3. Financial position and assets

3.1 Cash flow

No. 006
in € millions 2011 2010 Change in %
Cash flows from operating activities 1,084 890 21.8
Cash used in investing activities 1) -765 -324 < -100
Cash flows before financing activities
( free cash flow)
319 566 -43.6
Financial debt 7,485 6,477 15.6
Cash and cash equivalents 397 733 -45.8
Net financial debt 7,088 5,744 23.4
1) Including currency translation effects.

In 2011, cash flows from operating activities rose by EUR 194 m from the prior year to EUR 1,084 m [--break--]  (prior year: EUR 890 m). This inflow results primarily from improved earnings in 2011 as reflected [--break--] in EBIT of EUR 1,689 m (prior year: EUR 1,509 m).

In 2011, cash totaling EUR 765 m was used in investing activities (prior year: EUR 324 m). Cash paid for property, plant and equipment and intangible assets totals EUR 773 m, compared to EUR 361 m in the prior year.

On this basis, free cash flow amounts to EUR 319 m (prior year: EUR 566 m).

At December 31, 2011, net financial debt has increased by EUR 1,344 m to EUR 7,088 m (prior year: EUR 5,744 m), primarily as a result of the refinancing arrangement entered into in March 2011 and the decrease in cash and cash equivalents as at the reporting date. Financial debt includes shareholder loans of EUR 420 m.

Financial debt as at December 31, 2011 includes liabilities related to the Senior Facility Agreement of EUR 6,949 m (prior year: EUR 6,271 m).

The debt to EBITDA ratio, defined as the ratio of net financial debt (excluding shareholder loans) to earnings before taxes, non-controlling interests, financial result, depreciation, amortization and impairment losses (EBITDA), has changed to 3.0 at December 31, 2011 (prior year: 2.7). [--break--]  Net financial debt increased by more than EBITDA, which grew 7.0 % to EUR 2,243 m (prior year: EUR 2,097 m).

3.2 Capital structure

No. 007
in € millions 12/31/2011 12/31/2010 Change in %
Shareholders’ equity 1,714 3,341 -48.7
Provisions for pensions and similar obligations 1,217 1,111 9.5
Provisions 79 127 -37.8
Financial debt 7,168 6,413 11.8
Income tax payables 172 102 68.6
Other liabilities 261 423 -38.3
Deferred tax liabilities 124 116 6.9
Total non-current liabilities 9,021 8,292 8.8
Provisions 208 317 -34.4
Financial debt 317 64 > 100
Trade payables 873 729 19.8
Income tax payables 184 115 60.0
Other liabilities 672 486 38.3
Total current liabilities 2,254 1,711 31.7
Total shareholders’ equity and liabilities 12,989 13,344 -2.7

The Schaeffler Group’s shareholders’ equity (including non-controlling interests in consolidated subsidiaries) fell by EUR 1,627 m to EUR 1,714 m in 2011 (prior year: EUR 3,341 m). The equity ratio at December 31, 2011 was 13.2 % (prior year: 25.0 %).

In connection with the refinancing arrangement entered into in March 2011 for the IHO Group, [--break--]  defined as the consolidated group with the parent company INA-Holding Schaeffler GmbH & Co. [--break--] KG, dividends totaling EUR 2,364 m were distributed to Schaeffler Verwaltungs GmbH, the company’s shareholder, before Schaeffler GmbH was converted to a stock corporation. See the discussion of shareholders’ equity in the notes to the consolidated financial statements for further detail.

Reductions in shareholders’ equity that did not affect net income resulted mainly from the translation of net assets of foreign group companies (EUR -61 m) and from pension obligations and similar obligations (EUR -83 m).

As expected, these decreases in shareholders’ equity were partially offset by net income of [--break--]  EUR 902 m (prior year: EUR 73 m).

Non-current liabilities increased by EUR 729 m to EUR 9,021 m (prior year: EUR 8,292 m) and include financial debt of EUR 600 m assumed from the shareholder, Schaeffler Verwaltungs GmbH, under an assumption of debt in discharge of the previous debtor in connection with a dividend in kind on July 1, 2011. The financial debt was assumed at the existing terms underlying the Senior Facility Agreement.

The increase in provisions for pensions and similar obligations of EUR 106 m, which for the most part relates to German obligations, resulted primarily from a change in discount rates following the worldwide reduction in interest rates. A discount rate of 5.0 % was applied in Germany as at the reporting date, compared to 5.3 % as at the end of the prior year. The discount rate for the group’s plans in North America and the United Kingdom decreased by 1.0 percentage points and 0.5 percentage points, respectively, from those of the prior year.

The decrease in other non-current liabilities by EUR 162 m is mainly the result of fair value changes on interest rate hedging instruments.

The increase in current liabilities of EUR 543 m to EUR 2,254 m (prior year: EUR 1,711 m) is primarily due to higher financial debt and trade payables. Financial debt includes the current [--break--]  portion of EUR 300 m of a shareholder loan related to a dividend in kind. Trade payables rose by EUR 144 m to EUR 873 m (prior year: EUR 729 m) in line with the positive course of business. Considerably improved earnings have led to an increase in income tax payables. The decrease [--break--] in current provisions is the result of accrued selling costs (particularly customer bonuses, early-payment discounts and rebates), which are presented under other liabilities in 2011 due to their high level of certainty.

