FTE Holding GmbH (formerly Falcon (BC) Germany Holding 2 GmbH) Financial results for the twelve months ended December 31, 2015

Transcription

1 FTE Holding GmbH (formerly Falcon (BC) Germany Holding 2 GmbH) Financial results for the twelve months ended December 31, 2015 April 29, 2016

2 Contents 1. Presentation of financial and other information Business Structure Consolidated Income Statement Consolidated Statement of EBITDA Consolidated Statement of Cash Flows Consolidated Balance Sheet Capitalization, Liquidity and other financial data Material risk factors and material subsequent events Description of the Management and Shareholders of the Company and all material affiliate transactions Description of all material debt instruments Audited IFRS Consolidated Financial Statements as of December 31, 2015 of FTE Holding GmbH

3 1. Presentation of financial and other information Corporate and financing structure Falcon (BC) Germany Holding 3 and Falcon (BC) Germany Holding 2 (renamed into FTE Holding GmbH) were formed in connection with the acquisition of FTE Verwaltungs GmbH by Falcon (BC) Germany Holding 3 (the "Transaction"). The following simplified chart sets forth certain aspects of our corporate and financing structure after giving effect to the Transaction. Please refer to the Offering Memorandum relating to the Senior Secured Notes dated July 9, 2013 (the "Offering Memorandum") for more information. The Issuer closed the issuance of 9.000% Senior Secured Notes with an aggregate principal amount of million on July 12, The acquisition of the Target by the Issuer closed on the same date, July 12, 2013, with the transfer of the entire share capital of the Target (excluding treasury shares) to the Issuer. The Issuer merged with the Target effective as of January 1, 2013 and was subsequently renamed FTE Verwaltungs GmbH. On November 8, 2013, FTE Verwaltungs GmbH (former Falcon (BC) Germany Holding 3 GmbH) signed an agreement to sell 23.3 million newly issued Senior Secured Notes in a Private Placement. Closing of the new issue was on November 25, The net cash proceeds were used in 2014 for an upstream loan to its indirect parent company FTE Group Holding GmbH (formerly Falcon (BC) Germany Holding 1 GmbH) who used such funds for a partial repayment of shareholder loans granted by its shareholders. Financial and operational data The Holding and the Issuer were formed on February 21, 2013; opening balance sheets for these entities were created on April 5, 2013 and they were registered on April 9, These companies obtained control over the Target within the meaning of IFRS 3 on July 12, The Holding prepared IFRS consolidated financial information as of December 31, 2015 and for the period from January 1, 2015 to December 31, 2015 with comparative data as of December 31, 2014 and for the period from January 1, 2014 to December 31,

4 The financial results of the Holding and its subsidiaries are reported on a consolidated basis. This report contains data that was neither prepared in accordance with IFRS nor any other generally accepted accounting principles. It is for informational purposes only and does not purport to represent or to be indicative of the consolidated results of operations or financial position that the Group would have reported had the transaction and related financing as defined in the Offering Memorandum been completed as of the dates presented, and should not be taken as representative of the Group s future consolidated results of operations or financial position, nor does it purport to project the Group s financial position as of any future date or results of operations for any future period. The financial data presented in the consolidated income statement for the twelve-month periods ended December 31, 2015 and December 31, 2014 the consolidated statement of cash flows for the twelve-month periods ended December 31, 2015 and December 31, 2014 the consolidated statement of balance sheets as of December 31, 2015 and December 31, The financial data as of December 31, 2015 and of December 31, 2014 are based on the audited IFRS consolidated financial statements of the Holding as of December 31, 2015 and of December 31, 2014 included in section 9. Some financial information in this report has been rounded and, as a result, the figures shown as totals in this report may vary slightly from the exact arithmetic aggregation of the figures that precede them. Percentage figures have not been calculated on the basis of rounded figures, but have instead been calculated on the basis of such amounts prior to rounding. Unless otherwise indicated, all financial information in this report has been prepared on the basis of IFRS applicable at the relevant date and is presented in million Euro. IFRS differs in certain material aspects from generally accepted accounting principles in the US. Other financial measures Certain financial measures and ratios related thereto in this report, including EBITDA and Adjusted EBITDA (collectively, the EBITDA Metrics ), are not specifically defined under IFRS or any other generally accepted accounting principles. These measures are presented in this report because we believe that they are among the measures used by management to evaluate the cash available to us to fund ongoing, long-term obligations and they are frequently used by securities analysts, high yield investors and other interested parties for valuation purposes or as a common measure of the ability of issuers to incur and meet debt service obligations. These measures may not be comparable to other similarly titled measures of other companies and are not measurements under IFRS or other generally accepted accounting principles, and you should not consider such items as alternatives to net income (loss), operating income or any other performance measures derived in accordance with IFRS. We believe that this information, along with comparable IFRS measures, is useful to investors because it provides a basis for measuring the operating performance in the periods presented. These measures are used in the internal management of our business, along with the most directly comparable IFRS financial measures, in evaluating the operating performance. 4

