In 2010, Sulzer proved its ability to adapt quickly to changed market conditions. The company achieved a strong double-digit profitability with a return on sales of 12.8% and an improved return on capital employed of 28.1%. Sales (CHF 3.2 billion, –5.0%) were still impacted by the notable decrease in order intake in 2009. Net income1 increased by 11% to CHF 300.4 million, corresponding to earnings per share (EPS) of CHF 8.92. The Sulzer Board of Directors is proposing an increased dividend of CHF 3.00 per share. The Board is also proposing that Jill Lee be elected as a new board member, as Hans Hubert Lienhard has decided not to stand for reelection. Sulzer’s global presence was further strengthened as major investments in the emerging markets went into operation. The service business was substantially enhanced through acquisitions. Based on a healthy balance sheet, Sulzer continues to assess additional acquisitions. For 2011, Sulzer expects a moderate growth in order intake and increased sales on an adjusted2 basis. The divisional operating income is anticipated to be moderately higher.
In 2010, Sulzer exceeded the high performance level predicted in the midrange outlook, published in early 2009. The company maintained its leading market positions and remained resilient in a still generally challenging economic environment. Acquisitions, mainly the integration of Dowding & Mills into Sulzer Turbo Services, had a positive effect on the order intake. Overall sales decreased due to the significantly lower order intake in the previous year. The strong Swiss franc had a negative translation impact on order intake, sales, and operating income. Despite lower sales volumes, return on sales increased to 12.8%, mostly due to lower restructuring expenses and the associated cost savings achieved. The adaptation program was initiated proactively in early 2009, and most restructuring expenses were booked in the same year. Sulzer successfully completed its long-term real estate strategy by divesting Sulzer Real Estate Ltd. This sale had a positive effect on the operating income. Return on capital employed increased to a highly value-generating level of 28.1%. Divisional return on sales increased to 10.9%.
Net income attributable to shareholders increased to CHF 300 million, resulting in improved basic earnings per share of CHF 8.92. The balance sheet remains solid with a net liquidity of CHF 553 million, supported by a positive free cash flow.
Strengthened global presence and expanded service offering
In 2010, Sulzer further expanded its presence in the emerging and developing markets, which accounted for 42% of sales in 2010. In China, Sulzer opened a major state-of-the-art facility for engineered pumps. In addition, the company expanded a number of existing manufacturing plants in India, Brazil, and Russia and added service locations in Saudi Arabia, Russia, and Indonesia.Sulzer increased its stake in Sulzer India Ltd. to 94% and delisted the company.
Sulzer’s service business was further strengthened in 2010 with two acquisitions, which further increased the company-wide share of services to 43% of sales. The integration of Dowding & Mills allowed the company to combine the acquired electro-mechanical service business with the existing activities of Sulzer Turbo Services, thereby becoming a leading independent service provider for turbomachinery, generators, and motors. In addition, Sulzer strengthened its coating services with the acquisition of the diamond-like carbon coating business from Bekaert.
Outlook for 2011: Higher order intake, sales, and operating income
The positive trend in the early-cycle markets is expected to continue, albeit at a somewhat slower pace. Activity in the automotive industry is likely to continue at its current high level. Further recovery in the aviation industry is projected. The pulp and paper market is likely to continue its positive trend at a somewhat slower pace. For other general industrial markets, Sulzer anticipates moderate growth. The oil and gas industry is expected to grow, especially in the second half of the year, as the number of project studies has increased. The hydrocarbon processing industry will probably remain flat. After a sharp decline in 2010, Sulzer predicts that activity in the power generation industry will stabilize. Newly developed applications offer promising business opportunities. Stricter regulations and increasing environmental concerns will support demand for Sulzer’s offering of highly reliable and energy-efficient solutions. Geographically, the emerging markets, particularly Brazil, India, China, and Russia are expected to remain the main growth drivers.
Based on the strengthening Swiss franc—especially toward the end of 2010—further negative currency translation effects have to be expected in 2011. However, with its global manufacturing and service network, Sulzer is naturally hedged against major currency impacts on profitability.
Based on its healthy balance sheet, Sulzer is continuously assessing additional acquisitions to strengthen its portfolio and expand its global presence, while maintaining its criteria of strategic fit, integration ability, and value creation.
For 2011, Sulzer expects a moderate growth in order intake and increased sales on an adjusted1 basis. The divisional operating income is anticipated to be moderately higher, but the extraordinary income from the divestiture of the non-operational real estate will not reoccur.
Based on its leading market positions, focused strategy, and continued operational improvements, Sulzer is well positioned for continued long-term success. Over the next two years, Sulzer expects an increase of the divisional return on sales to approximately 11.8%, a divisional return on capital employed of around 25%, and an average yearly growth in organic sales of approximately 5%.