3.3 Asset structure

No. 008
in € millions 12/31/2011 12/31/2010 Change in %
Intangible assets 553 575 -3.8
Property, plant and equipment 3,328 3,041 9.4
Investments in equity-accounted investees 4,772 5,252 -9.1
Other investments 14 8 75.0
Other assets 95 166 -42.8
Income tax receivables 22 0 --
Deferred tax assets 350 289 21.1
Total non-current assets 9,134 9,331 -2.1
Inventories 1,562 1,482 5.4
Trade receivables 1,607 1,443 11.4
Other assets 200 257 -22.2
Income tax receivables 89 98 -9.2
Cash and cash equivalents 397 733 -45.8
Total current assets 3,855 4,013 -3.9
Total assets 12,989 13,344 -2.7

The financial position as at December 31, 2011 is marked by a slight decrease in total assets of EUR 355 m or 2.7 % to EUR 12,989 m (prior year: EUR 13,344 m) compared to the prior year. [--break--]  Non-current assets as a percentage of total assets rose slightly to 70.3 % (prior year: 69.9 %).

Intangible assets decreased by EUR 22 m to EUR 553 m (prior year: EUR 575 m) compared to the prior year. Additions of EUR 15 m were more than offset by amortization of EUR 37 m, including EUR 4 m in amortization of fair value adjustments.

Property, plant and equipment increased by EUR 287 m to EUR 3,328 m (prior year: EUR 3,041 m) compared to the prior year. Additions of EUR 831 m, including non-cash additions of EUR 58 m, were partially offset by depreciation of EUR 517 m.

Investments in equity-accounted investees decreased by EUR 480 m to EUR 4,772 m (prior year: EUR 5,252 m). On the one hand, shares in Continental AG of EUR 764 m were distributed as a dividend in kind to the parent company, Schaeffler Verwaltungs GmbH. On the other hand, the ongoing at equity investments contributed EUR 284 m.

Other non-current assets have fallen by EUR 71 m to EUR 95 m (prior year: EUR 166 m) compared to the prior year, particularly as a result of fair value changes on derivative financial instruments.

Schaeffler managed to limit the increase in inventories to 5.4 %, less than the growth in production, thanks to its sustainable working capital management. Inventories amount to EUR 1,562 m (prior year: EUR 1,482 m) at the reporting date.

Trade receivables rose by EUR 164 m to EUR 1,607 m (prior year: EUR 1,443 m) as at December 31, 2011 due to the increase in revenue.

Cash and cash equivalents decreased to EUR 397 m (prior year: EUR 733 m). Cash flows from operating activities of EUR 1,084 m, which have improved by 21.8 %, were more than offset by cash outflows for financing activities (EUR 646 m), particularly a dividend of EUR 400 m declared at the end of the prior year and paid in 2011, and significantly higher cash outflows for investing activities (EUR 765 m).

3.4 Capital expenditures

In 2011, our capital expenditure strategy was consistently aimed at facilitating future growth. The focus of our capital expenditures was on realizing capacity expansion projects and situating production in locations closer to markets and customers.

Capital expenditures of EUR 846 m (prior year: EUR 386 m), which included non-cash additions to property, plant and equipment of EUR 58 m (prior year: EUR 19 m), more than doubled compared to the prior year. At 7.9 %, capital expenditures as a percentage of consolidated revenue returned to our normal level, following a rate of 4.1 % in the prior year.

The relative increase was approximately equal in both divisions, with the Automotive division spending EUR 621 m (prior year: EUR 284 m) and the Industrial division making capital expenditures of EUR 225 m (prior year: EUR 102 m).

Capital expenditures

Local production facilities in Asia, mainly in China, were one regional focus of our investment activities in 2011, the objective being to increase the proportion of value added locally. Another focus was creating capacity for the start-up of production of new products and technologies in Germany, mainly at the Herzogenaurach, Schweinfurt, and Buehl locations. In addition, Schaeffler further expanded production at low wage locations, mainly in Slovakia and Romania in Eastern Europe and in Mexico in North America.

Capital expenditures by region

3.5 Schaeffler Group financing

The Schaeffler Group’s key financing structure remains unchanged.

The refinancing of the Junior Facility Agreement in late March 2011 at the level of the IHO Group significantly affected the Schaeffler Group as follows:

A cash dividend of EUR 400 m was paid in January 2011 for purposes of repaying IHO Group debt. In addition, Schaeffler AG distributed 12,043,528 Continental AG shares to its parent company, Schaeffler Verwaltungs GmbH, as a dividend in kind in May 2011.

Schaeffler AG assumed financial debt of EUR 600 m from its parent company as at July 1, 2011 at the terms underlying the existing Senior Facility Agreement (SFA) under an assumption of debt in discharge of the previous debtor. This increased the financial debt under the Senior Facility Agreement, which consists of a term loan of EUR 6,950 m and an additional line of credit (revolver) of EUR 793 m.

Furthermore, a dividend in kind of EUR 600 m was distributed on September 22, 2011 by creating a loan due from Schaeffler AG to Schaeffler Verwaltungs GmbH. EUR 186 m of this loan had been repaid by December 31, 2011.

Please refer to the 11. Report on subsequent events for details of additional refinancing arrangements made in January and February 2012.

3.6 Schaeffler Group liquidity

At December 31, 2011, cash and cash equivalents amount to EUR 397 m and consist primarily of bank balances, EUR 95 m of which are located in countries with foreign exchange restrictions. In addition, the Schaeffler Group has a revolving credit facility of EUR 793 m.