ANNUAL REPORT 2017

FEINTOOL GROUP

Sales increase organically by 8.1 % in local currency; EBIT rises organically by 15.7 % in local currency.

Key figures at a glance

(ongoing operations only)

2017

2016

2015

2014

2013

01/01/–12/31/17

01/01/–12/31/16

01/01/–12/31/15

01/01/–12/31/14

01/01/–12/31/13

Operating figures

in CHF m

Expected releases – high volume parts manufacturing

264.0

240.9

209.6

213.9

181.0

Orders received third (investment goods)

82.7

57.2

77.2

86.7

77.6

Orders backlog third (investment goods)

38.3

19.1

36.0

32.9

29.9

Net sales

612.3

552.2

508.9

503.4

435.7

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

83.2

76.0 1)

61.4

62.9

47.0

Operating profit (EBIT)

46.3

41.3 1)

32.9

35.1

20.4

Net earnings

27.7

26.6 1)

20.1

24.6

14.8

Return figures

in %

EBITDA margin

13.6

13.8 1)

12.1

12.5

10.8

EBIT margin

7.6

7.5 1)

6.5

7.0

4.7

Net return on sales

4.5

4.8 1)

3.9

4.9

3.4

Cash flow and balance sheet statistics

in CHF m

Cash flow from operating activities

38.5

74.1

40.1

50.8

49.4

Cash flow from investing activities (net)

-77.1

-59.4

-29.9

-12.1

-34.9

Free cash flow

-38.6

14.7

10.2

38.7

14.6

Total assets

597.4

530.7

426.9

427.4

398.9

Equity

255.2

229.9

207.9

202.9

183.8

Liabilities

342.2

300.8

219.0

224.6

215.1

Net debt

81.9

16.2

11.1

9.3

33.0

Equity ratio

42.7 %

43.3 %

48.7 %

47.5 %

46.1 %

Gross investments

60.1

74.9

31.8

43.4

36.6

Key figures per share

in CHF

Earnings per share (basic)

6.22

5.97 1)

4.51

5.53

3.53

Dividend per share

2.00 2)

2.00

1.50

1.50

1.20

Equity per share

57.19

51.61

46.72

45.55

43.80

Other

Number of employees at year-end (excl. apprentices)

2 485

2 239

2 049

1 987

1 818

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 in the previous period to the tune of kCHF 7 083 (amount excl. deferred taxes of kCHF 1 629). The EBITDA, EBIT, net earnings, net return on sales as well as earnings per share are shown in this overview without this effect.

2) Board of Directors' proposal

1) Last year, the Swiss pension fund adopted a change in policy that had a positive effective of kCHF 7 083 on the statement of comprehensive income in accordance with IAS 19. The EBITDA and EBIT are shown in this overview without this effect.

Financial Review

as at December 31, 2017

BUSINESS PERFORMANCE

General

The consolidated annual statement for 2017 applies to Feintool International Holding AG and all its subsidiaries. It covers the period from January 1 to December 31, 2017.

On April 13, 2017, Feintool acquired Schuler (Tianjin) Metal Forming Technology Center Co., Ltd. in Tianjin (China). The name of the company was then changed to Feintool Automotive System Parts (Tianjin) Co., Ltd. This company uses transfer presses to manufacture forming parts for the automotive industry and has generated sales of CHF 11.6 million and a negative EBIT of CHF 2.0 million since its takeover. This acquisition allowed Feintool to close the strategic gap in its offer of forming applications in Asia.

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 by 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 in the comparative year. The following explanatory remarks refer – unless expressly otherwise stated – to Feintool's business without this one-off effect.

In the year under review, the Euro strengthened considerably against the Swiss franc (at year end: +9.0 %). In some cases, this resulted in substantial valuation differences in the financial statements.

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

Orders received in the Fineblanking Technology segment, which does business in investment goods, increased by a total of 17.2 % to CHF 100.6 million (previous year CHF 85.8 million), with CHF 17.9 million stemming from the System Parts segment, which was significantly less than in the previous year (CHF 28.6 million). Third-party orders received thus rose substantially by 44.5 % to CHF 82.7 million (previous year CHF 57.2 million). Accounting for a 17.8 % share (previous year 33.3 %), the System Parts segment retains its position as the largest customer.

