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Annual Report 2016

FEINTOOL GROUP

Sales increase 5.9 %; EBIT in local currency rises by 20.8 %

Key figures at a glance

(only continuing operations)

    2016 2015 2014 2013 2012 1)
    01.01.–31.12.16 01.01.–31.12.15 01.01.–31.12.14 01.01.–31.12.13 01.01.–31.12.12
Operating figures in CHF m          
Expected releases – high volume parts manufacturing 240.9 209.6 213.9 181.0 138.1
Orders received third (investment goods) 57.2 77.2 86.7 77.6 78.8
Orders backlog third (investment goods) 19.1 36.0 32.9 29.9 30.0
           
Net sales 552.2 508.9 503.4 435.7 427.0
Earnings before interest, taxes, depreciation and amortization (EBITDA) 2) 76.0 61.4 62.9 47.0 43.0
Operating profit (EBIT) 2) 41.3 32.9 35.1 20.4 22.0
Net earnings from continuing operations 32.1 20.1 24.6 14.8 11.4
           
Return figures in %          
EBITDA margin 2) 13.8 12.1 12.5 10.8 10.1
EBIT margin 2) 7.5 6.5 7.0 4.7 5.2
Net return on sales 5.8 3.9 4.9 3.4 2.7
           
Cash flow and balance sheet statistics in CHF m          
Cash flow from operating activities 74.1 40.1 50.8 49.4 27.0
Cash flow from investing activities (net) -59.4 -29.9 -12.1 -34.9 -29.9
Free cash flow 14.7 10.2 38.7 14.6 -2.9
Total assets 530.7 426.9 427.4 398.9 385.9
Equity 229.9 207.9 202.9 183.8 136.8
Liabilities 300.8 219.0 224.6 215.1 249.2
Net debt 16.2 11.1 9.3 33.0 75.3
Equity ratio 43.3 % 48.7 % 47.5 % 46.1 % 35.4 %
Gross investments 74.9 31.8 43.4 36.6 34.8
           
Key figures per share 3) in CHF          
Earnings per share (basic) 7.20 4.51 5.53 3.53 2.94
Dividend per share 2.00 4) 1.50 1.50 1.20 1.00
Equity per share 51.61 46.72 45.55 43.80 35.43
           
Other          
Number of employees at year-end (excl. apprentices) 2 239 2 049 1 987 1 818 1 809

1)Including Automation segment, which was sold in the 2014 financial year

2)In financial year 2016, the Swiss pension fund approved an amendment to the regulations, which, according to IAS 19, had a positive impact on the consolidated statement of comprehensive income to the tune of kCHF 7 083. The EBITDA and EBIT are shown in this overview without this effect.

3)Restated for a share with par value CHF 10

4)Board of Directors' proposal








1)In financial year 2016, the Swiss pension fund approved an amendment to the regulations, which, according to IAS 19, had a positive impact on the consolidated statement of comprehensive income to the tune of kCHF 7 083. The EBITDA and EBIT are shown in this overview without this effect.


Financial Review

as at December 31, 2016

BUSINESS PERFORMANCE

General

The consolidated annual report for 2016 applies to Feintool International Holding AG and all its subsidiaries. It covers the period from January 1 to December 31, 2016.

On March 30, 2015, Feintool acquired Gabler Feinschneidtechnik GmbH in Oelsnitz/Erzgebirge (Saxony/Germany). The company was then renamed Feintool System Parts Oelsnitz GmbH.

In the summer of 2016 the Board of Trustees of the Swiss pension fund, together with Feintool, adopted a resolution to restructure the pension fund. The restructuring will take place, on the one hand, by increasing the contributions received from the founding company during the coming years and, on the other hand, by gradually reducing the conversion rate for future retirement pensions. The restructuring had a one-off positive effect on personnel costs in the amount of CHF 7.1 million. The following explanatory remarks refer – unless expressly stated otherwise – to Feintool's business without this one-off effect.

Orders received and order backlog in the capital goods business; expected releases in high-volume parts production

Feintool does business in investment goods as well as high-volume parts production. To increase transparency, Feintool separately presents the orders received and the order backlog in the investment goods business and the expected releases from high-volume parts contracts. Orders received and the order backlog in the capital goods business are legally binding orders. In high-volume parts production, the order backlog represents expected releases over the next six months. However, the customer can postpone, amend or even cancel these releases at any time. To that extent, the order backlog in the high-volume parts business is merely an important leading indicator.