Results in detail
Sulzer Pumps: higher profitability and expanded global presence
Sulzer Pumps increased profitability despite a decrease in sales, which occurred as a result of the lower order intake during the prior year. Markets remained challenging. The division’s presence in the emerging markets was further expanded with a state-of-the-art production facility in China and several new service locations. The division’s technology leadership was further strengthened with innovative solutions and new applications.
In 2011, the oil and gas industry is expected to grow, particularly in the second half of the year, as the number of project studies has increased. The hydrocarbon processing industry will probably remain flat. Sulzer predicts that the power generation industry will stabilize. The pulp and paper industry is likely to continue its positive trend at a somewhat slower pace. Order intake, sales, and operating income are expected to grow moderately.
Sulzer Metco: substantial increases in sales and profitability
Overall performance increased substantially, driven by the adaptation measures implemented in the prior year and the recovery of early-cycle markets. The integration of the newly acquired diamond-like carbon coatings activities is well advanced and has further strengthened the service business of the division. Sulzer Metco continued to develop innovative solutions, such as new automotive coating solutions and non-line-of-sight aero engine coatings.
The positive trend in the early-cycle markets is forecasted to continue, albeit at a somewhat slower pace. Activity in the automotive industry is likely to continue at its current high level. For other general industrial markets, moderate growth is anticipated. Further recovery is projected in the aviation industry. Sulzer Metco predicts that the power generation industry will stabilize. For 2011, the division expects a further increase of the operating income and moderate growth of the order intake and sales. The division aims to increase profitability to a double-digit level.
Sulzer Chemtech: increase in operating income and double-digit profitability
The division increased its operating income despite lower sales volumes, driven by the successful adaptation measures implemented in the prior year and the high activity levels of Sulzer Mixpac Systems. The global production and service network was further strengthened with facility expansions in India and Russia. The division advanced its bioplastic and carbon capture and storage technologies, which offer promising business opportunities. Innovative solutions, for instance, two-component application systems for the dental market, were also continuously developed for the attractive markets of Sulzer Mixpac Systems.
In 2011, the positive developments in the markets of the Process Technology and Sulzer Mixpac Systems business units are expected to continue at the current high levels. Demand for new equipment in the hydrocarbon processing industry will probably remain low, while the service activities are expected to continue the good performance of 2010. Sales and operating income are predicted to increase further, and order intake is expected to grow moderately.
Sulzer Turbo Services: substantial acquisitive growth
Sales volumes increased following the acquisition of Dowding & Mills, a leading repair and maintenance provider for generators, motors, and associated equipment. Operating income also increased strongly but was impacted by acquisition-related expenses of CHF 6 million. The long-term service agreements continued to have a stabilizing impact on the performance with steady streams of revenue. The acquisition of Dowding &Mills significantly strengthened the division’s market position. The integration of the new sites and activities advanced well. The newly acquired business complements the division’s current market offering and has allowed expansion into new markets such as transport and wind power.
In 2011, the service activity in the power generation industry is likely to recover slightly. Business generated in the hydrocarbon processing industry will probably remain comparatively low. Activity in the newly acquired electro-mechanical service businesses is predicted to remain healthy. The division expects increases in order intake, sales, and profitability, supported by the acquisition of Dowding & Mills.
Financial results—below the EBIT line
Primarily due to the strong Swiss franc, a net financial income of minus CHF 4.4 million was recorded in 2010 (2009: plus CHF 1.6 million).
The effective income tax rate decreased to 24.3%, compared with 25.4% in 2009, positively impacted by the gains generated from the disposal of real estate in Switzerland; these gains are taxed at a lower rate.
Proposals by the Board of Directors to the Annual General Meeting
Dividends
Considering the increased net income and the strong financial situation, the Board of Directors is proposing an increased dividend of CHF 3.00 per share (previous year: CHF 2.80) at the Annual General Meeting on April 14, 2011. The Sulzer share price increased by 76% over the year and again reached the level it had just prior to the economic downturn.
Advisory vote on Compensation Report
For the first time, Sulzer’s Board of Directors will hold a non-binding advisory vote on the Compensation Report at the next Annual General Meeting on April 14, 2011.
Board of Directors
At the upcoming Sulzer Annual General Meeting on April 14, 2011, the Board of Directors is proposing that Luciano Respini, Klaus Sturany, and Tim Summers be reelected for further one-year terms of office each.
Due to his ongoing responsibilities as CEO of Voith and additional board memberships, after 9 years in the Sulzer Board, Hans Hubert Lienhard has decided not to stand for reelection. The Board thanks Hans Hubert Lienhard for his important contributions since 2002.
The Board of Directors is proposing that Jill Lee be elected as a new Board member for a one-year term. Jill Lee (47, Singaporean) was Senior Vice President, Finance Strategy and Investments, at Neptune Orient Lines. Before that, she held various positions at Siemens including Chief Financial Officer for Siemens China and Chief Diversity Officer on a global level. She will bring extensive experience in general and financial management in a broad range of industries to the Sulzer Board.
