2. Earnings

2.1 Schaeffler Group earnings

No. 003
in € millions 2011 2010 Change in %
Revenue 10,694 9,495 12.6
Cost of sales -7,463 -6,506 -14.7
Gross profit 3,231 2,989 8.1
Functional expenses 1) -1,628 -1,478 -10.1
EBIT 1,689 1,509 11.9

in % of revenue

15.8 15.9 --
Financial result -409 -1,159 64.7
Income taxes -378 -277 -36.5
Net income 2) 889 63 > 100
1) Selling, administration and research and development.
2) Attributable to shareholders of the parent company.

The Schaeffler Group and its Automotive and Industrial divisions have again increased revenue significantly in 2011 while continuing to generate high quality earnings. The group was able to nearly maintain the prior year’s extraordinarily high EBIT margin (EBIT: Earnings before financial result and income taxes) of approximately 15.9 % in 2011.

Umsatz Schaeffler Gruppe_EN

In 2011, revenue grew 12.6 % to EUR 10,694 m (prior year: EUR 9,495 m), setting another company record. The improvement is mainly due to the buoyant demand for the Schaeffler Group’s innovative products and the start-up or ramp-up of numerous projects in the future-oriented fields of resource efficiency and environmental technology. In addition, its strong regional presence enabled the Schaeffler Group to profit particularly from the high rate of growth in the world’s emerging markets. The Automotive division exceeded prior year revenue by 13.2 %, one of the reasons being the more than proportional growth rates of innovative new products. Industrial division revenue increased by 15.3 % compared to 2010. Positive mention must be made of the aftermarket, machine tools, production systems and power transmission sectors.

Cost of sales increased by 14.7 % to EUR 7,463 m (prior year: EUR 6,506 m), growing faster [--break--]  than revenue and, therefore, slightly decreasing gross margin by 1.3 percentage points to 30.2 % (prior year: 31.5 %).

Higher plant utilization in 2011 and ongoing improvements in efficiency as well as economies of scale were more than offset by higher raw materials prices, particularly for steel, and cost increases resulting from additional expansion of capacity. Gross profit rose by EUR 242 m from the prior year period to EUR 3,231 m (prior year: EUR 2,989 m).

Research and development expenses grew by 6.0 % to EUR 495 m (prior year: EUR 467 m) in 2011. As a percentage of the significantly increased revenue, these expenses fell slightly to 4.6 % (prior year: 4.9 %). In addition to developing numerous new applications for existing technologies, the Schaeffler Group has pushed forward its activities in additional areas related to mechatronics, renewable energy and electric mobility.

Driven by the increased volume of business in 2011, selling expenses increased by 12.4 % to [--break--] EUR 725 m (prior year: EUR 645 m), primarily due to higher variable freight and logistics expenses.

EBIT rose by EUR 180 m over the prior year to EUR 1,689 m (prior year: EUR 1,509 m). The EBIT margin of 15.8 % was nearly unchanged.

The Schaeffler Group’s financial result improved considerably to EUR -409 m (prior year: EUR -1,159 m), primarily driven by Schaeffler’s share of the net income (loss) of equity-accounted investees of EUR 324 m (prior year: EUR -349 m) and net interest expense of EUR 733 m (prior year: EUR 810 m).

The share of net income (loss) of equity-accounted investees results almost entirely from the investment in Schaeffler Beteiligungs GmbH & Co. KG, to which the 36.14 % interest in Continental AG was transferred on September 30, 2011. This entity is accounted for under the equity method in the consolidated financial statements of the Schaeffler Group (see 2.1 Scope of consolidation).

Net interest expense comprises interest income of EUR 40 m (prior year: EUR 51 m) and interest expense of EUR 773 m (prior year: EUR 861 m).

Interest income of EUR 40 m relates primarily to expected returns on plan assets of funded [--break--]  pension plans.

In addition to interest expense on financial debt of EUR 494 m (prior year: EUR 386 m), interest expense includes interest expense of EUR 176 m (prior year: EUR 373 m) on interest rate derivatives, interest expense of EUR 86 m (prior year: EUR 84 m) relating to compounding of pensions and other provisions, and miscellaneous other financial expenses of EUR 17 m (prior year: EUR 18 m).

Interest expense on financial debt of EUR 494 m (prior year: EUR 386 m) includes primarily interest payments of EUR 395 m (prior year: EUR 282 m) for the Senior Facility Agreement and expenses of EUR 78 m (prior year: EUR 30 m) relating to transaction costs amortized over the term of the financial debt, as well as interest expense of EUR 20 m (prior year: EUR 25 m) on the annuity loan. Interest expense on interest rate derivatives of EUR 176 m (prior year: EUR 373 m) comprises EUR 170 m (prior year: EUR 252 m) in compensation payments on interest rate derivatives and EUR 75 m (prior year: EUR 91 m) in expenses arising from the amortization of the cash flow hedge accounting reserve accumulated up to November 20, 2009. These interest expenses were partially offset by EUR 69 m in gains (prior year: losses of EUR 30 m) arising from unrealized non-cash fair value changes of interest rate derivatives. These gains are presented in interest expense as well, since they economically relate to interest expense on the company’s financial debt.

