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Report on the Economic Position

Financial position and finance management

Cash flow and liquidity

The Schaeffler Group generated free cash flow of EUR 488 m (prior year: EUR 735 m) in 2017.

Cash Flow

2017
2016
Change
Cash flows from operating activities
1,778
1,876
-5.2 %
Cash used in investing activities
-1,290
-1,141
13.1 %
Free cash flow
488
735
-33.6 %
Cash used in financing activities
-830
-466
78.1 %
Net increase (decrease) in cash andcash equivalent
-342
269
-
Effects of foreign exchange rate changes on cash and cash equivalents
-31
3
-
Cash and cash equivalents as at beginning of period
1,071
799
34,0 %
Cash and cash equivalents
698
1,071
-34,8 %

in € millions

Cash flow from operating activities for 2017 declined by EUR 98 m to EUR 1,778 m (prior year: EUR 1,876 m), adversely affected by non-persistent cash outflows related to legal cases and restructuring. In addition, the prior year included interest received on a loan receivable by Schaeffler AG from IHO Verwaltungs GmbH. Since the loan was repaid in full in 2016, no such interest was received in 2017. Cash outflows related to expanding working capital amounted to EUR 31 m and were slightly higher than the prior year amount of EUR 22 m. The significant increase in inventories was partially offset by a reduction in trade receivables under a receivable sales program. Sales of receivables resulted in a cash inflow of EUR 150 m. The working capital ratio, defined as working capital as a percentage of revenue, was 19.0% at December 31, 2017 (prior year: 20.3%).

Capital expenditures on property, plant and equipment and intangible assets (capex) amounted to EUR 1,273 m (prior year: EUR 1,146 m) in 2017.

In addition, the acquisition of Compact Dynamics GmbH and autinity systems GmbH resulted in a cash outflow of EUR 47 m, while the disposals of Schaeffler Motorenelemente AG & Co. KG and the fine blanking activities in Switzerland led to a cash inflow of EUR 20 m. Thus, net cash outflow for M&A activities amounted to EUR 27 m in 2017.

These developments resulted in free cash flow for 2017 of EUR 488 m (prior year: EUR 735 m).

EUR 830 m in cash was used in financing activities (prior year: EUR 466 m) during the year. EUR 328 m of the EUR 330 m in dividends paid during the year represented the dividends paid to Schaeffler AG’s shareholders. A total of EUR 587 m in cash was used to redeem a USD bond and to terminate the related cross-currency derivatives in May 2017. EUR 350 m of the Revolving Credit Facility (RCF) was utilized in connection with these transactions, but was repaid in full by year-end. A new EUR 250 m loan agreement obtained to finance long-term logistics projects resulted in a cash inflow to the Schaeffler Group of EUR 90 m (prior year: EUR 0 m).

Cash and cash equivalents decreased by EUR 373 m to EUR 698 m as at December 31, 2017 (prior year: EUR 1,071 m).

At December 31, 2017, cash and cash equivalents consisted primarily of bank balances. EUR 293 m (prior year: EUR 325 m) of this amount related to countries with foreign exchange restrictions and other legal restrictions. In addition, the Schaeffler Group has a Revolving Line of Credit of EUR 1.3 bn (prior year: EUR 1.3 bn), of which EUR 12 m (EUR 13 m) were utilized at December 31, 2017, primarily in the form of letters of credit.

Additions to intangible assets and property, plant and equipment

The Schaeffler Group’s growth strategy is based, among other things, on investments in new products and technologies as well as in expanding the group’s global production network. Investing in intangible assets and property, plant and equipment is key to driving the Schaeffler Group’s growth.

The Schaeffler Group increased its capital expenditures on property, plant and equipment and intangible assets (capex) by 11.1% to EUR 1,273 m (prior year: EUR 1,146 m) in 2017. Capital expenditures amounted to 9.1% (prior year: 8.6%) of revenue (capex ratio). By far the largest share of total capital expenditures related to the Europe and Greater China regions.

Total additions to intangible assets and property, plant and equipment amounted to EUR 1,287 m (prior year: EUR 1,115 m). Approx. 81% of these additions related to the Automotive division and approx. 19% to the Industrial division. In order to strengthen its competitive position, the Schaeffler Group primarily invested in strategically aligning its logistics activities, expanding capacity, and in equipment and machinery for product start-ups.

In the Europe region, the company decided to make a significant investment by building a state-of-the-art integrated assembly and packaging center known as “Aftermarket Kitting Operation” (AKO) in Saxony-Anhalt near Halle (Saale). The new assembly and packaging center will further optimize the Schaeffler Group’s Automotive Aftermarket processes and generate sustained improvements in quality of delivery. Another significant element of the strategic alignment of the group’s logistics activities is the central distribution center “EDC Center” (Kitzingen), which forms part of the “European Distribution Center” (EDC) project. Construction in Kitzingen is nearly complete.

More on AKO and EDC see chapter operations.

