Seitennavigation Annual Report 2013 Annual Report

Transcription

1 Seitennavigation Annual Report 2013 Annual Report

2 Seitennavigation PWO Group Five Year Overview of Key Figures (IFRS) Income Statement (EURk) ) 2013 Revenue 206, , , , ,447 Total output 206, , , , ,244 Cost of materials 112, , , , ,897 Staff costs 67,065 77,023 87,962 97, ,933 EBITDA 12,179 33,050 35,828 40,190 43,505 EBIT -4,949 16,007 19,161 21,255 22,313 EBT -10,450 9,803 12,880 14,929 16,677 Net income for the period -8,949 6,459 9,016 10,430 13,137 Balance Sheet (EURk) Total assets 204, , , , ,384 Non-current assets 110, , , , ,371 Current assets 94, , , , ,013 thereof cash and cash equivalents 7,704 7,290 4,580 7,810 8,071 Equity 61,465 68,971 74,784 95, ,461 Interest-bearing borrowings 86,792 87,147 94,830 98, ,726 Other liabilities 56,407 67,341 71,121 85,892 89,197 Return on Equity in % (based on EBT) negativ Return on Equity in % (based on net income for the period) negativ Net debt as % of equity Equity ratio in % Cash Flow (EURk) Cash flow from operating activities 6,008 24,840 25,547 26,617 30,425 Cash flow from investing activities -12,658-16,849-26,412-33,262-24,694 Interest paid and received -3,748-4,594-4,716-4,537-4,162 Free cash flow -10,398 3,397-5,581-11,182 1,569 Dividends paid -1, ,500-3,500-5,000 Other cash flow from financing activities 15,981-2,461 1,429 19,888-3,051 Net change in cash and cash equivalents in the period 4, ,652 5,206-6,482 Numbers per share (EUR) Weighted average number of shares (in million) Earnings per share (diluted = basic) Dividend per share ) XETRA share price, year-end Employees (as of December 31) PWO Group (incl. part-timers) 2,046 2,288 2,664 2,916 3,103 thereof in Germany 1,116 1,209 1,340 1,393 1,451 thereof in international locations ,174 1,356 1,482 thereof trainees ) Some amounts deviate from the amounts reported in the consolidated financial statements for fiscal year 2012 due to adjustments of the application of IAS 19 (see note 4). 2) Proposal to the 91st Annual General Meeting

3 Seitennavigation Company Profile PWO is one of the world s leading developers and manufacturers of sophisticated metal components and subsystems in lightweight construction for automotive safety and comfort. Thus, we are excellently positioned in the global market. As an automotive supplier, we focus exclusively on those product areas where we can reap the full benefits of our comprehensive process know-how in the forming and joining technology of steel, stainless steel, and aluminum. These include mechanical components for electrical/electronic applications, safety components for airbags, seats, and steering, as well as structural components/ subsystems for the vehicle bodies and chassis. With our innovative strength, we create high precision pioneering solutions. With its expertise in metal formation and processing methods for load-optimized, high-strength steels PWO is the worldwide leader. Continuous product and process innovation and a Group-wide lean management system boost productivity and competitiveness. Flexible international capacity and process structures allow us to profit from growing globalization. PWO is the only supplier worldwide who covers the entire value-added chain from product and process development, through tool design, up to series production of ready-to-install components in zero-defect quality for such a broad range of products. Our products are used mainly in premium vehicles. Through our product mix, we are profiting immensely from the trend towards a higher level of equipment for comfort and safety as well as from the themes of lightweight construction and electromobility. We manufacture a broad portfolio of products for our customers in a cost efficient and justin-time manner. Through our consistent global focus with our own manufacturing locations in Western and Eastern Europe, North America, and Asia together with international collaboration, we reduce our dependence on the success of single markets and open up sustainable growth potential across the globe. Over the near and medium term, we will establish assembly locations in both America and Asia. Annual Report

4 The PWO Locations THE PWO LOCATIONS Germany Progress-Werk Oberkirch AG, Oberkirch 1,451 Canada PWO Canada Inc., Kitchener 261 Mexico PWO de México S.A. de C.V., Chachapa, Puebla 564 Great Britain Portugal Spain Argentina Brazil 4 Annual Report 2013

5 The PWO Locations PWO Locations Employees per 31/12/2013 (including part-timers without Trainees) Cooperation Partners Czech Republic PWO UNITOOLS CZ a.s., Valašské Mezirící 427 China PWO High-Tech Metal Components (Suzhou) Co. Ltd., Suzhou 230 Thailand India South Africa Annual Report

6 PWO Product Areas PWO PRODUCT AREAS As a globally leading developer and manufacturer of sophisticated metal components and subsystems for the automobile, PWO focuses on three strategic product areas that provide safety and comfort and which contribute almost equally to Group revenues. Precision motor housings for ABS and ESP systems, fan drives, windshield wipers and power windows, housings for electronic controls and components for electric drive systems are all included in the product area of mechanical components for electrical and electronic applications. The second product area comprises safety components for airbags, steering systems, as well as seat structures, seat adjustments, and seat locking mechanisms. The third product area includes vehicle body components, heat shields, cross-members, as well as components for chassis and accumulators for air suspension systems. With an array of more than 1,000 products, we are the only supplier worldwide, which covers the entire value chain from product and process development and tool design, ranging from small series to large series production, whose unit numbers reach into the millions. 6 Annual Report 2013

7 PWO Product Areas Revenues by product area (100 % = EUR million) 23 % Mechanical components for electrical and electronic applications 31 % Safety components for airbags, seats, and steering 46 % Structural components and subsystems for vehicle bodies and chassis Annual Report

8 THE PWO- FACTOR The Future Factor The Innovation Factor The Global Engineering Factor The Location Factor The Manufacturing Factor The Sales Factor The Quality Factor The Wiki Factor The Sustainability Factor The Financial Factor The Added Value Factor The Human Factor The Investment Factor

9 2013 CONTENT To our Shareholders Consolidated Financial Statements of the 38 PWO Group 108 Letter from the Management Board 42 Consolidated Income Statement 110 Report of the Supervisory Board 44 Consolidated Statement of Comprehensive Income 111 Corporate Governance Report 50 Consolidated Balance Sheet 112 PWO Share 58 Consolidated Statement of Changes in Equity 114 Consolidated Statement of Cash Flows 115 Notes to the Consolidated Financial Statements 116 Group Management Audit Opinion 153 Report and Management Report of PWO AG 62 Further Information 154 Group principles Report on business development Significant events subsequent to the end of the fiscal year Report on forecasts, opportunities, and risks Dependency report Disclosures required pursuant to Section 289 (4) and Section 315 (4) HGB Corporate Governance Statement pursuant to section 289a HGB Remuneration Report Responsibility Statement Management Report for Progress-Werk Oberkirch AG Governing Bodies Proposal for the Appropriation of Profits Annual Report

10 Future Innovation Global Engineering Location Manufacturing Sales Quality Wiki Sustainability Financial Added Value Human Investment THE PWO- FACTOR In the global competition of today and tomorrow, it is not enough to just be well positioned. The capacity to act is much more in demand. Our customers in the automotive industry expect us to provide cost efficient innovations, a high level of agility throughout the entire value chain, and flexibility in the organization of processes. High efficiency and synergies in a long list of strategic areas ensure our competitiveness and long-term profitability. 10

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12 0 % The Future Factor Innovation Global Engineering Location Manufacturing Sales Quality Wiki Sustainability Financial Added Value Human Investment THE FUTURE FACTOR The car of the future will have as small of an impact as possible on the environment, be more economical with resources, and be safer and more intelligent. The weight of the vehicle is the primary key to higher energy efficiency. The lighter the car, the less energy it uses. When it comes to reducing weight and emissions, the magic word is lightweight construction. PWO feels particularly committed to this. This involves a new construction philosophy: All constructive, material and technical manufacturing means must be aimed at reducing the mass of the product and at the same time increase the product s quality. This means that next to aluminum and other lightweight materials, high-strength steel can make a crucial contribution to the sustainable mobility of tomorrow. Next to aluminum, high-strength steel is a suitable material for lightweight construction. The reason: Innovative materials allow automotive parts to be thin-walled and thus constructed in a weight-saving manner without having to compromise on safety. Depending on the components and its purpose, high-strength steels can achieve weight savings of up to 30 percent. The vehicle body comprises close to 40 percent of the total weight of an average passenger car and the chassis contributes close to 25 percent. Equipment, including the electrics/electronics comprises 20 percent of the total weight and the drive contributes 15 percent. Therefore, when it comes to lightweight construction, it s not only the reduction in the weight of the vehicle body that is important, but also achieving much lighter components for the chassis and equipment. A weight reduction of 100 kilograms can already lead to a reduction in fuel consumption of 0.4 liter per 100 kilometers and 8.5 grams per kilometer lower emission of CO 2. New lightweight construction solutions at PWO are playing a major role in this development. 12

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14 0 % Future The Innovation Factor Global Engineering Location Manufacturing Sales Quality Wiki Sustainability Financial Added Value Human Investment THE INNOVATION FACTOR Suppliers contribute 70 percent of the value added to a vehicle today. This is the reason the automotive industry is particularly dependent on our sustainable innovative strength and flexibility. As a supplier, PWO must anticipate global developments and create the relevant strategies which allow us to always remain competitive and provide deliverability worldwide. Therefore, speed and long-term innovative strength are decisive for success. The challenge of innovative lightweight construction concepts is to accomplish the necessary functions while using less material and to do this in a quick and cost effective manner. Forming high-strength steel sheets with the utmost speed and precision and at a competitive cost necessitates special processes. In this regard, PWO has acquired unique knowhow over the past several years, which is appreciated and used by our customers. The majority of new incoming orders in fiscal year 2013 occurred in the construction of lightweight components. This includes specialized electric motor housings as well as lightweight components for seats and air suspension systems which in the meantime are also being used in electric vehicles. Our forming solutions not only bring cost advantages, but also a tremendous reduction in weight. With the most up-to-date simulation, calculation, and testing methods, we not only define standards in sheet formation, but also stretch the boundaries with our complex formation processes. 14

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16 00 % Future Innovation The Global Engineering Factor Location Manufacturing Sales Quality Wiki Sustainability Financial Added Value Human Investment THE GLOBAL ENGINEERING FACTOR Think global, act local. As a supplier, we must provide manufacturing systems today which are consistent worldwide. This includes managing manufacturing start-ups on a global basis while guaranteeing the same high quality that the customer has come to expect at all times and around the world. With the expansion of our international cooperation network comprising development, procurement, and manufacturing, we are opening up further potential for growth. On the one hand, this includes creating the highest flexibility in our own processes as possible and on the other hand intensely managing our own supply chain with the utmost cost transparency. Therefore, we offer our engineering and tool design know-how on a global basis at all of our locations. The final coordination within PWO is always carried jointly with the areas of development, manufacturing, planning, and construction as well as with the suppliers to the respective production line. Today, with our new and flexible presses, we are in a position to manufacture modern components cost-efficiently and integrate further manufacturing steps into our formation process in a flexible manner. 16

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18 Future Innovation Global Engineering The Location Factor Manufacturing Sales Quality Wiki Sustainability Financial Added Value Human Investment THE LOCATION FACTOR Our global positioning is a key prerequisite for our further growth. With our manufacturing locations in Western and Eastern Europe, North America, and Asia, we are profiting from the opportunities offered by the international growth markets. PWO has access to orders which are only awarded to companies manufacturing internationally. These types of orders include particularly high numbers of components for vehicle platforms to be produced and spanning over a period of many years. These orders are not only highly attractive because of their positive effect on the utilization of our European locations, but also due to their high volumes and long durations. reduce our dependence on the success in the German and European markets and create the best conditions for further global growth. We accompany our globally active customers in all markets and can also ensure high performance and deliverability even internationally. PWO produces high-tech components, modules, and subsystems in the millions of units at all of its locations around the globe with the highest efficiency. By having five of our own manufacturing locations spread across Europe, North America, and Asia, and our global cooperation partners, we The current market slowdown in Western Europe is compensated by our gains in market share. Meanwhile, our location in the Czech Republic has become a true benchmark location in terms of tool manufacturing as well as series production. Our manufacturing locations in Canada and Mexico benefit for the continued favorable market environment in the NAFTA area, whereas our location in Puebla, Mexico, is now also supplying our customers in Brazil. The highest growth rates are being recorded at our location in China. 18

19 South America 4 6 North America India 4 11 Europe China THE VEHICLE MARKET IN THE COURSE OF STRUCTURAL CHANGE. Regional market volume Production in millions. / Vehicles up to 6 tons. Market 2012 Market Potential 2020 Annual Report

20 5 % Future Innovation Global Engineering Location The Manufacturing Factor Sales Quality Wiki Sustainability Financial Added Value Human Investment THE MANU- FACTURING FACTOR Since the introduction of our PWO Production System, the set-up times Group-wide have declined by 60 percent, employee productivity has risen 50 percent and overall equipment efficiency (OEE) in the press area has increased over 75 percent. In addition, equipment utilization has increased by 30 percent. Extremely short reaction times to changes in customer requirements and continuous improvements are factors which make PWO stand out. At all of our locations we operate according to the value stream principle. To ensure uniformly high process quality Company-wide, PWO practices its proprietary PWO Production System. This system standardizes all operating processes in all value-added areas and defines, monitors, and maintains uniform planning and performance standards for every location. Through the use of best practice processes, we establish high standards which our employees fulfill with enthusiasm and which are developed further on an ongoing basis. This occurs just the same in series production as it does in process planning, the construction of operating materials, work preparation, and in all processes. This is how we have been able to achieve great success in the continuous improvement in all of our processes. and testing methods, and the consistent use of all data available throughout the entire process chain, accelerate processes and increase the quality of development. For example, at our technical center, we have developed a highly efficient process technology in the drive area for a new generation of structures that significantly reduces tool costs and allows for increased flexibility in manufacturing. In the first quarter of 2013, a new 1,250 ton servo press was brought into operation at the Oberkirch location for upcoming start-ups and ramp-ups in the manufacturing of diverse structural components and motor housings. In the previous fiscal year, we had already expanded our capacity at locations in the Czech Republic and China with two forming presses of the same model. Both products and processes are developed simultaneously by over 400 employees. Together with our customers and in consultation with our suppliers, new products are created in simultaneous engineering. Modern simulation, calculation, The new servo presses allow the manufacturing of modern and highly-functional components by making the integration of additional manufacturing steps in the formation process much more flexible. The noticeable increase in output leads to a significant rise in productivity. On average, productivity increases of close to 20 percent are possible and in some cases there may be increases of up to even 50 percent. 20

21 For the last 10 years, PWO has owned the fastest manufacturing process for deep-drawn housings for electric motors. During this time, this process has been developed further and its foundation has been integrated in the manufacturing processes of other components. By means of our lean manufacturing system we are in a position to continue with the ongoing reduction in reaction and lead times. We can employ flexibly our world-leading expertise in the forming and joining of metals at each site and thus carry out manufacturing on a global scale at competitive costs. This is a crucial advantage in the market. Annual Report

22 0 % Future Innovation Global Engineering Location Manufacturing The Sales Factor Quality Wiki Sustainability Financial Added Value Human Investment THE SALES FACTOR We not only meet the requirements of customers in terms of function, precision, weight, costs and deadlines, but often exceed them. Our customers include important vehicle manufacturers worldwide such as Audi, BMW, Daimler, Ford, Porsche, Škoda, Volvo, and VW as well as well-known suppliers such as Bosch, Brose, Continental, Faurecia, Johnson Controls, Lear, ThyssenKrupp, TRW, Valeo, Visteon, Wabco, and ZF. We have earned a reputation for long-standing topmost deliverability in zero-defect quality. This greatly promotes long-term customer relationships. Our international customer basis is broadly positioned and avoids dependence on any individual customers. We are especially proud of the numerous awards we have received from our customers once again in 2013: For the fourth time, we received the Bosch Global Supplier Award. In particular, the current award recognizes our performance in the area of deep-drawn housings for electric motors, where we are the global market leader. The FORD Motor Company awarded us with their World Excellence Award in silver. This categorizes PWO as one of the best global FORD suppliers. This award is an acknowledgement for our performance, especially in the areas of quality, costs, and delivery reliability in the course of providing FORD with cross-members in Europe and North America. We also received the Quality Excellence Award from Volvo Cars. Volvo awards this prize annually to its suppliers for their top quality, reliability, and best overall performance. The conditions for the award are the fulfillment of 12 requirements given by Volvo which PWO had fulfilled in full within the scope of the cross-member project. 22

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24 Future Innovation Global Engineering Location Manufacturing Sales The Quality Factor Wiki Sustainability Financial Added Value Human Investment THE QUALITY FACTOR 50 Zero-defect quality is the benchmark in the automotive industry for all products and processes. Here we make full use of our integrated, automated quality control in manufacturing. The highest precision possible is already a mandatory prerequisite in tool development to ensure uncompromised product quality: A product can only be as good as the tool that created it. The tool is the decisive factor for the efficiency of a manufacturing process and hence the key portion of the unit costs for a component or module. Only with intelligent and highly precise tool solutions is it possible to improve the quality of the part and at the same time raise the manufacturing speed to the level achieved today by PWO. At PWO, over 250 highly-qualified specialists develop and produce robust tools of the highest precision. Computer-supported simulation of the formation process creates the basis for the construction, state-of-the-art CNC-controlled processing centers produce the tool components, and experienced tool mechanics assemble them. Our tool construction machinery also offers the best conditions for the qualified manufacturing of samples and prototypes. This competency makes us a model for the industry. We optimize our tools not only for the highest manufacturing quality possible, but also for the lowest possible use of materials. Our aim is continuous quality improvements accompanied by cost optimization. In doing so, PWO follows an uncompromising zero-defect philosophy. Continual improvement processes cover all areas of the Company. The range spans from the optimized synchronization of all manufacturing and logistic processes through to the reduction of downtime until the minimization of input from raw materials and supplies and the systematic improvement in process safety. 24

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26 60 Knowledge is the only material that Future Innovation Global Engineering Location Manufacturing Sales Quality The Wiki Factor Sustainability Financial Added Value Human Investment THE WIKI FACTOR multiplies with use. We believe the exchange of knowledge and experience of all employees is an important source of innovation and continuous process improvement. Ever-growing requirements and close cooperative teamwork demand a greater level of information. To respond to this in a professional manner, we have designed modern, IT-based knowledge management tools. These systems are embedded in our intranet and are available to our employees along the entire process chain. We have standardized the IT infrastructure for our international subsidiaries which applies to manufacturing planning, inventory management, and business administration, as well as to risk management. Our international manufacturing sites in the Czech Republic, Canada, Mexico, and China are linked to the Company s main office at the headquarters in Oberkirch. This ensures the Companywide communication of our employees around the globe and around the clock. 26

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28 0 % THE SUSTAIN- Future Innovation Global Engineering Location Manufacturing Sales Quality Wiki The Sustainability Factor Financial Added Value Human Investment ABILITY FACTOR Our corporate activity is characterized by the responsibility that we perceive to society in social, economic, and environmental areas. The protection of the environment, the climate, and of resources today represents one of the most elementary requirements for all manufacturing companies and for each individual consumer. We at PWO see it as our duty towards the environment to take lasting responsibility because we are not only responsible for what we do, but also for the things we do not do. This maxim inspires us every day. We consider the low consumption of energy and water and the minimization of waste and emissions as our most important environmental aspects which we constantly monitor and improve. possible in their manufacture, use, and disposal. We place great emphasis on the efficient use of raw materials and energy both during their manufacture and in their disposal or recycling. At PWO, product quality means that our products not only meet the legal requirements and satisfy the needs of our customers, but are also as environmentally friendly and socially acceptable as With the commissioning of our new cogeneration plant in 2013 at our site in Oberkirch, we reduced CO 2 emissions by approximately 50 percent while improving the overall energy balance by 30 percent. We also pursue the consistent protection of the environment internationally. In the planning and development of products and processes, the PWO environmental management system is implemented according to DIN standards. 28

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30 0-4 Our business model is focused on revenue and profit Future Innovation Global Engineering Location Manufacturing Sales Quality Wiki Sustainability The Financial Factor Added Value Human Investment THE FINANCIAL FACTOR growth while limiting risk at the same time. Start-ups and ramp-ups of a number of series orders and the vigorous new business form the basis for our further growth. A balanced revenue structure and a broad customer base make us largely independent of the success of individual models or single orders. The long lead times in our business enable us to plan ahead in terms of capacity. With Group-wide tools in planning, control, and risk management, we are able to cost-effectively control the operation of all manufacturing sites and to respond very flexibly to different developments in the markets. In fiscal year 2013, we have implemented the Group-wide operation of a new and highly efficient software-based risk management system. The expansion is based on market share gains and our international presence. Our foreign locations, in particular, have achieved higher revenues and results in the 2013 fiscal year than in the prior year. Germany is still the most important location for the Group, however, in the meantime, the foreign subsidiaries are contributing significantly to the Group s profitability. This contribution will continue to grow in the years to come. Even the best idea in the world is only valuable if enough people believe in it. We feel extremely committed to these people our shareholders and want to always honor their commitment with the payment of an appropriate annual dividend and steady increases in the Company s value. 30

31 0 11 % 11 % Czech Republic Mexico 25 % Export share of German site 38 % Germany 12 % 3 % Canada China Shares of the locations in Group revenue Annual Report

32 00 % THE ADDED VALUE Future Innovation Global Engineering Location Manufacturing Sales Quality Wiki Sustainability Financial The Added Value Factor Human Investment FACTOR The entire value chain generates earnings potential for PWO. Our world-leading expertise in tooling and large series production ensure this first-class standing. A key competitive strength of PWO is its positioning along the entire value chain. In the past, PWO consistently followed a policy of extending the value chain of individual components to entire modules and complex components. This allows us to offer customers expertise from one source, which ranges from development to tooling through to the large series production of ready-to-install subsystems. 32

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34 046 THE HUMAN Future Innovation Global Engineering Location Manufacturing Sales Quality Wiki Sustainability Financial Added Value The Human Factor Investment FACTOR Every success that a company can show is primarily dependent upon the human factor. This concerns improvements in quality and productivity and relates to increases in Company s value. This awards the highest importance to the ability to recognize problems at an early stage and efficiently implement creative solutions. Competency, flexibility, and reliability describe the people who are employed at PWO values which are embodied in PWO s mission statement. The willingness to take responsibility for one s own work and to play an active role in the ongoing improvement process is anchored deeply in the minds of the employees and increases the commitment, the performance, and the success, which in turn leads to more pleasure in their work and a greater identification with the Company s objectives. Striving for maximum performance requires a sound and professional level of education in addition to an extraordinary amount of motivation. Here, our qualified staff also makes their personal contribution by passing on their know-how to younger people: Under the guidance of experienced professionals PWO offers coveted apprenticeships on an annual basis for future tool mechanics, energy electronics, mechatronics technicians and industrial clerks. Particular attention is also paid to the subject of training. Through a wide range of measures, we align the qualifications of our employees to the constantly rising demands. By taking into account personal preferences and talents, we increase not only technical know-how, but also promote flexibility and responsibility through methodological and social competence. The global complexity of our industry also opens up international opportunities for our employees: Engineers, technicians, and specialists from all disciplines have the opportunity to practice their profession within our international site network and thus have the chance to broaden their horizons, both professionally and personally. 34

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36 00 % THE INVESTMENT Future Innovation Global Engineering Location Manufacturing Sales Quality Wiki Sustainability Financial Added Value Human The Investment Factor FACTOR Our medium-term investment plan is aimed at strengthening our innovation and expanding our capacity. Through the additional assembly locations planned, we will improve the proximity to our customers globally and open up further growth potential. The extension of our development expertise and technology leadership is at the center of our medium-term plans which run until To maintain our balanced revenue distribution we want to enhance its breadth even further. The further expansion of the performance capabilities of our manufacturing sites in Germany, Canada, the Czech Republic, China, and Mexico is of outstanding importance for our international competitiveness. Therefore, over the next three years, PWO plans to invest a total of nearly EUR 100 million. In addition to investments in technology and development expertise, investments in expansion in the form of additional manufacturing and logistics capacities are also on the agenda. These will comprise over a third of our total investment volume. 36

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39 TO OUR SHAREHOLDERS To our Shareholders Letter from the Management Board Report of the Supervisory Board Corporate Governance Report PWO Share Consolidated Financial Statements of the PWO Group Group Management Report and Management Report of PWO AG Further Information Annual Report

40 The Management Board To our Shareholders The Management Board We are working on our strategic positioning in a consistent and determined manner. This includes having a clear strategy in terms of our global presence, innovative product range, and value-adding potential. We are not only well positioned in the areas of development and production. To be better than the competition in all areas along the entire value chain, we constantly pursue strict cost management and continually improve the quality and efficiency of all our processes. 40 Annual Report 2013

