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Earnings

Schaeffler Group earnings

EBIT margin before special items 11.3%

Positive revenue trend continued – revenue growth at 5.9% at constant currency // Both divisions contribute to the encouraging trend // Growth continues to gather momentum in the second half of the year – strong Q4 with growth of 8.5% at constant currency // Double-digit growth in the Greater China region in 2017 // EBIT before special items at EUR 1.6 bn // Earnings quality below prior year – both divisions' EBIT margins stabilized in the second half of 2017 // R&D activities expanded considerably // Earnings per common non-voting share increased to EUR 1.48 (prior year: EUR 1.30)

2017
2016
Change
Revenue
14,021
13,338
15.1 %
at constant currency
-
-
5.9 %
Revenue by division
-
-
-
Automotive
10,869
10,338
5.1 %
at constant currency
-
-
5,9 %
Industrial
3,152
3,000
5,1 %
at constant currency
-
-
5.7 %
Revenue by region 1)
-
-
-
Europe
7,138
7,077
1.5 %
at constant currency
-
.,4 %
Americas
2,910
2,803
3.8%
at constant currency
-
-
4.6 %
Greater China
2,456
2.,053
19.6 %
at constant currency
-
-
24.1 %
Asia/Pacific
1,472
1,405
4.8 %
at constant currency
-
-
5.6 %
Cost of sales
-10,175
-9,552
6.5 %
Gross profit
3.846
3,786
1.6 %
in % of revenue
27.4
28.4
-
Research and development expenses
-846
-751
12.6 %
Selling and administrative expenses
-1,413
-1,343
5.2 %
Earnings before financial result and income taxes (EBIT)
1,528
1,556
-1.8 %
in % of revenue
10.9
11.7
-
Special items 2)
56
144
-61.1 %
EBIT before special items
1,584
1,700
-6.8 %
in % of revenue
11.3
12.7
-
Financial result
-192
-341
-43.7 %
Income taxes
-339
-343
-1.2 %
Net income 3)
980
859
14.1 %
Earnings per common non-voting share (basic/diluted, in €)
1.48
1.30
13.8 %

in € millions

1) Based on market (customer location).
2) Please refer to chapter Performance indicators and special items for the definition of special items.
3) Attributable to shareholders of the parent company.

The Schaeffler Group increased its revenue by 5.1% to EUR 14,021 m in 2017 (prior year: EUR 13,338 m). Excluding the impact of currency translation, revenue grew by 5.9%. Both divisions contributed to this encouraging performance. Thanks to the strong third and fourth quarters, the Automotive division generated 5.9% in additional revenue, excluding the impact of currency translation. The Industrial division grew its revenue by 5.7% excluding the impact of currency translation, reporting a growth rate excluding the impact of currency translation of 9.0% for the fourth quarter of 2017. These figures demonstrate that the Industrial division has returned to a long-term growth path.

All regions of the Schaeffler Group contributed to the increase in revenue in 2017. Revenue in the Europe region was up 1.5% (+1.4% at constant currency), with both divisions reporting similar growth rates. The Americas region reported growth of 3.8% (+4.6% at constant currency). Along with the Automotive business, the Industrial division’s business also made a positive impact, growing again after declining in the prior year. The Greater China region once again reported the most dynamic growth. Revenue there was up 19.6% (+24.1% at constant currency) thanks to the encouraging performance of both divisions. The Asia/Pacific region generated a 4.8% revenue growth rate (+5.6% at constant currency) with the support of both divisions.

Cost of sales increased by 6.5% to EUR 10,175 m (prior year: EUR 9,552 m) during the year. Gross profit improved by 1.6% or EUR 60 m to EUR 3,846 m (prior year: EUR 3,786 m). The company’s gross margin declined to 27.4% (prior year: 28.4%). Affected by the impact of sales prices and currency translation it could not fully offset, the Automotive division saw its gross margin fall to 27.2% (prior year: 28.5%). The gross margin of the Industrial division, on the other hand, rose to 28.3% (prior year: 27.9%) since a favorable volume impact more than offset the adverse impact of sales prices and currency translation.

Research and development expenses increased significantly by 12.6% to EUR 846 m in the reporting period (prior year: EUR 751 m), representing an R&D ratio of 6.0% (prior year: 5.6%) of revenue. Apart from inflation-related cost increases, the increase is especially attributable to a focused expansion of the headcount in connection with the strategic alignment of the company’s research and development capacities in order to lay the foundation for future growth.