Apart from these projects, the company invested mainly in equipment and machinery for new product start-ups in the Europe region. For instance, the first assembly lines for electric axles and hybrid modules were set up in Herzogenaurach. The group also continued to expand its production capacity at the Central and Eastern European production plants. For instance, a new plant was opened in Svitavy, Czech Republic, in 2017. The plant focuses on manufacturing thermal management modules for applications in both internal combustion engines and future mobility concepts.

In the Americas region, the Schaeffler Group invested especially in expanding capacity and in equipment and machinery for new product start-ups of future electrified drive concepts. The recent addition of new capacity at the Wooster location in the U.S. permits the Schaeffler Group to continue to meet the highverters, and converter lockup clutches in addition to producing hybrid modules. In Puebla, Mexico, the Schaeffler Group primarily invested in expanding capacity for continuously variable transmissions (CVT) as well as torque converters and converter lockup clutches. At the Irapuato location in Mexico, investments mainly related to expanding production capacities and new product start-ups.

In the Greater China region, the company made targeted invest in the Automotive division. Significant investments related to the Engine and Transmission Systems business divisions, mainly for products that form part of the strategy “Mobility for tomorrow“. Key investments in the Industrial division were made to expand production and logistics capacities for the standard rolling bearing business to be able to optimally meet the continuing high demand in the high-volume business.

In the Asia/Pacific region, the Schaeffler Group invested primarily in the production locations in South Korea, Vietnam, and Thailand. In South Korea, apart from replacements in the standard rolling bearing business of the Industrial division, the company mainly invested in equipment and machinery for new product start-ups in the Automotive division. In addition, a new plant to produce rolling bearings is under construction in Vietnam. It will expand the range of radial insert ball bearings for industrial customers. In Thailand, the Schaeffler Group invested mainly in new product start-ups in the Transmission Systems business division.

Financial debt

The group’s net financial debt decreased by EUR 266 m to EUR 2,370 m (prior year: EUR 2,636 m) in 2017.

Net financial debt

12/31/2017
12/31/2016
Change
Bonds
1,994
2,719
-26.7 %
Facilities Agreement
983
982
0.1 %
Capital investment loan
89
0
-
Other financial debt
2
6
-66.7 %
Total financial debt
3,068
3,707
-17.2 %
Cash and cash equivalents
698
1,071
-34.8 %
Net financial debt
2,370
2,636
-10.1 %

in € millions

The net debt to EBITDA ratio, defined as the ratio of net financial debt to earnings before financial result, income taxes, depreciation, amortization, and impairment losses (EBITDA), amounted to 1.0 at December 31, 2017 (prior year: 1.1). The net debt to EBITDA ratio before special items was 1.0 (prior year: 1.1).

The gearing ratio, the ratio of net financial debt to shareholders’ equity incl. non-controlling interests, decreased to 93.0% as at December 31, 2017 (prior year: 132.0%).

On May 24, 2017, the Schaeffler Group fully redeemed the bond with a principal of USD 700 m, a coupon of 4.25%, and an original maturity of May 2021. The redemption was funded using available liquidity and by utilizing EUR 350 m of the Revolving Credit Facility. On November 23, 2017, the Schaeffler Group reduced the amount drawn under the Revolving Credit Facility to a remaining balance of EUR 150 m by repaying EUR 200 m from available liquidity. On December 27, 2017, the Schaeffler Group repaid the remaining balance of EUR 150 m outstanding under the Revolving Credit Facility in full.

On December 15, 2017, Schaeffler AG signed a loan agreement to finance long-term logistics projects. These logistics projects, which form part of the “European Distribution Center (EDC)” project, are the central distribution center “EDC Center” (Kitzingen) and the European assembly and packaging center known as “Aftermarket Kitting Operation” (AKO). The total amount of the loan is EUR 250 m, of which EUR 90 m (prior year: EUR 0 m) were drawn as at December 31, 2017. The loan has a term until 2022 plus certain renewal options.

On April 25, 2017, rating agency Fitch Ratings published its first rating of Schaeffler AG. Fitch assigns a rating of BBB- (investment grade) to Schaeffler AG with a stable outlook. The bonds were assigned an issuance rating of BBB-, the same as the company rating.

Rating agency Standard & Poor’s raised the outlook for the company’s rating from stable to positive on September 26, 2017. The following summary shows the ratings assigned to the Schaeffler Group by the three rating agencies Fitch, Moody’s, and Standard & Poor’s as at December 31:

Schaeffler Group ratings

  • 2017
    2016
    Fitch
    BBB-/stable
    -
    Moody's
    Baa3/stable
    Baa3/stable
    Standard & Poor's
    BB+/positive
    BB+/stable
  • 2017
    2016
    Fitch
    BBB-
    -
    Moody's
    Baa3
    Baa3
    Standard & Poor's
    BB+
    BB+

The Schaeffler Group had the following loans outstanding at December 31, 2017:

