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Report on the economic position

Financial position and financial management

Cash flow and liquidity

The Schaeffler Group generated free cash flow of EUR 222 m (prior year: EUR 488 m) in 2018.

Cash Flow

2018
2017
Change
Cash flows from operating activities
1,606
1,778
-9.7 %
Cash used in investing activities
-1,384
-1,290
7.3 %
Free cash flow
222
488
-54.5 %
Cash used in financing activities
-111
-830
-86.6 %
Net increase (decrease) in cash and cash equivalents
111
-342
-
Effects of foreign exchange rate changes on cash and cash equivalents
-8
-31
-74.2
Cash and cash equivalents as at beginning of period
698
1,071
-34.8 %
Cash and cash equivalents
801
698
14.8 %

in € millions.

Cash flows from operating activities declined by EUR 172 m to EUR 1,606 m (prior year: EUR 1,778 m) in 2018, primarily due to weaker earnings during the reporting period. Changes in working capital had a favorable impact totaling EUR 32 m (prior year: adverse impact of EUR 31 m), a trend primarily attributable to both the reduction in trade receivables and the increase in trade payables, which, in combination, more than offset the increase in inventory levels. Sales of receivables resulted in a cash inflow of EUR 54 m (prior year: EUR 150 m). The working capital ratio, defined as working capital as a percentage of revenue, was 17.9% at December 31, 2018 (prior year: 19.0%).

Capital expenditures on property, plant and equipment and intangible assets (capex) amounted to EUR 1,232 m (prior year: EUR 1,273 m) in 2018.

Net cash outflow for M&A activities in 2018 was EUR 162 m, with outflows of EUR 161 m relating to the establishment of the joint venture Schaeffler Paravan Technologie GmbH & Co. KG. Other M&A activities included the payment of the second tranche of the purchase price for the acquisition of autinity systems GmbH and the proceeds received on the disposal of PStec Automation and Service GmbH.

These developments resulted in free cash flow for 2018 of EUR 222 m (prior year: EUR 488 m). Free cash flow before cash in- and outflows for M&A activities amounted to EUR 384 m (prior year: EUR 515 m).

EUR 111 m in cash was used in financing activities (prior year: EUR 830 m) during the year. EUR 361 m of the EUR 363 m in dividends paid during the year represented the dividends paid to Schaeffler AG’s shareholders. Cash of EUR 310 m was provided by utilizing the Revolving Credit Facility and obtaining a bilateral loan. EUR 150 m of this amount was repaid in 2018. In 2018, an additional EUR 94 m (prior year: EUR 90 m) was drawn under the capital investment loan obtained to finance the long-term logistics projects.

Cash and cash equivalents increased by EUR 103 m to EUR 801 m as at December 31, 2018 (prior year: EUR 698 m).

As at December 31, 2018, cash and cash equivalents consisted primarily of bank balances. EUR 379 m (prior year: EUR 255 m) of this amount related to countries with foreign exchange restrictions and other legal and contractual restrictions. In addition, the Schaeffler Group has a Revolving Credit Facility of EUR 1.3 bn (prior year: EUR 1.3 bn), of which EUR 160 m was drawn as at December 31, 2018. In addition, EUR 13 m of the Revolving Credit Facility was utilized (prior year: EUR 12 m), primarily in the form of letters of credit.

Capital expenditures

The Schaeffler Group’s growth strategy is mainly based 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. At the same time, the Schaeffler Group is putting a stronger focus on the efficient allocating and using its capital.

Capital expenditures on property, plant and equipment and intangible assets (capex) declined by EUR 41 m or 3.2% to EUR 1,232 m in 2018 (prior year: EUR 1,273 m). Capital expenditures amounted to 8.7% (prior year: 9.1%) of revenue (capex ratio). By far the largest share of total capital expenditures related to the Europe and Greater China regions.