5 The EBITDA Metrics have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results or any performance measures under IFRS as set forth in our financial statements. Some of these limitations are: they do not reflect our cash expenditures or future requirements for capital expenditures; they do not reflect changes in, or cash requirements for, our working capital needs; they do not reflect the interest expense or cash requirements necessary to service interest or principal payments on our debt; they do not reflect any cash income taxes that we may be required to pay; they are not adjusted for all non-cash income or expense items that are reflected in our consolidated income statement; they do not reflect the impact of earnings or charges resulting from certain matters that we consider not to be indicative of our ongoing operations; assets are depreciated or amortized over differing estimated useful lives and often have to be replaced in the future, and these measures do not reflect any cash requirements for such replacements; and other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures. Because of these limitations, the EBITDA Metrics should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our IFRS results and using these non-ifrs measures only supplementary to evaluate our performance. You are encouraged to evaluate each of the adjustments reflected in our presentation of the EBITDA Metrics and whether you consider each to be appropriate. Industry Data In this report, we may rely on and refer to information regarding our business and the market in which we operate and compete. We have obtained this information from various third party sources, including providers of industry data, discussions with our customers and our own internal estimates. We cannot assure you that any of this information is accurate or correctly reflects our position in the industry, and none of our internal surveys or information has been verified by any independent sources. We do not make any representation or warranty as to the accuracy or completeness of any such information set forth in this report. Forward looking statements and other qualifications The following discussion and analysis is based on and should be read in conjunction with our historical financial information included elsewhere in this annual report. Certain capitalized terms used herein defined have the meaning set out in the Offering Memorandum. The discussion may include forward looking statements, which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties, which could cause actual events or conditions to differ materially from those implied herein. You are cautioned not to place undue reliance on these forward looking statements. These forward statements are made as of the date of this report and are not intended to give any assurance as to future results. 5

6 2. Business Structure Overview The Group is an international automotive supplier. As a Tier 1 supplier, the Group supplies all vehicle manufacturers operating around the world, as well as automotive manufacturers operating in the relevant local market, with its actuator products for the clutch and brakes segment as well as innovative hi-tech components for the various vehicle transmissions. We sell our products directly to original equipment manufacturers ( OEMs ). We also manufacture and sell a range of spare and remanufactured parts to wholesalers, distributors and other participants in the automotive parts aftermarket. In line with our international direction, the Group employs a global workforce of approximately 3,700 employees and has production and development locations in Germany (Ebern, Fischbach, and Mühlhausen), Slovakia, the Czech Republic, Denmark, the USA, Mexico, Brazil and China. The Group ensures its direct customer contact through 14 technical offices located in 14 countries across 4 continents in close proximity to our customers. This provides close, efficient communication with our business partners. Accordingly, the Group has technical offices at various locations in Germany and also beyond Germany in France, the UK, Sweden and Italy as well as in NAFTA and South America. In Asia, technical offices are established both in Japan and Korea as well as in India. In the twelve months ended December 31, 2015, we recorded revenues of million and Adjusted EBITDA of 86.8 million. We produce two main categories of products and produce and sell certain other parts: Clutch Products (62% of 2015 revenues) We are one of the world s leading supplier of Manual Shift Technology with hydraulic clutch components for manual transmissions. Approximately 40% of all hydraulic manual transmission cars produced worldwide in 2015 included our products. Our core clutch products are essential to our customers manual transmission systems and are used to convert the pressure of a driver s foot on the clutch pedal into the movement of the clutch mechanism through hydraulic pressure. We work closely with our OEM customers to design and produce our specialized hydraulic clutch products, which include master cylinders (which convert the pressure of a driver s foot on the clutch pedal into hydraulic pressure), slave cylinders and concentric slave cylinders (which convert hydraulic pressure into movement of the clutch), clutch pipe assemblies and sensors. The content per car (defined as the aggregate value of components included in a vehicle comprised, in part, of our products) of our clutch products ranges from approximately 10 to 30 on average. Outside our core clutch product portfolio, we have recently developed and gained customers for innovative products, such as components for dual clutch transmissions ( DCT ), which we expect will be a key growth area in the future. Based on our existing contracts with OEMs, the content per car of our DCT products is expected to be 20 to 80 on average. 6