41 The Management Board Consolidated Financial Statements of the PWO Group Group Management Report and Management Report of PWO AG To our Shareholders Bernd Bartmann Member of the Management Board Karl M. Schmidhuber Chairman of the Board Dr. Winfried Blümel Member of the Management Board Administration and Finance Market and Technology Production and Materials A precise instrumentation of planning, In product development, we use our Our consistent product and process control, and risk management ensures room to manoeuvre in terms of design innovations are putting us in a leading our long-term success. Thus, we have complete transparency when it comes to opportunities and potential risks and can set right course early on. We have also laid the groundwork for financing our further growth from our own and are able to reduce complexity. Our lightweight solutions achieve both extensive weight savings and cost benefits. As a result, when speaking of global competition, we are not only competitive, but are at the forefront internationally. position globally in terms of quality and cost. With our just-in-time delivery with zero-defect quality we are opening up international growth markets. Further Information resources. Annual Report

42 Letter from the Management Board To our Shareholders Letter from the Management Board Dear Shareholders, We can look back on an overall successful year in 2013: Despite the weakness of the European automotive market, we still managed to achieve record revenues and earnings. Our international locations were significant contributors to this positive development. At Oberkirch, our largest location, we were able to increase our series revenues, as well as our total revenues, by 2.1 percent in comparison to the previous year despite the market weakness in Western Europe and declining steel prices. However, profitability at Oberkirch was adversely impacted by a strong rise in energy prices and personnel costs. The development was extremely encouraging at our Valašské site in the Czech Republic, which benefited from a marked increase in the production volumes at our customer s plants in Eastern Europe and also from the high level of process reliability. Here, series revenues rose by 15 percent and tool sales grew 40 percent. In Europe overall, PWO achieved year-on-year revenue growth of 4.4 percent in the midst of a declining passenger car market. Our locations in Canada and Mexico have developed well and benefited from the growth of the North American automotive market. In local currencies, series revenues of PWO Canada Inc., Kitchener, Ontario, grew 19 percent compared to the prior year and PWO de México in Puebla achieved growth of 9 percent. The highest growth rates compared to 2012 were achieved by PWO High-Tech Metal Components in Suzhou, China. The series revenues increased approximately 82 percent and tool revenues climbed 176 percent. Start-up losses in China were reduced dramatically in the past fiscal year and in the fourth quarter the break-even point was reached for the first time, as previously projected. Consolidated Group revenues rose by 5.4 percent to EUR million (p/y: EUR million) and EBIT increased 5.0 percent to EUR 22.3 million (p/y: EUR 21.3 million). The Group s total output amounted to EUR million (p/y: EUR million). Net income for the period rose 26 percent to EUR 13.1 million (p/y: EUR 10.4 million). The development of the exchange rates of the Canadian and US dollar against the Euro in the course of the year prevented an even greater increase of revenues, total output, and earnings in the consolidated financial statements. More than ever, we have benefited this past year from the groundbreaking trend in the automotive industry towards lightweight construction. We are increasingly in demand as a development partner and competent supplier during times in which automotive manufacturers are offering more fuel-efficient and consequently less polluting vehicles. For years, we have been working intensely on the lightweight design of components and on optimizing their manufacturing processes. We have developed unique expertise and an outstanding reputation in this field. This trend also becomes visible in the development of new business volume acquired in the reporting year. New business volume has also shot to record levels and the predominant portion of this volume is in lightweight components. 42 Annual Report 2013

43 Letter from the Management Board We should also highlight the development of our free cash flow, which reached a break-even level in the reporting year. We were able to use our earnings power to finance all of our investments internally. Our long-term and solid growth trend was particularly reflected in the second half of the year by the performance of our share. The stock market is increasingly rewarding our favorable business development, our strong market position with our customers as a globally capable supplier, and our excellent growth prospects. The agreeable performance of this reporting year allows us to look to the year 2014 with optimism. With our successful internationalization, we have created a solid foundation for our further growth. All sites will benefit from this and the future growth in our revenues and earnings will be increasingly supported by our international locations. Group Management Report and Management Report of PWO AG In fiscal year 2014, we expect approximately a 6 percent increase in revenues to EUR 400 million. Earnings before interest and taxes should experience an above-average rise and underline the sustainability of our positive development by achieving a new record of approximately EUR 25 million. At this point, we would like to thank all of our employees for their loyalty and commitment. We would also like to thank our shareholders for their trust and support. We would be very pleased to see your continued involvement in PWO. Karl M. Schmidhuber (Chairman) Bernd Bartmann Dr. Winfried Blümel Further Information To our Shareholders Consolidated Financial Statements of the PWO Group Annual Report

44 Report of the Supervisory Board To our Shareholders Report of the Supervisory Board In the following, the Supervisory Board of Progress Werk Oberkirch Aktiengesellschaft ( the Company ) is reporting on its activities during the 2013 fiscal year. The focus of this report is the collaboration of the Supervisory Board and the Management Board and the key issues addressed in the Supervisory Board meetings. Furthermore, the Supervisory Board reports on the work of its committees. Dieter Maier (Chairman) In fiscal year 2013, the Supervisory Board had carried out its duties as defined by the law and the Company s Articles of Association and its Rules of Procedure. To this end, the Supervisory Board and the Management Board had continuously cooperated and had maintained a close dialogue, which included all other major issues concerning the development of the Company and the Group. The Supervisory Board advised the Management Board on a regular basis and monitored the Company s management in the aspects of legality, expediency, and efficiency. The Management Board had directly involved the Supervisory Board in the decisions of fundamental importance for the Company or the Group. Above all, both the Management Board and the Supervisory Board had coordinated closely in matters relating to the strategic direction of the Group. The Management Board kept the Supervisory Board fully informed in a timely and comprehensive manner on the basis of detailed verbal and written reports. This communication addressed all significant issues regarding market trends of relevance to the Company and the Group, the current state of business, as well as the position of the Company and the Group. Furthermore, this included an in-depth discussion of on-going development projects and investments, short-term and long-term corporate planning, as well as the further strategic development of the Group. Moreover, the Management Board reported on the liquidity and risk situation and the Groupwide risk management system, including compliance topics. All deviations from the forecasts and targets occurring in the course of business as well as suitable measures to counteract them were discussed in detail by the Management Board and were reviewed by the Supervisory Board. All Management Board s reports were critically reviewed by the Supervisory Board with regard to their plausibility. The Supervisory Board confirmed that the subject and the scope of the Management Board s reporting fully met the requirements of the Supervisory Board. After a thorough examination and discussion, the Supervisory Board approved the reports and proposals by the Management Board to the extent required by the legal and statutory provisions. Matters requiring the Supervisory Board s approval were submitted for resolution by the Management Board in a timely manner. The Chairman of the Supervisory Board was in regular close contact with the Management Board, particularly with its Chairman and also outside of the Supervisory Board meetings. He advised the Management Board in questions concerning strategy, planning, business development, the risk situation, risk management, as well as in Company compliance issues. The Chairman of the Supervisory Board was continually informed of all material business occurrences. He also briefed the other Supervisory Board members outside of the meetings and discussed current developments with them. 44 Annual Report 2013

45 Report of the Supervisory Board Continuous information of the Chairman of the Supervisory Board was provided regarding special business transactions which were deemed vital to the assessment of the situation and development, as well as for the management of the Company and Group. He was kept informed by the Management Board on a timely basis via verbal or written reports. To our Shareholders No events had occurred during the reporting period, which could be classified as unusual or problematic. Therefore, it was not necessary to call an extraordinary meeting of the Supervisory Board. Conflicts of interest involving members of the Management Board and the Supervisory Board, which would require immediate disclosure to the Supervisory Board as well notification to the Annual General Meeting, did not occur in fiscal year The Supervisory Board approved the mandate awarded by the administration to the law firm Gleiss Lutz, at which the Supervisory Board member, Dr. Gerhard Wirth, is a partner. The work of the plenary In fiscal year 2013, the plenary met on five occasions: March 25; May 22; July 25; September 30; and December 12, In addition, two resolutions were passed by the Supervisory Board by circulation procedure. Group Management Report and Management Report of PWO AG Except on one occasion, all of the Supervisory Board meetings took place at the Company s headquarters. Following a longstanding tradition, one of the meetings in 2013 took place at one of the Group s international locations. The Supervisory Board uses these opportunities to inspect the respective locations. On September 30, 2013, the Supervisory Board met at the premises of the subsidiary in Canada. All members of the Supervisory Board were present at all the meetings. The Supervisory Board regularly and closely concerns itself with the Company s strategy, current market conditions, on-going development projects, and the state of investments. In all meetings, the Supervisory Board also discussed the respective situation and earnings reports of the Management Board with respect to the economic and operational environment. Other topics discussed included the Annual General Meeting, questions concerning financing, and forecasts for the reporting year. The following items were also topics of the meeting agendas: Consolidated Financial Statements of the PWO Group At the meeting of March 25, 2013 the Supervisory Board dealt in detail with the financial statements of fiscal year 2012, the report of the Supervisory Board, the 2012 Annual Report, and the meeting agenda of the 2013 Annual General Meeting. The discussions also included the report submitted by the Management Board on the current status of the structural measures initiated at the Oberkirch and Suzhou locations and questions relating to the risk management and compliance management systems. The meeting on May 22, 2013 focused on the 2013 Annual General Meeting, which took place on the same day. In addition to the regular topics on the agenda at all meetings, the Supervisory Board dealt with the first forecast for the current fiscal year and with questions concerning the management of IT security. Further Information Annual Report

46 Report of the Supervisory Board To our Shareholders At the meeting of July 25, 2013 the Supervisory Board discussed the Management Board s report regarding the occupational pension scheme. For this purpose, a study of an external management consultant firm, KPMG AG Wirtschaftsprüfungsgesellschaft, was used as a reference. At the meeting of September 30, 2013, the Supervisory Board also dealt with the second forecast for fiscal year 2013 and visited the premises in Kitchener, Canada. At the meeting of December 12, 2013, the focal point was the presentation, discussion, and adoption of the medium-term planning with regard to the earnings development, the balance sheet, financing, and personnel and investment requirements up to and including the year Additionally, the Supervisory Board concerned itself with the Management Board s reports on risk management, compliance, and internal revision, and discussed questions concerning mandating. The Supervisory Board also dealt with diverse corporate governance topics. The Supervisory Board discussed the efficiency of its activities in detail. The scope of this audit included, among others, the number, preparation, and conduction of Supervisory Board meetings, the quality of the meeting documents, and the completeness and regularity of the topics of the obligatory questions posed by the Supervisory Board to the Management Board. At this meeting, the Supervisory Board, together with the Management Board, discussed and resolved Progress Werk Oberkirch AG s Declaration of Conformity pursuant to Section 161 AktG relating to the recommendations of the Government Commissioned German Corporate Governance Code in its version of May 13, 2013 including the deviations from these recommendations. Further information on corporate governance can be found in Progress-Werk Oberkirch AG s Corporate Governance Report and the statement on corporate governance according to Section 289a HGB. These are both included in this 2013 Annual Report of the Company. At the meeting of March 25, 2014, the Supervisory Board dealt in depth with the financial statements and consolidated financial statements for fiscal year This included the combined management report for the Company and the Group, the Management Board s proposal for appropriation of unappropriated retained earnings, and the Dependence Report of the Management Board pursuant to Section 312 AktG. In accordance with Section 315a HGB, no consolidated financial statements according to HGB were prepared. The accounting, financial statements, consolidated financial statements, and the combined management report for the Company and the Group as well as the Dependence Report, were audited and furnished with an unqualified audit opinion by Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Stuttgart. The audit opinion furnished by Ernst & Young Wirtschaftsprüfungsgesellschaft GmbH with regard to the Dependence Report is as follows: In accordance with our duty, and based on our audit and assessment, we hereby confirm that the details specified within the disclosure report are accurate. The financial and consolidated financial statements, the combined management report for the Company and the Group, the Management Board s proposal for the appropriation of unappropriated retained earnings, the Dependence Report, and the audit reports prepared by the auditor, were provided to the Supervisory Board members in advance of the meeting on March 25, The Audit Committee reviewed these documents at its meeting on March 12, Annual Report 2013

47 Report of the Supervisory Board The auditor was present at the meeting of the Audit Committee on March 12, 2014 and at the Supervisory Board meeting on March 25, 2014 and had reported on the material results of the audit. To our Shareholders The Supervisory Board has examined the financial statements, the consolidated financial statements, the combined management report for the Company and the Group, and the Management Board s proposal for the appropriation of unappropriated retained earnings. Upon the recommendation of the Audit Committee, the Supervisory Board has agreed with the auditor s results of the audit at the meeting on March 25, No objections were raised following the conclusive results of the Supervisory Board s examination. The Supervisory Board approved the consolidated financial statements and the parent company financial statements, which were thereby adopted. At the meeting on March 25, 2014, the Supervisory Board had also examined and approved the Dependence Report as well as the results of the auditor s examination. No objections to the Management Board s statement at the end of the Dependence Report were raised following the conclusive result of the Supervisory Board s examination. The Supervisory Board also agreed on the Management Board s proposal as to the appropriation of the 2013 unappropriated retained earnings. Therefore, the management will propose a dividend distribution of EUR 1.80 per share to the Annual General Meeting on May 21, Group Management Report and Management Report of PWO AG The work of the committees In order to efficiently perform its duties, the Supervisory Board has established a Personnel Committee and Audit Committee in accordance with its Rules of Procedure. It has conferred upon them certain decision-making rights to the extent permissible under law. In addition, the committees prepare the relevant issues for their consideration by the plenary. The Chairmen of the committees regularly report to the plenary on the deliberation and resolutions of the respective committee. The Chairman of the Supervisory Board heads the Personnel Committee. The Committee prepares the personnel decisions of the Supervisory Board. Rather than the Supervisory Board, the Personnel Committee decides on the Company s representation in dealings with Management Board members, the consent to any outside or competing offices held by members of the Management Board, and the granting of loans to Management and Supervisory Board members. Consolidated Financial Statements of the PWO Group The Personnel Committee met five times during the 2013 reporting year on January 7, February 20, March 20, July 2, and July 18, and all members were present at all meetings. At its meetings, the committee primarily dealt with the succession of Mr. Schmidhuber. The Deputy Chairman of the Supervisory Board, Dr. Klaus-Georg Hengstberger, headed the Audit Committee until his departure from the Supervisory Board on May 22, On May 22, 2013, Dr. Georg Hengstberger became a new member of the committee and since July 24, 2013, has been the Chairman of the Audit Committee. Both gentlemen possess particular knowledge and experience in the application of accounting principles and internal controlling methods. Further Information Annual Report

48 Report of the Supervisory Board To our Shareholders In the place of the Supervisory Board, the Audit Committee assumes the tasks of previewing the financial statements and consolidated financial statements, the management report and the Group management report, as well as the audit report furnished by the auditor. In addition, the Committee prepares the report to be submitted by the Supervisory Board according to Section 171 AktG. The Audit Committee also concerns itself with monitoring the accounting process, the effectiveness of the internal controlling system, the risk management system, as well as with the audit and compliance. The Audit Committee met on five occasions in the 2013 fiscal year: February 12; March 12; April 29; July 24; and October 28. All meetings were attended by all members of the Committee. The main topics discussed were the 2012 financial statements, the interim reports of fiscal year 2013, and the recommendation for the Supervisory Board s proposal to the Annual General Meeting for the election of the auditor for fiscal year The Audit Committee also carried out the mandating of the auditor and the agreement of his fee. Furthermore, the Audit Committee obtained the auditor s Declaration of Impartiality pursuant to Section of the German Corporate Governance Code. During the year under review, the Audit Committee found no evidence that would cast doubt on the auditor s impartiality. In addition, the Audit Committee intensely concerned itself with the business development of the Company. To this end, it accepted the reports of the Management Board giving special attention to the current development of the Company s and Group s profitability. Moreover, the Committee discussed questions regarding the measurement of equity interests, corporate management, and accounting practices. The Audit Committee regularly reviewed the Company s and the Group s current development and compared it with the corresponding plan in order to determine the need for any action. In the year under review, the committees were comprised of the following members: Personnel Committee Dieter Maier (Chairman) Dr. jur. Klaus-Georg Hengstberger (until May 22, 2013) Ulrich Ruetz Dr. Gerhard Wirth (since May 22, 2013) Audit Committee Dr. Georg Hengstberger (since May 22, 2013; Chairman since July 24, 2013) Dr. jur. Klaus-Georg Hengstberger (Chairman until May 22, 2013) Herbert König Dieter Maier 48 Annual Report 2013

49 Report of the Supervisory Board Changes in the composition of the Governing Bodies To our Shareholders Dr. Klaus-Georg Hengstberger retired from the Supervisory Board The conclusion of the Annual General Meeting on May 22, 2013 marked the end of an era for the Company and Progress-Werk Oberkirch AG s Supervisory Board: The longstanding Deputy Chairman, Dr. Klaus-Georg Hengstberger, retired from the Supervisory Board for age reasons. We extend our special thanks for his visionary ideas as a member of the Supervisory Board as the Managing Director of the Company s main shareholder, Consult Invest Beteiligungsberatungs-GmbH, and was a decisive factor in shaping the successful development of the PWO Group. The Supervisory Board wishes Dr. Hengstberger all the best for his future. Additional changes The term of office of the remaining members of the Supervisory Board elected by the Annual General Meeting ended with the conclusion of the Annual General Meeting on May 22, Therefore, a new election was necessary. The previous members, Messrs. Dieter Maier, Ulrich Ruetz, and Dr. Gerhard Wirth, were re-elected. Dr. Georg Hengstberger, Dr. Klaus- Georg Hengstberger s son, was newly elected to the Supervisory Board. On the same day, the Supervisory Board re-elected Mr. Dieter Maier as Chairman and elected Dr. Gerhard Wirth as Deputy Chairman. Group Management Report and Management Report of PWO AG A word of thanks from the Supervisory Board The international competitive ability of the PWO Group, which has been expanded consistently in recent years, and its technological and market leadership in its relevant market segments, have yielded benefits in fiscal year 2013 once again. The Group has repeatedly achieved record revenues and earnings. The stock market has rewarded this performance with a substantial rise in the share price. The remarkable sales success of recent years could be leveraged even further. As a result, our volume of new business in 2013 reached a new record once again. This volume greatly exceeds the volume of contracts expiring in the years to come, not least due to the consistent focus of the product range in the direction of the automotive industry s demand for lightweight components for reducing the fuel consumption of cars. Hence, we were able to significantly strengthen the Company s future viability, improve its prospects, and secured employment for years to come. Consolidated Financial Statements of the PWO Group These results could only be achieved thanks to the extraordinary commitment of all the employees of the PWO Group worldwide. For this, the Supervisory Board would like to extend its thanks to all employees at all of the Group s locations and the Management Board. This report was discussed in detail and approved by the Supervisory Board at its meeting on March 25, Oberkirch, March 25, 2014 Dieter Maier (Chairman) Further Information Annual Report

50 Corporate Governance Report To our Shareholders Corporate Governance Report Acting responsibly throughout the entire Group forms a key aspect of how we view ourselves. We are committed to long-term and sustainable added value. At PWO, good corporate governance is built on these principles. In order to maintain and increase confidence in the Group s management of shareholders and employees, customers and suppliers, and the general public, all executives involved in the management and control of the Company have committed themselves to complying with these principles. In implementing these principles, Progress-Werk Oberkirch AG follows the relevant statutory regulations and the standards of good corporate governance commonly used by German businesses. The Company s Articles of Association do not contain any provisions deviating from those mentioned. The Management Board and the Supervisory Board work together closely, efficiently, and faithfully. At the very least, we strive to build trust through transparent and timely communication, both internally and externally. Statement on Corporate Governance pursuant to section 289a HGB (Part of the management report unaudited pursuant to Section 317 (2) no. 3 HGB) This Statement on Corporate Governance (Section 289a HGB) of Progress-Werk Oberkirch AG contains the Declaration of Conformity by the Management Board and the Supervisory Board pursuant to Section 161 of the AktG. It also includes information on the corporate governance practices applied above and beyond the legal requirements and a description of the procedures of the Management Board and the Supervisory Board along with the composition and procedures of the committees established by the Supervisory Board. 1. Declaration of Conformity pursuant to Section 161 AktG In December 2013, the Management Board and the Supervisory Board had issued the following Declaration of Conformity according to Section 161 AktG: The Management Board and Supervisory Board of Progress-Werk Oberkirch AG declare that the Company will comply with the recommendations of the Government Commission on the German Corporate Governance Code as published on May 13, 2013 with the following exceptions: Code Item 3.8 D&O Insurance For the Supervisory Board, the Articles of Association stipulate a deductible equal to half of the fixed annual remuneration of the Supervisory Board member. In the opinion of the Company, this is an adequate arrangement. Code Item Contracts with Management Board Members With the extension of management contracts for the protection of established rights that were concluded before this code item was entered into force, Code Item 4.2.3, paragraph 4 and 5, will not be complied with. Previously concluded management contracts provide for a cap on the variable remuneration components. An additional cap on the overall remuneration would cause significant practical problems due to the fluctuations in the allocations to 50 Annual Report 2013

51 Corporate Governance Report pension provisions. Therefore, the Supervisory Board has refrained from a determination of a cap on overall remuneration. To our Shareholders Code Item Nomination Committee The Supervisory Board sees no reason for the formation of a Nomination Committee. Since the Supervisory Board consists of only six members, it is considered to be appropriate for the entire Supervisory Board to deal with the nomination of Supervisory Board candidates. Code Item Composition of the Supervisory Board The Supervisory Board aims to bring the various types of professional knowledge, expertise, and experience together in the Supervisory Board, especially in the areas of the automotive sector, finance, and commercial law. In view of the low number of Supervisory Board members, for practical reasons it is not possible to consider further issues with this formation. In this respect, there are deviations from the requirements of Item , in particular, there is currently no age limit set for members of the Supervisory Board. The Company will continue to refrain from set-ting an age limit for Supervisory Board members because this would limit the selection of qualified candidates. The Supervisory Board has refrained from setting a specific number of independent Board members as referred to in Item (2), since, in practice, there is no uniform definition in the interpretation of the term independent. Based on the current assessment of the Supervisory Board together with the employee representatives, all Supervisory Board members shall be regarded as independent for the purposes of Item Group Management Report and Management Report of PWO AG Code Item Remuneration of Supervisory Board Members For Committee membership, Board members receive the attendance fee set out in the Articles of Association and no additional compensation. The recommendations of the government commission on the German Corporate Governance Code in the version of May 13, 2013, and in the version of May 15, 2012 have been complied with since the submittal of the last declaration in accordance with Section 161 AktG in December 2012 with the exception of the described items. Oberkirch, December 2013 Progress-Werk Oberkirch AG Consolidated Financial Statements of the PWO Group The Supervisory Board The Management Board The relevant current declaration pursuant to Section 161 AktG can be found on the Company s website in the Investor Relations section under Corporate Governance. Further Information Annual Report

52 Corporate Governance Report To our Shareholders 2. Relevant information on corporate governance practices At PWO, corporate actions are based on defined principles and values and on good corporate governance as a matter of course. Corporate Values With our three key corporate principles customer orientation, employee orientation, and the pursuit of success, we strive to set the highest standards. These give rise to the corporate values that form the cornerstone of PWO s management culture and serve as a model of corporate governance for our daily activities: CUSTOMERS, PRODUCTS, AND A GLOBAL PRESENCE Continuously satisfied customers: Here is where we focus our efforts. Worldwide, we develop and produce components and systems for automotive comfort and safety at the highest level for our customers. Through our particular expertise in lightweight construction, we meet one of our customers key demands: the minimization of fuel consumption. While meeting their requirements, we set standards in our industry. We bring satisfaction through quality, reliability, flexibility, speed, and competitive pricing. The PWO production system provides lean processes and a balanced creation of value along the entire process. EMPLOYEES Our employees are the key to our success. Therefore, we make sustainable investments in their abilities and motivation. We offer our employees performancebased compensation and allow them to participate in our success. We pay heed to a balanced relationship between wages, salaries, and other remuneration across all hierarchical levels within the Group, including the Management Board. By providing the optimal working conditions, we create the environment necessary for our employees to be enthusiastic, enjoy their work, and deliver maximum performance. INVESTORS, SUPPLIERS, AND THE GENERAL PUBLIC We want to raise the value of our Company in a sustainable manner and gear ourselves toward the interests of our investors and the general public. Through our strategic long-term vision, we are strengthening our market position. We take part in shaping the future worldwide and are already working on a successful response to the demands of tomorrow. Our corporate objectives are clearly focused on success and advancement. We make progress through our creative efforts and have the necessary momentum to be able to respond to new opportunities quickly and flexibly. Our economic efficiency secures our earnings. We are fair to our suppliers because our products require flawless materials. Our Company is a part of society. Therefore, we take an active role in issues of societal importance, and take our social, economic, and ecological responsibility seriously at all times. Governance Principles Our management culture is based on the personal responsibility and initiative of our managers. This is reflected in our governance principles. These principles are an expression of our attitude and give our managers a policy framework for their daily interaction with employees. We are convinced that a cooperative attitude, the ability to coordinate, and an informative and a delegatory management style are the key requirements necessary for a trustworthy collaboration between managers and employees. 52 Annual Report 2013