Selling and administrative expenses increased by 5.2% to EUR 1,413 m (prior year: EUR 1,343 m) in 2017, mainly due to higher selling expenses (+6.0%). These higher expenses resulted primarily from increased logistics expenses driven by rising volumes, due, among other things, to the significant expansion of the business in the Greater China region. Total functional costs rose by 7.9% to EUR 2,259 m (prior year: EUR 2,094 m), growing to 16.1% of revenue (prior year: 15.7%).

EBIT decreased by EUR 28 m or 1.8% to EUR 1,528 m (prior year: EUR 1,556 m) during the reporting period. The Schaeffler Group’s EBIT margin was 10.9% (prior year: 11.7%). In 2017, the group’s EBIT was adversely affected by EUR 56 m in special items (prior year: EUR 144 m), including EUR 17 m in special items for legal cases resulting from provisions for claims for damages. In addition, the company recognized EUR 39 m in restructuring expenses incurred to set up a shared service center in Europe in 2017. The prior year included EUR 86 m in special items for legal cases resulting from provisions for claims for damages in antitrust cases and for other compliance cases. The company also recognized restructuring expenses of EUR 45 m in connection with the second wave of the “CORE” program in the prior year. Additionally, the prior year was adversely affected by other special items of EUR 13 m resulting from streamlining the production portfolio. Based on these items, EBIT before special items declined to EUR 1,584 m (prior year: EUR 1,700 m) in 2017, and the EBIT margin before special items dropped to 11.3% (prior year: 12.7%). The decline was primarily due to the decrease in gross margin as described above and the significantly expanded R&D activities, mainly in the Automotive division. In addition, the EBIT margin was also affected by an adverse impact of currency translation.

The Schaeffler Group’s financial result improved by EUR 149 m to EUR -192 m (prior year: EUR -341 m) in 2017.

Schaeffler Group financial result

2017
2016
Interest expense on financial debt 1)
-123
-286
Interest income on shareholder loans
0
49
Gains and losses on derivatives andforeign exchange
-17
-33
Fair value changes on embedded derivatives
-14
-30
Interest income and expense on pensions andpartial retirement obligations
-38
-45
Other
0
4
Total
-192
-341

in € millions

1) Incl. amortization of transaction costs and prepayment penalties.

Interest expense on financial debt amounted to EUR 123 m in 2017 (prior year: EUR 286 m) and included prepayment penalties of EUR 13 m (prior year: EUR 48 m) and EUR 5 m (prior year: EUR 31 m) in deferred transaction costs derecognized.

In 2016, IHO Verwaltungs GmbH prepaid its loans payable to Schaeffler AG in full. As a result, the Schaeffler Group no longer earned any interest income on loans to shareholders in 2017 (prior year: EUR 49 m).

Net foreign exchange losses on financial assets and liabilities and net losses on derivatives amounted to EUR 17 m (prior year: EUR 33 m). These include the impact of translating the financing instruments denominated in U.S. dollars to euros and hedges of these instruments using cross currency swaps.

Fair value changes on embedded derivatives, primarily prepayment options for external financing instruments, resulted in net losses of EUR 14 m (prior year: EUR 30 m).

Income tax expense amounted to EUR 339 m in 2017 (prior year: EUR 343 m), resulting in an effective tax rate of 25.4% (prior year: 28.2%) The change compared to the prior year resulted primarily from lower non-deductible expenses of EUR 24 m (prior year: EUR 32 m) and from additional income tax benefits related to prior years of EUR 29 m (prior year: EUR 7 m). The U.S. tax reform had comparatively little impact on the Schaeffler Group’s deferred taxes.

Net income attributable to shareholders of the parent company for 2017 was EUR 980 m (prior year: EUR 859 m). Net income before special items amounted to EUR 1,022 m (prior year: EUR 962 m). The Board of Managing Directors and the Supervisory Board will propose a dividend for 2017 of EUR 0.54 (prior year: EUR 0.49) per common share and EUR 0.55 (prior year: EUR 0.50) per common non-voting share to the annual general meeting. This represents a dividend of 35.4% (prior year: 34.1%) of net income attributable to shareholders before special items.

Basic and diluted earnings per common share increased to EUR 1.47 (prior year: EUR 1.29) in 2017. Basic and diluted earnings per common non-voting share amounted to EUR 1.48 (prior year: EUR 1.30). The number of shares used to calculate earnings per common share and earnings per common non-voting share was 500 million (prior year: 500 million) and 166 million (prior year: 166 million), respectively.

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