7 Brake Products (25% of 2015 revenues) Our brake products use hydraulic pressure to convert or enhance the pressure of a driver s foot on the brake pedal into the movement of brake pads. Our brake products portfolio includes wheel cylinders (which convert hydraulic pressure into pressure on the brake pads), brake boosters (which enhance the pressure applied to the brake pads), brake pipe systems, sensors and complete drum brakes. The content per car of our brake products ranges from 10 to 40 on average. Other (13% of 2015 revenues) We also manufacture and supply aftermarket products that can be used in both clutch and brake systems and certain specialized hydraulic and electronically activated components. In addition to our work with, and supply of products to, OEM customers, we are also active in the global passenger car and commercial vehicle spare and remanufactured parts aftermarket. We produce new brake and clutch parts and refurbish used brake calipers for a wide range of vehicles for the automotive aftermarket. Our aftermarket product range includes approximately 10,000 parts for approximately 35,000 vehicle models. We sell our products through three channels: to OEMs as part of their new car production, to OEMs as part of their spare and replacement part offering, which is referred to as the original equipment supplier ( OES ) aftermarket and the independent aftermarket ( IAM ). 68% of our revenues came from OEMs, 7% from OES aftermarket and 25% from the IAM. In 2015 approximately 24%, 50% and 63% of our revenues were generated by our top one, top five and top ten customers, respectively. We believe that our success is based on our ability to develop innovative and reliable products. We develop and manufacture specialized materials used in our products, particularly plastic and rubber. We have developed complex material mixtures that allow our products to withstand extreme heat and pressure with reduced weight and increased reliability. Our rubber and plastic fabrication facilities in Germany provide most of the specialized rubber and plastic that we use in our clutch and brake products. Our customers look to us for innovative products, such as dual concentric slave cylinders for DCT systems. Since our products perform mission-critical functions in our customers vehicles, failure rates must be low. We are committed to producing the highest quality products. We have stable and long-standing relationships with our key OEM customers. We have been serving our top five OEM customers for more than 30 years and our top ten OEM customers for an average of 25 years. We have also expanded our customer base in Asia by establishing new relationships with major Asian OEMs and transmission manufacturers. As a result of the longevity of our OEM customer relationships, we have been able to cooperate with some OEMs on development projects and thereby respond to changes in the requirements of the OEMs that we supply. OEMs develop new vehicle platforms over the course of several years and then produce vehicles based on those platforms, typically for the following four to seven years. We supply products for transmission platforms, which typically last five to eight years. We work with our OEM customers during the platform development phase to create products tailored to the particular customer s specifications. Our 14 technical offices and the engineers we send to our OEM customers facilitate this close product development interaction. Once we have been chosen as the supplier for a particular platform, there are high barriers for OEM customers to switch suppliers. Over the last 5 years we had an average renewal rate of approximately 90% for supplying components for subsequent OEM platforms. For our core clutch business, we currently provide our products to approximately 130 platforms for 17 OEM customers. 7

8 We are often the single supplier of particular components to many of our OEM customers and for the year ended December 31, 2015, we were the sole supplier for approximately 85% of the platforms served. We have a geographically diversified global production footprint with eleven production facilities in eight countries over four continents. We have focused our expansion outside our traditional markets in Europe on NAFTA, South America and Asia, where we have been able to capture the increasing demand for our products, in part driven by a significant increase in vehicle production, particularly in the United States, Mexico, Brazil and China. Strategy The Group s international growth strategy is continuously pursued through ongoing and systematic research and development work and, by replacing metal with plastic and by integrating electrical components, with innovative, weight-saving and cost-effective products in the areas of Electrical Shift Technology and Electrical Pump Technology. With these new products, which can also be used in the area of automatic and hybrid drives, and with the brake calipers reconditioning business in the aftermarket acquired at the end of 2014, the Group has enhanced its leading market and innovation position for clutch actuating products in the field of manual shift technology. Following the growth of 2015 and in the years ahead, the Asia region is becoming ever-more important and is becoming established as the second strongest region within the Group behind the European region, with its moderate growth, and ahead of NAFTA and South America region. The following are the key elements of our strategy: Maintain and Enhance Our Market Position in the Global Manual Transmission Clutch Product Market Maintain strong position by continued focus on quality and relationships Our focus on quality and our strong relationships with our OEM customers are central elements of our strategy. We believe that our reputation for delivering high-quality, mission-critical products and our technological leadership in plastics and hydraulics technology will continue to make us a valuable partner for our OEM customers. We plan to continue to work closely with our OEM customers to develop and deliver products that are customized to their requirements. We also plan to further strengthen our market position through organic growth and are also open to considering selective acquisitions. Enhance global position by emerging market development We aim to leverage our leading market position and proven track record in the manual transmission clutch market to grow our sales to OEMs globally by providing advanced and localized solutions driven by customer demands for value-added products. In particular, we plan to leverage our strong, long-standing relationships with current OEM customers and seek selective and profitable investments in order to increase our sales to those OEMs in emerging markets and capture additional market share. We believe that vehicle production within emerging markets, particularly China, Brazil and India, will increasingly use hydraulic actuation for manual transmissions and grow at a pace above global average. We continue to gain market share in emerging markets, which we believe is indicative of the growing sophistication, maturity and demand for high-quality products in these regions. As we expand in emerging markets, we plan to continue to increase sales to local OEMs. We believe our local facilities and local technical support centers will allow us to provide superior service to customers in these regions. 8