53 Corporate Governance Report Transparency In addition to the statutory requirements and listing standards for timely reporting and the equal treatment of all shareholders (annual and quarterly reports, adhoc announcements, directors dealings, and reportable changes in voting rights made aware to the Company), the Management Board feels committed to comprehensive communication with the public. To our Shareholders In recent years, the Management Board has systematically expanded its communication with the capital market and especially with press relations. The management presents itself at capital market conferences and addresses the questions of analysts, investors and media representatives. Information that is relevant in judging the Group s perspectives is made public as promptly as possible. All reports and announcements are documented on our website under Here, further information is also available such as all of the necessary information related to the Annual General Meeting, the Company s Articles of Association, as well as the professional activities and other mandates of the Supervisory Board members. Risk Management Good corporate governance includes the reasonable limitation and responsible handling of all risks associated with business decisions. The Company has introduced a modern and efficient risk management system. This system is regularly subjected to a review of its effectiveness and is continuously developed further. This relates in particular to changes in the relevant national statutory requirements, both at home and internationally. Group Management Report and Management Report of PWO AG Code of Conduct The assurance of the legally compliant and ethical behavior of our employees is our central concern. For this reason, we have summarized compliance behavior guidelines into a Code of Conduct. The contents of these can be viewed at any time during normal business hours at our offices at Industriestraße 8, Oberkirch. 3. The working procedures of the Management Board and the Supervisory Board As a stock corporation under German law, Progress-Werk Oberkirch AG is subject to the relevant statutory provisions with regard to management and supervision. Its dual management and control structure consists of a Management Board and a Supervisory Board. The Management Board and the Supervisory Board base their management and monitoring of the Company on the German Corporate Governance Code in its relevant current version. Consolidated Financial Statements of the PWO Group Management Board The Management Board of Progress Werk Oberkirch AG is solely responsible for the Company s operational management and strategic development and currently consists of three members. The principles of cooperation are summarized in the Board s bylaws and the assignment of duties within the Board is documented in the schedule of responsibilities. The Management Board conducts the Company s business and bears the overall responsibility for the common goals, plans, and policies. Irrespective of the overall responsibility of the Management Board, each member acts on his own responsibility in his own field, but is advised to keep departmentalrelated interests subordinate to the overall interests of the Company. When the activities and transactions of one board member s responsibility coincide with that of one or more of the other Board members, the responsible Board member Further Information Annual Report

54 Corporate Governance Report To our Shareholders must attain the agreement in advance from the other board members involved. If an agreement is not reached, then each participating board member is obliged to bring a resolution to the entire Board. Each Board member is also obliged to bring a resolution to the board when the activities under another board members responsibility cause reason for concern and these concerns cannot be resolved by discussion with the responsible board member. Irrespective of these principles, the consent of the entire board is required for measures and transactions which are conducted by the Company or the Group which are either of particular importance or which are pose an extraordinary economic risk. The Chairman of the Board coordinates the management of the Company via the entire board. The board members are obliged to regularly inform the Chairman of the Board of any major transactions and the progress of business in their respective departments. Board meetings should take place at regular intervals, and if possible, take place at least every two weeks and on dates established far in advance. The Management Board can take decisions with a simple majority of votes cast, and by a simple majority of its members outside of the regularly scheduled meetings, as long as unanimity is not required by the mandatory statutory provisions. An abstention shall not be considered as a vote. In a tied vote, the vote of the Chairman of the Board shall be decisive. The Board will take its decisions unanimously when possible. The Management Board regularly informs the Supervisory Board in accordance with statutory requirements, in a timely and comprehensive manner, on all key issues regarding business activity and the business trends of the Company and the Group. This includes, the intended business policy and other fundamental issues of corporate planning, significant transactions that could be important for the liquidity and profitability of the Company or the Group, as well as the current profitability and earnings situation as well as the risk situation and risk management. In addition, the Management Board reports on investments, ongoing development projects, and the strategic development of the Company and the Group. In the Management Board s Rules of Procedure, a list of transactions and activities is defined that may require the prior approval of the Supervisory Board. Supervisory Board The Supervisory Board monitors and advises the Management Board in the management of the Company. Duties and responsibilities are derived from the legal requirements and the Articles of Association as well as the Supervisory Rules of Procedure. The decisions of the Supervisory Board are passed by a simple majority vote, unless the law requires otherwise. In the event of a tied vote, the vote of the chairman decides. The Supervisory Board of Progress Werk Oberkirch AG consists of six members. Twothirds of the Supervisory Board is comprised of shareholder representatives, and one third is comprised of employee representatives. Generally, the members of the Management Board participate in the meetings of the Supervisory Board unless, in individual cases, the Supervisory Board makes an alternative arrangement. 54 Annual Report 2013

55 Corporate Governance Report The Rules of Procedure provide for the formation of committees. There are currently two committees: the Personnel Committee and the Audit Committee. Their capabilities are detailed in the Rules of Procedure of the Supervisory Board. To our Shareholders The Personnel Committee prepares the personnel and compensation decisions of the Supervisory Board. During the preparation of compensation decisions, the Committee consults, if necessary, with outside consultants. Its members include the Chairman of the Supervisory Board, his deputy, as well as a further member of the Supervisory Board who is proposed for election by the Supervisory Board s shareholder representatives. It is chaired by the Chairman of the Supervisory Board. In fiscal year 2013, the composition of the Personnel Committee was as follows: Dieter Maier (Chairman) Dr. jur. Klaus-Georg Hengstberger (until May 22, 2013) Ulrich Ruetz Dr. Gerhard Wirth (since May 22, 2013) In the place of the Supervisory Board, the Audit Committee conducts the preliminary examination of the financial statements, the management report, and the auditor s audit report. In addition, there are other assigned duties of the Audit Committee which are derived from the German Corporate Governance Code. The Committee consists of the Chairman of the Supervisory Board and two further Supervisory Board representatives. The Supervisory Board may also appoint other Supervisory Board members to the Audit Committee. The chair of the Committee should not be led by the Chairman of the Supervisory Board. In fiscal year 2013, the composition of the Audit Committee was as follows: Group Management Report and Management Report of PWO AG Dr. Georg Hengstberger (since May 22, 2013; Chairman since July 24, 2013) Dr. jur. Klaus-Georg Hengstberger (Chairman until May 22, 2013) Herbert König Dieter Maier Dieter Maier is an independent financial expert as defined in Section 100 (5) AktG. The Committee chairmen report to the Supervisory Board on the deliberations and decisions of the various committees. Further details on the Supervisory Board s manner of operating and its committees particularly with regard to the number of meetings and their topics can be found in the Report of the Supervisory Board in the 2013 Annual Report. Consolidated Financial Statements of the PWO Group Further Information Annual Report

56 Corporate Governance Report To our Shareholders Additional disclosures on Corporate Governance Shareholders and the Annual General Meeting The Management Board feels a special obligation towards the shareholders. We respect the interests of our shareholders and take full notice of their rights. All shareholders are treated equally. As owners of the Company, they provide the capital for maintaining and expanding Progress-Werk Oberkirch AG s international market position and act in entrepreneurial terms. It is the aim of the Management Board to permanently strengthen the competitive position of Progress-Werk Oberkirch AG and its subsidiaries, and, simultaneously, to achieve a sustainable and long term attractive return on the capital provided. The shareholders of Progress-Werk Oberkirch AG exercise their rights at the Annual General Meeting which is held at least once a year. Every shareholder who registers in time is allowed to attend the Annual General Meeting. Shareholders who cannot attend the Annual General Meeting in person have the opportunity to exercise their voting rights through a credit institution, a shareholders association, a proxy set up by the Company, or another nominee of their choice. All documents and information regarding the Annual General Meeting are made available on our website. Diversity in the Management Board and Supervisory Board The Supervisory Board is committed to paying steady attention to diversity in the future appointment of Management Board members and especially aims to give proper consideration to women. The Supervisory Board also welcomes the intention of the German Corporate Governance Code, to define rules governing the appointment and composition of the Supervisory Board and feels fundamentally committed to this aim. From those reasons given for the deviations to code item of the German Corporate Governance Code, which are listed in the declaration of conformity, the Supervisory Board believes it is inappropriate to name specific objectives, with respect to the criteria for diversity, among others. Mandates of the Management Board Outside of the PWO Group, Bernd Bartmann serves as the Deputy Chairman of the Supervisory Board of avenit AG, Offenburg, and as a member of the Advisory Board of the Sparkasse Offenburg/Ortenau. Dr. Winfried Blümel is a member of the Board of the industry association of sheet metal forming (Industrieverband Blechumformung e.v. [IBU]) and a member of the University Council of the University of Offenburg. Karl M. Schmidhuber has currently not accepted any mandates outside of the Group. In the fiscal year under review, there were no conflicts of interest of the Management Board members. Shareholdings of the governing bodies Dr. Klaus-Georg Hengstberger, who was a member and the Deputy Chairman of the Supervisory Board until May 22, 2013, held percent of the outstanding shares of Progress-Werk Oberkirch AG at the end of fiscal year The shares are held through Consult Invest Beteiligungsberatungs-GmbH, Böblingen of which he is the majority shareholder and managing director. Dr. Georg Hengstberger, who was newly elected on the Supervisory Board on May 22, 2013, is a coshareholder of Consult Invest Beteiligungsberatungs-GmbH. 56 Annual Report 2013

57 Corporate Governance Report In the past fiscal year, the Company was made aware of a number of transactions which were subject to statutory disclosure pursuant to Section 15a of the German Securities Trading Act (WpHG). These are available on our website at To our Shareholders Stock Option Programs There were no stock-option programs or similar stock-based incentive systems in existence in fiscal year 2013, nor are there any currently in existence. Accounting and Auditing The consolidated financial statements and the consolidated interim reports of Progress-Werk Oberkirch AG are prepared in accordance with International Financial Reporting Standards (IFRS), as applicable in the EU. The financial statements of Progress-Werk Oberkirch AG are prepared in accordance with the provisions of the Commercial Code. The consolidated financial statements and the financial statements were audited by the 2013 Annual General Meeting elected auditor, Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft in Stuttgart. The Supervisory Board has agreed with the auditor that the Chairman of the Audit Committee be informed immediately of any issues during the audit for disqualification or bias issues, where these issues cannot be resolved without delay. The auditor should also report immediately to the Supervisory Board on important facts and events that arise during the course of the audit. Group Management Report and Management Report of PWO AG Remuneration Report The remuneration report explains the principles of the remuneration system for the Management Board and the Supervisory Board and discloses the remuneration of the members of the Management Board and Supervisory Board in fiscal year The remuneration report is part of the management report and is presented on pages 101 to 104 of the Annual Report. Consolidated Financial Statements of the PWO Group Further Information Annual Report

58 PWO Share To our Shareholders PWO Share: Continued favorable performance Investor relations activities In fiscal year 2013, we continued to grow and expand our active investor relations activities. As in the previous years, we presented the share, our strategy, and the prospects for the Group at a number of investor conferences and roadshows both domestically and internationally. Traditionally, one of the focuses of our investor relations activities has been the German Equity Forum. In December 2013, for the first time, we held two days of private meetings with investors and analysts in addition to our plenary presentation. What was particularly well received was our reporting on our expertise in lightweight construction. This expertise represents one of the main drivers for our current growth in new business. Also in fiscal year 2013, we have paid special attention to expanding our media relations and have reported more often on the developments in the Group outside of the scheduled reporting dates than in the past. This was met with a very positive response and contributed to our shares being increasingly discussed in the financial media. PWO share development in fiscal year 2013 The year 2013 was a solid year for the stocks of the German automotive industry and PWO was one of the winners. The DAXsector Automobile price index climbed 37.3 percent and PWO s shares gained 55.7 percent. PWO s shares also did well in comparison to the German small cap index, the SDAX, which grew 26.5 percent. The shares rose up to EUR by the end of 2013 following a closing price of EUR EUR (all data XETRA prices) at the close of As a result of their almost continuous rise they only experienced a consolidation in line with the market from the second half of May until mid-june the share marked its year low of 2013 with a closing price of EUR on the first trading day. The highest closing price, which was also a new all-time high, was reached on December 9 when the share price reached EUR The PWO share recorded its first significant price boost following the announcement of the 2012 fiscal year s preliminary results on February 14 which were very well received. The publication of first quarter results on May 6 was also rewarded with a rising share price. The consolidation period previously mentioned came to a close on July 1 upon the announcement of a global large series order from one of our key customers. The share subsequently resumed its upward trend. The share price rose more than 11 percent within days after PWO announced ahead of the IAA on September 9 that at this year s event a special emphasis would be placed on lightweight solutions since the demand in this area had been rising sharply and had already accounted for percent of incoming orders. PWO s shares recorded an even stronger price jump after reporting on new business on November 27. PWO had reported that the lifetime volume of contract for future series production previously acquired by the Group had 58 Annual Report 2013

59 PWO Share increased to more than EUR 400 million. In addition, there were also tool orders amounting to EUR 30 million. For the full 2012 fiscal year, lifetime volume of orders amounted to EUR 350 million, in addition to EUR 25 million in tool volume. After reaching a new record high, the shares ended 2013 in a period of consolidation. To our Shareholders EUR SHARE PRICE PERFORMANCE Indices are rebased on the PWO Share price of the first day of trading in Jan. 13 Feb. 13 Mar. 13 Apr. 13 May 13 Jun. 13 Jul. 13 Aug. 13 Sep. 13 Oct. 13 Nov. 13 Dec. 13 Jan. 14 Feb. 14 Continued high trading volume PWO SDAX DAXsector Automotive Source: Reuters Group Management Report and Management Report of PWO AG The average daily volume of PWO shares in 2013 was 2,576 units after 2,404 units in the previous year. After significant growth in the trading volume in recent years, the level of volume has improved by a further 7 percent in fiscal year Trading volume on the regional exchanges which in some cases experienced a sharp rise played a particularly strong role in this increase. On XETRA, however, the volumes declined overall in the reporting year. 1,714 1,597 1,619 1,728 1, Stable shareholder structure 1, , ,404 2, DEVELOPMENT OF TRADING VOLUME Source: Reuters Consolidated Financial Statements of the PWO Group There were no significant changes in the shareholder structure of Progress-Werk Oberkirch AG in the 2013 fiscal year. Our large shareholders continue to have confidence in us. We are very proud of this fact. Our shareholder base below the three percent threshold continued to expand. SHAREHOLDER STRUCTURE AS AT DECEMBER 31, % % Consult Invest Beteiligungsberatungs-GmbH, Böblingen Free Float of which Delta Lloyd N.V., Amsterdam, The Netherlands % Sparkasse Offenburg/Ortenau, Offenburg 5.88 % Source: WpHG notifications, own analyses Further Information Annual Report

60 PWO Share To our Shareholders Shareholder-friendly dividend policy PWO considers itself a value investment with a sustainable growth component. This is the reason we have been pursuing a shareholder-friendly dividend policy for many years. Our aim is to distribute 30 percent to 40 percent of the Group s net income for the period. Following our very successful capital increase in 2012, we temporarily exceeded this target payout corridor. Thus, as early as the spring of 2013, at the time of our resolution with regard to the proposal to the Annual General Meeting, we emphasized our continued optimism for the future development of our business, even in the face of a difficult industry environment. Furthermore, in line with our targeted operating development, we are also aiming for a steady and sustainable development in our dividend. Apart from exceptional years of market crisis, such as the years 2008/2009, the dividend should at least reach the previous year s level and should generally tend to rise in small but regular increments. For fiscal year 2013, a dividend payment in the amount of EUR 1.80 per share will be proposed to the Annual General Meeting. Based on the closing price of 2013, this would represent a payout ratio of 43 percent and a dividend yield of 4.10 percent. DEVELOPMENT OF DIVIDEND PER SHARE AND PAYOUT RATIO % % 35 % 34 % 42 % % 39 % 48 % 43 % Dividend per share (EUR) Pay-out ratio * * Proposal to the 91st Annual General Meeting 0.00 Stock exchange data Data as at December 31, 2013 Subscribed capital 9,375,000 EUR Total number of shares outstanding 3,125,000 Treasury shares None ISIN DE Ticker symbol PWO Market segment Regulated Market (Prime Standard) Sector Automobile Subsector Auto Parts and Equipment Place of trading Regulated market: Frankfurt, Stuttgart, and XETRA Regulated unofficial market: Berlin, Düsseldorf, Hamburg, and Munich Designated Sponsor Close Brothers Seydler Bank AG 60 Annual Report 2013

61 PWO Share Composition and development of share capital To our Shareholders The amount and composition of the share capital and the authorized capital did not change in fiscal year Detailed information on this subject will be explained in the Management Report. The development of equity is presented in detail in the statement of changes in equity which is part of the financial statements. Stock options continue to play no part in the compensation of PWO s Management Board members or its employees. From the viewpoint of management, there is only a small link between the performance of single employees and the development of the share price. As a result, stock options do not offer any additional performance incentive. Key figures of the PWO share Corporate key figures ) 2013 Revenue EUR million EBIT EUR million Group Management Report and Management Report of PWO AG Net income for the period EUR million Revenue per share EUR Earnings per share EUR Dividend per share EUR ) Book value per share EUR Valuation key figures (based on year-end share price on XETRA) XETRA share price, year-high EUR XETRA share price, year-low EUR XETRA share price, year-end EUR Market capitalization EUR million Net debt EUR million Enterprise Value (EV) EUR million Price/Sales PER negative Consolidated Financial Statements of the PWO Group Price/Book Dividend yield % EV/Sales EV/EBIT negative Some amounts deviate from the amounts reported in the consolidated financial statements for fiscal year 2012 due to adjustments of the application of IAS 19 (see note 4). 2 Proposal to the 91st Annual General Meeting. Further Information Annual Report

62 62

63 GROUP MANAGE- MENT REPORT AND MANAGEMENT REPORT OF PWO AG Group principles Report on business development Significant events subsequent to the end of the fiscal year Report on forecasts, opportunities, and risks Dependency report Disclosures required pursuant to Section 289 (4) and Section 315 (4) HGB Corporate Governance Statement pursuant to section 289a HGB Remuneration Report Responsibility Statement Management Report for Progress-Werk Oberkirch AG Group Management Report and Management Report of PWO AG Consolidated Financial Statements of the PWO Group Further Information Annual Report

64 Group principles Group Management Report and Management Report of PWO AG Group Management Report and Management Report of PWO AG On the following pages, we present the combined Management Report for Progress-Werk Oberkirch Aktiengesellschaft and for the PWO Group for the 2013 fiscal year ending December 31, The Group continues to conduct its accounting in accordance with the international IFRS accounting standards as applicable in the EU. Progress-Werk Oberkirch AG maintains its accounting in accordance with the provisions of the German Commercial Code (HGB). The composition of the scope of consolidation is described in detail in the notes to the consolidated financial statements. There have been no changes to the group of consolidated companies in the reporting year that have materially affected the net assets, financial position, or results of operations. Group principles Business model Organizational structure of the Group The PWO Group has a very lean organizational structure. The five global production locations comprise the key units of the Group. Our China business is the only business for which have we established an intermediate company. This company is based in Hong Kong and currently does not carry out any operating functions. This structure ensures quick decision making and thus facilitates the most efficient management of the Group. The hierarchies are kept very flat, even at our individual locations. The Group s main office is situated at its German location in Oberkirch. From this location, PWO AG carries out the tasks of Group management. PWO AG is managed by a Management Board consisting of three persons. A six-member Supervisory Board forms the supervisory body. Segments and locations The international structure of the Group consists of five production facilities spread over three continents. In Europe, we are represented by our German location in Oberkirch and our Czech site in Valašské Meziříčí. In the Americas we are represented by our Canadian location in Kitchener as well as our Mexican plant in Puebla. In Asia, we have our Chinese plant in Suzhou. This leads to the following breakdown of the operating business: A total of four business segments, namely, Germany, Rest of Europe, the NAFTA area, and Asia, refer to the regions where the Group operates. All locations are essentially independently responsible for acquiring their own orders and for their own operational management. They each have their own development, production, and assembly capacity and are expected to cover the Group s entire spectrum of products. PWO AG assumes a coordinating role within the Group and provides the subsidiaries the necessary assistance when needed. 64 Annual Report 2013

65 Group principles The individual companies still differentiate themselves through their different technological capabilities and through the different levels of maturity of their business processes: Within our portfolio of locations, the German, Canadian and Czech locations are operating at the highest level. In China, we started with the establishment of a local site in 2008 which is currently making excellent progress. In 2007, a local company was acquired in Mexico. Here we are gradually instituting stable production processes. The capacity in tool development is positioned within the Group according to the respective level of performance: This capacity is mainly located in Germany and in the Czech Republic. Canada has a high level of expertise in this area, but limited capacity. In China, tool development is under construction, and Mexico is currently focused on tool maintenance. Operating processes and products PWO is one of the world s leading developers and manufacturers of sophisticated metal components and subsystems in lightweight construction for automotive safety and comfort. The majority portion of our components and modules are delivered to the premium automotive segment. We are both directly and indirectly present in many volume models through our business with Tier-1 customers. Group Management Report and Management Report of PWO AG We are an outsourcing partner to our customers and we manufacture customized solutions in large series in some cases, by the millions. We cover the entire value chain from development and tool design to series production. Our reputation is based on our superior innovation, absolute delivery reliability, and zero-defect quality. Our technological leadership in product and process development as well as in tool development represents the basis of our current market position. Every innovative product solution requires components that must be manufactured with a material-appropriate forming process. Through the development of the relevant tools, we achieve the highest quality of parts and production speed, all at a competitive cost. In our Company history reaching as far back as 1919, we have built the highest expertise with regard to the behavior of steel during the cold forming process and in the use of sophisticated joining technologies. Today, we produce components and subsystems made of steel including high-strength, lightweight steels, stainless steel, and aluminum. These serve to increase the comfort and safety of the automobile and exhibit a sustained level of growth that outpaces the automotive industry as a whole. Demand for greater comfort and greater safety in all vehicle categories and in all sales regions is rising inexorably among car buyers. Consolidated Financial Statements of the PWO Group We have positioned ourselves early in the field of lightweight solutions and now have an excellent reputation in this field. The majority of our new business volume during the reporting year already stemmed from components in lightweight construction. This is our contribution to the requirement of vehicle manufacturers to reduce the weight of their vehicles to meet the upcoming and increasingly demanding international requirements for avoiding CO 2 and producing vehicles with increasingly lower emissions. Lightweight construction solutions made of high-strength and ultra-high strength steel sheets, in some cases, require new forming concepts in order to manufacture these products at a high speed, with high precision, and at a competitive cost. Further Information Annual Report

66 Group principles On the one hand, this allows weight reduction to be achieved through the substitution of classical deep drawing steel with high-strength steel grades. On the other hand, significant weight savings can be achieved through a load-optimized design of components, even when using classical deep drawing steels. In the case of cross-members, this has helped us to realize weight reductions of 50 percent while achieving higher performance and maintaining the same level of cost. Various measures have led to the ability to make additional features possible at the same time. Our revenue is spread over three strategic product areas as shown in the graph below. Group Management Report and Management Report of PWO AG REVENUE IN FISCAL YEAR 2013 (100 % = EUR million) 46 % Structual components/subsystems for vehicle bodies/chassies 23 % Mechanical components for electrical/electronic applications 31 % Safety components for airbags, seats, and steering Mechanical components for electrical/electronic applications and safety components for airbags, seats, and steering are mainly supplied to international Tier-1 suppliers, who in turn, supply these as part of their own systems to various automotive manufacturers for various vehicle models. Structural components and subsystems for vehicle bodies and chassis are generally modelspecific and are produced directly on behalf of the automotive manufacturers. Here too, however, the breadth of applications continues to increase due to the increased penetration of platform concepts upon which a variety of vehicle models of one manufacturer are based. With this approach, we secure our independence of the commercial success of single vehicle models and can replace expiring series contracts with follow-up contracts for diverse product solutions. This gives us the greatest possible entrepreneurial flexibility and allows us to concentrate on our attractive growth opportunities. In the area of electric motor housings and air suspension components, we see ourselves as a global leader. We are faced with different competitors in each of our three product areas. These competitors are both global corporations with sometimes a variety of other activities, and also specialized providers. In principle, competitive pressure in the automotive industry is always extremely high. Sales markets Our locations are in markets where a high number of premium vehicles are being produced today. These are the only markets possessing high enough and sustainable enough outsourcing volumes from the automotive manufacturers and Tier-1 suppliers to make it economically feasible to carry out our investment in proprietary production facilities within our capital-intensive business. 66 Annual Report 2013