The orders backlog rose by a total of 29.4 % to CHF 45.4 million (previous year CHF 35.1 million) as a result. The orders backlog for internal orders, on the other hand, fell by 50.0 % to CHF 7.1 million. The third-party orders backlog doubled as a result to 38.3 million (previous year CHF 19.1 million), equivalent to just under eight months' worth of work for the long-term press business. This means that there is a stronger starting position for press building in financial year 2018.

The expected releases in the high-volume parts segment for the next six months amount to CHF 264.0 million. This represents an increase of 9.5 % over the previous year, with CHF 3.9 million involving the new forming plant in Tianjin. Accordingly, Feintool's customers expect a very satisfactory business development in all regions for the next six months

Net sales

Consolidated sales rose by 10.9 % to CHF 612.3 million (previous year CHF 552.2 million). In the year under review, currency movements supported growth with an effect of CHF 3.7 million, or 0.7 percentage points. The acquisition of the Chinese forming plant contributed CHF 11.6 million or 2.1 percentage points. In local currency, Feintool therefore achieved 8.1 % organic growth in sales. This development was made possible by a good economy in the automotive industry and increasing volumes of new products. The System Parts segment generated 89.4 % of third-party sales (previous year 86.8 %) and was responsible for the growth. Fineblanking Technology showed stable sales which contributed 10.6 % (previous year 13.2 %) to the total. When intragroup sales are included, the share accounted for by the Fineblanking Technology investment goods segment totaled 14.3 % (previous year: 16.2 %). The parts business will continue to drive Feintool's growth in the future.

11.0 %

Organic growth
of the high-volume parts segment

Sales in the System Parts segment rose by 14.2 % to CHF 547.4 million in the financial year (previous year CHF 479.3 million). The positive currency effects totaled CHF 3.8 million; the positive effect of the acquisition amounted to CHF 11.6 million. In local currency, growth in the segment reached 13.4 % or 11.0 % without the acquisition. The sales in Europe increased by 25.0 % to CHF 315.9 million, which includes a positive currency effect of CHF 6.0 million. In local currency, the growth was therefore high at 22.6 %. The business in North America reported a 2.6 % drop to CHF 171.8 million. The currency effect of the US dollar negatively impacted sales by CHF 1.2 million, thus ultimately resulting in a drop of 1.9 % in local currency. As a result, Feintool's sales declined less than the American market as a whole (-3.7 %). Sales in Asia rose by 20.7 % to CHF 61.0 million. The acquisition of the forming plant in China had a positive effect of CHF 11.6 million. On the other hand, currency movements decreased sales by CHF 1.0 million. Asian business excluding currency and acquisition effects remained at the previous year's level, with a shift of roughly CHF 2.0 million from Japan to China. Due to many localization projects by Japanese automakers, vehicle production in Japan has been stagnating for several years. The share of sales generated by European locations for the parts business thus rose to 57.7 % (previous year 52.7 %), since European companies grew significantly faster than the Group average. The share of sales by subsidiaries in the US fell to 31.4 % (previous year 36.8 %). The Asian share remained almost unchanged at 10.9 % (previous year 10.5 %).

Sales in the Fineblanking Technology segment totaled CHF 91.4 million (previous year CHF 92.7 million) and thus fell slightly by 1.4 %, or by 1.3 % in local currency. While internal sales with the System Parts segment rose by CHF 6.7 million, sales to third-party customers fell by a total of CHF 8.0 million or 10.0 %.

Overall, the Feintool Group sold CHF 334.7 million or 54.7 % of its products and services in Europe (previous year CHF 287.6 million or 52.1 %). The growth of sales in North America was clearly weaker than in the other regions, with sales totaling CHF 171.8 million, proportionately 28.1 % (previous year CHF 168.8 million or 30.6 %). On the other hand, Asian sales increased significantly to CHF 105.8 million or 17.2 % (previous year CHF 95.9 million or 17.3 %), with the increase being attributable to the acquisition of the forming plant in Tianjin.

Gross margin

The gross margin fell slightly by 0.2 percentage points to 40.1 % relative to the previous year, while the gross profit rose by 10.4 % and amounted to CHF 245.6 million in the financial year.