9 Further develop market position in aftermarket The automotive parts aftermarket is an attractive high-margin area of growth, and we aim to expand our share of the automotive aftermarket by increasing sales to third-party distributors, enhancing our global position in emerging markets and competing for new customers. Building on our experience in original equipment aftermarket sales and brake calipers remanufacturing, we seek to expand sales of our newly developed products into aftermarket sales channels. We believe that increasing our aftermarket sales of spare parts will further enhance the continuity and predictability of our revenues and contribute to our profitability. Build on Product Developments to Successfully Enter other Transmission Markets We believe that the number of OEMs requiring dual clutch transmission components will increase over the coming years, as OEMs install more fuel-efficient transmission options in their cars. We meanwhile supply a product portfolio of component parts for DCT directly to OEMs and to Tier 1 transmission suppliers, which we believe will offer weight and cost advantages, along with significant packaging and assembly benefits. Three key products that we have developed for DCT have each already been contracted for supply to at least one major OEM platform. We intend to grow with the DCT market by offering our existing products to other OEM customers and by selectively expanding our product range to increase the number of components we supply per vehicle. Furthermore, our new products in the fields of Electrical Shift Technology (EST) and Electrical Pump Technology (EPT) can also be used in the area of automatic, hybrid and electronic drives. Following the successful market launch of the first plastic transmission oil pump, the modular EPT kit was enhanced with high-performance variants (EP-100 and EP-200). These pumps are intended for use in automatic and duplex clutch gearboxes and can be used there for cooling and lubrication as well as serving as additional oil pumps. In the case of EST products, the emphasis in 2015 was on developing an additional gear shift module that is planned for a new duplex clutch gearbox for an Asian customer. The first prototypes have already been delivered and successfully tested. The plastic cooling oil valve (COV) has already been readied for series production and successfully validated. Production is scheduled to begin in A new product was developed for the Group with the parking lock actuator (PLA) for electrically activating the parking function for automatic and duplex clutch gearboxes. Here again, initial prototypes have already been delivered to a customer. Testing has been positive to date. In order to open up further sales opportunities for the Group in the area of heavy goods vehicles (HGVs), work began on the development of a pneumatic clutch actuation module for automated HGV transmissions. This development is being followed with interest by potential customers and will continue in 2016 with the manufacturing and testing of prototypes. Continue to Invest in Product Development to Drive Product Innovation and Medium-Term Revenue Growth Product development is central to our business, and we plan to continue developing and introducing new products through our significant research and development program. Integrating our research and development function with our production processes allows us to efficiently manage our new product development to meet recent technological trends, including higher fuel efficiency, improved product reliability and lower cost. 9