67 Group principles We also routinely work on a project basis with local partners to supply our customers global orders on a global basis. Hence, we cover all of the key production sites of our customers throughout the world. This is how we have been able to position ourselves among a small group of providers who deliver globally and simultaneously protect our own resources. External factors influencing our operations The main external factors affecting PWO s business include the changes in the macroeconomic environment and industry-specific economic activity. These are explained below in the section titled Macroeconomic Environment and in the section The International Automotive Industry Environment. Other external factors and their effects are presented in the Risk Report. Among these are the continued price pressure, which is typical for our industry, the call order behavior of our customers, and changes in material prices and exchange rates. Control system The focus of our corporate management is gaining additional market share in Europe and in the global markets while strengthening the earnings and financial position of the Group. This is how we intend to achieve sustainable and above-average increases in revenues and earnings in comparison to the development of the respective market. Group Management Report and Management Report of PWO AG The Group s management is fundamentally aimed at limiting order-related risk as well as cyclical risk while preserving all available opportunities. Therefore, we have built a broad product spectrum in order to ensure that we remain independent of individual single orders and of the success of individual vehicle models. Additionally, we maintain a balanced revenue structure with a high number of smaller orders and large contracts with staggered points in time for their respective start-ups and phase-outs. Thus, we can ensure high capacity utilization while at the same time limiting the risk of follow-up orders. We strive to achieve about a third of our revenues in each of our three strategic product areas. After successfully acquiring new orders for the production of cross-members, the area of structural components and subsystems for vehicle bodies and chassis currently has a higher share of revenues. This portion, however, will decline again in the next few years since we have just recently been awarded significant new orders for our other two product areas. As an operating performance indicator, PWO uses primarily EBIT (earnings before interest and taxes), free cash flow (cash flow from operating activities less cash flow from investing activities less interest paid, plus interest received) and gearing (net debt, i.e., interest-bearing liabilities less cash and cash equivalents, as a percentage of equity). Consolidated Financial Statements of the PWO Group Our management aims to steadily increase revenues and at the same time, continually improve the EBIT margin. In the future, our net debt should see a further decline, although our preparations for future growth may require upfront investment in individual years. Beyond the development of net debt, we aim to successively reduce our gearing as a result of rising profits and increases in retained earnings. Further Information Annual Report

68 Group principles Report on business development Research and development PWO considers itself as an outsourcing partner to its customers. The development and production of components and subsystems is solely provided on an individual basis on behalf of our customers. Accordingly, a majority of the product development costs arise in the context of customer projects. These expenses are either partially reimbursed directly at the conclusion of a defined developmental phase or paid for through the prices for the parts in the course of the series production. For the Group s proprietary purposes, the research and product development activities are of minor importance. The use of third-party services for these purposes is also immaterial. Group Management Report and Management Report of PWO AG Report on business development Macroeconomic environment In 2013, the global economy experienced stabilization overall, especially during the second half of the year. After years of recession, the crisis countries of the euro area have succeeded in taking the first steps towards an economic recovery. The International Monetary Fund (IMF) expects a total of 3.0 percent real growth in the world economy in 2013, which is slightly below the level of the previous year. Among the industrialized nations, the development in the United States was particularly weaker than expected, while the recession in the euro area has slowed. According to preliminary calculations by the German Federal Statistical Office, the real gross domestic product in Germany in 2013 increased to 0.4 percent (2012: 0.7 percent). Thus, the total economic output only rose slightly for the second consecutive year. This was due to a lack of foreign demand from the euro area and other important industrial and emerging countries in addition to a weak start in the year caused by weather conditions. This also dampened the willingness of domestic companies to invest. The international automotive industry environment As in the previous year, the international automotive industry can look back on very different regional developments in fiscal year The ongoing sales boom in China and a strong, vibrant automotive industry in the USA were offset by continued, albeit weaker, declines in Europe. The Russian car market also showed weakness. Given our favorable position in the current growth markets of China and North America, we were able to benefit from the latter s development. In China, car sales in the whole of 2013 exceeded the previous year s level by nearly a quarter (+23 percent) and rose to a total of 16.3 million new vehicles sold. As a result, China has become the largest automotive market in the world. In the USA, 7.6 percent more light vehicles (cars and light trucks) were sold than in the previous year for a total of 15.6 million units. Thus, 2013 marked the best year since 2007 and for the first time the level seen before the outbreak of the international financial crisis was reached. Compared to the 2009 crisis, the U.S. market has even increased its sales of new vehicles by about 50 percent or more than 5 million units. German manufacturers have increased their sales of light vehicles in the U.S. market in 2013 by 5 percent to 1.3 million 68 Annual Report 2013

69 Report on business development units and have thus achieved a new sales record. This represents an increase of around 75 percent in comparison to 2009, when these manufacturers sold 763,000 light vehicles. Of the light vehicles sold by German manufacturers in 2013, 20 percent (260,000 units) were manufactured in the USA. When production from Mexico is included, the total from the NAFTA region amounts to 35 percent (470,000 units). A total of 50 percent of U.S. sales stem from the production at German locations. After Great Britain, the United States was the second most important export partner for the German auto makers and had a total share of 16 percent of the total German car exports in In Russia, there were indications of a revival at the end of 2013, but in the end there was an overall decline recorded of about 5 percent to approximately 2.8 million units. Western Europe also showed signs of recovery at the year s end. December s growth rates in automotive sales were strong nearly across the board and with growth of almost 13 percent made a return to a double-digit growth rate for the first time in almost four years. In the previous crisis countries of Greece, Spain, and Portugal, sales even surged well above average. Whereas in the first half of 2013, new car sales in Western Europe were still nearly 7 percent below the level of the previous year, in the second half of the year, demand increased by 4 percent. For the full year of 2013, the Western European passenger car market achieved a volume of almost 11.6 million new cars but still fell short of last year s level by about 2 percent. The new EU member states had car sales of 754,100 units for the full year 2013 and thus were in line with last year s level. Group Management Report and Management Report of PWO AG According to the German Federal Motor Vehicle Office (Kraftfahrtbundesamt) a total of 2.95 million new cars were registered in Germany in After a total of 3.08 million new car registrations in the previous year, this represents a decline of 4.2 percent. In 2012, sales had declined by 2.9 percent. A total of about 5.45 million cars were produced in Germany. This represents slight growth of one percent over the previous year. In 2012, production was down 4 percent. During the full year of 2013, domestic passenger car production benefited once again from foreign demand 77 percent of the cars built in Germany were exported. A total of 75 percent of the automotive value-added in Germany is attributed to suppliers. Business development Order situation In the course of this reporting year, we were also able to win numerous new orders. The lifetime volume acquired in 2013 for future series production in the PWO Group rose to EUR 425 million. Additionally, the corresponding tool volume amounted to around EUR 31 million. In fiscal year 2012, we had won series contracts with a lifetime volume of EUR 350 million in connection with tool volume of EUR 25 million. This underscores our positive expectations regarding the medium-term revenue growth of the Group. Consolidated Financial Statements of the PWO Group PWO is currently benefiting significantly from the rapidly climbing customer demand for lightweight solutions. A vast majority of the new business volume in 2013 was related to such components. Over the past several years, we have developed unique process know-how in this area. This know-how includes the processing of high-strength steel sheets using deep drawing and rolling technology and also includes the ability to adapt these processes to the local conditions of our five production locations and thus allow for global production at competitive costs. Further Information Annual Report

70 Report on business development One example of this is a large order we have received from an important customer for the production of a new generation of housings for electric motors. The challenge here was to implement the necessary functions using less material and produce a lightweight and extremely cost effective solution at the highest production speed. We were also commissioned for the supply of components for air suspension systems in lightweight construction for use in a passenger car of a pioneer in the field of electric vehicles. This is where our process know-how in the field of aluminum deep drawing and rolling technology is put to its full use. Group Management Report and Management Report of PWO AG In addition, the Group recorded a number of large orders for lightweight seating components, where the processing know-how for high-strength thin steel sheets plays a central role. Our Czech location, in particular, will benefit from these orders and we have expanded this location accordingly. We were also very pleased with our ability to win another major contract for our Chinese location for the production of cross-members. In the area of air suspension components for passenger cars and SUV s, where we are the global leader, we also received a number of new orders and were able to strengthen our market position. The key reason for this success continues to be our innovative strength, which enables us to provide optimal solutions in terms of weight, space utilization, functionality and cost. Our global presence combined with our sophisticated logistics concepts ensures efficient, worldwide delivery to our clients locations. Most of the new orders have a maturity of five to eight years and, to a large extent, will start in These orders are distributed across all production locations and will help secure these locations future utilization and growth. Financial situation Results of operations INCOME STATEMENT Selected data (in EURk) 2013 in % of iin % of total output ) total output Revenue 377, % 358, % Total output 384, % 366, % Cost of materials 203, % 197, % Staff costs 104, % 97, % Other operating expenses 36, % 35, % EBITDA 43, % 40, % EBIT 22, % 21, % Net income for the period 13, % 10, % 1) Restated due to the effects of the application of IAS 19 The PWO Group s business developed favorably in fiscal year Despite the weakness experienced by the European car market, revenues rose 5.4 percent to EUR million (p/y: EUR million). Total output increased 4.8 percent to EUR million (p/y: EUR million) as changes in finished goods and work-in-progress and other own work capitalized during the reporting year were lower than in the previous year. EBIT increased by 5.0 percent 70 Annual Report 2013

71 Report on business development to EUR 22.3 million (p/y: EUR 21.3 million). Despite a higher depreciation and amortization rate, the EBIT margin stabilized at 5.8 percent (p/y: 5.8 percent). The development of the exchange rates of the USD and CAD against the Euro prevented an even greater increase particularly in relation to revenues and total output and to a limited extent related to earnings Group EBIT The Group s positive development was distinguished by a sharp growth in revenues at most of our international locations, which in turn, significantly increased their earnings or greatly reduced their losses. Here, the permanent price pressure in the automotive industry dampened the increase in revenues which would have typically resulted from higher volumes. 0.1 EBIT (in EUR million) German site International sites Consolidation effects Group Management Report and Management Report of PWO AG In Oberkirch, which continues to be by far our largest location, growth remained below the Group s average due to market conditions and EBIT declined in absolute terms. Details concerning our regional development are shown in the following section describing the segments. Owing to changes in the product mix, we were able to achieve a slight improvement in our cost of materials ratio which declined to 53.1 percent (p/y: 54.0 percent). The increase in the staff costs ratio to 27.3 percent (p/y: 26.5 percent) was mainly due to increased labor costs in Germany related to collective wage agreements. On the contrary, our international locations we are able to record some significant reductions in the staff costs ratio. Previous investments over the years have led to a slight rise in our depreciation and amortization ratio to 5.5 percent (p/y: 5.2 percent). In the future, this ratio is likely to increase at a rather moderate rate since the large-scale initial investments in our international expansion will decline. At EUR 5.6 million (p/y: EUR 6.3 million) the interest expenses remained significantly below the previous year s level. Lasting relief came from low interest rates, which makes it possible to renegotiate expiring fixed interest rates at significantly better conditions. Consolidated Financial Statements of the PWO Group Particularly pleasing was the decline in the tax rate to 21.2 percent (p/y: 30.1 percent). This was primarily the result of the advantageous tax situation at our Czech location due to the use of tax-loss carryforwards and other tax credits. Overall, the Group s net income for the period increased 26.0 percent in fiscal year 2013 to EUR 13.1 million (p/y: EUR 10.4 million). Earnings per share rose by 16.3 percent to EUR 4.20 (p/y: EUR 3.61). Due to the capital increase in May 2012, the total number of shares in the previous year was lower. Further Information Annual Report

72 Report on business development Segments In accordance with the management of the Group, our production facilities provide the basis for our segment reporting, broken down by regions. The segments are determined according to the location of the Group s assets. The revenues are allocated on the same basis. The following discussion is based on the external revenue of an individual segment. Group Management Report and Management Report of PWO AG SEGMENT GERMANY Selected data (in EURk) A significant portion of deliveries and services between the individual locations represents parts deliveries between the locations since, in the context of global projects, production capacity for components can be flexibly utilized. In Germany, the Czech Republic, and in China, tools for other locations are also produced. For the first time, the year under review also includes tool deliveries invoiced from China to other locations in % of in % of total output ) total output External revenue 237, % 234, % Total output 255, % 251, % EBITDA 26, % 29, % EBIT 14, % 17, % Net income for the period 7, % 10, % Investments 15, , ) Restated due to the effects of the application of IAS 19 The PWO Group headquarters are allocated to the segment Germany. This is where the parent company, Progress-Werk Oberkirch AG, is situated and conducts the operations at the Oberkirch location. Revenues in the reporting year increased 1.1 percent. The segment s EBIT fell to EUR 14.0 million (p/y: EUR 17.8 million), net income declined to EUR 7.2 million (p/y: EUR 10.6 million), whereby the tax burden had increased significantly to 35.9 percent (p/y: 28.5 percent). The profitability of the Oberkirch location was impacted by the weakness of the European automotive market as well as by the significantly higher energy and staff costs occurring in fiscal year In addition, higher maintenance expenses for tools and equipment as well as start-up costs for numerous new projects also had a negative impact. Some of these factors are non-recurring items. For other factors countermeasures were taken and their effects were increasingly visible as the year progressed. This included a reduction in inventories by the end of the reporting year. What proved to be a relief to our energy costs was the commencement of operation of our cogeneration unit. In addition, we were able to attain a reduction in our personnel costs. 72 Annual Report 2013

73 Report on business development 2013 in % of total output 2012 in % of total output External revenue 40, % 34, % SEGMENT REST OF EUROPE Selected data (in EURk) Total output 46, % 40, % EBITDA 8, % 5, % EBIT 5, % 3, % Net income for the period 5, % 2, % Investments 3, , Our location in the Czech Republic, which forms the Rest of Europe segment, was able to benefit once again from start-ups and ramp-ups of series productions and from a stronger tool business in fiscal year Meanwhile, we are successfully supplementing the weaker periods of utilization in tool development with orders from third parties with whom we are not in competition with in our series business. This location now has very stable production processes and has achieved a high level of technological capability. This helped the EBIT margin to increase again over the previous year. We also expect the future level of profitability at this location to be above the average for the Group. This location will undergo significant expansion in the coming years. Group Management Report and Management Report of PWO AG In the reporting year, EBIT grew to EUR 5.4 million (p/y: EUR 3.6 million). The net income for the period of the Rest of Europe segment amounted to EUR 5.7 million (p/y: EUR 2.5 million) and was even slightly higher than EBIT. This stemmed from the fact that the positive tax effects more than offset the financing costs. We were able to make full use of existing taxloss carryforwards during the year. Additional tax credits are still available in % of total output 2012 in % of total output External revenue 86, % 82, % Total output 88, % 83, % EBITDA 8, % 7, % EBIT 3, % 2, % SEGMENT NAFTA AREA Selected data (in EURk) Consolidated Financial Statements of the PWO Group Net income for the period 1, % % Investments 9, , In the NAFTA area segment, our two locations in Canada and Mexico are combined. After two years of high growth we were also able to profit from the market s positive development and thus increase revenues in the reporting year as well as improve our earnings. The Canadian location made a considerable contribution to this development. This location benefited from further start-ups and ramp-ups in series production. In local currency, the series revenues climbed 19 percent. Further Information Annual Report

74 Report on business development After increasing 51 percent in the previous year, revenues at our Mexican location remained unchanged in fiscal year EBIT also remained close to last year s level. Series revenues, based on local currency, increased 9 percent. The NAFTA area segment generated a total EBIT of EUR 3.6 million (p/y: EUR 2.6 million) in the reporting year. The net income for the period was EUR 1.7 million (p/y: EUR 1.0 million). SEGMENT ASIA Selected data (in EURk) 2013 in % of total output 2012 in % of total output External revenue 12, % 6, % Total output 14, % 7, % Group Management Report and Management Report of PWO AG EBITDA % 1, % EBIT % 2, % Net income for the period 1, % 3, % Investments 3, , The segment Asia consists of our location in China. We have now reached a level of revenue which is nearing the break-even level and in the reporting year we doubled our revenues to almost EUR 13 million. EBIT in 2013 amounted to EUR 0.8 million (p/y: EUR 2.5 million). Positive EBIT was achieved in the fourth quarter. Special effects have supported this development, but even without these effects the break-even level would have been achieved in the fourth quarter. This allowed us to dramatically reduce the previous start-up losses. The net income for the period was EUR 1.5 million in 2013 (p/y: EUR 3.4 million). Given the well-filled pipeline of new series orders and further increases in the tool volumes of other Group companies, we are pleased with the development of this location. This is especially true with regard to the high level of quality this location has achieved and its rapid expansion of technological capabilities. Therefore, we will invest further in the education and training provided in China. A positive accompaniment to this is the loyalty of our employees and the very low level of fluctuation compared to local standards. REVENUES IN FISCAL YEAR 2013 (100 % = EUR million) 11 % Czech Republic 11 % Mexico 38 % Germany 12 % Canada 3 % China 25 % Export share of German site 74 Annual Report 2013

75 Report on business development Net assets The PWO Group s total assets have grown to EUR million (p/y: EUR million) during the reporting year. This primarily resulted from continued investment in our further expansion. Property, plant, and equipment experienced a particularly strong increase to EUR million (p/y: EUR million). However, after the high amount of investments made in the previous year, a lower level of investments was necessary in the reporting year, as expected, to ensure the future growth of the Group. As shown in the segment reporting, investments declined to EUR 32.0 million (p/y: EUR 41.2 million). Depreciation and amortization amounted to EUR 21.2 million (p/y: EUR 18.9 million). In the reporting year, there were several new projects to expand capacity at several locations simultaneously. As in the previous year, our largest location in Oberkirch incurred the highest level of investment with EUR 15.4 million (p/y: EUR 19.6 million). A new 1,250-ton press was put into operation at this location. This is not only one of the largest pieces of machinery in the PWO Group but it also allows very complex forming of high strength steels. One of its main features is its enormous flexibility. Last but not least, it achieves a significantly higher level of output than conventional presses due to the modern servo-drive technology. The result is a noticeable increase in productivity. Group Management Report and Management Report of PWO AG One focus of our investments was the new cogeneration plant, which we put into operation in order to optimize electricity costs and to ensure sustainable energy production. Along with the usual recurring investments in manufacturing facilities, we also began expanding various buildings. We have lowered the investments at our Czech Republic location to EUR 3.1 million (p/y: EUR 5.1 million). The focus here was the acquisition of additional land. Through purchasing this property, we have closed a property gap between the previous areas. Through the upcoming expansions we have planned, we can now build an optimal internal logistics system. In the NAFTA area, investments remained virtually unchanged at EUR 9.7 million (p/y: EUR 9.5 million). Only a limited amount of resources were necessary to expand the production facilities and to prepare for the expansion of the logistics center at our Canadian location. Mexico accounted for the larger portion of the investments made in the NAFTA area. There we are gradually modernizing the machinery in line with existing order requirements and thus increasing this location s performance. We have also initiated the operation of a new 1,250-ton press at this location. Additionally, work has begun on the construction of a new logistics and production building. Consolidated Financial Statements of the PWO Group In China, after the high level of investment in the previous year, the investment budget was reduced from EUR 7.1 million to EUR 3.9 million in the year under review. Investment in a new 600-ton press, which had been initiated in the previous year, was concluded and the investment in a further press of this type as well as an investment in manufacturing facilities, including a laser welding system, has also been initiated. Current assets recorded a visible increase to EUR million (p/y: EUR million) in the fiscal year However, this did not result from individual major changes, but affected almost all of the items under current assets and primarily reflected usual business development. Further Information Annual Report

76 Report on business development Financial position In the past fiscal year, there were no substantial changes to the PWO Group s balance sheet structure. Some previous year amounts deviate from the figures initially reported for fiscal year This was due to adjustments which were necessary as a result of the adoption of IAS 19 (revised). For fiscal year 2013, this resulted in only some minor effects on earnings. These adjustments are explained in the notes in detail. Group Management Report and Management Report of PWO AG The PWO Group possesses a healthy balance sheet with a solid equity ratio of 34.2 percent (p/y: 34.1 percent). The high capital intensity of our business, the up-front costs in recent years for our portfolio of international locations, and the aftermath of the economic and financial crisis of 2009, have resulted in net debt in the reporting year of EUR 99.7 million (p/y: EUR 90.5 million). The gearing in the reporting year stood at 97 percent (p/y: 95 percent), which is above the Group s strategic range of 60 to 80 percent. We are striving to bring the amount of gearing back into its target range as soon as possible. For an explanation of the principles and objectives of our financial management, please refer to the notes. Also the maturity, currency, and interest rate structure of our liabilities has not changed fundamentally in the course of the year and there were no significant financing activities. The largest single item is still interest-bearing borrowings, which totaled EUR million (p/y: EUR 98.3 million). Of this, EUR 47.7 million (p/y: EUR 48.3 million) were attributable to non-current liabilities and EUR 60.0 million (p/y: EUR 50.0 million) to current liabilities. As in the previous years, these borrowings were exclusively owed to banks and leasing companies. The increase in borrowings during the reporting year arose from financial requirements related to the Group s growth and for investments to the extent these requirements were not covered by the proceeds from the cash flow. As per the reporting-date, there was only a rise in non-current borrowings in the past fiscal year. We continually review opportunities to optimize our funding structure. We have recently stepped-up our review so that we may secure the currently favorable level of interest rates over the long term. Generally, we finance our investments using an appropriate combination of short- and longterm loans. Credit conditions are improving continuously to the extent that expiring longterm fixed interest rates are being refinanced by more favorable terms in the current low interest rate environment. Beyond the liabilities to banks, other significant sources of funding include the provisions for pensions, which were unchanged compared to the previous year and amounted to EUR 41.0 million, and trade payables of EUR 24.7 million (p/y: EUR 22.1 million). The development of trade payables is closely correlated to the Group s growth and was used to fund a portion of the growth-related increase in current assets. On the reporting date there significant rises versus the prior year in inventories and, to a lesser extent, in receivables and other assets. Total liabilities of the PWO Group increased in the reporting year to EUR million (p/y: EUR million). In particular, the liabilities of the Asia segment rose to EUR 42.3 million (p/y: EUR 32.9 million) due to the successful expansion of our Chinese location in the reporting year and an almost doubling of the site s revenues. Ensuring sufficient liquidity for the PWO Group is always at the center of our financial management. We have sophisticated liquidity management; major bank account balances are scheduled each day to maintain a liquidity reserve above the ongoing payment obligations. We also strive to limit the utilization of short-term credit lines as much as possible and therefore, these are netted against any excess liquidity. 76 Annual Report 2013

77 Report on business development In the reporting period, the cash flow from operating activities grew to EUR 30.4 million (p/y: EUR 26.6 million). This was partly due to the higher net income for the period of EUR 13.1 million (p/y: EUR 10.4 million). Depreciation and amortization increased to EUR 21.2 million (p/y: EUR 18.9 million). Other non-cash expenses/income totaled EUR 0.9 million, whereas this item had resulted in a cash outflow of EUR -5.8 million in the previous year. Cash flow from investing activities amounted to EUR 24.7 million in the reporting year (p/y: EUR 33.3 million). The investments were explained in detail in the previous chapter on net assets. The deviation between the investment volume mentioned in that chapter and the cash flow from investing activities resulted from lease financing. Positive free cash flow of EUR 1.6 million was generated after interest paid and received of EUR -4.2 million (p/y: EUR -4.5 million). In the previous year, negative free cash flow of EUR 11.2 million was recognized as a result of significantly higher cash outflows for investing activities. Including dividend payments of EUR 5.0 million (p/y: EUR 3.5 million) and the repayment of borrowings totaling a net EUR 3.1 million (p/y: EUR 2.1 million), the net change in cash and cash equivalents during the reporting year amounted to EUR -6.5 million. In the previous year, in addition to the items already mentioned there was a cash inflow of EUR 22.0 million from the capital increase in May This resulted in a change in cash and cash equivalents of EUR 5.2 million. Group Management Report and Management Report of PWO AG Financial performance indicators During the reporting year we were again able to increase revenues and EBIT in line with our long-term strategic planning. With Group revenues of EUR million, we have nearly reached our target of EUR 390 million given for the 2013 fiscal year. Furthermore, we are pleased with our EBIT of EUR 22.3 million, which was close to our EBIT forecast of approximately EUR 23.0 million. Free cash flow was slightly positive, as planned. In contrast, higher net debt and an increase in the gearing ratio during the reporting year meant that we could not achieve our aim of attaining stable net debt and a reduction in gearing. For further information on the development of the financial performance indicators during the reporting year, please refer to the previous chapter on the results of operations, net assets, and financial position. Consolidated Financial Statements of the PWO Group We will propose a dividend for the past fiscal year of EUR 1.80 (p/y: EUR 1.60) per share to the Annual General Meeting. This corresponds to a total dividend distribution of EUR 5.6 million (p/y: EUR 5.0 million) and a payout ratio of 43 percent of the Group s net income for the period (p/y: 48 percent). Thus, we continue unreservedly with our shareholder-friendly dividend policy, which is described in the chapter on the PWO share in this Annual Report. New business development is essential for the future growth of the PWO Group. Due to the long-term nature of our business, current contracts largely determine our pace of expansion in the years to come. Only a very small percentage of our annual production volumes and revenues results from orders awarded on short notice which begin quickly after the contract s award. In the course of the reporting year, we acquired a lifetime volume for future series production of more than EUR 425 million (p/y: EUR 350 million). In addition, the corresponding tool volumes amounted to EUR 31 million (p/y: EUR 25 million). Further Information Annual Report