Orders received in the Fineblanking Technology segment, which does business in investment goods, fell by 8.8 % to CHF 85.8 million (previous year CHF 94.1 million), with CHF 28.6 million stemming from the System Parts segment, which was significantly more than in the previous year (CHF 17.0 million). Thus third-party orders received fell by 25.9 % in the reporting year to CHF 57.2 million (previous year CHF 77.2 million). Accounting for a 33.3 % share (previous year 18.0 %), the System Parts segment substantially grew its position as the largest customer.

The third-party order backlog decreased by 46.9 % to CHF 19.1 million (previous year CHF 36.0 million) as a result. The order backlog for internal orders, on the other hand, increased by CHF 8.8 million to CHF 16.0 million. The overall order backlog therefore fell by 18.8 % to 35.1 million (previous year CHF 43.2 million), equivalent to just under six months' worth of work for the long-term press and tool business.

The expected releases in the high-volume parts business for the next six months totaled CHF 240.9 million. This means that this value increased by 14.9 % and is now at a record high at the end of the year. Feintool's customers expect to see positive business development in all regions over the next six months.

Net sales

Consolidated sales rose by 8.5 % to CHF 552.2 million (previous year CHF 508.9 million). In the reporting year, the currency movements supported growth with an effect of CHF 13.1 million. In local currencies, Feintool reported sales growth of 5.9 % as a result. This is attributable to the good level of business in the automobile sector and to the launches of new products. The System Parts segment generated 86.8 % of external sales (previous year 86.1 %). Fineblanking Technology contributed 13.2 % (previous year: 13.9 %) to sales. When intragroup sales are included, the share accounted for by the Fineblanking Technology investment goods sector totaled 16.2 % (previous year: 16.7 %).

The parts business in the System Parts segment grew by 9.4 % to CHF 479.3 million in the reporting currency during the financial year (previous year CHF 438.0 million). The positive currency effects totaled CHF 12.8 million; the positive effect of the acquisition amounted to CHF 6.0 million. In local currency terms, growth in the segment reached 6.5 % or 6.2 % without the acquisition. The fineblanking business in Europe increased by 18.9 % to CHF 161.6 million in the reporting currency, which includes a positive currency effect of CHF 2.7 million. In local currency, the growth totaled 16.9 %, and without acquisitions it was still 14.8 %. The Forming Europe segment generated sales of CHF 91.2 million, which corresponds to an increase of 7.3 %. When corrected for the currency impact, the area grew by 4.8 %. Business in the US saw an increase of 2.6 % to CHF 176.4 million in the reporting currency. The currency effect from the US dollar was almost entirely responsible for the growth of CHF 4.2 million. Adjusted for currency effects, the region of America finished the year at the level of the previous year. Sales in Asia, mainly generated by the operations in Japan, rose by 11.6 % to CHF 50.5 million due to the appreciation of the yen. In the local currency, Asian business grew by 3.3 %. The European operations accounted for a 52.7 % share of sales (previous year: 50.4 %). The European companies grew at a slightly faster rate than on average in the Group. The share from operations in the US fell to 36.8 % (previous year 39.2 %). While the American operations were responsible for growth in past years, this year the European operations, in particular, accounted for the increase in sales. The Asian share remained almost unchanged at 10.5 % (previous year 10.3 %).

9.7 %

Organic growth
in the series parts business in local currency



Sales in the Fineblanking Technology segment totaled CHF 92.7 million (previous year CHF 87.8 million). The increase was due to a rise of CHF 2.0 million from third-party orders and CHF 2.9 million from internal sales. Third-party sales increased by 2.9 % and totaled CHF 73.0 million.

The Feintool Group sold products and services amounting to a total of CHF 287.6 million or 52.0 % in Europe. The growth of sales in North America was clearly weaker than in the other regions, with sales revenue totaling CHF 168.8 million, proportionately 30.6 % (previous year CHF 163.0 million or 32.0 %). Sales in Asia rose substantially, to CHF 95.9 million or a share of 17.4 % (previous year CHF 87.0 million or 17.1 %). With sales of CHF 11.1 million, or 2.0 %, the Swiss market is of little significance to Feintool (previous year CHF 4.9 million, or 1.0 %).