Material is by far the largest cost component for Feintool. In the year under review, the share of materials in sales rose from 44.4 % to 45.7 %, and the cost of materials amounted to CHF 279.9 million (previous year CHF 245.0 million). This includes costs for external processing of the parts such as hardening or coating. The change in the share of materials is due, on the one hand, to the continuous increase in the added value generated in-house (hardening, double disc grinding, etc.), which reduces the share of materials. On the other hand, steel prices rose sharply in the year under review. Thanks to price escalation clauses in many customer contracts and intensive negotiations, Feintool was able to pass on most of these increases to its customers. Nonetheless, these price increases had a significant impact on the share of materials. Direct personnel expenses totaled CHF 90.3 million or 14.8 % of sales. The slight percentage decline of 1.1 percentage points in direct personnel costs is a result of improved production processes in many plants.

The System Parts segment achieved a gross margin of 39.4 %, which is slightly below the previous year's figure (39.7 %). Increases in efficiency at many locations and greater vertical integration compensated for the higher share of materials due to higher steel prices. The plant in Saxony (Germany), which was acquired in 2015 and over 140 tools have been moved to, had a negative impact on the gross margin, due to high training and preliminary costs for the sampling of these parts. The same applies to the two Chinese plants, which also had massively higher training and preparation costs compared to sales. The new plant in Most (Czech Republic), whose cornerstone was laid in November 2017, had only an insignificant impact.

The gross margin in the Fineblanking Technology segment fell slightly to 38.3 % (previous year 39.8 %) This decline can be attributed, on the one hand, to changes in the product mix and, on the other, to a higher share of internal machines with slightly lower margins.

Key cost items

Personnel expenses increased overall by CHF 20.8 million to CHF 179.9 million or 29.4 % of sales (previous year 28.8 %). Excluding the one-off effect in the previous year from the reduction of the conversion rate for the retirement pension in Swiss pension plans, the increase amounted to CHF 13.8 million. The increase was largely attributable to the System Parts segment, with personnel costs accounting for 25.7 % of sales in the year under review (previous year 26.9 %). Despite another round of high investments in the future, such as the construction of the two production plants in China, the plant in Oelsnitz and the initial hiring at our new location in Most (Czech Republic), personnel costs were reduced slightly in percentage terms. The increase in value added through additional work steps such as "hardening" also involves training expenses and requires an increase in headcount.

Other operating expenses rose by CHF 6.4 million to CHF 78.1 million; relative to sales, these expenses fell slightly to 12.8 % (previous year 13.0 %). Systematic cost management was able to slow down the increase in costs. Other operating income rose to CHF 2.4 million. As a result of the ongoing focus on core activities, income from secondary services and income from properties no longer used was at a low level.

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

Earnings before interest, taxes, depreciation and amortization (EBITDA) rose by CHF 7.3 million or 9.5 % to CHF 83.2 million in the year under review. The currency effect in the amount of CHF 0.7 million had a positive impact. The EBITDA margin of 13.6 % in the financial year was slightly lower than in the previous year.

Depreciation and impairment

Depreciation increased this year by 6.6 % to CHF 36.9 million. The reasons for this were the high investments in recent years, particularly in the System Parts segment. Relative to sales, depreciation fell from 6.3 % to 6.0 %, however. At CHF 60.1 million, investments significantly exceeded depreciation in the financial year; this expense item is consequently set to continue growing over the coming years.

Operating profit (EBIT)

Feintool generated operating profit (EBIT) of CHF 46.3 million (previous year CHF 41.3 million), corresponding to an EBIT margin of 7.6 % (previous year 7.5 %). The positive currency impact on the EBIT was CHF 0.5 million. In local currency, Feintool thus increased its operating profit (EBIT) by 10.7 %, with the acquired Chinese forming plant hurting the operating earnings with a negative EBIT of CHF 2.0 million and the associated acquisition costs of CHF 0.4 million.