78 Report on business development Non-financial performance indicators Product and process innovation We have earned a reputation for high innovative strength in the areas of product and process development. This provides the foundation necessary for securing and expanding our competitive position in an industry characterized by heavy differentiation and in which development services are to be increasingly provided by suppliers. Group Management Report and Management Report of PWO AG We are the development partners of our customers when it comes to new and creative solutions and promote ourselves on this basis for future tasks even before the series contracts are up for bidding. We benefit from the extensive expertise in the area of steel sheet forming and joining technologies we have gained though offering diversified applications in our broad product range which strengthens our unique market position. Additionally, we have positioned ourselves early enough to benefit from the trend towards lightweight construction. We certainly expect increased competition in the future from other technologies such as the hot forming of steel sheets, plastic injection molding, or in the use of other materials such as carbon-fiber-reinforced-plastics (CFK). At the same time we are convinced that volumes that could be lost to these other technologies, will be more than compensated for by trends shifting in favor of our portfolio. For example, we see a strong trend away from forged and cast components to those made of steel sheets. We have already earned an excellent position in the market for these types of solutions. This also applies to the use of high-strength steels and high-quality joining and bonding technologies for load-optimized components and subsystems. This allows considerable reductions in weight to be achieved through the use of modern laser welding or gluing processes. We inextricably link product innovation to process innovation, even during the series production period. The necessary tools for the entire production process are already conceived in the development phase of the product solution. This is how we achieve innovations which play a significant part in the high efficiency of the series production and therefore contribute to our sustainable earnings strength. Quality management Our zero-defect philosophy represents a core aspect of our self-image. This philosophy permeates throughout the Group and includes both the production and the administration areas. Stable processes and integrated, automated quality tests throughout the entire value chain are what set us apart. In production, we attach importance to the permanent reduction of errors. In terms of customer deliveries, we provide the most far reaching zero-defect quality possible. This underpins our reputation as a leading provider offering the utmost in dependability and delivery reliability. In addition, as a manufacturer of safety components, we are especially committed this level of quality regardless of the customer s requirements. 78 Annual Report 2013

79 Report on business development Corporate responsibility We consider ourselves corporate citizens and, as such, are committed to acting responsibly, even beyond compliance with the law. This applies to our international locations as well as to our German domestic location. The goal is to shape the interactions between employees, customers, business partners, and the social environment overall, in a manner that avoids or restricts any impairments to social interests and the environment resulting from our business activities. This also includes comprehensive occupational safety. We foster a corporate culture that places the appreciation of our employees at the center. This is a core aspect of our executive development program. We let our employees know that they are the key to our success. We consistently promote their voluntary social commitment. In the past fiscal year, as in the previous year, over 80 percent of our trainees engaged in voluntary activities. The Group itself is also socially involved in a variety of ways. Our responsibility towards our employees includes occupational safety, which is as comprehensive as possible, and which we provide through the appropriate aids. We also direct our efforts at protecting the environment as extensively as possible. For example, for many years now, Progress-Werk Oberkirch AG has been certified in accordance with the Directive DIN EN ISO The key processes to protect the environment that are required by this Directive are also implemented at our subsidiaries. Group Management Report and Management Report of PWO AG In addition, we have modernized the heating system of our German location and, in the course of doing so, have initiated the operation of a cogeneration unit. On the one hand, this allows us to save energy and costs and combat rising energy costs and, on the other hand, it allows us to make a contribution to CO 2 reduction. Currently, we are exempt from the apportionment for the funding of electricity generation from renewable energy sources (EEG apportionment). Should this exemption no longer be possible in the future due to changing circumstances, this would result in only a minor additional burden. Our new cogeneration plant has achieved roughly a 30 percent overall improvement in energy balance compared to the previous heating system. The CO 2 emissions are reduced by about 50 percent. After commissioning the cogeneration plant in the fall of 2013, 13 percent of the total power consumption was self-generated electricity. Consolidated Financial Statements of the PWO Group Further Information Annual Report

80 Report on business development Employees Group Management Report and Management Report of PWO AG NUMBER OF EMPLOYEES IN THE GROUP BY LOCATION AS OF DECEMBER 31 (incl. temporary employees) Germany Canada Czech Republic China Mexico Trainees ,451 1, , , The development in our employee numbers generally guides the development of our revenues. New employees are hired and trained in advance of extensive series start-ups. This in turn, ensures that the launches are both time and cost efficient. However, depending on the maturity of a location s business processes, this tendency varies considerably. In fiscal year 2013, we had only a moderate increase in the number of employees in the overall Group. With our current and future growth in mind, we recorded significant growth at our Czech and Chinese locations. In Germany, we are focused on strengthening selected key functions Total 3,103 2,916 2,664 2,288 In Canada, the rate of increase in the number of employees was reduced after two years of rapid growth. The same applies to the development in the number of employees in Mexico. At this location, it is still necessary to provide essential quality training for improving the performance quality of the location. The aim is to promote the most talented employees and tie these employees to the PWO Group for an extended period of time and further reduce the fluctuation in Mexico. Traditionally, we have been very committed to the training of young people in order to give them a chance to enter the workforce and to ensure that the Group has skilled workers in the future. We offer training positions at all of our international locations in addition to those we offer at our home base in Germany. A particular focus of these positions is China, where our training ratio stands at 15 percent. Through this high level of commitment, we provide our young employees with the expertise necessary for our production processes and provide them with training that is close to the high level of the German standards. To make training at the PWO Group even more attractive, we now allow gifted and committed young people to go abroad during their training period to widen their perspective. We demonstrate our employee appreciation in a very concrete manner via our day-to-day personnel management. For instance, we have made various models available for flexible working hours and also for part-time work. Our orientation program regularly receives a very positive response from employees. This program is for new employees and for those transferred within the Company, returning from abroad, or returning to PWO following a private career break. In addition, our programs for managing demographic change and health management are gaining in importance. Lastly, we continue to expand our innovation management. We give room for the development of the creative and innovative ideas of our employees for shaping their own work environment especially those ideas which are beyond product and process development. 80 Annual Report 2013

81 Report on business development In 2013, we have invested extensively in further training. In the reporting period, the expenses for education and training amounted to a total of EUR 3.0 million (p/y: EUR 2.8 million). Our employees reward us for our efforts through their loyalty to the Company. In fiscal year 2013, the turnover rate was only 2.8 percent (p/y: 5.0 percent). Overall assessment of business development and position of the Group The PWO Group achieved positive overall business performance in fiscal year The success of our internationalization is now becoming increasingly visible: Meanwhile our locations abroad are contributing significantly to the Group s increases in revenues and earnings. This allows us to benefit from the differentiated growth in the automotive markets on a regional basis and more than compensate for the current weakness in Europe. This will continue in the future, since the very encouraging growth in new business seen in the reporting year is strongly related to our international business. In terms of our medium-term growth, we are in excellent shape with recognized innovative strength, high expertise in lightweight construction, and highly efficient production processes. Group Management Report and Management Report of PWO AG Further Information Consolidated Financial Statements of the PWO Group Annual Report

82 Significant events subsequent to the end of the fiscal year Report on forecasts, opportunities, and risks Significant events subsequent to the end of the fiscal year No events of significant importance with regard to the net asset, financial position, or results of operations have occurred after the end of the fiscal year which require reporting. Report on forecasts, opportunities, and risks Group Management Report and Management Report of PWO AG Risk report Risk philosophy and risk policy The basic principles of our risk philosophy are to avoid risks that could jeopardize the Company s existence, and limitation of and coping with strategic and operational risks. Risks that are not inherent in our operating business are avoided. This is particularly true for the financial area. For example, no open positions are entered into; hedges are only carried out for business operations. Risk management is viewed as the basis for optimizing the Group s opportunity and risk profile. Thus, PWO s risk philosophy also strives to recognize market opportunities. Full compliance with the relevant statutory provisions is a prime concern. Our value-based business model and our operational and commercial processes are set up with this in mind. The focus of our risk policy is to preserve and expand our innovative abilities in product and process development and ensure our global delivery capabilities. Thus, we meet our customers main requirements when selecting their strategic partners. Our diversified product range, the strategic limitation of the share of individual bulk orders, the use of standardized machinery and equipment, and the organization along standardized and continuously developed processes, all serve to mitigate risk. Aside from cost, both quality and our ability to deliver are in the foreground when it comes to procurement. Therefore, we consider our suppliers as partners with whom we maintain long-term relationships and who have also established stable processes. In terms of recognizing opportunities, it is the close and longstanding relationships with our customers, the automakers and Tier 1 suppliers, which are of central importance, while general market analyses particularly those on overall economic development play a subordinate role. These customer relationships enable us to identify future trends and megatrends on the international automotive markets at an early stage and consequently allow us to gain greater independence from the general cyclicality of the industry. The continual expansion of our expertise in lightweight solutions is an important example of this. An essential growth driver for PWO is the CO 2 savings achieved through weight reduction, which is largely independent from the general sales development of the automotive markets. The PWO risk management system Unavoidable risks are actively addressed in the context of a uniform Group-wide risk management system to the extent possible and economically reasonable. This creates transparency with regard to the risk situation of the Group and is therefore an essential prerequisite for the Group s management. Both the Management Board as well as the decision-makers in the individual areas are thus in a position to anticipate and promptly take the risk manage- 82 Annual Report 2013

83 Report on forecasts, opportunities, and risks ment measures that they consider to be appropriate. This is how the PWO risk management system ensures the optimization of the Group s opportunity and risk profile and contributes to the long-term stability of the Group s revenues and secures its survival. PWO s existing risk management system has proven itself in phases of strong growth and in recessionary phases, and has fully demonstrated its exceptional capabilities. Against the background of our rapidly growing international activities, the considerably more volatile overall economy, and industry-related developments, in fiscal year 2012 we took the decision to fundamentally develop our existing risk management system further based on both the existing comprehensive reporting system and on the risk philosophy embedded in all of the Group s divisions. In fiscal year 2013, our foreign locations were integrated into our risk management system to an even greater extent. Over the medium term, PWO will establish a Group-wide integrated, value-based risk management system, which will be linked to the operational processes and management systems to an even greater extent than before. In the ongoing development of our system, the risk dimension will be integrated into the planning and decision processes. This will be accompanied by an increase in the transparency of the risk situation of the Group. Our aim is to make a key contribution to securing the future success of the Group by increasing the risk awareness of all those employed at the Group. Other objectives include the optimization and reduction of risk-related costs and the control of the Group according to the aspects of risk and return. Group Management Report and Management Report of PWO AG At the PWO Group, risks are generally defined as an event that can lead to both a positive and a negative deviation from the plan. All risks are assessed by means of scenario distributions in terms of the level of damage and probability of occurrence. With the help of certified software the potential impact of risks in their entirety on corporate planning may be calculated in the future. At PWO, all risks and measures in the planning and extrapolation processes are reviewed and updated throughout the Group by all those responsible. In order to ensure the highest data quality possible, also in terms of cross-sectional risks, workshops are held at least once per year at all companies. In these workshops, risks are systematically analyzed, discussed, and evaluated. The aim is to reveal potential weaknesses at an early stage and to initiate the appropriate risk reduction measures. The effectiveness of the measures already initiated is also reviewed and ensured. In the future, opportunities will be identified and analyzed in the same way. Consolidated Financial Statements of the PWO Group Further Information Annual Report

84 Report on forecasts, opportunities, and risks ORGANIZATION OF RISK MANAGEMENT SYSTEM WITHIN THE PWO GROUP Supervisory Board monitors reports to Management Board responsible for an efficient risk management system defines risk policy and risk regulations monitors reports to Group Management Report and Management Report of PWO AG Group Risk Management methodology monitoring & organization reporting (regular/ad hoc) monitors report to Risk Management Process in the planning and extrapolation processes coping identification individual risk owner analysis reports to report to assessment Other parties involved auditor internal audit stakeholders The Management Board has overall responsibility for the PWO Group s risk management. It is responsible for both the definition of risk policy as well as for the specification of the general risk management framework. Group Risk Management coordinates the systematic and timely identification, assessment, and control of risks by the risk owner and reports directly to the Management Board. Group Risk Management carries the central responsibility for the Group s risk management process, monitors this process and controls it. It also ensures the uniform consolidation of existing risk management activities in the individual processes and tracks the relevant management measures. It prepares the risk information for the Management Board. The heads of department in the individual companies act as risk owners and bear the primary responsibility for risk and for the measures for coping with risk in their respective fields. They identify, analyze, and assess risks according to a predetermined method. The 84 Annual Report 2013

85 Report on forecasts, opportunities, and risks transfer of information to the Management Board, or to the management of the respective companies and to Group Risk Management, is carried out in line with the Group s provisions. The effectiveness of the risk management system is reviewed internally on a regular basis and optimized further. The principles formulated by the Management Board are documented in a risk management manual. The Audit Committee established by the Supervisory Board is involved in risk reporting and concerns itself with the effectiveness of the risk management, internal control, and audit systems. Compliance management and compliance control Compliance represents the goal of companies and their governing bodies to organize their company in such a way that they may identify risks at an early stage and prevent them. For the Management Board, the ultimate goal and a prerequisite for successful and sustainable growth is compliance with the laws, rules, and regulations that PWO s entrepreneurial activity is subject to on a global scale. Therefore, a compliance officer, appointed by the PWO AG Management Board of PWO AG, is entrusted with the development of a Group-wide compliance management system. After thoroughly revising the system and introducing it at PWO AG in 2012, the focus of the year under review was the successive integration of the subsidiaries. Group Management Report and Management Report of PWO AG To ensure the most complete possible identification of all potential risks, the respective individual risks are identified and assessed across the Group on a regular basis. A binding Code of Conduct based on this assessment has been introduced and revised as needed and employees have been taught conduct during training. A sense of the special relevance of individual compliance issues should be heightened in order to prevent further specific risks by continuously raising awareness among all employees. The integration of compliance risks into the Company-wide risk management system is planned in the future in order to achieve synergies especially in communication and reporting. Expected total risk exposure in fiscal year 2014 While the European car market continued to weaken in 2013, the markets in the USA and in China recorded a considerable increase in sales figures. This divergent global development poses a special challenge, not only to the entire industry, but especially to European automotive producers. The PWO Group is well equipped to meet this challenge. We recognized the need and the opportunities involved in positioning ourselves as a global supplier early on and, over the past few years, have placed the focus of our investment specifically on expanding our international locations. In the course of this, the revenue share of our activities abroad has nearly doubled in the past five years to almost 40 percent. Consolidated Financial Statements of the PWO Group The Management Board believes that the risk situation in 2014 will differ only slightly from that of the reporting year. Currently, the PWO Group is not exposed to any particular risks that are considered typical or atypical for its business activities. Apart from the expectation of a certain revival of the European automotive market during the stabilization of the macroeconomic environment, in 2014, Asia and North America will still be the fastest growing regions for the international automotive industry. In addition to the Further Information Annual Report

86 Report on forecasts, opportunities, and risks Company-specific growth drivers (including strong new business growth, a high level of series production start-ups and ramp-ups or economies of scale), the Management Board expects that the PWO Group s international locations will deliver the growth in revenues also in view of the general trend in the industry. The valid collective wage agreements give planning security for staff costs for the full year Group Management Report and Management Report of PWO AG An added risk is the possible change in the legal framework in Germany. In the coalition agreement of the new federal government, modifications were agreed to with respect to the employment of temporary workers. For example, temporary workers may only be employed up to a maximum of 18 months and their remuneration after 9 months of employment must be equivalent to the level paid to permanent employees. Depending on the configuration of the relevant laws, these modifications could lead to reduced flexibility in the use of temporary workers and increased costs. Due to the lead time for the legislation, any possible changes will only have a noticeable effect in the further course of 2014 or later. The PWO Group s risk-bearing capacity increased significantly from a financing perspective as a result of the capital increase in fiscal year The Management Board believes that the risks described in the risk report for the PWO Group are manageable and will not endanger the Group s viability. At the same, PWO has the chance in many of its areas to develop better than planned. Here, we can highlight the strong new business in recent years, our strong position in solutions using lightweight construction, and our international position. These factors allow us to benefit from the positive development expected from the global automotive market. Overall, we believe that the opportunities outweigh the business risk. Thus, the prospects for the further development of the PWO Group are very positive. Once again, we were able to attain a record level of new business in fiscal year 2013 which was well above the previous year. This will help to ensure the utilization of our capacity in the years ahead and increase our revenue. Presentation of risks and opportunities with short-term effects The following presentation provides an overview of the potential impact of the major risks and opportunities on the operational planning for 2014 while taking into account the mitigating internal measures. In line with our risk management system, we have allocated the individual risk explanations in accordance with the following risk categories: Performance, market, financial risks, and regulatory risks. The order of the risk categories and individual risks within the categories reflects our current assessment of the relative degree of risk for PWO. To the extent that the economy and the automotive industry develop in line with their longterm cyclical nature, our business is basically characterized by a high degree of predictability within manageable ranges of fluctuation. This results not only from our strategic management of the Group but also due to lead times for orders spanning over many years and the five-to eight-year terms of series productions. This long-term nature of our business adds to risk reduction. At the same time, this also means that near-term opportunities are limited in terms of better-than-expected revenues and earnings development. Therefore, in the following presentation, the risks with regard to the operational planning in 2014 outweigh the opportunities. 86 Annual Report 2013

87 Report on forecasts, opportunities, and risks Performance risks To provide series production for the international automotive industry means being able to meet the requirements of maximum process reliability, product quality, and delivery reliability on an ongoing and reliable basis over a period of many years. Performance failures not only lead to short-term costs but also to significant damage to one s reputation. Therefore, for providers like PWO who are positioned at the forefront of the market, performance failures are to be avoided in all cases. Quality risks / product liability and recall risks The quality of our PWO Production System makes it possible to cope with phases of highly volatile call volumes in a flexible manner without generally compromising the location s profitability. Today, we achieve this level of performance reliability and product quality at all of our locations with the exception of Mexico; however, at this location we are achieving continual improvements in performance. At the moment, the Mexican market does not yet require the highly complex and fully automated production processes that are employed at our other locations. Accordingly, greater leeway is allowed in the production process, which in turn, helps to limit risk. Product liability risks and risks resulting from product recalls have continuously gained in importance in recent years. Generally, the PWO Group is hedged against such risks through corresponding insurance policies. Nevertheless, we must always ensure that the amount insured is commensurate to the liability risk. Group Management Report and Management Report of PWO AG Weitere Informationen Business interruption risks can result mainly through damage to or the loss of a manufacturing plant or a tool. Depending upon the extent of damage and the duration of the outage, this may prevent the timely delivery to customers. Business interruption in production Within the PWO Group, these risks are effectively limited through a range of measures from the area of business continuity management, which is the Company-specific emergency and crisis management for the systematic preparation for controlling critical emergency situations of the Company. From the location in Oberkirch, business continuity management is being successively used for controlling Group-wide risks. In the view of the Management Board, the risk of the outage of an entire location, which would jeopardize the location s existence, could only arise from external, uncontrollable factors. Specifically, these include natural disasters or forces majeure. With the ubiquitous application of safety precautions in the Group, which are checked regularly and in their entirety by recognized external consultants, we are able to effectively limit the possible damages that could be caused by natural events. Therefore, the Management Board believes that the failure of an entire location can be virtually eliminated. Consolidated Financial Statements of the PWO Group Annual Report

88 Report on forecasts, opportunities, and risks Start-up and ramp-up risks The start-up and ramp-up of new series productions present a number of risks. For one, we need to provide up-front investment to make suitable capacity available. If there is a shortterm delay in the start of series production, this could lead to a corresponding underutilization of these capacities. For another, production goes through a so-called learning curve, i.e., at the start efficiency is still at a relatively low level and then proceeds to rise continuously. Our long-established positive development shows that we are able to control these risks. Group Management Report and Management Report of PWO AG Tool sourcing from China Fluctuations in customer call volumes, including the postponement of start-ups and ramp-ups In this reporting year, we have implemented a tool sourcing strategy for our China location. The aim is to place this location in a position to provide tools for its own series production as well as tools for the other production locations within the Group. This creates a competitive advantage for all of our locations. Over the medium term, the successful implementation of this tool sourcing strategy is of key importance for the profitability of all locations, but in the short term, it is of central importance to the Asia segment. Extensive measures have been initiated to manage this risk. Market risks An essential prerequisite for achieving the margins necessary for our capital intensive business is ensuring an adequate utilization of our production sites. For existing orders, the utilization risk extends particularly to fluctuations in the volumes of the series productions resulting from fluctuations in demand on the part of the end users as well as an unplanned or premature discontinuation of the series. In the case of new orders, there is a risk of a shift in the start-up of new projects. Due to the broad diversification of our product range and the strategic limitation of large orders, we are not dependent on the success of individual passenger car models and, to a large extent, only experience average market fluctuations. In order to respond accordingly, we work continuously on improving the flexibility of all of our business processes. This allows us to economically manufacture even small unit volumes. Moreover, we have structured our plant and equipment as flexibly as possible and utilize uniform production processes worldwide. This allows us to replace expiring series orders with very different follow-up contracts. In addition, we have the ability to shift machinery and assembly plants within our portfolio of locations. We have made the following agreements for a majority of the contracts defining the services that we should provide: In the case of our services including an amortization agreement for the entire life of the contract, certain obligations will be incumbent on the customer in the case of a contract cancellation. Project-specific market risks related to investments and pre-financing of services are contractually hedged in line with usual market practices. No significant risks from development services exist which would be amortized via the unit price in the course of a series production. 88 Annual Report 2013

89 Report on forecasts, opportunities, and risks The continual increase in competition and pricing pressure is one of the typical risks for the automotive supply industry. This risk is particularly pronounced in periods of economic weakness, since these are the periods when car manufacturers grant discounts to end customers and, in turn, try to recoup these discounts by squeezing suppliers. Risk of declining prices Due to the economic trends expected, we believe the risk from unplanned price reductions will be low in fiscal year Moreover, our long-established, positive development demonstrates that we are capable of successfully overcoming these risks. Through our innovative strength, we provide our customers with quantifiable added value. Furthermore, we are constantly improving the efficiency of all operational processes. Similar to the volatility of call volumes due to fluctuating demand from end customers, a critical economic downturn would jeopardize the utilization necessary at our production locations for generating a profit. A downturn, such as the one recorded in 2008/2009, cannot be absorbed through a broad diversification of the product range, since all market segments would be affected to a similar extent. The PWO Group counters this risk with its high degree of flexibility in production and through the use of temporary workers and flexible working hours. In addition, modern controlling and planning instruments provide for short reaction times and the prompt introduction of cost-saving programs. The risk of a crisis-ridden economic downturn is considered to be low in fiscal year Critical economic downturn Group Management Report and Management Report of PWO AG In some areas, PWO limits itself to purchasing intermediate products from only a few selected suppliers. If one of these strategic suppliers is lost as a result of insolvency then there is the risk of not finding an immediate alternative source of supply. This, in turn, may lead to a problem with customer deliveries, which could have a corresponding impact on the earnings of the PWO Group. This risk is managed by systematically selecting suppliers in order to keep the probability of an actual insolvency low. We are also currently working intensively on the development of our supply chain management in this area. The raw materials and supplies required for our production processes include mainly steel and, to a far lesser extent, aluminum. We purchase these metals on the world market. We maintain long-term supply relationships with selected suppliers. Long-term framework agreements, however, are currently no longer offered on the market. In the past, we have not experienced any shortages in the supply of our input materials. Any price increases in excess of the fluctuation span that was contractually agreed on with the customer could be passed on through either escalation clauses or by successfully arriving at a solution by negotiation with the customer. Conversely, falling commodity prices are passed on to our customers. Insolvency of a strategic supplier Raw material price risk Consolidated Financial Statements of the PWO Group Greater price volatility and a rising trend in prices cannot be ruled out in the future. Occasional supply shortages can also not be excluded. Further Information Annual Report

