, the Segment streamlined its product portfolio, improved production efficiency through a focused factory approach, and increased its emphasis on higher-value projects and quality orders. That has led to the Segment’s ability to capture business and profit in 2017 in agriculture, construction, transportation and automotive markets globally. In particular, the Segment recorded a significant increase in sales in the China transportation market.

Segment order intake increased 29.7 % in 2017 to CHF 778 million (including a positive currency impact of 1.3 %) compared to CHF 600 million in 2016, while order backlog more than doubled to CHF 202 million at year-end 2017 compared with CHF 97 million at year-end 2016. Segment sales totaled CHF 730 million in 2017 (including a positive currency impact of 1.3 %), an increase of 19.3 % from CHF 612 million in 2016.

Reflecting the continued benefits of its restructuring and process optimization measures, the Segment delivered a 52.9 % increase in EBITDA in 2017, which amounted to CHF 78 million, or 10.6 % of sales, compared with CHF 51 million, or 8.4 % of sales in 2016. EBIT for 2017 tripled to CHF 36 million, or 4.9 % of sales, from CHF 12 million, or 2.0 % of sales, in 2016.

A major pillar of Oerlikon’s strategy is to maintain a balanced portfolio of market-leading technologies, a global presence and a broad range of comprehensive services. By Segment – the Surface Solutions Segment contributed 48 % to total Group sales in 2017, while the Manmade Fibers Segment and the Drive Systems Segment each accounted for approximately 26 % of Group sales. With a strong global footprint, Oerlikon operates over 186 sites in 37 countries, with 85 sites in Europe, 58 sites in Asia-Pacific and 43 sites in the Americas. In 2017, Europe continued to account for the largest proportion of Group sales. Sales amounted to CHF 1 101 million, or 39 % of Group sales, versus CHF 973 million, or 42 % of Group sales, in 2016.

Asia Pacific remained the second largest regional contributor to Group sales in 2017, with sales totaling CHF 1 073 million, or 37 % of sales, compared with CHF 751 million, or 32 % of sales, in 2016. Group sales in North America totaled CHF 538 million, or 19 % of Group sales, in 2017, versus CHF 496 million, or 21 % of Group sales, in 2016. Sales in other regions remained at 5 % of Group sales in 2017 at CHF 135 million compared with CHF 111 million in 2016.

As of December 31, 2017, Oerlikon’s balance sheet totaled CHF 4 352 million, compared to CHF 3 825 million at year-end 2016. The Oerlikon Group had equity (attributable to shareholders of the parent) of CHF 1 970 million, representing an equity ratio of 45 %, compared to CHF 1 826 million, or an equity ratio of 48 % as at December 31, 2016.

The year-on-year increase in the total balance sheet and continued strong equity ratio primarily reflected the improved cash and cash equivalent positions due to higher customer advances. Net cash amounted to CHF 499 million at year-end 2017, compared with CHF 401 million at year-end 2016.

Credit facility extension

In December 2017, Oerlikon exercised the optional one-year extension of its five-year unsecured syndicated credit facility of CHF 600 million, and thereby has maintained a strong financial base for further investment in core strategic businesses and new technologies, including additive manufacturing, and to support future growth.

Cash flow from operating activities before changes in net current assets increased 50.6 % in 2017 to CHF 405 million compared with CHF 269 million in 2016. Net working capital, defined as trade and trade note receivables plus inventories minus trade payables and current customer advances, totaled CHF 147 million, corresponding to 5 % of Group sales in 2017 versus CHF 316 million, or 14 % of Group sales in 2016.

Capital expenditure (CAPEX) amounted to CHF 237 million, compared to CHF 144 million in 2016. Excluding amortization of acquired intangible assets, the CAPEX-to-depreciation ratio was 1.52 times, which is higher than the Group’s target of between 1.0 to 1.2 times due to investments in additive manufacturing, as well as for building up the e-mobility business and repositioning of the Drive Systems Segment.

Cash flow from investing activities was minus CHF 237 million in 2017 compared with CHF 57 million in 2016 (mainly attributable to proceeds from the sale of the vacuum business less capital expenditure and short-term deposits investments).

Cash flow from financing activities amounted to minus CHF 132 million in 2017, mainly for dividend payments of CHF 104 million, compared with minus CHF 448 million in 2016, mainly reflecting dividend payments of CHF 104 million, repayment of financial debt of CHF 301 million and interest paid of CHF 38 million. Primarily reflecting the Group’s operating cash flow, Oerlikon reported a cash and cash-equivalent position at the end of 2017 of CHF 871 million compared with CHF 751 million at the end of 2016. Oerlikon continued to invest approximately 4 % of its revenues in research and development (R&D). In 2017, R&D expenditure was CHF 107 million, or 4 % of Group sales, compared with CHF 94 million, or 4 % of Group sales, in 2016.

Oerlikon believes that dividend payout is an important means of returning value to shareholders. Based on the strong performance in 2017, the Board of Directors will recommend an increased dividend payout of CHF 0.35 per share at its 45th An nual General Meeting (AGM) of Shareholders on April 10, 2018.