10 We plan to meet these requirements by continuing to improve our products reliability, developing alternative materials and expanding into new product areas. We plan to continue to work closely with key OEMs during the product development process and leverage our core technologies to innovate new solutions across all transmission systems, as recently demonstrated by the launch of our CPx product for the hybrid and electrical transmission market gear shift actuator module and lubrication oil pump. Selectively Develop our Market Position in Brake Products We believe that our diverse product portfolio comprising both clutch and brake products helps to strengthen our relationships with OEMs, which are able to turn to us for innovative, high-quality products for their mission-critical transmission and braking systems. We plan to develop our brake business selectively according to our product lines in order to continue providing a highquality product offering to our customers and to capture market share. Continue Further Cost Savings and Operating Efficiency Initiatives We plan to continue to make our manufacturing process more efficient. By continuously monitoring and improving our manufacturing processes, we seek to identify and exploit operational, cost and time savings in cooperation with our employee representatives. We also aim to increase our purchases from low-cost countries and maximize savings in purchases from our suppliers. In addition, we plan to leverage our leading research and development capabilities through our global production footprint to serve our global OEM. Our international production capacity allows us to provide our products closer to the production locations of our customers. Strengths Global Market Leader in Attractive Segments of the Transmission Market Leader in core clutch components business We are the world s leading supplier of hydraulic clutch components for manual automobile transmissions. More than 40% of all hydraulic clutch actuated manual transmission cars produced in 2015, include our products. We believe that our leading market position allows us to maintain our profitability and provides us with significant competitive advantages. Strong presence in high growth regions Since cars with manual transmissions tend to be more affordable than cars with automatic transmissions, we expect growing demand for manual transmissions especially in emerging markets as car ownership continues to expand in those emerging markets. In response to these trends, we have built presences in fast-growing emerging markets, including Brazil (where approximately 50% of cars produced in Brazil with hydraulic clutch actuated manual transmissions include our products) and China (where almost 20% of cars produced in China with hydraulic clutch actuated manual transmissions include our products). We have developed and are developing global production capabilities and technical relationships with OEMs that enable us to further extend our core hydraulic clutch products market leadership in these growth markets. High exposure to resilient and high-margin aftermarket sector We also produce and sell products into the automotive aftermarket, a market segment that has shown resilience and attractive margins through difficult macroeconomic periods. We hold a leading market position for spare and replacement clutch actuation components in Western Europe and NAFTA, a significant presence in South America and a growing position in Asia that we expect to allow us to grow our revenues from the automotive aftermarket in the future. 10

11 Well positioned to benefit from global automotive industry trends We focus on technological trends, market segments with strong structural and product attributes that are becoming increasingly important to OEM customers, such as reduced weight and increased fuel efficiency. Our core clutch business is based on hydraulic clutch technologies which we believe are replacing cable-based manual clutch system designs. Additionally, our research and development capacity positions us well to be a leading participant in other growing transmission component markets such as double-clutch, automatic, hybrid and electric drives. Innovative Technology Leader for High-Quality Products Specialist manufacturer of high-quality, mission-critical products with low relative price and high cost of failure We believe providing superior product quality to our customers is a key competitive advantage of our business and paramount to our success. Our products are essential to the performance, durability and reliability of the vehicles in which they are installed, and the cost of replacement is very high relative to the cost of the product. We have approximately 100 test benches located in our production facilities in Germany, NAFTA and China to detect defects before products are delivered to our customers. The quality of our products is reflected in our low warranty costs, which were less than 4% of revenues for the financial year ended December 31, We have been recognized by our customers with numerous awards for the high quality of our products. Track record of innovation driven by consistent substantial research and development spend We believe that our combination of technological innovation and history of producing high-quality products is also central to our continuing success. We have a track record of product innovation driven by a dedicated team of more than 300 research employees in facilities in Germany and the United States. We typically spend approximately 4% - 5% of our total sales revenue on research and development activities. We have developed sophisticated plastic compounds to build durable, low-weight products which had previously been made only out of metal. We believe we were the first manufacturer to develop and produce plastic clutch master cylinders and were the first to introduce high-performance concentric slave cylinders for manual transmissions. As further examples, we have developed and brought into series production the first plastic transmission oil pump and an innovative gear shift actuator module. Ability to enter fast-growing market segments through innovation The global automotive market is trending towards increased fuel efficiency, CO 2 emission reduction, hybrid solutions, low-cost production and increased product reliability. We believe that our technological leadership and core research and development competencies position us well to respond to those trends. Our innovative products and market-leading production processes are developed through our targeted research and development platform, which is fully integrated with our product design and manufacturing process. We work closely with key OEMs in developing new products as they develop their new car platforms, allowing us to quickly adapt to our customers demands. This cooperative interaction has led, for example, to the development of our new DCT product line, which gives us access to a fast-growing new transmission segment, aligns us with customer needs and complements our existing business. We were the first company to market an integrated low-weight gear shift module for DCTs. Furthermore, our new products in the fields electrical shift and pump technologies enable us to access the automated and hybrid transmission markets as well as the market of electric drives. 11