90 Report on forecasts, opportunities, and risks Loss of a major customer The PWO Group operates in a competitive and technologically fast changing environment. Therefore, we are exposed to the risk of being displaced by existing or new competitors. This risk would be particularly high if we are not able to comply with the requirements of our customers in terms of quality and delivery reliability. The resulting damage to our reputation would also have a correspondingly negative effect on the acquisition of new customers. Group Management Report and Management Report of PWO AG Allowances / impairments Our broad-based positioning prevents a dependence on large customers, since our revenues with single customers are always spread across diverse contractually independent projects for individual products possessing differing contract terms and volumes. The probability of all projects for any one customer failing simultaneously is extremely low. In the course of the reporting year, as in the prior year, none of our customers accounted for more than 10 percent of our revenues. At some of our foreign locations however, there are a few large customers which account for more than 10 percent of revenues. In these cases, complying with the relevant quality requirements of the customer is of particular importance, since the loss of a major customer could have a material adverse effect. Financial risks and opportunities The risk of allowances or impairments is particularly relevant when the Group does not reach its targets or the earnings outlook deteriorates. An increase in the discount rate for expected future cash flows also poses additional risk. This risk increases particularly during periods of economic difficulty. Since we are assuming that the planned results will be achieved, the likelihood of a possible impairment related to the 2014 plan is considered to be very low. Currency risks and opportunities The PWO Group is exposed to currency risk at all of its locations. These risks are comprised of translation risk (translating the financial statements of each subsidiary into euros) and also transaction risk (on the selling and supply sides). In addition to the Euro, the main currencies in the Group are the Canadian dollar, the US dollar, and the Chinese renminbi. We conclude the appropriate hedging transactions to avoid these currency risks. Our aim is to keep the impact of exchange rate fluctuations on the Group earnings as low as possible. The available range of hedging instruments is based on a thorough analysis of the underlying transaction to be hedged. With the help of these hedging transactions, the Group is able to hedge a vast majority of its currency risk. The residual risk is limited in size. There is always a chance of exchange rates developing better than expected, which would then lead to opportunities to improve earnings. However, the high level of hedging means that the opportunities are also limited. Interest rate risk The Group is always exposed to interest rate risk since it uses bank borrowings to refinance. Therefore, there is a risk at the time of the expiry of fixed-interest periods that bank loans might need to be refinanced at a higher rate. We minimize this risk through an appropriate combination of short- and long-term borrowings. We are also vigilant about matching maturities. As a rule, investments associated with long-term customer orders are also financed over the long-term. In the case of variable-interest loans, interest rate swaps are also employed. Hereby, we strive for a balanced maturity profile of our borrowings and of our interest rate hedges. We consider this an integral part of our risk management. 90 Annual Report 2013

91 Report on forecasts, opportunities, and risks We have built longstanding and solid relationships with our banking partners which remain sound. Therefore, we are still not faced with any financing risks. Nevertheless, we conduct an ongoing review of any possible alternative refinancing instruments in order to expand our available options if this appears appropriate in consideration of economic or diversification aspects. Financing risk Financing risks may also arise in cases where a financial institution does not fulfil its obligations in connection with the investment of liquid funds, or as a counterparty of derivative financial assets. We rely on the careful selection and diversification of our partners and see no need for adjustments with regard to risk management. Regulatory risk Compliance with national and international laws and internal and external policies is a fundamental part of the PWO Group s operations. In the case of violations, this may lead to substantial fines, damages, or to the imprisonment of the employees involved. We address the compliance risk through our compliance management system. This includes measures for the prevention and early detection of violations and the measures to respond to any possible violations. In the reporting year, the focus was on the successive integration of our subsidiaries. Compliance risk Group Management Report and Management Report of PWO AG New product development involves the risk of violating the industrial property rights of third parties, which, in our industry, represent patents and utility models. What can prove to be problematic is when property rights, which have already been registered, are not yet published. Within the time period between the registration of the rights and their publication, there is no clarity as to whether the property rights of another market participant have been violated. This risk could lead to unplanned subsequent royalty payments, which, in the automotive industry, should not be expected to result in a ban on production. The risk can be limited through the cooperation with an external patent attorney and through the longstanding product and industry expertise of our employees in the areas of product and process development. Currently, there are no disputes. Presentation of strategic risks and opportunities with medium-term effects The following presentation provides an overview of the strategic risks and opportunities impacting the medium-term, i.e., a period of at least three years. Also in this chapter, the order of the risks and opportunities presented reflects our current assessment of their relative importance for PWO. Patent infringement Consolidated Financial Statements of the PWO Group Development of new technologies and products Ongoing product and process innovation constitute the key success factors in ensuring the preservation and expansion of our competitive position in an industry where development activities are increasingly being provided by the suppliers. Since new developments are becoming increasingly more complex, the risk is increasing that the relevant development and start-up costs throughout the entire value chain are not being properly assessed in advance and may exceed expectations. However, at the same time, the opportunities outweigh this risk: In the past, we have repeatedly been able to offer the superior solution and win the order. Especially when having to find solutions for complex product Further Information Annual Report

92 Report on forecasts, opportunities, and risks specifications often associated with conflicting requirements (such as higher security requirements while at the same time saving weight). This, in particular, is where on our deep understanding of the customer s needs and our decades of experience in metal processing has an influence. Group Management Report and Management Report of PWO AG We are continually expanding this competence and thereby reducing the risks of higher development and start-up costs. Furthermore, in order to effectively reduce these risks, we systematically weighed them in advance of upcoming developments in cross-divisional teams and initiate appropriate measures for their control if necessary. Our long-term favorable performance corroborates our ability to expand our market position through continual product and process innovation so that the opportunities presented by this area significantly outweigh the risks. Long-term development in demand With our product and service portfolio, and through our innovative strength and our global presence, we believe we are well positioned to benefit from several trends in demand in the automotive industry simultaneously. Energy-saving and emission-reducing mobility: Saving weight in the all of the vehicle s components and bringing about a reduction in fuel consumption represent one of the main criteria. We are particularly interested in seizing the opportunities in this area that arise from our leading expertise in lightweight construction. We assume that the portion of weight-reduced parts and components will continue to grow significantly in the coming years, in terms of total volume, and result in an expansion of our overall market share. More comfort in the automobile: In our view, the trend in the international automotive industry in the next few years will clearly continue in this direction. For years, PWO has been firmly established in the field of comfort-enhancing solutions (such as, vibration reduction in cross-members, multi-optional seat adjusters, components for the growing number of electrically-driven functions). The automotive manufacturers traditionally present their innovations in their premium models in order to then introduce them into the volume models. Our strong presence in the premium sector puts us in a position to participate in this development from the start. More safety in the automobile: The arguments given on the subject of comfort also fully apply when it comes to the ever-increasing demand for mobile safety. Again, we can expand upon our many years of expertise and innovation. Also, this represents an area where we have had close and trusting collaborations with numerous customers over a period of many years, which gives us an excellent starting point for our future growth. Development of the customer and competitive environment The trend towards greater comfort and safety coupled with lower fuel consumption and thus a higher level of overall complexity of the automobile as a product is pushing global automotive manufacturers to use outside expertise more and more and consequently obtain substantial portions of their value chain from suppliers. Suppliers are then challenged to provide absolutely reliable products, both in terms of product quality and in terms of the flexibility necessary for fluctuating call volumes. With our proven and highly flexible PWO Production System and our zero-defect philosophy we are extremely well prepared to continue to gain market share in the future and to increase our revenue per vehicle. 92 Annual Report 2013

93 Report on forecasts, opportunities, and risks Expansion of PWO s global reach In recent years, we have invested quite substantially in broadening the PWO Group s global presence. By expanding our capacity in local markets, we were able to increase the synergy and cost reduction potential and improve our proximity to the customer. We are now in a position to win global tenders such as those for platform concepts. We intend to take even more advantage of these opportunities in the coming years through the focused establishment of assembly locations in our key automotive markets such as those in America and China. With this approach, we will be able to benefit from the trend in the automakers reduction in their number of suppliers and their focus on suppliers able to deliver globally. In addition, in the next few years we are also expecting a marked increase in China s demand for products having the highest precision and quality our products. We intend to use this development to rapidly continue expanding our location. Tool sourcing from China The tool-sourcing strategy described in the chapter on the short-term effects of risks and opportunities also results in medium-term risks and opportunities. In principle, it is possible that it will take longer than expected to implement this strategy, so that the expected positive earnings contributions may be delayed beyond the forecasts of The development of the location thus far indicates that the personnel there are able to quickly gain and expand the tool development know-how necessary and possibly even exceed our respective medium-term expectations. Therefore, we perceive more opportunity than risk for the development of the Group s earnings over the medium term from sourcing tools in China. Group Management Report and Management Report of PWO AG Development of currency exchange rates Hedging instruments against currency fluctuations are generally not available for the entire period of series production. Although hedging transactions can be extended by roll-overs at the end of term of the individual transaction, there still may be fundamental changes in exchange rates over the medium term for the currencies which are important for the PWO Group. This can result in both risks and opportunities for our earnings development. Report on forecasts and outlook Expected general economic and industry development The IMF forecasts a noticeable improvement in the global economy for the current fiscal year. It should grow by 3.7 percent after having achieved an increase of 3.0 percent in Growth is expected in almost all regions. The US economy, in particular, will benefit from strong domestic demand and should increase by 2.8 percent in 2014 after an increase of 1.9 percent in the prior year. Therefore, a robust automotive market in the USA can be expected for the current year. The euro area should exit the recession and grow slightly by one percent in 2014 after a decline of 0.4 percent in the previous year. Above all, the German economy is expected to grow significantly with 1.6 percent after 0.4 percent. Consolidated Financial Statements of the PWO Group In the opinion of the German Automobile Industry Association (VDA), the positive figures recorded in December 2013 show that the stabilization of the German passenger car market has continued. For the full year 2014, the VDA expects modest growth in new car registrations to around 3 million vehicles. The association expects the global market to grow by a total of three percent in 2014 to 74.7 million units. Except for the Japanese market, all of the relevant markets are expected to develop positively. In China, the pace of growth should recede somewhat, but the market is still expected to grow 7 percent to more than 17 million Further Information Annual Report

94 Report on forecasts, opportunities, and risks cars for the first time. In the USA, an increase of 3 percent and a volume of almost 16 million light vehicles are expected. The VDA expects Western Europe to reach positive territory again in 2014 after four years of declining sales. With an increase of two percent, however, only a slight increase is being predicted. In the new EU countries, the recovery should start to accelerate and growth is projected at 7 percent. Group Management Report and Management Report of PWO AG Thus in 2014, the shifts in the world market are set to continue: Compared to the crisis year of 2009, new car sales in China in 2014 are expected to grow from 8.4 million to 17.1 million vehicles and, in the USA, light vehicles sales are expect to rise from 10.4 to 15.9 million. Conversely, over the same period the Western European market is expected to decline from 13.7 million to 11.6 million passenger cars. Measured in terms of market share, China s share of the global passenger car market rose from 15 to 23 percent, and the US market share increased from 19 to 21 percent. In contrast, the Western Europe market share declined from 25 percent to almost 16 percent. Business development and future direction Development of the PWO Group In view of the opportunity and risk situation and assuming no changes in the composition of the Group in comparison to the prior year, the Management Board expects the following developments during the 2014 fiscal year. After the substantial level of new business volume acquired over the past several years, the order situation at the PWO Group is encouraging. We expect an increase in Group revenues of about 6 percent to EUR 400 million in the new fiscal year EBIT is expected rise more than average and increase from EUR 22.3 million to about EUR 25 million, which is yet another record. Net income for the period is expected to grow even stronger due to a slight decline in interest expenses resulting from the overall development in interest rates and a continued low tax rate. As in the prior year, this will be influenced by the low tax burden of our Czech location. This development should give PWO additional leeway in fiscal year 2014 to continue its traditional shareholder-friendly dividend policy. Thus, the strategic aim of distributing percent of the Group net income will be upheld. As in the previous year, the Group s revenue growth will be largely driven by the foreign subsidiaries, while revenues at the German location, Oberkirch, are expected to see a slightly below-average improvement. The planning for Oberkirch does not assume a significant recovery in the European automotive markets during the current fiscal year. Therefore, despite the high export rate of the German location, we also remain cautious with respect to the development of the volumes and the prices that will be achievable. On the cost side, there is a certain degree of planning certainty for collective wage developments. The growth in staff costs at the Oberkirch location will rise faster than the revenues in However, cost reductions, reduced start-up costs, and increased efficiency at all levels and fewer services from third parties should lead to an overall stable EBIT. In the NAFTA area, we expect the positive development of the business to continue. After strong growth in the course of the year at the Canadian location due to additional production start-up and ramp-ups, in 2014 we expect this location to stabilize at the current high levels. We expect a similar development from our revenues in Mexico. Both locations are gearing up 94 Annual Report 2013

95 Report on forecasts, opportunities, and risks for future start-ups ahead of what is currently linked to building extensions. For the years subsequent to 2014, we foresee significant increases in revenues. However, operating earnings in the NAFTA area in 2014 are expected to continue growing above average. In part, this is due to the fact that the Canadian location is now working with completely stable processes at the revenue level it has achieved, and also because the improvement in operating performance in Mexico is progressing. In contrast, we expect revenue growth in the current fiscal year to be well above the Group average, both in the Czech Republic as well as in China. The Czech location is profiting from the development in new business over the recent years and is achieving double-digit percentage increases. The production increases planned for 2014 in China will lead to a further jump in revenues at this location. In addition, we will rapidly continue with the expansion of the Chinese location and transform it into a global tool supplier for the Group which had begun in the second half of On an operational basis, for the full year, we expect China to reach the break-even level for the first time. The material risks which can lead to deviations from the plan described for fiscal year 2014 are listed below: Group Management Report and Management Report of PWO AG the continued above-average risk related to economic development, primarily due to the international debt crisis, possible delays in reaching the efficiency improvements planned for all areas and at all locations, delays in transforming the Chinese location into a global tool supplier, and higher than expected price concessions. Net asset and financial position The net assets and financial position of the PWO Group are expected to improve further in Given the continued increase in EBIT and net income expected in the period, we expect a level of positive free cash flow, which should be slightly higher than the level reached in fiscal year By increasing the equity ratio in the order of 37 percent and maintaining a nearly unchanged level of net debt, the level of gearing is expected to be visibly reduced. Investments The investment plan for the current fiscal year provides for a slight increase in comparison to the level in A total investment volume of approximately EUR 33 million is planned and accounts for around one third of the planned investment volume for the three-year period from 2014 to Consolidated Financial Statements of the PWO Group When looking at the individual locations, the focus of investment will be in Germany and the Czech Republic, while the volumes at the locations in the NAFTA area and in China will be reduced. At these locations, the majority of the expected upfront investments for the next few years particularly those for the additional capacity and structures necessary for the growth have been largely completed. The efforts to improve the efficiency of the Oberkirch location require volumes in excess of the prior year s level. In addition, building extensions already started in the previous year will be completed in the current fiscal year. The investments in the Czech location are devoted to further growth: During the reporting year an additional piece of land was purchased and thus the property gap between the previous areas was closed. With the expansion planned there now, the entire internal logistics system can be optimized. Further Information Annual Report

96 Report on forecasts, opportunities, and risks Additional performance indicators Employees: The issues raised in the chapter titled Employees of this Management Report also largely apply to the current fiscal year. These primarily concern the continued great effort given to our internal training and development as well as to employee retention. In 2014, we want to ensure, once again, that our dependence on the regional labor markets, especially those for high-skilled employees, remains limited. Group Management Report and Management Report of PWO AG Product and process innovation: For the preservation and strengthening of the Group s global competitiveness, the need for continuous product and process innovation is a constant challenge that we have been able to meet in the past with great success. All of those involved in the Group are aware of this fact and, accordingly, all future efforts are aimed in this direction. The constant enhancement of the traditionally very close cooperation between our development teams and the respective customers represents a core and lasting objective. Moreover, in the recent past we have been very successful in acquiring new customers. We intend to continue with this success and especially with our expertise in lightweight construction. From a fundament point of view, the importance of product and process innovation is equal. Product innovations open up new market opportunities and process innovations are the key to operational success. In the current fiscal year, priorities have been set in the procedural areas at the Oberkirch location in order to achieve further efficiency gains. Quality management: The PWO Production System, established within the Group, aims at the continuous improvement of all operational processes and at the provision of safety via Group-wide standardized processes as well as the highest quality possible as a result of our zero-defect philosophy, which is also implemented Group-wide. The minimization of waste and set-up time will remain a cross-sectional tasks having one of the highest priorities in the future. Corporate responsibility: Wherever we operate, our self-image as a corporate citizen remains unchanged. This is also how we continue to remain committed to our goals of interacting with employees, customers, business partners, and the social environment as a whole, in a manner that avoids or lessens the burdens arising from our operations and takes into account social concerns, such as the environment and natural resources, so that they are largely spared. For economic and ecological reasons, a reduction in the necessary use of natural resources per unit of output continues to be one of our most important goals. We continue to uphold our broad community involvement, particularly at a regional level. Overall statement on future development The PWO Group can look back on a year of positive overall business performance in fiscal year With the success of our internationalization, the essential basis had been created for continuing ahead on this path. Our locations abroad will contribute significantly to the revenue and EBIT growth of the Group in the current fiscal year and beyond. In the years follow- 96 Annual Report 2013

97 Report on forecasts, opportunities, and risks ing 2014, significant production expansions are planned in Mexico and China, especially in the wake of several start-ups and ramp-ups. Accordingly, substantial increases in revenue should be generated in those regions starting in the year Thus, we will have substantially reduced the Group s general dependence on the regionally different growth phases of the automotive markets and, currently, from the effects of the weakness in Europe. This fundamental improvement in the Group s position within an internationally competitive environment has been strengthened further by the recent, very encouraging level of new business, specifically at the international level. Our innovative strength, which is recognized globally and is successfully aligned to the major development trends in the industry under, for example, the heading of lightweight competence, as well as our highly efficient production processes, places the Group in an excellent position to compete. From today s perspective, special items occurring after the end of fiscal year 2014, which could significantly and permanently influence the further development of the Group, are not expected. Control and risk management in the financial reporting process Group Management Report and Management Report of PWO AG The control and risk management of the financial reporting process constitute an integral part of the Group s risk management. It is based on specially established policies, procedures, regulations, and measures that are directed at the organizational implementation of management decisions and pursue the following objectives: to ensure the effectiveness and efficiency of business activities (this also includes the protection of assets), to ensure the accuracy and reliability of internal and external accounting, to comply with applicable legal regulations, in particular, the compliance of the consolidated financial statements and the group management report with the respective standards. In order to achieve these objectives, all operating units are integrated according to a precisely defined organization of the management and reporting. The principles, procedures, processes, schedules, and systems are documented in writing. The entire organization is reviewed periodically for effectiveness and adapted to external and internal developments. Consolidated Financial Statements of the PWO Group There is a clear segregation of duties among all units involved, which is just as consistently implemented as the four-eyes principle. Employees involved in the financial reporting process meet the quality requirements and are routinely trained. The consolidated financial statements are prepared in a multi-stage process. Automated or manual controls are embedded at all levels. The individual subsidiaries prepare their financial statements, which are audited by the respective auditors, and are then combined with the consolidated financial statements of Progress-Werk Oberkirch AG. The PWO Group s accounting policies ensure that uniform recognition and measurement standards are applied by the consolidated domestic and foreign companies. Underlying Further Information Annual Report

98 Report on forecasts, opportunities, and risks Dependency report Disclosures required pursuant to Section 289 (4) and Section 315 (4) HGB these policies is a uniform Group-wide system of accounts. New laws, accounting standards, and other official announcements are continually analyzed for their relevance and their impact on the consolidated financial statements and the combined management report. If necessary, the accounting policies and the draft of the accounts are adjusted accordingly. The recording of the business transactions of the operating units is carried out in a uniform manner on the SAP-based accounting system. The access rights are clearly defined. Group Management Report and Management Report of PWO AG To ensure the accuracy of the accounting and the overall statement of the financial statements, including the management report, the following reviews and measures are implemented, evaluated, and developed regularly in a structured process: identification and analysis of the essential areas of risk and control, monitoring and plausibility checks in order to oversee the processes and their results at the level of the Management Board and the operating business units, this includes regular visits to foreign locations throughout the year by the Management Board and parent company management staff, preventive control measures in finance and accounting as well as the essential operational business processes for accounting, measures to ensure the proper, complete, and timely IT-based processing of accounting-related matters and data, measures to monitor the accounting-related internal control and risk management systems as well as measures to overcome any weaknesses in control, documentation of the control process. Dependency report A dependency report in accordance with Section 312 AktG has been prepared with regard to the relationship with Consult Invest Beteiligungsberatungs-GmbH, Böblingen. As in previous years, the report concludes with the following statement: Transactions subject to disclosure have not occurred in the fiscal year. Disclosures required pursuant to Section 289 (4) and Section 315 (4) HGB In the following, the information required under Sections 289 (4) and 315 (4) HGB is detailed and explained. The share capital of Progress-Werk Oberkirch AG ( Company ) is EUR 9,375, It is divided into 3,125,000 ordinary bearer shares with a notional value of EUR 3.00 per share each. All shares are bearer shares. They carry identical rights and convey one vote each at the Annual General Meeting. Preferences or other rights conveying powers of control do not exist. The provisions of the German Stock Corporation Act regarding the rights and obligations related to the holding of shares are referenced. 98 Annual Report 2013

99 Disclosures required pursuant to Section 289 (4) and Section 315 (4) HGB There are no restrictions on the voting rights or the transfer of shares. In addition, the Management Board is not aware of such arrangements which have been agreed between shareholders. Consult Invest Beteiligungsberatungs-GmbH, Böblingen, has given notification of an interest of percent in the Company. Delta Lloyd N.V., Amsterdam, the Netherlands, has given notification of an interest of percent. There is no participation of employees, who do not exercise their control rights directly. In accordance with the Company s Articles of Association, the Management Board consists of two or more members. These members are appointed for a period of no more than five years. A reappointment or extension of the term of office is permissible in each case up to a maximum of five years. The Supervisory Board determines the number of Management Board members, their appointment, and the revocation of their appointment, as well as the conclusion, amendment, and termination of employment contracts concluded with them. The Supervisory Board may appoint one member of the Management Board as Chairman or Spokesman of the Management Board. The nomination as well as the appointment of Board Members can be revoked before the expiration of the term, if there is good cause. Group Management Report and Management Report of PWO AG Pursuant to Section 179 (1) and Section 119 (1), No. 5 AktG, each amendment in the Articles of Association requires a shareholder resolution of the Annual General Meeting. In a deviation to Section 179 (2), no. 1 of the said Act, Section 15 of the Articles of Association provides for resolutions on amendments to the Articles of Association to be adopted by the Annual General Meeting by a simple majority of the voting capital to the extent that legally a larger majority is not required. In addition, the Supervisory Board is authorized to adopt amendments to the Articles of Association which relate only to their wording. There is no authorization to repurchase own shares. By resolution of the Annual General Meeting of May 26, 2010 and subject to the consent of the Supervisory Board, the Management Board is authorized to increase the Company s share capital once or several times by up to EUR 3,000, by issuing new non-par bearer shares against payment in cash until May 25, Shareholders must generally be afforded the right to subscribe. The Management Board is authorized, however, with the consent of the Supervisory Board, to exclude the right of shareholders to subscribe in order to redress fractional shares or issue shares to employees of the Company or employees of the Group companies. Consolidated Financial Statements of the PWO Group In May 2012, the Management Board partially exercised this authority with the consent of the Supervisory Board. The share capital was increased by EUR 1,875, through the issuance of 625,000 shares. The shares were offered to shareholders by way of indirect subscription rights. The new shares are entitled to dividend payments as of January 1, The execution of the capital increase was entered in the commercial register on May 16, On the same day, the new shares were approved for trading on the Frankfurt Stock Exchange. Further Information Annual Report

100 Disclosures required pursuant to Section 289 (4) and Section 315 (4) HGB As a result, the Authorized Capital 1/2010 amounted to up to EUR 1,125, as per the reporting date. By resolution of the Annual General Meeting of May 26, 2010 and subject to the consent of the Supervisory Board, the Management Board is authorized to increase the Company s share capital once or several times by up to EUR 750, by issuing new non-par bearer shares against payment in cash until May 25, Shareholders must generally be afforded the right to subscribe. The Management Board is, however authorized, with the consent of the Supervisory Board, to exclude the right of shareholders to subscribe in order to redress fractional shares. Group Management Report and Management Report of PWO AG No use has been made of this authorization to date. By resolution of the Annual General Meeting on May 26, 2010, the Management Board is authorized once or on several occasions to issue warrant-linked bonds or convertible bonds made out to bearer ( bonds ) for a total nominal value of up to EUR 65,000,000.00, until May 25, In addition, the Management Board is authorized with the consent of the Supervisory Board to grant option rights to the holders of warrant-linked bonds and/or conversion rights to the holders of convertible bonds; said rights being to receive bearer shares in the Company representing a proportion of share capital totaling up to EUR 3,000,000.00, pursuant to the terms of the warrant-linked and/or convertible bonds. The share capital shall therefore be conditionally increased by up to EUR 3,000, through the issue of bearer shares, insofar as the holders of bonds shall exercise their option or conversion rights or meet any incumbent conversion obligations. When bonds are issued, shareholders must be afforded the right to subscribe. The Management Board is, however authorized, with the consent of the Supervisory Board, to exclude the right of shareholders to subscribe, insofar as the Management Board upon due investigation is of the opinion that the issue price of the bonds is not materially below their hypothetical market price as calculated in accordance with recognized, and in particular, actuarial methods. The authorization to exclude the subscription right applies to bonds with warrants or conversion rights or conversion obligations with respect to Company shares on a pro rata amount of the share capital that may not exceed 10 percent of the equity capital. This 10 percent limit may not be exceeded at the time it takes effect or at the time of executing this authorization if the value is lower. No use has been made of this authorization to date. Other than the usual extraordinary rights of termination contained in loan agreements and contracts with customers, no further agreements have been entered into in the event of a change in control resulting from a takeover. Compensation agreements which favor the Management Board or employees do not exist. 100 Annual Report 2013