In the Europe region, the Schaeffler Group once again invested extensively in strategically aligning its logistics activities. The completion of the “European Distribution Center” (EDC) project in the second quarter of 2018 provided the Industrial division with a logistics center that makes the entire global supply chain – from suppliers to the production network through to the customer – more cost efficient, quicker, and more flexible. A further significant step in the strategic alignment of Schaeffler Group logistics is the start on construction of a state-of-the-art assembly and packaging center of the Automotive Aftermarket division known as “Aftermarket Kitting Operation” (AKO) in the second quarter of 2018. At this central logistics hub, automotive parts the Automotive Automotive Aftermarket division sells as separate products as well as in the form of repair solutions will be picked, assembled into kits, packaged, and shipped throughout Europe starting in 2020.

More on AKO and EDC in chapter "Operations, Supply chain management and Purchasing".

In addition, significant funds were invested in expanding capacity in the Engine and Transmission Systems business divisions and in the standard rolling bearing business. The Schaeffler Group is also preparing for electric mobility. Significant investments in this field related to equipment and machinery for product start-ups of electric axles in Herzogenaurach and hybrid transmissions in Buehl.

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 permits the Automotive OEM division to continue to meet the high demand for components for torque converters and torque converter lockup clutches.

In the Greater China region, the company continued to make targeted investments in expanding capacity and to realize new product start-ups in the Automotive OEM division in 2018. Significant investments related to engine and transmission systems, 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 meet the continuing high demand in the high-volume business.

In the Asia/Pacific region, the Schaeffler Group invested primarily in the production location in Vietnam in 2018. By building a new plant in Biên Hòa City that was completed in late 2018, the Industrial division has considerably expanded its production capacity for rolling bearings in this region. Biên Hòa City mainly manufactures standing and needle roller bearings with a high degree of vertical integration. Apart from that, the Industrial division invested primarily in its standard rolling bearing business in South Korea.

Financial debt

The group’s net financial debt increased by EUR 177 m to EUR 2,547 m (prior year: EUR 2,370 m) in 2018.

Netto-Finanzschulden

12/31/2018
12/31/2017
Change
Bonds
2,019
1,994
1.3 %
Facilities Agreement
1,146
983
16.6 %
Capital investment loan
183
89
> 100 %
Other financial debt
0
2
-100 %
Total financial debt
3,348
3,068
9.1 %
Cash and cash equivalents
801
698
14.8 %
Net financial debt
2,547
2,370
7.5 %

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 1.2 at December 31, 2018 (prior year: 1.0). The net debt to EBITDA ratio before special items was 1.2 (prior year: 1.0) as well.

The gearing ratio, defined as the ratio of net financial debt to shareholders’ equity including non-controlling interests, decreased to 83.2% as at December 31, 2018 (prior year: 91.8%).

On August 30, 2018, rating agency Standard & Poor’s raised its company rating for the Schaeffler Group from BB+ (outlook: positive) to BBB- (outlook: stable). As a result of this upgrade, the Schaeffler Group is now rated investment grade by all three major rating agencies – Standard & Poor’s, Moody’s, and Fitch. Standard & Poor’s upgraded the rating for the outstanding bonds issued by Schaeffler Finance B.V. to BBB- as well.

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

  • 2018
    2017
    Fitch
    BBB-/stable
    BBB-/stable
    Moody's
    Baa3/stable
    Baa3/stable
    Standard & Poor's
    BBB-/stable
    BB+/positive
  • 2018
    2017
    Fitch
    BBB-
    BBB-
    Moody's
    Baa3
    Baa3
    Standard & Poor's
    BBB-
    BB+

On August 31, 2018, the Schaeffler Group signed an amendment to its EUR 2.3 bn Facilities Agreement (consisting of a EUR 1 bn term loan and a EUR 1.3 bn Revolving Credit Facility). The amendment initially does not change the facilities or terms and conditions but extends the maturity by two years to September 30, 2023. Meeting certain conditions will automatically trigger a further amendment resulting in improved terms and conditions, enhanced operational and financial flexibility, as well as an increase in the Revolving Credit Facility from EUR 1.3 bn to EUR 1.5 bn. The conditions required to be met for this amendment to become effective include a reduction in the term loan from EUR 1 bn to EUR 500 m.