Gross margin

The gross margin rose year on year by 1.8 percentage points to 40.3 %, the gross profit totaled CHF 222.5 million in the financial year.

At CHF 245.0 million (previous year CHF 239.0 million), materials are by far the largest cost component for Feintool. In the year under review, the cost of materials as a percentage of sales fell from 47.0 % to 44.4 %. Feintool is constantly increasing the added value it generates in the company (hardening, double-disc grinding), which will reduce the amount of material used. Although most customer contracts contain price adjustment clauses, Feintool benefitted from lower raw material costs in individual cases. Direct personnel expenses totaled CHF 84.1 million or 15.2 % of sales. The slight increase in the percentage of personnel expenditures, by 0.5 percentage points, is a direct consequence of the increase in added value.

The System Parts segment achieved a gross margin of 39.7 %, which is slightly above the level from the previous year (previous year 37.9 %). Besides the already mentioned factors, the increases in efficiency at all the locations also contributed to this rise in margins. The relocation of roughly 140 tools to Saxony (Germany) due to the sharp appreciation of the Swiss franc in the previous year hurt the gross margin on account of the high training and relocation costs for the sampling of these parts.

The gross margin in the Fineblanking Technology segment rose slightly to 39.8 % (previous year: 39.2 %). This slight increase is primarily due to changes in the product mix. As a result, the higher share of personnel costs – due to a return to the 40-hour work week in Switzerland – will be compensated by other increases in efficiency.

Key cost items

Personnel expenses increased overall by CHF 9.8 million to CHF 159.0 million, or 28.8 % of sales (previous year 29.3 %). Without one-off effects from a reduction in the conversion rate for retirement pensions in Swiss employee benefit plans, the increase was CHF 16.8 million, and the personnel expenditures as a percentage of sales rose to 30.1 %. The increase was only seen in the System Parts segment, with the share of personnel expenses amounting to 26.9 % in the year under review. The reason for this development was investments in the future, such as the expansion of the production facilities in China and Oelsnitz. Likewise, the initiation of new orders in Switzerland required additional staff. The increase in value added through additional work steps such as "hardening" involves training expenses and also requires an increase in headcount. In the Fineblanking Technology segment, personnel expenses fell by CHF 0.1 million, their amount as a percentage of sales fell to 30.1 %.

Other operating expenses rose by CHF 7.8 million to CHF 71.8 million; relative to sales, these expenses rose slightly to 13.0 % (previous year 12.6 %). The increase results from many smaller items. Other operating income remained almost unchanged at CHF 2.0 million. The ongoing focus on core activities means that income from ancillary services and income from discontinued operations fluctuated at a low level.

Earnings before interest, taxes, depreciation and amortization (EBITDA)

Earnings before interest, taxes, depreciation and amortization (EBITDA) rose by CHF 14.6 million or 23.7 % to CHF 76.0 million in this year. The currency effect in the amount of CHF 2.5 million had a positive impact. The EBITDA margin rose substantially in the financial year, from 12.1 % in 2015 to 13.8 % in 2016. If the one-off effect from employee benefits is taken into account, EBITDA reached CHF 83.1 million and the EBITDA margin 15.0 %.

Depreciation and impairment

Depreciation increased massively this year, by 21.5 %, to CHF 34.6 million. The reasons for this were the high investments in recent years, particularly in the System Parts segment. Relative to sales, depreciation rose from 5.6 % to 6.3 %. At CHF 74.9 million, investments significantly exceeded depreciation in the reporting year; consequently, this expense item is set to continue growing over the coming years.

Operating profit (EBIT)

Feintool generated an operating profit (EBIT) of CHF 41.3 million (previous year CHF 32.9 million), which equates to an EBIT margin of 7.5 % (previous year 6.5 %). The positive currency effect on the EBIT level amounted to CHF 1.6 million. In local currency terms, Feintool increased its operating profit (EBIT) by 20.8 %. All segments and regions generated an operating profit. The EBIT with the inclusion of the one-off effect from the Swiss pension fund reached CHF 48.4 million and the EBIT margin 8.8 %.