101 Corporate Governance Statement pursuant to section 289a HGB Remuneration Report Corporate Governance Statement pursuant to section 289a HGB The Corporate Governance Statement of Progress-Werk Oberkirch AG is part of the reproduced Corporate Governance Report in this Annual Report. Remuneration Report Remuneration of the Management Board The Supervisory Board of Progress-Werk Oberkirch AG believes that a balance between the wages and salaries of the workforce and the remuneration of the Management Board should be maintained. The Management Board shares this view in its entirety. The criteria for defining the compensation of the Management Board include the duties of the single Board members, their personal performance, the financial situation, the success and the future prospects of the Group, as well as the prevailing level of compensation at peer companies and the remuneration structure of the Company. Here, the Supervisory Board also takes into account the relation of the Management Board s compensation and the remuneration of senior management and the workforce, as a whole, and its development over time. Group Management Report and Management Report of PWO AG The total remuneration of the Management Board members includes monetary components, non-cash compensation, and pension plans and is composed of fixed and performancerelated components. The fixed remuneration consists of a basic annual salary, non-cash benefits, and pension benefits. The performance-based element of the compensation is the bonus. This is divided into a short-term variable component and a long-term variable component. The short-term variable component is measured according to the net income of the Group for the past fiscal year. The long-term variable component is measured according to the average net income over a period of three years. The variable component is structured in such a manner that the long-term component is more heavily weighted. Furthermore, it is limited in its absolute amount. The variable compensation also ensures that both positive and negative corporate developments are taken into account. Consolidated Financial Statements of the PWO Group Furthermore, a discretionary bonus is included in the existing employment contracts, whereby the Supervisory Board may consider extraordinary positive and negative developments up to a limited amount at its discretion. In fiscal year 2013, the total compensation of the Management Board (short-term and longterm compensation) was EURk 1,697 (p/y: EURk 1,529). This included performance-based compensation amounting to EURk 919 (p/y: EURk 783). The non-cash benefits, especially in the form of insurance premium payments and the provision of company cars, amounted to EURk 78 (p/y: EURk 73). Further Information Annual Report

102 Remuneration Report The individual remuneration of the members of the Management Board is shown in the table below. REMUNERATION OF THE MANAGEMENT BOARD EURk Fixed remuneration Performance-related remuneration Total remuneration Basic annual salary Non-cash benefits Short-term variable component of bonus Long-term variable component of bonus Group Management Report and Management Report of PWO AG Karl M. Schmidhuber, Chairman Bernd Bartmann Dr. Winfried Blümel Total ,697 1,529 The members of the Management Board are also insured under one of the Company s financial loss liability insurance policies for directors and certain managers (D&O insurance). The D&O policy provides for a deductible of 10 percent of the loss up to the amount of one and a half times the Management Board members fixed remuneration. In addition, Management Board members are entitled to retirement, disability, and widow s pensions as of their second term. The individual expenses for pensions are also listed in the table Pensions. Pensions for retirement are paid to Management Board members who have either reached the pension age of currently 65 years, or following their departure from the Company from the age of 60, provided they are receiving social security benefits as a full pension simultaneously. In granting pensions for retirement, Management Board members must have been in the service of the Company for at least 3 consecutive years (waiting period) at the time of the commencement of retirement, unless, prior to the insured event, the pension rights were already vested. The amount of the Management Board members monthly pension is set out in the respective pension agreement. The amount of an early retirement pension is calculated from the retirement pension amount, whereby during the drawing of the pension, this amount is reduced by 0.25 percent per month during the period from the beginning of early retirement until the end of the members 65th year. The future pension benefits of the current Management Board members are adjusted in line with the changes in the cost of living for a 4-person household of hourly and salaried workers with an average income pursuant to the Federal Statistics Office. The Company has made provisions for pensions in accordance with IFRS for the future entitlements of the Management Board members for payment of the retirement pensions. In the year under review, an amount of EURk 179 (p/y: EURk 140) was allocated to the pension provisions for active Management Board members. This amount takes into account the so-called service cost and excludes interest costs. 102 Annual Report 2013

103 Remuneration Report The following table details the annual pension entitlements of the Management Board members when they have reached the retirement age of 65 on the basis of the acquired claims up to December 31, EURk Annual entitlement Present value of benefit obligations Allocation to pension provisions PENSIONS Karl M. Schmidhuber, Chairman ,898 1, Bernd Bartmann Dr. Winfried Blümel Total ,371 2, Former members of the Management Board and their surviving dependents have received pension payments amounting to EURk 240 in the year under review (p/y year: EURk 234). On December 31, 2013, the corresponding provision for pensions amounted to EURk 2,057 (p/y: EURk 2,146). Group Management Report and Management Report of PWO AG In the event of termination of employment, no other benefits were promised to any member of the Management Board. In fiscal year 2013, no members of the Management Board had received any payments or promises from a third party in connection with their work as a Management Board member. Remuneration of the Supervisory Board The remuneration of the Supervisory Board members is specified in Section 11 of the Articles of Association, and is essentially governed as follows: Every member of the Supervisory Board receives a fixed annual remuneration of EUR 20,000. The Chairman of the Supervisory Board receives twice this amount and the Deputy Chairman receives one and one half times this amount. Additionally, the members of the Supervisory Board receive an attendance fee of EUR 500 for every meeting of the Supervisory Board and its committees personally attended. For numerous meetings taking place on the same day, an attendance fee is paid only once. Consolidated Financial Statements of the PWO Group Supervisory Board members, who have been members for only part of the fiscal year, receive one twelfth of the yearly compensation for the commencement of each month they were present. The compensation is payable at the end of the fiscal year. The Company also reimburses the Supervisory Board members for their expenses as well as for any value added tax payable on their remuneration and expenses. The members of the Supervisory Board are also insured under one of the Company s financial loss liability insurance policies for directors and certain managers (D&O insurance). The premiums for this are assumed by the Company. Here, a deductible is agreed on in the amount of half of the fixed annual remuneration of the Supervisory Board member. Further Information Annual Report

104 Remuneration Report Also in this reporting year, the Company did not pay any remuneration to the Supervisory Board members for activities performed outside of their supervisory role. The individual remuneration of the Supervisory Board members (short-term remuneration) is shown in the table below. REMUNERATION OF THE SUPERVISORY BOARD EURk Fixed remuneration Attendance fees * Total remuneration Dieter Maier, (Chairman) Group Management Report and Management Report of PWO AG Dr. Klaus-Georg Hengstberger (Deputy Chairman until May 22, 2013) Dr. Gerhard Wirth (Deputy Chairman since May 22, 2013) Dr. Georg Hengstberger (member since May 22, 2013) Herbert König Ulrich Ruetz Katja Ullrich Total * All figures shown have been rounded. This results in deviations when using addition. 104 Annual Report 2013

105 Responsibility Statement Responsibility Statement We declare to the best of our knowledge, and in accordance with the applicable reporting principles, that the consolidated financial statements give a true and fair view of the net assets, financial position, and results of operations of the Group, and furthermore that the Group management report includes a fair review of the development of the business including the results and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group. Oberkirch, March 13, 2014 The Management Board Karl M. Schmidhuber Bernd Bartmann Dr. Winfried Blümel Group Management Report and Management Report of PWO AG (Chairman) Further Information Consolidated Financial Statements of the PWO Group Annual Report

106 Management Report for Progress-Werk Oberkirch AG Management Report for Progress-Werk Oberkirch AG Group Management Report and Management Report of PWO AG Progress-Werk Oberkirch AG (the parent company ) is located in Oberkirch, Baden-Wuerttemberg. This location forms the headquarters of the Group and has its largest production site. In order to limit risk, the Group s international locations are closely managed by the Oberkirch location, particularly in the areas of finance, controlling, and legal affairs. However, each location is responsible for carrying out their respective daily business operations. The financial statements for the AG are prepared in accordance with the provisions of the German Commercial Code (HGB), whereas the consolidated financial statements are prepared in accordance with IFRS. The general statements of the combined management report for the PWO Group and PWO AG also apply to PWO AG alone, particularly in the areas of the market, strategy, management, and the opportunities and risks inherent in business activities. The number of employees in the AG, including temporary workers, grew to 1,451 (p/y: 1,393) as of the reporting date. INCOME STATEMENT Selected data (in EURk) 2013 in % of total output 2012 in % of total output Revenue 252, % 247, % Total output 255, % 250, % Cost of materials 130, % 129, % Staff costs 78, % 72, % Depreciation and amortization 10, % 9, % Other operating expenses 24, % 25, % Financial result 2, % 6, % Result from ordinary activities 12, % 11, % Net income 7, % 6, % Unappropriated retained earnings 5, % 5, % During the reporting year, the development of the AG was impacted by the weakness of the automotive market in Europe as well as by higher energy and staff costs. Higher maintenance costs for tools and equipment as well as start-up costs for numerous new projects also had a negative impact. At this point, we would like to refer to the statements regarding the segment Germany in this combined management report. Revenues and total output each increased by around two percent overall compared to the previous year. Opposing trends were observed in the two major cost blocks, cost materials and staff costs: While the cost of materials ratio improved slightly due to shifts in the product mix, the staff costs ratio recorded a significant increase. In the course of the year, cost-cutting measures were implemented in this area, but their positive effects will only unfold in the new fiscal year Annual Report 2013

107 Management Report for Progress-Werk Oberkirch AG In the case of other operating expenses, our efforts at limiting expenses have already had a positive effect: They experienced a small absolute decline in the reporting year and the expense ratio receded to 9.7 percent (p/y: 10.0 percent). Despite the low growth in the reporting year and the charges mentioned on the expenditure side, the result from ordinary activities climbed to EUR 12.6 million (p/y: EUR 11.3 million). However, this resulted from the fact that, in the previous year, a one-time charge of EUR 3.6 million was recorded in the financial result. In addition, expenses of EUR 0.8 million were incurred for the capital increase in May Excluding these two charges, earnings in the 2013 fiscal year would have fallen on a purely operating basis versus the previous year. The net income of the AG amounted to EUR 7.9 million (p/y: EUR 6.8 million) and included an unchanged extraordinary result of EUR -0.3 million and higher income taxes of EUR 4.4 million (p/y: EUR 4.2 million). The total assets of the AG increased in the reporting year to EUR million (p/y: EUR million) and thus disproportionally to the growth of the Company. Almost all the items on the asset side of the balance sheet have grown slightly in the course of our further investment in strengthening the location and in preparing for future series start-ups. However, the everincreasing operational linkages of our international portfolio of locations were particularly essential for increasing our total assets. This meant that both the EUR 32.7 million (p/y: EUR 23.8 million) in loans to affiliated companies as well as the EUR 13.5 million (p/y: EUR 9.0 million) in receivables from affiliated companies experienced strong gains. Group Management Report and Management Report of PWO AG Due to a moderate increase in the net income of the AG, its equity rose only slightly to EUR million (p/y: EUR million), while the equity ratio at 50.2 percent (p/y: 53.0 percent) remained at a very high level. While the provisions rose only moderately to EUR 41.8 million (p/y: EUR 39.3 million), the liabilities increased significantly to EUR 71.8 million (p/y: EUR 59.6 million). This mainly related to banks borrowings and represents the conscious controlling within the Group. Although the trade payables increased to a similar degree in percentage terms, in absolute terms a lower amount is attributed to this position. In view of the future business development, the statements with regard to the opportunities and risks of the Group are also largely valid for the AG. However, we expect lower growth in the AG than in the Group since the AG primarily serves the saturated European market which beyond the cyclical fluctuations has fundamentally lower growth rates than many of the international markets. Consolidated Financial Statements of the PWO Group In terms of the AG s profitability, we believe that our continued efforts to reduce costs and increase productivity will be sufficient enough to compensate for the ongoing expense increases and the business price pressure which is typical in our industry. With improved market conditions in Western Europe, we expect the earnings level of the AG to also achieve a noticeable improvement once again. Further Information Annual Report

108 108

109 CONSOLIDATED FINANCIAL STATEMENTS OF THE PWO GROUP Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Audit Opinion 153 Further Information Consolidated Financial Statements of the PWO Group Annual Report

110 Consolidated Income Statement Consolidated Income Statement Note no EURk 2012 restated 1) EURk 6 Revenue 377, ,072 Change in finished goods and work-in-progress 3,994 5,205 7 Other own work capitalized 2,803 3,347 Total output 384, ,624 8 Other operating income 4,592 4,507 Cost of raw materials and supplies and merchandise purchased -182, ,248 Cost of purchased services -21,338-22,710 Cost of materials -203, ,958 Wages and salaries -86,344-81,528 Social security and post-employment costs -18,589-15,775 9 Staff costs -104,933-97,303 Amortization of intangible non-current assets and depreciation of property, plant and equipment -21,192-18, Other operating expenses -36,501-35,680 Consolidated Financial Statements of the PWO Group Earnings before interest and taxes (EBIT) 22,313 21,255 Financial income Financial expenses -5,696-6,378 Financial result -5,636-6,326 Earnings before taxes (EBT) 16,677 14, Income taxes -3,540-4,499 Net income for the period 2) 13,137 10, Earnings per share in EUR (diluted = basic) based on net income attributable to the shareholders of PWO AG ) Some amounts deviate from the amounts reported in the consolidated financial statements for fiscal year 2012 due to adjustments of the application of IAS 19 (see note 4). 2) The net income for the period is entirely attributable to the shareholders of PWO AG. 110 Annual Report 2013

111 Consolidated Statement of Comprehensive Income Consolidated Statement of Comprehensive Income 2013 EURk 2012 restated 1) EURk Net income for the period 13,137 10,430 Items that may be reclassified to profit and loss in future periods Net gains/losses from cash flow hedges 252 1,494 Tax effect Unrealized gains/losses from derivative financial instruments 97 1,143 Currency translation differences -2,449 2 Items that will not be reclassified to profit and loss Actuarial gains/losses from defined benefit pension plans 2,126-7,350 Tax effect ,091 Actuarial gains/losses from defined benefit pension plans 1,528-5,259 Other comprehensive income after tax ,114 Total comprehensive income after tax 12,313 6,316 1) Some amounts deviate from the amounts reported in the consolidated financial statements for fiscal year 2012 due to adjustments of the application of IAS 19 (see note 4). Consolidated Financial Statements of the PWO Group Further Information Annual Report

112 Consolidated Balance Sheet Consolidated Balance Sheet ASSETS Note no EURk 2012 restated 1) EURk 1. Jan restated 1) EURk Land and buildings 52,474 47,331 42,962 Technical equipment and machinery 68,513 62,879 47,969 Other equipment, operating and office equipment 11,737 11,471 7,512 Prepayments and assets under construction 11,746 14,598 16, Property, plant, and equipment 144, , ,456 Contract and customer-related development services 4,481 4,161 3,350 Industrial property rights and similar rights 1,743 2,375 3,139 Goodwill 5,363 5,485 5,478 Prepayments Intangible assets 11,814 12,028 11,971 Non-current portion of other assets Non-current portion of income tax receivables Deferred tax assets 7,593 6,611 4,833 Non-current assets 164, , ,049 Raw materials and supplies 21,226 18,389 14,864 Work-in-progress 25,063 23,156 16,729 Finished goods and merchandise 15,895 14,245 16,151 Consolidated Financial Statements of the PWO Group 16 Inventories 62,184 55,790 47,744 Trade receivables and other receivables 55,892 52,125 50,972 Other assets 7,109 5,940 6,540 Other financial assets 1,232 1, Income tax receivables Receivables and other assets 64,758 59,823 58, Cash and cash equivalents 8,071 7,810 4,580 Current assets 135, , ,508 Total assets 299, , ,557 1) Some amounts deviate from the amounts reported in the consolidated financial statements for fiscal year 2012 due to adjustments of the application of IAS 19 (see note 4). 112 Annual Report 2013

113 Consolidated Balance Sheet EQUITY AND LIABILITIES Note no EURk 2012 restated 1) EURk 1. Jan restated 1) EURk Subscribed capital 9,375 9,375 7,500 Capital reserves 37,494 37,494 17,155 Retained earnings 56,300 46,538 43,724 Currency translation differences ,741 1, Total Equity 102,461 95,148 70,118 Interest-bearing borrowings 47,735 48,275 37,088 Provisions for pensions 41,002 40,974 32,861 Other provisions 2,904 3,203 3,509 Non-current portion of other liabilities Deferred tax liabilities 1, Non-current liabilities 92,841 93,762 74,353 Trade payables 24,719 22,061 20,957 Advance payments received on account of orders 2,765 2,091 1,757 Interest-bearing borrowings 59,991 49,988 57,742 Other liabilities 11,669 11,591 12,062 Other financial liabilities 865 1,424 2,492 Income tax liabilities 1, Current portion of provisions for pensions 1,525 1,495 1,410 Current portion of other provisions 1,546 1,743 1,439 Current liabilities 104,082 90,393 98, Total liabilities 196, , ,439 Consolidated Financial Statements of the PWO Group Total equity and liabilities 299, , ,557 Further Information Annual Report

114 Consolidated Statement of Changes in Equity Consolidated Statement of Changes in Equity Equity attributable to PWO AG shareholders Other components of equity Items that may be reclassified to profit and loss in future periods EURk Subscribed capital Capital reserves Retained earnings Defined benefit pension plans Currency translation differences Cash flow hedges Total December 31, ,500 17,155 49, , ,784 IAS 19 adjustment ,545-4,666 January 1, ) 7,500 17,155 49,148-4,545 1, ,118 Net income for the period 1) 10,430 10,430 Other comprehensive income 1) -5, ,143-4,114 Total comprehensive income 1) 7,500 17,155 59,578-9,804 1, ,434 Capital increase 2) 1,875 20,339 22,214 Dividend payment -3,500-3,500 December 31, ) 9,375 37,494 56,078-9,804 1, ,148 Consolidated Financial Statements of the PWO Group January 1, ,375 37,494 56,078-9,804 1, ,148 Net income for the period 13,137 13,137 Other comprehensive income 1,528-2, Total comprehensive income 9,375 37,494 69,215-8, ,461 Dividend payment -5,000-5,000 December 31, ,375 37,494 64,215-8, ,461 1) Some amounts deviate from the amounts reported in the consolidated financial statements for fiscal year 2012 due to adjustments of the application of IAS 19 (see note 4). 2) According to IAS 32.37, the proceeds from the capital increase are reported net of net transaction costs of EUR 599k. This includes income tax benefits in an amount of EUR 233k. 114 Annual Report 2013

115 Consolidated Statement of Cash Flows Consolidated Statement of Cash Flows Note no EURk 2012 restated 1) EURk Net income for the period 13,137 10,430 Amortization of intangible non-current assets and depreciation of property, plant, and equipment, net of write-ups 21,192 18, Income tax expense/refund 3,540 4, Interest income and expenses 5,636 6,326 Change in current assets -11,569-9,506 Change in non-current assets Change in current liabilities (excluding interest-bearing borrowings) 2, Change in non-current liabilities (excluding interest-bearing borrowings) -1,984 6, Income taxes paid -3,731-4,421 Other non-cash expenses/income 869-5,830 Gain/loss on disposal of property, plant and equipment Cash flow from operating activities 30,425 26,617 Proceeds from disposal of property, plant, and equipment Payments for investments in property, plant, and equipment -22,873-30,898 Payments for investments in intangible assets -2,079-2,583 Cash flow from investing activities -24,694-33, Proceeds from capital increase 0 22,813 Transaction costs related to the capital increase Dividends paid -5,000-3,500 Interest paid -4,221-4,589 Interest received Consolidated Financial Statements of the PWO Group Proceeds from borrowings 24,457 29,087 Repayment of borrowings -27,508-31,180 Cash flow from financing activities -12,213 11,851 Net change in cash and cash equivalents -6,482 5,206 Effect of exchange rates on cash and cash equivalents Cash and cash equivalents as at January 1 2,664-2,560 Cash and cash equivalents as at December 31-3,721 2, of which cash and cash equivalents 8,071 7, of which bank borrowings due on demand -11,792-5,146 Further Information 1) Some amounts deviate from the amounts reported in the consolidated financial statements for fiscal year 2012 due to adjustments of the application of IAS 19 (see note 4). Annual Report

116 Notes to the Consolidated Financial Statements Company Information Accounting Policies Notes to the Consolidated Financial Statements Company Information The consolidated financial statements of Progress-Werk Oberkirch AG (PWO) and its subsidiaries for the January 1, 2013 to December 31, 2013 fiscal year were authorized by the Management Board on the basis of a resolution passed on March 13, 2014 and were subsequently submitted to the Supervisory Board for examination. PWO is an exchange-listed stock corporation headquartered in Oberkirch, Germany. The Company s shares are traded on XETRA, within the regulated market in Frankfurt and Stuttgart, as well as within the Regulated Unofficial Market in Berlin, Düsseldorf, Hamburg-Hannover, and Munich. The main business activities of the Company and its subsidiaries are described in detail in the Group management report in the chapter titled Group principles. The consolidated financial statements are included in the consolidated financial statements of Consult Invest Beteiligungsberatungs GmbH, Böblingen, as the premier group parent company, and can be accessed in the Bundesanzeiger (Federal Gazette). Accounting Policies Consolidated Financial Statements of the PWO Group 1 Basis of presentation The consolidated financial statements of Progress-Werk Oberkirch AG and its subsidiaries are prepared in accordance with the International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB) and applicable in the European Union, as well as with the commercial regulations also applicable under Section 315a (1) HGB (German Commercial Code). The consolidated financial statements are prepared using the historical cost principle, with the exception of derivative financial instruments and foreign currency receivables and payables which are carried at fair value. The income statement has been prepared on the basis of the nature of cost method. The consolidated financial statements are presented in thousands of euros. Unless otherwise indicated, all values are rounded up or down to the nearest thousand (EURk) according to the commercial method. 2 Principles of consolidation The consolidated financial statements include the financial statement of Progress-Werk Oberkirch AG and its subsidiaries for each fiscal year ending December 31. Subsidiaries are fully consolidated as of the acquisition date. Consolidation ends as soon as the parent company ceases to control the subsidiary. The financial statements of the subsidiaries are prepared using uniform accounting methods for the same reporting periods as the financial statements of the parent company. Business combinations are accounted for by applying the purchase method (IFRS 3). The acquisition costs of the business combination are allocated to the acquired identifiable assets, liabilities, and contingent liabilities, at their fair values applicable on the acquisition date. Insofar as the remaining difference is positive, it is then reported as goodwill; insofar as it is negative, it is recognized in profit or loss 116 Annual Report 2013

117 Notes to the Consolidated Financial Statements Accounting Policies after reexamination. Revenues, expenses, and income, as well as receivables and payables between consolidated entities, are offset against one another (IAS 27). Deferred taxes are recognized for consolidation measures affecting income taxes. The consolidated financial statements include six foreign entities held either directly or indirectly. Details relating to ownership interests, the equity, and net income of the consolidated entities are outlined below: EURk Ownership Net income Equity PWO Canada Inc., Kitchener, Canada 100 % 2,389 14,080 PWO UNITOOLS CZ a.s., Valašské Meziříčí, Czech Republic 100 % 5,666 17,674 PWO Holding Co., Ltd., Hongkong, China 100 % PWO High-Tech Metal Components (Suzhou) Co., Ltd., Suzhou, China 1) 100 % -1,530 16,786 PWO High-Tech Tool Trading (Suzhou) Co., Ltd., Suzhou, China 1) 100 % PWO de México S.A. de C.V., Puebla, Mexico 2) 100 % ,189 1) indirect holding through PWO Holding Co., Ltd., for a total of 100 % 2) indirect holding through PWO Canada Inc. for a total of 1 % 3 Summary of significant accounting policies Currency translation The consolidated financial statements are presented in euros, which is the functional currency of the parent company. The financial statements of the companies included in the consolidated financial statements, which are prepared using foreign currencies, are translated according to the functional currency concept (IAS 21). Each company within the Group determines its own functional currency. The items contained in the financial statements of the respective companies are measured using this functional currency. All balance sheet items of the foreign consolidated entity were translated into euros by applying the relevant mean rate of exchange at the reporting date. Expenses and income in the Group income statement were translated using the year-average exchange rate. The net income for the period from the translated income statement was transferred to the balance sheet. Differences are recognized directly in equity as a currency translation difference. Foreign currency transactions are initially translated between the functional currency and the foreign currency at the spot rate prevailing on the transaction date. Monetary assets and liabilities denominated in a foreign currency are translated at the closing rate. All exchange rate differences are recorded in the net income or loss for the period. Non-monetary items that are measured in a foreign currency at historical purchase or production cost are translated at the foreign exchange rate prevailing on the transaction date. Non-monetary items in a foreign currency that are measured at fair value are translated at the rate prevailing at the time the fair value was determined. Consolidated Financial Statements of the PWO Group As of January 1, 2012, PWO Holding Co., Ltd., Hong Kong, China changed its functional currency from HKD to EUR since the underlying transactions as of that date have been predominantly invoiced and paid in EUR. Goodwill arising in connection with the acquisition of a foreign operation and fair-value adjustments to carrying amounts of assets and liabilities arising from the acquisition of this foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. Further Information Annual Report