9.6 %

EBIT margin
in high-volume parts segment

The operating results of the System Parts segment rose significantly by CHF 8.3 million or 18.7 % (by 17.5 % when adjusted for currency effects) to CHF 52.6 million (previous year CHF 44.4 million). The sales growth due to the good economy in the automotive market 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 again slightly to 9.6 %. The European locations reported a significant increase in operating earnings of CHF 11.5 million. Currency movements between the Euro and the Swiss franc had a positive impact of CHF 0.7 million. Overall, this area generated operating income of CHF 32.8 million, which represents an increase of more than 50.0 %. This area benefited from the rapid growth of orders won in the market in previous years; however, individual locations are struggling with additional costs resulting from the rapid growth. The American operations also contributed a solid share to earnings with an EBIT of CHF 18.0 million. When adjusted for currency effects, this amounts to an increase of 4.3 % from the previous year. In Asia, Feintool's EBIT in the parts business fell sharply to CHF 1.8 million. The new plant in Tianjin generated a negative EBIT of CHF 2.0 million. The other Chinese plant also slipped slightly into losses again. On the other hand, Japan again delivered a satisfactory result, even though automobile production in Japan has been stagnating for years.

The Fineblanking Technology segment generated an operating profit of CHF 4.0 million (previous year CHF 4.3 million). The margin fell slightly year on year to 4.4 % (previous year 4.7 %). The main reasons for this development are the slightly lower sales and the also slightly lower gross margin. Research expenses were consciously increased to CHF 7.0 million, as they constitute an investment in the future.

The non-operating units incurred costs of CHF 9.0 million (previous year CHF 6.9 million). This includes one-off costs for the focusing measures of CHF 2.0 million introduced in December. Excluding this special effect, the costs remained largely unchanged at the level of the previous year.

Financial result

The financial result fell significantly to CHF -6.2 million (previous year CHF -3.2 million). This includes a currency loss of CHF 2.9 million (previous year currency gain of CHF 0.5 million). The financial result not including currency effects decreased by CHF 0.3 million to CHF 3.3 million.

Taxes

The tax expense of Feintool companies totaled CHF 12.4 million. The effective tax rate of 30.8 % was just slightly higher than in the previous year (29.1 %). Feintool's main markets – Germany, the US and Japan – all have high taxes. The reduction of the tax rate in the US will result in a reduction of the theoretical tax rate to around 24.0 % in the future. As in previous years, the tax expense is influenced by losses in countries (especially China) in which the loss carryforwards become time-barred relatively quickly. Non-capitalized loss carryforwards therefore increased by CHF 7.7 million to CHF 22.1 million in the year under review.

Net income

Consolidated net income rose slightly year on year to CHF 27.7 million (previous year CHF 26.6 million). However, the net return on sales of 4.5 % fell slightly compared to the previous year (4.8 %), due to the significant increase in sales.

CONSOLIDATED BALANCE SHEET

The acquisition of the Chinese metal forming plant and another round of very high investments caused a significant increase in the balance sheet during the year under review. Total assets rose by 12.6 % or CHF 66.7 million to CHF 597.4 million.

Since the changes largely offset each other, the change in current assets of CHF 255.3 million was only minimal overall. Cash and cash equivalents fell by CHF 40.4 million to CHF 52.4 million as a result of the acquisition and the high investments. On the other hand, receivables increased massively (+30.1 %) and totaled CHF 111.5 million. Only CHF 3.2 million of the increase is of an acquisition nature. Relative to sales, receivables rose from 15.5 % to 18.2 %. The general trend in the automobile industry is to have longer payment terms, and this was also observed in the year under review. The age structure of receivables hardly changed 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 13.3 million (previous year CHF 10.5 million). The inventories and net assets of construction contracts increased by CHF 12.5 million to CHF 84.6 million, with CHF 8.2 million coming from the acquisition. Without the acquisition, the increase would have been only CHF 4.3 million or 6.0 %, significantly lower than the increase in sales. Accrued income increased to 4.3 million.

Operating net working capital rose by CHF 17.4 million to CHF 78.1 million, amounting to 12.8 % of sales (previous year 11.0 %). The main reason for this increase is the development of trade receivables, which increased by CHF 19.4 million, and the increase in inventories and net assets from construction contracts by CHF 12.5 million. Trade payables as well as accrued expenses and deferred income increased by only CHF 13.2 million and only partially compensated for this rise. Feintool continues to make consistent use of the discounts and rebates granted by a number of important suppliers, which inevitably reduces its flexibility with regard to its liabilities.