9.3 %

EBIT margin
in high-volume parts production



The operating results of the System Parts segment rose significantly by CHF 8.6 million or 23.9 % (by 19.8 % when adjusted for currency effects) to CHF 44.4 million (previous year CHF 35.8 million). The sales growth due to the good automobile economy and new launches or the ramp-up of many products led to higher capacity utilization at most companies, which had a positive impact on margins overall. The programs for increasing efficiency at all locations and higher added value have supported this pleasing development. The EBIT margin increased significantly to 9.3 % as a result of this. The American operations contributed the largest share to earnings with an EBIT of CHF 17.4 million. This equates to an increase of 10.3 % relative to the previous year. The appreciation of the US dollar had a positive impact of CHF 0.4 million. In the local currency, the increase still amounted to 7.6 %. The European fineblanking operations reported a decrease of CHF 0.3 million or 2.6 % in their operating result. Currency movements between the euro and the Swiss franc had a positive impact in the amount of CHF 0.3 million. In total, this segment generated an operating result in the amount of CHF 10.7 million. With an operating profit of CHF 10.6 million, the Forming Europe segment almost doubled its results from the previous year (previous year CHF 5.5 million). It also increased a solid 88.2 % without the currency support. This segment profited from the rapid growth of orders that were won on the market in previous years. In Asia Feintool increased EBIT in the parts business by 25.3 % (13.0 % when adjusted for currency effects) to CHF 5.7 million. For the first time, the production site in China also reported positive earnings, even if they were very modest at CHF 0.2 million or an EBIT margin of 2.1 %.

The Fineblanking Technology segment generated an operating profit of CHF 4.3 million (previous year CHF 4.6 million). The margin fell significantly year on year to 4.7 % (previous year 5.2 %). The main reason for this development is the costs in the amount of CHF 1.2 million for the reorganization of the China business. The technology center created in Shanghai in 2013 was too large for the needs of Feintool and will be reduced in 2017. The expenditures required for this have been set aside in the year under review. Research expenses were consciously increased to CHF 5.6 million, as they constitute an investment in the future.

The non-operating units incurred costs of CHF 6.9 million (previous year CHF 7.0 million).

Net financial income/finance costs

Net financial income/finance costs fell significantly to CHF -3.2 million (previous year CHF -3.7 million). This includes a currency profit of CHF 0.5 million (previous year CHF 0.1 million). The net financial expenses not including currency effects remained CHF 3.7 million.

Taxes

The tax expense of Feintool companies totaled CHF 13.2 million. The effective tax rate of 29.1 % is just below the weighted tax rate of 29.3 % due to special effects. Feintool's main markets – Germany, the US and Japan – all have high taxes. This also explains the high tax rate for Feintool.

Discontinued operations

Discontinued operations comprise IMA Automation Amberg GmbH and its associated operating premises. There were no transactions in discontinued operations during the financial year.

Net income

Net income rose to CHF 32.1 million (previous year CHF 20.1 million), which translates into a net return on sales of 5.8 % (previous year 3.9 %). This includes the tax-adjusted one-off effect from the Swiss pension fund in the amount of CHF 5.5 million. The net income is CHF 26.6 million without this effect, corresponding to a net return on sales of 4.8 %.

CONSOLIDATED BALANCE SHEET

The extraordinarily high investments and the issuance of a promissory note loan led to a significant expansion of the balance sheet in the year under review. Total assets rose by 24.3 % or CHF 103.8 million to CHF 530.7 million.

Current assets rose significantly, by CHF 64.9 million, to CHF 256.0 million. Cash and cash equivalents increased by CHF 61.2 million to CHF 92.8 million due to the inclusion of the promissory note loan. Accounts receivables increased again (+ 2.6 %) and totaled CHF 85.7 million. As a percentage of sales, receivables fell from 16.4 % to 15.5 %, however. The general trend in the automobile industry is to have longer terms of payment, and this was also observed in the year under review. Total receivables sold in the context of the factoring programs - which are not required to be included on the balance sheet - increased to CHF 10.5 million (previous year CHF 8.2 million). Inventories and net assets of work orders and work in progress fell minimally to CHF 72.1 million despite the increase in sales. Accrued income fell to CHF 3.1 million.