12 Long-standing OEM Relationships and Growing Global Presence Supplier of choice to leading OEM customers Our stable and long-standing relationships with our OEM customers create high barriers to entry for potential competitors and high supplier switching costs for our customers. We have been serving our top five OEM customers for more than 30 years and our top ten OEM customers for an average of 25 years. We believe there are very few suppliers which, like us, have such longstanding relationships with the largest global OEMs, and there are an even smaller number of suppliers which, like us, are capable of delivering solutions to complex projects globally and on a consistent and high-quality basis across the product portfolios. We consider our loyal customer base a competitive advantage, and we are the sole supplier of hydraulic clutch actuation products for approximately 85% of the vehicle models we supply. Historically reliable sales visibility from contracted sales and high contract renewal rates Our highly advanced technological capabilities, global manufacturing and managerial footprint, significant operational scale and track record of financial stability enable us to be a supplier that can support an OEM throughout the full product life cycle, including as a development partner during the early stages of vehicle platform development. This ability to support the development process of OEMs and act as a global supplier is an important differentiator and competitive advantage, especially for innovative product solutions, and would take significant investment and many years to attempt to replicate. From operational, technical and logistical perspectives, OEMs face substantial switching costs in replacing the supplier of a particular component or sub-system, particularly during the life cycle of a specific vehicle platform, and the supplier of a particular car platform is often also chosen for subsequent generations of that platform. This is largely due to the long lead-time and significant investment required to set up the production and supply processes, and to the efficiencies and savings gained through experience with the manufacturing processes of particular products. Track record of expansion to follow OEMs into emerging markets As our main OEM customers have expanded their production capacity in emerging markets, we have built facilities to provide locally manufactured products to their plants. Our first emerging market production facility opened in Mexico in 1997, followed by Brazil in 1998 and the establishment of a joint venture in China in As demand for our products grew in China and Brazil, we responded by opening our own production facility in China in 2009 and established a new production facility in Brazil in We continue to actively explore expansion opportunities in emerging markets to be close to the production lines of our OEM customers in those markets and to generate new business with local OEMs. Strong Profitability and Consistent Cash Generation Attractive profitability levels and cash generation in our core clutch products business Our core clutch products business has been able to produce strong profits and cash flow. We have been able to maintain high margins and preserve cash despite weakening sales during the recent global economic downturn. Over the last three fiscal years, we have achieved an average Adjusted EBITDA margin of 16.7%. Predictable revenues and cash flow are the result of longterm contracts with our OEM customers. Once a project has been nominated to a supplier, it is rare for an OEM to switch to another supplier, given the high operational, technical and logistical costs of switching, particularly during the life cycle of a specific vehicle platform. 12

13 We have a track record of high contract renewal rates in our core clutch business, which have averaged approximately 90% over the past five years. Typically, approximately 80% of our projected original equipment sales for the following five years is already contracted, giving us some visibility for our expected production levels. Strong degree of resilience through the cycle We believe our regionally diversified OEM customer base and our expanding presence into new products and growth markets help to mitigate the risk that may result from possible fluctuations in demand in our core clutch products business in Europe. We believe that our consistent profitability is driven by our diversified customer base and sizable aftermarket business, which represents 25% of revenues for the fiscal year ended December 31, 2015, and a significant portion of our profits. Since the last downturn in 2009, we have also reduced our cost of sales in our core clutch business by increasing operational efficiency through localized production facilities, automated processes and global sourcing. Our cash flow has enabled us to repay debt and reduce leverage over time, which allows us to return greater value to our investors. Strong and Experienced Management Team Our management team has a proven track record of achieving long-term profitable growth as well as establishing the Group as a technology, quality and innovation leader in the clutch component market. Our management team has over 200 years of combined experience in the automotive industry with a proven ability to execute our strategic plans and sustain and expand valuable customer relationships. We believe that under the leadership of our strong management team we will continue to enhance our product portfolio, expand our global production footprint and grow revenues. We also expect to benefit from the market expertise, business relationships, knowledge, investments and experience of our shareholder. Business Description Our Customers As the leading Tier 1 supplier for hydraulic clutch components, we have a diversified global customer base and long-term customer relationships with OEMs and with distributors, retailers and other participants in the automotive products aftermarket. We have been serving our top five OEM customers for more than 30 years and our top ten OEM customers for an average of 25 years. Our products are sold to almost all top OEMs. We believe that we can leverage our strong OEM customer and aftermarket customer relationships to further increase our customer base. We also sell aftermarket products as co-manufacturers (for example, of clutch kits) to other manufacturer, parts distributors, central buying groups and retailers. Our extensive global footprint and technical expertise have enabled us to win mandates on global projects with the top OEMs around the globe. Mandates in the automotive OEM business involve long-term production arrangements based on the life cycle of the specific model or platform. As a consequence of our strategic and long-term relationships with our OEM customers, and given the material operational, technical and logistical costs of switching suppliers during the life cycle of a specific vehicle platform, we have strong visibility on our mid-term revenues. Approximately 80% of our projected OEM sales for the following five years is already contracted. Our geographical diversification strategy is aligned with the ongoing expansion by OEMs into growth economies and the consolidation of their existing presence in established markets. We are well established within the European marketplace, with strong performance also in the North American market. New relationships with OEMs have enabled us to grow our presence in Asia. 13