Schaeffler Group loans

Tranche
Currency
12/31/2017
Carrying amount in € millions
12/31/2016
Carrying amount in € millions
12/31/2017
Carrying amount in € millions
12/31/2016
Carrying amount in € millions
12/31/2017
Coupon
12/31/2016
Coupon
Maturity
Term Loan
EUR
1,000
1,,000
991
992
Euribor 1)
+ 1.20 %
Euribor 1)
+ 1.20 %
07/18/2021
Revolving Credit Facility 2)
EUR
1,300
1,300
-8
-10
Euribor 1)
+ 0.80 %
Euribor 1)
+ 0.80 %
07/18/2021
Capital investment loan 3)
EUR
250
0
89
0
Euribor 1)
+ 1.00 %
n/a
12/15/2022
Total
-
-
-
1.072
982
-
-
-

1) Euribor floor of 0.00%.
2) EUR 12 m (December 31, 2016: EUR 13 m) were drawn down as at December 31, 2017, primarily in the form of letters of credit.
3) EUR 90 m (December 31, 2016: EUR 0 m) were drawn down as at December 31, 2017.

In addition, the Schaeffler Group had further committed lines of credit in the equivalent of approx. EUR 154 m (prior year: approx. EUR 160 m), primarily for the U.S. and China. Approx. EUR 111 m (prior year: approx. EUR 160 m) of these committed facilities were unutilized at December 31, 2017.

The following bonds issued by Schaeffler Finance B.V., Barneveld, Netherlands, were outstanding as at December 31, 2017. All Schaeffler bonds are listed on the Euro MTF market of the Luxembourg Stock Exchange.

Schaeffler Group bonds

ISIN
Currency
12/31/2017
Principal in millions
12/31/2016
Principal in millions
12/31/2017
Carrying amount in € millions
12/31/2016
Carrying amount in € millions
Coupon
Maturity
XS1212469966
EUR
400
400
398
397
2.50 %
05/15/2020
US806261AJ29
USD
0
700
0
658
4.25 %
05/15/2021
XS1067864022
EUR
500
500
498
498
3.50 %
05/15/2022
US806261AM57
USD
600
600
502
571
4.75 %
05/15/2023
XS1212470972
EUR
600
600
596
595
3.25 %
05/15/2025
Total
-
-
1,994
2,719
-
-

1) Redeemed in full on May 24, 2017.

Under its existing debt financing agreements, the Schaeffler Group is subject to certain constraints including a requirement to meet a leverage covenant. Compliance with this financial covenant is monitored continually and reported to the lending banks on a regular basis. As in the prior year, the company has complied with the leverage covenant throughout 2017 as stipulated in the debt agreements.

The company’s maturity profile, which consists of the term loan, the capital investment loan, and the bonds issued by Schaeffler Finance B.V., Barneveld, Netherlands, was as follows as at December 31, 2017:

Finance management

The objective of the Schaeffler Group’s finance management is to ensure that sufficient liquidity is available to the group and to its foreign and domestic subsidiaries at all times. Finance management primarily comprises capital management and liquidity management.

Corporate capital management provides the financial resources required by Schaeffler Group entities, ensures the long-term availability of liquidity, and secures the Schaeffler Group’s credit standing. Capital management also administers and continually improves the company’s existing financial debt consisting of its external group financing arrangements. To this end, the Schaeffler Group has laid the foundations for efficiently obtaining debt and equity funding via the capital markets. The Schaeffler Group’s management will continue to focus on the group’s ability to place financial instruments with a broad range of investors and to further improve financing terms. To this end, the company particularly intends to maintain the investment grade rating it initially gained in 2016 for the long-term.

External group financing is primarily provided by money and capital market instruments as well as syndicated and bilateral lines of credit from international banks. One such line of credit is a contractually agreed RCF of EUR 1,300 m available to cover any short- to medium-term liquidity needs. In addition, the Schaeffler Group uses receivable sales programs to a limited extent to manage liquidity and improve its working capital. For this purpose, the company has access to an ABCP program (asset-backed commercial paper) of revolving sales of trade receivables with a committed volume of EUR 150 m (prior year: EUR 0 m). Additionally, the Schaeffler Group has the ability to selectively use a further receivable sales program without a fixed committed volume.

The Schaeffler Group has a policy of financing its domestic and foreign subsidiaries from internal sources. In accordance with this policy, subsidiaries’ financing needs are met using internal loans to the extent possible and economically justifiable. As a result, subsidiaries are primarily financed by loans provided by Schaeffler AG and one other subsidiary. As part of the company’s liquidity management measures, liquidity is balanced between group companies on a short- and medium-term basis using primarily cash pools or intercompany loans. In a few cases, Corporate Treasury obtains lines of credit for subsidiaries from local banks for legal, tax, or other reasons. Local financing is primarily used to cover fluctuations in working capital.

Centralized finance management performed by the Corporate Treasury department also ensures a uniform presence in the capital markets and when dealing with rating agencies, eliminates structural differences between the various groups of creditors, and strengthens the group’s bargaining position with respect to banks and other market participants. In addition, centralized finance management facilitates the centralized allocation of liquidity as well as groupwide management of financial risk (foreign exchange and interest) on a net basis.

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