The operating net current assets remained unchanged at CHF 70.4 million and thus still totaled 12.8 % of sales (previous year 13.8 %). While the increase in customer receivables was disproportionately low and inventories remained at the level of the previous year, liabilities to suppliers rose by 24.8 % to CHF 55.4 million. Feintool continues to systematically use discounts and payment rebates granted by some important suppliers.

Assets rose heavily, due to more massive investments of CHF 74.9 million (+ 16.5 %), to CHF 274.8 million. Property, plant and equipment grew by CHF 39.4 million to CHF 237.5 million. Intangible assets rose by CHF 1.6 million to CHF 18.4 million. The increase largely resulted from capitalized development costs in the year under review.

Financial assets fell further to CHF 1.6 million. The customer tools prefinanced by Feintool fell again by CHF 1.0 million.

Deferred tax assets fell slightly to CHF 17.3 million (previous year CHF 18.1 million).

On the liability side, debt rose substantially, by CHF 81.8 million, to CHF 300.8 million. Trade payables and other liabilities rose by CHF 6.4 million and totaled CHF 70.7 million, although the increase was limited to trade payables. Accrued expenses and deferred income, short- and long-term provisions as well as deferred tax liabilities remained virtually unchanged at CHF 53.2 million. Liabilities for the pension fund (IAS 19) rose by CHF 0.5 million to CHF 63.1 million in the financial year. The restructuring of the Swiss pension fund had a one-off positive effect of CHF 7.1 million on this item due to the reduction in the conversion rate for pension funds. On the other hand, changes in actuarial assumptions had a negative effect in the amount of CHF 5.4 million.

Interest-bearing liabilities rose by CHF 66.3 million to CHF 108.9 million. CHF 15.9 million of the interest-bearing liabilities are short-term. Long-term interest-bearing liabilities rose by CHF 76.6 million to CHF 93.0 million in the year under review. On July 15, 2016, Feintool had a promissory note loan in the amount of EUR 65 million with three tranches that have terms of five, seven and ten years and bear interest at rates between 0.90 and 1.66 %. This loan caused a substantial increase in this item. The majority of the borrowed money is reported in cash and cash equivalents as at December 31, 2016. All covenants – both for the promissory note loan and for the bank loans – have been complied with as of December 31, 2016.

Net debt only increased by an insignificant amount in the financial year, to CHF 16.2 million (previous year CHF 11.1 million) despite very high investments.

Equity stood at CHF 229.9 million as at December 31, 2016 (previous year CHF 207.9 million). The equity ratio fell from 48.7 % to 43.3 % due to the expansion of the balance sheet. The statement of changes in equity shows that consolidated earnings caused equity to increase by CHF 32.1 million. The distributed dividend reduced equity by CHF 6.7 million. Actuarial losses relating to employee benefit obligations (IAS 19) and charged directly to equity had a negative effect on equity of CHF 5.4 million, while currency differences of CHF 1.6 million had a positive impact on equity.

CONSOLIDATED STATEMENT OF CASH FLOWS

The cash flow from operations was very positive at CHF 74.1 million (previous year CHF 40.1 million). In the reporting year, net working capital fell by CHF 8.0 million. The cash flow from investment activity is massively negative at CHF 59.4 million. In addition, lease financing was carried out to the tune of CHF 15.5 million. Overall, therefore, this resulted in a cash flow from operating activities of CHF 14.7 million (previous year CHF 10.2 million). Feintool financed the very high investments once again from its operating business.

14.7

Operating cash flow (in CHF million)
despite very high investments



EMPLOYEES

The number of employees (excluding trainees) increased by 190 to 2239 in the financial year. In addition, 68 (previous year 75) young persons are currently with our company as trainees. The System Parts segment employed a total of 1962 persons - an increase of 182. An increase was seen in all regions (Europe + 119, America + 38 and Asia + 25). The Fineblanking Technology segment employed 242 people at the end of the year (+ 5 on the previous year). Thirty five members of staff (+ 3) were employed in units not directly involved with operations.