In addition, an amendment to the EUR 250 m capital investment loan was signed on August 31, 2018, as well. Meeting the same conditions as under the EUR 2.3 bn Facilities Agreement will enhance the operational and financial flexibility to the same extent.

As a result of the rating upgrade by Standard & Poor’s, the Schaeffler Group was able to have the remaining in rem security under both the EUR 2.3 bn Facilities Agreement and the outstanding bonds issued by Schaeffler Finance B.V. released on September 15, 2018.

On September 28, 2018, Schaeffler AG established a EUR 5 bn debt issuance program. The corresponding base prospectus was approved by the Luxemburg regulator, Commission de Surveillance du Secteur Financier (CSSF). The debt issuance program provides Schaeffler with a flexible platform for obtaining funding from the debt capital markets in the future.

In 2018, Schaeffler AG drew down an additional EUR 94 m under the capital investment loan obtained to finance the long-term logistics projects. As a result, a total of EUR 184 m of the credit facility was utilized as at December 31, 2018 (December 31, 2017: EUR 90 m).

The total amount drawn under the Revolving Credit Facility as at December 31, 2018, was EUR 160 m (December 31, 2017: EUR 0 m).

The Schaeffler Group had the following syndicated loans outstanding at December 31, 2018:

Schaeffler Group loans

Tranche
Currency
12/31/2018
Principal in millions
12/31/2017
Principal in millions
12/31/2018
Carrying amount in € millions
12/31/2017
Carrying amount in € millions
12/31/2018
Coupon
12/31/2017
Coupon
Maturity
Term Loan
EUR
1,000
1,000
993
991
Euribor 1)
+ 1.20 %
Euribor 1)
+ 1.20 %
09/30/2023
Revolving Credit Facility 2)
EUR
1,300
1,300
153
-8
Euribor 1)
+ 0.80 %
Euribor 1)
+ 0.80 %
09/30/2023
Capital investment loan 3)
EUR
250
250
183
89
Euribor 1)
+ 1.00 %
Euribor 1)
+ 1.00 %
12/15/2022
Total
-
-
-
1,329
1,072
-
-
-

1) Euribor floor of 0.00 %.
2) EUR 173 m (December 31, 2017: EUR 12 m) were drawn down as at December 31, 2018, including EUR 13 m in the form of ancillary facilities such as letters of credit.
3) EUR 184 m (December 31, 2017: EUR 90 m) were drawn down as at December 31, 2018.

In addition, the Schaeffler Group had further lines of credit in the equivalent of approximately EUR 134 m (December 31, 2017: approximately EUR 154 m), primarily in the U.S. and China. Approximately EUR 118 m of these facilities were unutilized as at December 31, 2018 (prior year: approximately EUR 111 m).

The following bonds issued by Schaeffler Finance B.V., Barneveld, Netherlands, were outstanding as at December 31, 2018. All bonds are listed on the Euro MTF market of the Luxembourg Stock Exchange. The bonds have a contractual call date after which they can be called by the issuer at any time. At December 31, 2018, three of the four bond series have reached this date and can be redeemed by the issuer at a set price with notice at any time.

Schaeffler Group bonds

ISIN
Währung
12/31/2017
Principal
in millions
12/31/2017
Principal
in millions
12/31/2018
Carrying amount
in € millions
12/31/2017
Carrying amount
in € millions
Coupon
Maturity
XS12124699661)
EUR
400
400
399
398
2.50 %
05/15/2020
XS10678640221)
EUR
500
500
499
498
3.50 %
05/15/2022
US806261AM571)
USD
600
600
525
502
4.75 %
05/15/2023
XS1212470972
EUR
600
600
596
596
3.25 %
05/15/2025
Total
-
2,019
1,994
-
-

1) Bond has reached its contractual call date and can be redeemed at any time at the issuer's discretion.

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 2018 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, 2018:

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 1.3 bn available to cover any short- to medium-term liquidity needs. In addition, the Schaeffler Group uses receivable sale 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 200 m (prior year: EUR 150 m). Additionally, the Schaeffler Group has the ability to selectively use a further receivable sale 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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