14 With locations and customers throughout Europe, NAFTA, South America and Asia, we are well placed to grow further as OEMs seek to establish their presence in growth markets and to grow outside their home markets. We have general framework contracts with most of our OEM customers that stipulate the general terms and conditions for all sales to the respective OEM customer. For specific parts, our OEM customers generally appoint us as the supplier by way of a nomination letter. A nomination letter usually provides a commitment by the OEM to source for a certain period (usually five or more years) a certain portion or all of its demand for a certain part from us and includes pricing agreements. These agreements do not generally stipulate minimum volumes of purchases from us. Conversely, the agreements usually require us to maintain a certain minimum production capacity for the parts nominated. It is customary in the relationships between us and our OEM customers to readjust prices if the actual volumes deviate significantly from the volumes forecasted by the OEM. We use a combination of the projections of our own customers and thirdparty market research estimates of the volume of vehicles expected to be produced by that OEM to determine our estimated contracted sales for each part supplied. Our Suppliers We purchase various manufactured components and raw materials for use in our manufacturing processes. The majority of these components and raw materials are available from several sources. We maintain a strategic supplier list and employ continuous supplier portfolio management to ensure that we only purchase the highest-quality products at the most competitive prices. We focus on preferred suppliers for new sourcing, and seek to build favorable relationships with our key suppliers to ensure excellent service, sustainable cost advantages and speedy delivery and to enhance our competitive advantage in the marketplace. Our suppliers, like our OEM customers, are increasing their global footprint and as such we believe we have built stable supply relationships in the countries in which we operate. We have strong relationships with our suppliers in low-cost countries in Eastern Europe and China. Due to our size and our position in the marketplace, we expect to be able negotiate competitive contracts from suppliers. The primary products we purchase from our suppliers are sheet metal formed parts, bearings, resin, cold formed parts and sensors. Our contracts with suppliers typically provide for annual price reductions and require our suppliers to keep their prices competitive by passing through price reductions to us or entitling us to claim a price reduction if we, based on benchmarking, conclude that the prices charged by the supplier are above the market rate. Our contracts with OEMs often contain agreed pricing, although some contain surcharges for raw material costs or price adjustment mechanisms for variable raw material prices. We are generally able to pass through increased aluminum costs to our customers but our ability to pass through the increased costs of other raw materials such as steel and plastics is limited. Our Products We produce a range of clutch products that are essential to our customers transmission systems. Our clutch products are designed for manual and automated manual transmissions, such as DCT. We started delivering our DCT products in the second half of 2014 with an increased ramp up in We also produce products for brake systems, as well as complete drum brakes. Additionally, we supply clutch and brake products in the automotive aftermarket, offering our own remanufactured, third-party rebranded products. We sell our products to OEMs and in the OES and independent spare parts aftermarket. Furthermore, our new products in the fields electrical shift and pump technologies enable us to access the automated and hybrid transmission markets as well as the market of electric drives. 14

15 The following table identifies the different transmissions into which our products (including new products in development/prototype stage) are placed: Our Clutch Products for Manual Transmissions Manual transmissions are disconnected from the engine manually by the driver in order to change gear and avoid stalling the engine while the car comes to a stop. We produce master cylinders, slave cylinders, concentric slave cylinders, clutch pipe assemblies and sensors, all of which are incorporated into the manual transmissions of the vehicles produced by our OEM customers. The following simplified diagram shows the powertrain for a manual transmission: 15

16 The following simplified diagram shows the mechanics for a manual transmission and explains how the system works and what the components we produce do within the system: (1) The driver disconnects the clutch from the engine by stepping on the clutch pedal. (2) The master cylinder converts the pressure of the driver s foot on the clutch pedal into hydraulic pressure. The clutch pedal moves a piston in the clutch master cylinder, which moves a volume of fluid. (3) The pressure generated by this movement of fluid is transferred through the clutch pipe to a slave cylinder. (4) An external slave cylinder is mounted on the transmission. A concentric slave cylinder is mounted inside the transmission. A piston in the slave cylinder is moved by the hydraulic fluid pressure. The slave cylinder moves a release lever which, in turn, releases the clutch. (5) Sensors in the master or the slave cylinder can measure the current status of the cylinder and optimize the clutching process or direct other vehicle functions. Master Cylinder The clutch master cylinder is directly connected to the clutch pedal. It features an internal piston that moves according to the amount of pressure applied via the pedal. Our clutch master cylinders are durable and highly efficient. To improve safety, comfort and responsiveness, sensors can be integrated into our master cylinders to support a vehicle s start-lock, cruise control, electronic park brake or automatic start/stop systems. Our master cylinders are predominantly made of plastic in order to reduce weight. The unit is built from recyclable materials in order to conform to environmental standards. 16