Income taxes for 2011 amounted to EUR 378 m (prior year: EUR 277 m), consisting of current tax expense of EUR 386 m (prior year: EUR 314 m) and deferred tax benefit of EUR 8 m (prior year: deferred tax benefit of EUR 37 m).

Net income after non-controlling interests was EUR 889 m following net income of EUR 63 m in the prior year.

2.2 Automotive division

Revenue Automotive division

No. 004
in € millions 2011 2010 Change in %
Revenue 7,160 6,325 13.2
Cost of sales -5,209 -4,483 -16.2
Gross profit 1,951 1,842 5.9
EBIT 1,074 990 8.5

in % of revenue

15.0 15.7 --
Prior year information presented based on 2011 segment structure.

The positive economic situation in the automotive markets and gains from new customer projects considerably outpacing market growth allowed the Automotive division to increase its revenue by 13.2 % to EUR 7,160 m (prior year: EUR 6,325 m) in 2011. The division managed to replace projects coming to an end with larger volume new and follow-up orders. Towards year end, however, growth was beginning to slow down.

Revenue (Automotive)

During the course of the year, revenue growth was driven in particular by the sales markets in Asia (+20 %), North America (+13 %), and Europe (+13 %). Among top-selling product groups, torque converters (+27 %), ball bearings (+18 %), and tapered roller bearings (+18 %) showed above-average growth. In addition, innovative new products such as the dry double clutch, ball screw drives, and the fully variable electro-hydraulic valve control system (UniAir/MultiAir) experienced particularly high growth rates.

Revenue increased considerably compared to the prior year across all business divisions within the Automotive division, leading to very high capacity utilization in almost all plants.

Cost of sales increased faster than revenue, growing by 16.2 % to EUR 5,209 m (prior year: [--break--]  EUR 4,483 m). Thus, gross profit increased by EUR 109 m to EUR 1,951 m (prior year: EUR 1,842 m); the gross margin was 27.2 % (prior year: 29.1 %).

Higher production volumes had a positive effect on gross profit, but could not completely offset the rising cost of materials, energy and personnel. This is also reflected in the increase in cost of sales compared to the prior year.

Total Automotive division earnings before financial result and income taxes (EBIT) grew by EUR 84 m to EUR 1,074 m (prior year: EUR 990 m) in 2011. Following the high level in the prior year, the EBIT margin fell only slightly to 15.0 % (15.7 %).

2.3 Industrial division

Revenue Industrial division

No. 005
in € millions 2011 2010 Change in %
Revenue 3,462 3,002 15.3
Cost of sales -2,182 -1,855 -17.6
Gross profit 1,280 1,147 11.6
EBIT 615 519 18.5

in % of revenue

17.8 17.3 --
Prior year information presented based on 2011 segment structure.

The Industrial division benefitted more than proportionally from the strong global economy in 2011. Revenue rose by 15.3 % to EUR 3,462 m (prior year: EUR 3,002 m). The impact of currency translation was negligible. Revenue grew by double digits across all regions, ranging from 11.0 % in North America to 24.5 % in Germany. Total revenue for the year exceeded the division’s prior record level set in 2008.

Revenue (Industrial)

Orders on hand at year end 2011 amounted to EUR 2,542 m (prior year: EUR 2,206 m), increasing [--break--]  15.2 % over the prior year. Despite an increase in capacity during the year, the year end order backlog increased slightly to 8.9 months (prior year: 8.8 months).

Revenue growth was primarily driven by the aftermarket, power transmission and production [--break--]  machinery sectors. Capacity limits in our production prevented even stronger growth in these areas. Wind power revenue is below prior year: A difficult fiscal situation blocked necessary [--break--] investment in renewable energy in many countries. In China, political reorganization with respect to the approval of wind parks and restrictions on loans granted by the central government brought down orders and, consequently, revenue. In addition, the adverse impact of excess capacity and price competition was felt across the entire wind power sector.

Cost of sales increased slightly more than proportionally by 17.6 % to EUR 2,182 m (prior year: EUR 1,855 m). The gross margin decreased by 1.2 percentage points to 37.0 % (prior year: 38.2 %). While high utilization of the plants ensured continued economies of scale, the sharp rise in [--break--]  production volumes to facilitate supplying the markets also led to temporary constraints on plant productivity. Higher expenses resulting from the revenue decrease in the wind power [--break--] sector and increased raw materials and energy prices also drove up cost of sales.

Industrial division EBIT improved by EUR 96 m or 18.5 % to EUR 615 m (prior year: EUR 519 m) in 2011. This growth was driven by the very encouraging revenue trend and the less than proportional increase in functional area expenses. The EBIT margin increased to 17.8 % (prior year: 17.3 %).