Fixed assets rose sharply to CHF 342.1 million as a result of another round of high investments totaling CHF 60.1 million (+24.5 %). The acquisition of the Chinese plant caused an increase in fixed assets of CHF 38.5 million. The increase in fixed assets would have been just 10.5 % without the acquisition effect. Property, plant and equipment rose by CHF 42.5 million – CHF 15.5 million due to the acquisition – to CHF 280.0 million. Intangible assets increased by CHF 25.3 million to CHF 43.7 million, with CHF 23.0 million resulting from the acquisition. The organic growth is attributable to capitalized research and development costs, software and some minor items. Financial assets remained unchanged at CHF 1.6 million. Deferred tax assets fell slightly to CHF 16.7 million.

On the liabilities side of the balance sheet, debt rose significantly by CHF 41.3 million to CHF 342.2 million, of which the acquisition accounted for more than 60.0 %, i.e. CHF 25.1 million, of the increase. Trade payables and other liabilities increased by CHF 4.2 million and totaled CHF 74.8 million, with CHF 6.0 million resulting from the acquisition. The liabilities of the other companies thus declined slightly. Accrued expenses and deferred income, current and non-current provisions and deferred tax liabilities increased by CHF 10.5 million (CHF 6.4 million from the acquisition) to CHF 63.7 million. Liabilities for the pension fund (IAS 19) fell by CHF 3.6 million to CHF 59.5 million in the financial year. While the obligation of the Swiss plans decreased by CHF 5.0 million, the obligations in Germany – partially on account of the appreciation of the euro – rose by CHF 1.3 million. The initiated restructuring of the Swiss pension plans had a one-off positive effect of CHF 7.1 million on this item in the previous year, due to the reduction of the conversion rate for old age pensions.

Interest-bearing liabilities rose strongly by CHF 25.3 million – of which CHF 12.7 million is due to the assumption of debts from the acquisition in China – to CHF 134.2 million. CHF 30.7 million of the interest-bearing liabilities are short-term. Non-current interest-bearing liabilities rose by CHF 10.5 million to CHF 103.5 million in the year under review. Feintool signed a new syndicated loan of CHF 90.0 million in the year under review. With CHF 134.1 million in cash and cash equivalents and available, confirmed bank lines, Feintool has more financial flexibility than in the previous year, despite high investments and the acquisition in China (CHF 117.8 million).

Equity stood at CHF 255.2 million as at December 31, 2017 (previous year CHF 229.9 million). As a result of the increase in the balance sheet, the equity ratio fell slightly from 43.3 % to 42.7 %. The statement of changes in equity shows that the consolidated profit increased equity by CHF 27.7 million. The distributed dividend reduced equity by CHF 8.9 million. Actuarial revaluations relating to employee benefit obligations (IAS 19) charged directly to equity in the amount of CHF 3.9 million and currency differences of CHF 2.6 million had a positive effect. The other items hardly had any influence.

CONSOLIDATED STATEMENT OF CASH FLOWS

The cash flow from operating activities was CHF 38.5 million and thus significantly lower than in the previous year (CHF 74.1 million). In the year under review, net working capital rose sharply, by CHF 36.7 million. The cash flow from investment activity at CHF 77.1 million was very negative, with CHF 24.7 million attributable to the cash purchase price of the Chinese forming plant. In addition, lease financing in the amount of CHF 6.2 million was made use of. Overall, therefore, this resulted in a negative cash flow from operating activities of CHF 38.6 million (previous year positive CHF 14.7 million). Feintool was not able to finance the very high investments from its operating business in the year under review.

EMPLOYEES

The number of employees (excluding trainees) increased by 246 to 2 485 in the financial year. In addition, 81 (previous year 68) young persons are currently with our company as trainees. The System Parts segment employed 2 206 people, an increase of 244. Strong growth in sales precipitated the increase of 152 employees to 1 244 in Europe, while there are 350 employees in Asia, which represents an increase of 111 persons, with 52 being attributed to the acquisition. In the US, the number of employees fell to 612 (-19 relative to the previous year). The Fineblanking Technology segment employed 239 people at the end of the year (-3 on the previous year). Forty members of staff (+5) were employed in units not directly involved with operations.

A total of 419 employees and 32 trainees are employed in Switzerland, which corresponds to an increase of 26 persons and one trainee.