17 Clutch Pipes Slave Cylinder Concentric Slave Cylinder The clutch pipe is filled with hydraulic fluid. It conveys the pressure applied at the pedal to the external clutch slave cylinder or concentric slave cylinder. Because the clutch pipe acts as a bridge between the clutch pedal and the transmission, it could potentially also transmit engine vibrations. In order to eliminate adverse influences like this and to ensure comfortable operation of the clutch pedal and give the driver a feeling for the right pressure to apply, our clutch pipes are fitted with a frequency modulator that absorbs unwanted vibrations. Our clutch pipes are highly efficient and can be quickly adapted to meet the specifications of a new platform. They can also be made from plastic to reduce weight and cost and we only use renewable raw materials in order to comply with environmental standards. The slave cylinder transfers the pressure applied through the clutch pipe to open and close the clutch directly by applying pressure to a lever on the clutch. This is accomplished with a piston that is moved forward or backward by the hydraulic fluid. Our slave cylinders are easy to install and are highly reliable and efficient. They automatically adjust to offset routine wear and tear on the clutch. Our slave cylinders are predominantly made of plastic in order to reduce weight. Concentric slave cylinders are compact and easy to install. Like the clutch slave cylinder, our concentric slave cylinders contain a single piston to move the clutch. They have a plastic housing which is resistant to high temperatures and are designed for an operating pressure of up to 40 bar. Controlled Pistons (CPx) Our controlled pistons are used in a variety of applications to provide precise, electronic control of hydraulic loads for either manual or automated manual transmissions. They are used in trucks and hybrid vehicles. The unit offers a power solution that is cost-efficient, fast and controllable. It is unique in terms of overall efficiency, power dynamics and integrated electronics. Our controlled pistons produce virtually no noise or pulsation and are suitable for a variety of hydraulic fluids including mineral oil and brake fluid. They are predominantly made from aluminum and plastic. Sensors Our sensors can be integrated into our master cylinders, slave cylinders and concentric slave cylinders. They assist with certain vehicle functions such as start-lock (the vehicle starts only if the clutch is fully depressed), cruise control (cruise control is switched off as soon as the clutch pedal is depressed), electronic parking brake (the brake is operated as a function of clutch travel) and automatic start/stop (the engine is stopped automatically when the vehicle stops (for example, at a traffic light)). 17

18 Our Clutch Products for DCT Dual clutch transmissions (DCTs) can be considered as two manual transmissions operating in parallel. A DCT has two clutches: one for odd-numbered gears and one for even-numbered gears. During gear shifts, the next gear is preselected and ready to be engaged in the inactive part of the gearbox before the torque (turning force) is moved from one clutch to the other without interruption. Gear shifts are carried out by electro-hydraulic or electro-mechanic movement. DCTs can be operated in fully automatic mode or in manual mode via a shift lever or steering wheelmounted paddles that enable sequential shifting. The following simplified schematic diagram shows a dual clutch transmission with two side-byside clutches. We have developed and brought into series production three products for our DCT product portfolio and have received nomination letters from certain OEM customers for the supply of all or some of these products for their future DCT platforms. Dual Concentric Slave Cylinder Gear Shift Module The dual concentric slave cylinder is a derivative of our concentric slave cylinder. The dual concentric slave cylinder is predominantly made of plastic and aluminum and works like a conventional concentric slave cylinder, but with two concentric pistons instead of one. Independently of each other, the pistons move each of the two clutches in the DCT and are powered electro-hydraulically via a power pack. Valves control the volume of hydraulic fluid. The position of the pistons is determined by two small electrical sensors, which work reliably and independently of each other at temperatures from -40 C to +180 C. Gear shift modules are key elements for shifting gears in DCTs and automated gearshifts and enable fast and safe gear shifting. Our gear shift modules simplify what was previously a complex system of different parts by taking those parts and housing them all in one easy-to-install unit. Customer-specific developments, from a single cylinder without sensors to a multi-cylinder module with integrated displacement sensors, are available in our product portfolio. The housings for our shift actuators are made of high-quality technical plastics which allow for a significant cost reduction compared to metal-based shift actuators, cost-efficient manufacturing, freedom in design and freedom from wear throughout the service life of the product. They are self-ventilating to allow proper functioning during use and after long idle periods. 18