118 Notes to the Consolidated Financial Statements Accounting Policies The following exchange rates were used for currency translation purposes within the consolidated financial statements: Year-end exchange rate Average exchange rate China CNY Canada CAD Mexico USD Revenue recognition Income is recognized when it is likely that the economic benefit of the transaction will accrue to the Group and when the amount of income can be reliably determined, regardless of the time of payment. Income is measured at the fair value of the consideration received or claimable, in accordance with the contractual payment terms stipulated, net of taxes or other duties. Revenue is recognized from the sale of products when the key opportunities and risks associated with the sold products pass from the seller to the buyer. This normally occurs when goods are delivered. Interest income from financial instruments carried at amortized cost is recognized on the basis of the effective interest rate. This is the rate that precisely discounts future expected cash payments or receipts through the expected term of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. Interest income is reported as part of financial income in the income statement. Consolidated Financial Statements of the PWO Group Government grants Government grants are recognized if there is reasonable assurance that the grants will be received and the entity will comply with the conditions attached to it. Grants related to assets are presented in the balance sheet by deducting the grant in order to arrive at the carrying amount of the asset. Cost-related grants are reported as income. Taxes Actual tax refund claims and tax liabilities for the current period are calculated based on the amount expected to be refunded by the taxation authority or paid to the taxation authority. The calculation of the amount is based on the tax rates and tax laws in force on the reporting date in the countries in which the Group operates and generates taxable income. Deferred taxes are recognized using the balance sheet liability method for all temporary differences existing on the reporting date between the recognition of an asset or liability in the balance sheet and the tax valuation rates. Deferred tax liabilities are recognized for all taxable temporary differences, excluding non-tax-deductible goodwill and temporary differences originating from initial recognition of an asset or a liability in a business transaction which is not a business combination, and which at the time of the transaction influences neither IFRS results for the period or the taxable results. Deferred taxes are recognized for tax-loss carryforwards to the extent that it is probable that these can be used. Deferred taxes are measured at the tax rates that apply or are expected to apply to the period when the asset is realized or the liability is settled, based on the current legal situation in the individual countries. 118 Annual Report 2013

119 Notes to the Consolidated Financial Statements Accounting Policies Deferred taxes attributable to items accounted for directly in equity are recognized in equity rather than through the income statement. Deferred tax assets and deferred tax liabilities are offset if the Group has a legally enforceable right to set off current tax assets and current tax liabilities and if these relate to the income taxes of the same taxable entity and are imposed by the same taxation authority. Property, plant, and equipment Property, plant, and equipment are carried at cost less accumulated depreciation and impairment losses. Depreciation is performed on the basis of the straight-line method. Certain items of machinery as well as contract-related tools were depreciated according to the units-of-production method, based on the number of units in the reporting year, and calculated in terms of the total number of items specified or planned in the order. Leases The decision as to whether an agreement contains a lease is based on the economic content of the agreement at the time the agreement was concluded and requires an assessment as to whether the performance of the contractual agreement depends on the utilization of a specific asset or assets and whether the agreement grants a right to the use of the assets, even if this right is not expressly stated in an agreement. Upon initial recognition, finance lease arrangements where nearly all risks and opportunities associated with the ownership of the transferred assets are transferred to the Group, are recognized at amounts equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payments. Lease payments are apportioned between financial expenses and the repayment of the outstanding lease liability, such that the remaining residual carrying amount of the lease liability bears interest at a fixed and variable interest rate. Leased assets are depreciated over the useful life of the asset. If, however, the transfer of the asset to the Group is not guaranteed at the end of the lease period, the leased asset is completely depreciated over the shorter of either the expected useful life or the lease term. Lease payments for operating leases are recognized as expenses linearly over the term of the lease. Borrowing costs Borrowing costs are recognized as part of the acquisition or production costs of an asset if they can be allocated directly to the acquisition or production of the asset and if a considerable period of time is necessary in order to assign the asset in its intended usable or saleable condition. All other borrowing costs are recognized as an expense in the period they occurred. Borrowing costs consist of interest costs and other costs that a company incurs in connection with the borrowing of funds. Consolidated Financial Statements of the PWO Group Intangible assets Individually acquired intangible assets are measured at acquisition cost less cumulative amortization and impairment losses. Intangible assets include goodwill, patents, customer-related development services, software, customer relations, non-competitive clauses, licenses and similar rights. The Group applies the straight-line method to amortize intangible assets with finite useful lives over the expected useful life to the estimated residual value. Customer-related development services, which are amortized based on their volume, are excluded. Goodwill is not amortized on a scheduled basis, but instead, is subject to an annual impairment test. With the exception of goodwill, the Group has not identified any intangible assets with indefinite useful lives. Further Information Annual Report

120 Notes to the Consolidated Financial Statements Accounting Policies Development costs are capitalized if the recognition criteria of IAS 38 are fulfilled. This specifically relates to the existence of specific customer orders for the development of tools. After initial capitalization, the asset is carried at cost less accumulated amortization and impairment losses. Capitalized development costs include all directly attributed individual costs as well as proportional overheads, and are amortized over the planned product life span (5 to 7 years). The amortization of capitalized development costs forms part of the production costs and is allocated to the components through which they have been incurred. An impairment test relating to goodwill is performed annually. An impairment test is performed for other intangible assets with a finite useful life, as well as for property, plant, and equipment, if there are specific indications that an asset may be impaired. Impairment is recognized in profit or loss if the recoverable amount of the asset is less than its carrying amount. The recoverable amount must be determined for each individual asset unless the asset does not generate cash inflows that are largely independent of those of other assets or other groups of assets. The recoverable amount is the higher of an asset s net realizable value and its value in use. The net realizable value is the amount that can be realized from the sale of an asset in a normal market transaction, less selling costs. Value in use is calculated using the discounted cash flow method on the basis of the estimated future cash flows expected to arise from the continuing use of an asset and from its disposal. The cash flows are derived from longterm corporate planning which take into account historical developments and macroeconomic trends. The value in use of the relevant cash generating unit is normally considered in order to calculate the intrinsic value of the goodwill. Consolidated Financial Statements of the PWO Group The long-term corporate planning, approved by the Supervisory Board, runs until the end of the detailed planning period in Long-term corporate planning reacts sensitively to the key assumptions regarding the development of sales figures in the automotive industry, commodity prices, and the increase in productivity. These developments were assessed and determined on the basis of past experience, using publicly available data, existing project agreements, and on measures decided internally. Cash flows are discounted up until the reporting date by applying risk equivalent capitalization rates (pre-tax). When applying an impairment test on the goodwill associated with PWO UNITOOLS CZ a.s. and PWO Canada Inc., capitalization rates (Weighted Average Cost of Capital WACC) of 10.99% (p/y: 10.39%) and 14.35% (p/y: 13.78%) were applied respectively with regard to the first phase. The second phase (growth rate in perpetuity) was calculated with a growth rate for PWO UNITOOLS CZ a.s. and PWO Canada of 1.03% (p/y: 1.04%) and 1.29% (p/y: 1.28%), respectively. The growth rates of the relevant automotive markets were used as a basis for determining the cash flows. Assumptions that have been made are subject to a certain level of sensitivity. While based on reasonable judgment, a change to one of the assumptions made in determining the value in use for PWO UNITOOLS CZ a.s. and PWO Canada Inc. is fundamentally possible, we believe it is rather unlikely that the carrying amount of goodwill of these units could significantly exceed its recoverable amount since the actual recoverable amounts for PWO Canada Inc. and PWO UNITOOLS CZ a.s. exceed their carrying amounts by EURk 7,420 (p/y: EURk 11,195) and by EURk 13,054 (p/y: EURk 1,604), respectively. However, under the assumption of an unchanged capitalization rate, an impairment would be required if the free cash flows were sustainably reduced by more than 26% for PWO UNITOOLS and by 34% for PWO Canada. Conversely, under the assumption of unchanged free cash flows, an impairment would be required if the capitalization rate increased to 14.13% for PWO Canada and to 11.06% for PWO UNITOOLS. 120 Annual Report 2013

121 Notes to the Consolidated Financial Statements Accounting Policies Financial instruments Financial instruments are contracts that give rise to a financial asset of one entity and a financial liability or equity instrument of another entity (IAS 39). In the case of financial assets, where the trade and the settlement could occur on different dates, the settlement date is applied for the purpose of initial recognition. Financial instruments are measured at cost on initial recognition; transaction costs are generally included in the initial measurement. The subsequent measurement of financial instruments is dependent on how these instruments are allocated to the categories in accordance with IAS 39. They are either measured at fair value or at amortized cost. IAS 39 differentiates between primary and derivative financial instruments. Primary financial instruments relate specifically to trade receivables and payables, other financial assets, cash and cash equivalents, bank borrowings, and other financial liabilities. These items are measured at amortized cost. In the case of trade receivables and payables and other liabilities as well as cash and cash equivalents, the carrying amount mainly corresponds to fair value. In order to hedge interest-rate and exchange-rate risks PWO employs currency-related derivatives in the form of interest-rate swaps, foreign exchange swaps, options, and foreign exchange forward contracts. These are carried at fair value at the time of purchase and as part of subsequent measurement. In the case of derivative financial instruments which do not fulfill the criteria of a hedging transaction, gains or losses from changes in the fair value are reported immediately in profit or loss. Market value changes of derivative financial instruments used to hedge future cash flows (cash flow hedges) are recognized directly in equity in the amount of the effective share of equity, while the ineffective share is immediately recognized in profit or loss. When the hedged transaction takes place, the derivative is transferred from equity to profit or loss. The fair value of exchange listed derivatives corresponds to the positive or negative market value. If no market values are available, these are calculated using recognized actuarial valuation models, e.g. discounted cash flow model or option price model. In the case of short-term financial assets and financial liabilities, the carrying amount is a reasonable approximation of the fair value. At each reporting date, the Group determines whether there is objective evidence of an impairment of a financial asset or group of financial assets. The fair value of fixed-interest rate borrowings from banks and leasing companies is measured on the basis of a discounted cash flow model by applying interest rates with matching. The Group has not yet made use of the option of designating financial assets at fair value through profit or loss at the time of their initial recognition. Consolidated Financial Statements of the PWO Group In the case of financial liabilities, the Group has not yet resorted to the option of designating these as financial liabilities at fair value through profit or loss at the time of their initial recognition. Measurement of fair value The Group measures derivative financial instruments at fair value at each reporting date. The fair values of financial instruments carried at amortized cost are described in Note 22. The fair value is the amount to be achieved upon the sale of an asset in an orderly business transaction between market participants on the valuation date or the amount to be paid for the transfer of a liability. Measuring the fair value assumes that the transaction leading to the sale of the asset or the transfer of the liability, takes place on the asset s principal market or the principal market for the transfer of the liability or, if such a principal market is not available, on the most favorable market for the asset or for the transfer of the liability. The Group must have access to either the principal market or the most favorable market. Further Information Annual Report

122 Notes to the Consolidated Financial Statements Accounting Policies The fair value of an asset or liability is determined on the basis of assumptions that market participants would take into consideration in the pricing of the asset or liability. It is assumed that market participants act in their own best economic interest. The Group uses valuation techniques that are appropriate for the respective circumstances and for which sufficient data for measuring the fair value are available. The use of relevant, observable input factors should be kept as high as possible and the use of unobservable input factors should be kept as low as possible. All assets and liabilities, for which fair value is determined or reported in the financial statements, are allocated to the fair value hierarchy described below based on the input parameters of the lowest level relevant for the overall measurement of the fair value: Level 1 Quoted (unadjusted) prices in active markets for identical assets or liabilities. Level 2 - Valuation method in which the lowest level of input parameters essential for the overall measurement at fair value, is either directly or indirectly observable on the market. Level 3 - Valuation method in which the lowest level of input parameters essential for the overall measurement at fair value, is not observable on the market. For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group determines whether reclassifications between the hierarchy levels have taken place by reviewing the classification (based on the input parameters of the lowest level relevant for the overall measurement of the fair value) at the end of each reporting period. Consolidated Financial Statements of the PWO Group Inventories Inventories of raw materials and supplies are recognized at the lower of average purchase price or realizable values. Unsaleable or obsolete materials are impaired accordingly. Work-in-progress and finished goods are measured at the lower of cost or net realizable value on the basis of item-by-item calculations based on current operational accounting. In addition to direct costs, production costs include appropriate portions of material and production overheads as well as production-related depreciation and production-related administration costs. Costs arising from general administration and borrowing costs are not capitalized. Tooling and development contracts are measured at acquisition and production costs. In this context, a loss-free valuation considers the maximum cost to be recognized as the selling price plus revenue generated via series production. Revenue is recognized when the Group has transferred the significant risks and opportunities relating to ownership of the goods to the buyer. Cash and cash equivalents Cash and cash equivalents include cash on hand and short-term bank deposits with an initial remaining term of less than 90 days. 122 Annual Report 2013

123 Notes to the Consolidated Financial Statements Accounting Policies Provisions Pension provisions are measured on an annual basis for the consolidated financial statements by independent appraisers using the internationally accepted projected unit credit method in accordance with IAS 19 (revised). As part of this process, expected future increases in salaries and pensions are taken into account in addition to pensions and acquired vested rights to future pension payments known at the reporting date. With the abolition of the corridor method, there was a change to the OCI method (other comprehensive income) as of fiscal year Actuarial gains and losses are recognized immediately through other comprehensive income in equity. The past service cost is recognized immediately in profit or loss. Other provisions are recognized when the Group has a current legal or factual obligation with respect to third parties, where a future outflow of resources is probable and a reliable estimate of the amount of the obligation can be made. If the interest effect is material, provisions are discounted. To the extent that the Group expects at least a partial reimbursement for a provision carried as a liability, the reimbursement is recognized as a separate asset, provided inflow of the reimbursement is likely. 4 Changes in accounting policies RECENTLY ADOPTED ACCOUNTING STANDARDS IFRS 13 Measurement of fair value This standard establishes uniform guidelines for the measurement of fair value. It does not cover the question of when assets and liabilities are to be measured at fair value, but only how fair value is appropriately determined under IFRS. The application of IFRS 13 has had no material effect on the measurement of the fair value of the Group. Required information can be found in the notes to the individual assets and liabilities whose fair values were determined. IAS 1 Presentation of Financial Statements: Presentation of Components of Other Comprehensive Income The amendment to IAS 1 requires a new classification of components of other comprehensive income. Components that will be reclassified to profit or loss in subsequent reporting periods (recycling) are to be presented separately from components which will not be reclassified. The amendment affects only the presentation and has no effect on the Group s net assets, financial position, or results of operations. Consolidated Financial Statements of the PWO Group Further Information IAS 1 Presentation of Financial Statements: Clarification of Requirements for Comparative Information This amendment clarifies the difference between voluntary additional comparative information and required comparative information. If a comparative period is provided in the financial statements that extends beyond the minimum comparative information requirements, then the entity must include Annual Report

124 Notes to the Consolidated Financial Statements Accounting Policies comparative information in the notes for the entire period presented. The amendment clarifies that no comparative information for the opening statement of financial position (available as of January 1, 2012) is required in the notes when they were prepared as a result of retrospective restatements or reclassification of financial statement items. Accordingly, the Group did not provide comparative information in its financial statements in the opening statement of financial position as of January 1, This amendment affects only the presentation and has no effect on the Group s net assets, financial position, or results of operations. IAS 19 Employee Benefits (revised 2011) The IASB comprehensively revised IAS 19 Employee Benefits (revised 2011). The adjustments range from fundamental changes, such as those concerning the determination of expected returns on plan assets and the abolition of the corridor method, to mere clarifications and reformulations. The revised standard has an impact on the amount of the provision which now fully reflects the obligation. Actuarial gains and losses will no longer be recognized on a pro-rata basis through profit or loss, but fully recognized in equity in the period incurred within other comprehensive income. The cumulative unrecognized actuarial losses on December 31, 2012 of EURk 13,404 (p/y: EURk 6,320) have a significant impact. Minor income effects due to the adjustments to the previous year s figures resulted from the immediate recognition of unvested past service costs occurring through profit or loss instead of recognizing them over the period of vesting, as well as from the abolition of the corridor method. The following tables show the impact on the opening balance sheet of January 1, 2012 and the income statement and statement of comprehensive income: CONSOLIDATED BALANCE SHEET 2012 January 1, 2012 Consolidated Financial Statements of the PWO Group EURk adjustment adjustment preadjustment postadjustment preadjustment postadjustment Deferred tax assets 2,842 3,769 6,611 3,011 1,822 4,833 Retained earnings 56,192-9,654 46,538 48,390-4,666 43,724 Non-current provisions for pensions 27,551 13,423 40,974 26,373 6,488 32, Annual Report 2013

125 Notes to the Consolidated Financial Statements Accounting Policies CONSOLIDATED INCOME STATEMENT 2012 EURk adjustment preadjustment postadjustment Staff costs -97, ,303 of which social security and post-employment costs -16, ,775 EBIT 20, ,255 EBT 14, ,929 Income taxes -4, ,499 Net income for the period 10, ,430 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2012 EURk adjustment preadjustment postadjustment Net income for the period 10, ,430 Other comprehensive income after tax 1,145-5,259-4,114 of which actuarial gains/losses from defined benefit pension plans 0-5,259-5,259 NEW AND AMENDED ACCOUNTING STANDARDS The following new and amended standards and interpretations, which were required in fiscal year 2013 for the first time, had no effect on the consolidated financial statements of PWO AG: Description Applicable as of Amendment of IFRS 1 - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters 01/01/2013 Amendment of IFRS 1 - Government Loans 01/01/2013 Amendment of IFRS 7 - Disclosures: Offsetting Financial Assets and Financial Liabilities 01/01/2013 Amendment of IAS 12 - Deferred Taxes: Realization of Underlying Assets 01/01/2013 IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine 01/01/2013 ACCOUNTING STANDARDS ADOPTED BY THE EUROPEAN COMMISSION - NOT YET IMPLEMENTED The following accounting standards published by the IASB and previously adopted into EU law are not yet mandatory and have not yet been applied by the Group. Consolidated Financial Statements of the PWO Group IFRS 10 Consolidated Financial Statements IFRS 10 was issued in May 2011 and is to be applied for the first time to fiscal years beginning on or after January 1, The new standard replaces the existing provisions of IAS 27 Consolidated and Separate Financial Statements for consolidated financial statements and the interpretations of SIC- 12 Consolidation Special Purpose Entities. IFRS 10 established a unified control concept, which applies to all entities, including special purpose entities. In June 2012, the revised transitional provisions to IFRS were also published and should facilitate the first-time application of the new standard. Due to the transparent structure of the Group, we do not expect an impact on the consolidated financial statements from the amendments to IFRS 10. Further Information Annual Report

126 Notes to the Consolidated Financial Statements Accounting Policies IFRS 12 Disclosure of Interests in Other Entities The amendment of IFRS 12 was issued in May 2011 and is to be applied for the first time to fiscal years beginning on or after January 1, This standard sets uniform disclosure requirements for the area of consolidated financial reporting and combines the disclosures on subsidiaries, which were previously governed by IAS 27, the disclosures for jointly controlled and associated companies, which was thus far included in IAS 31 and IAS 28, and for structured companies. The application of the new standard is expected to have no impact on the consolidated financial statements. Amendments to IAS 36 - Impairment of Assets: Recoverable Amount Disclosures for Non-Financial Assets These amendments are to be applied retrospectively for fiscal years beginning on or after January 1, 2014 and eliminate the unintended consequences of IFRS 13 on the disclosure requirements in IAS 36. They also require the disclosure of the recoverable amount of the assets or cash-generating units for which impairments losses or reversals of impairment losses were recognized during the course of the year. The amendment leads only to additional or revised disclosures and has no impact on the net assets, financial position, or results of operations. Amendment to IAS 39 - Novation of Derivatives and Continuation of Hedge Accounting The amendments to IAS 39 and IFRS 9 were published in June 2013 and are to be applied for the first time to fiscal years beginning on or after January 1, Under certain conditions the amendment allows the continuation of the hedging relationship in cases in which derivatives designated as a hedge are transferred to a central counterparty due to legal or regulatory provisions (novation). The amendment is to be applied retrospectively and early adoption is permitted. The Group does not expect the amendment to have any effect on its net assets, financial position, or results of operations. Consolidated Financial Statements of the PWO Group The following new provisions are not applicable to the Group and therefore have no effect on its net assets, financial position, or results of operations: Description Applicable as of IFRS 11 - Joint Arrangements 01/01/2014 Amendments of IFRS 10, IFRS 12, and IAS 27 - Investment Entities 01/01/2014 IAS 27 - Separate Financial Statements (revised 2011) 01/01/2014 IAS 28 - Investments in Associated Companies and Joint Ventures (revised in 2011) 01/01/2014 Amendment of IAS 32 - Offsetting Financial Assets and Financial Liabilities 01/01/2014 PUBLISHED ACCOUNTING STANDARDS The following accounting standards published by the IASB but not yet adopted into EU law are not yet mandatory and have not yet been applied by the Group. IFRS 9 Financial Instruments: Classification and Measurement In November 2009, the first part of phase I was published. This standard includes new regulations for the classification and measurement of financial assets. In October 2010, the IASB completed the second part of phase I of the project. The standard was extended through the addition of provisions pertaining to financial liabilities. IFRS 9 Financial Instruments: Hedging Relationships With the publication of the provisions on hedging relationships in November 2013, the IASB continues its project work in developing the new IFRS 9. The standard is designed as a supplement or amend- 126 Annual Report 2013

127 Notes to the Consolidated Financial Statements Accounting Policies ment to the previously published version of IFRS 9 and formulates new provisions for the ability to designate instruments or risks, the effectiveness requirements, the adjustment and resolution of hedging relationships and, in part, for the accounting of hedging relationships. The standard is applicable as of the time of its publication, but requires the full application of IFRS 9 and formulates extensive transitional provisions. The following new provisions are not applicable to the Group and therefore have no effect on its net assets, financial position, or results of operations: Description Improvements to IFRS ( ) Applicable as of various IFRIC 21 - Levies 01/01/2014 IFRS 14 - Regulatory Deferral Accounts 01/01/ Key judgments, estimates, and assumptions In preparing the consolidated financial statements, the Management Board makes discretionary judgments, estimates, and assumptions which affect the level of reported income, expenses, assets, and liabilities shown at the end of the reporting period. The actual amounts may differ from the estimated amounts. The following explains the most important discretionary judgments, forward-looking assumptions, and other key sources of estimation uncertainties existing on the reporting date in cases where there is a significant risk that a material adjustment in the carrying amounts of assets and liabilities will be required within the next fiscal year: The Group performs impairments tests for goodwill at least once a year. This requires making estimates with regard to the value in use of cash generating units to which goodwill is allocated. Cash generating units are defined as direct and indirect companies included in the consolidated financial statements. For the purpose of estimating value in use, the Group is required to estimate the projected future cash flows associated with the relevant cash-generating unit, as well as to select an appropriate discount rate in order to determine the present value of the aforementioned cash flows. On December 31, 2013 the carrying amount of goodwill amounted to EURk 5,363 (p/y: EURk 5,485). With respect to sensitivity, please refer to note 3, and the section titled Intangible Assets. Deferred tax assets are recognized for all unutilized tax-loss carryforwards and tax credits, to the extent that, based on tax planning, it is probable that future taxable profit will be available against which the unused tax losses and tax credits can actually be utilized. As at December 31, 2013, deferred tax assets relating to unutilized tax-loss carryforwards in an amount of EURk 1,039 (p/y: EURk 1,913) and relating to tax credits in an amount of EURk 4,292 (p/y: EURk 2,102) had been recognized. Of the taxloss carryforwards, EURk 0 (p/y: EURk 444) was attributable to PWO Canada Inc., and EURk 0 (p/y: EURk 613) were attributable to PWO UNITOOLS CZ a.s., and EURk 1,039 (p/y: EURk 856) were attributable to PWO de México S.A. de C.V. The tax credits concern PWO UNITOOLS CZ a.s. Consolidated Financial Statements of the PWO Group It is assumed that the deferred tax assets will retain their value due to the planned business development for the subsequent years. Determining the amount of deferred tax assets requires significant judgment with regard to the timing and amount of future taxable profit and the future tax planning strategies. On December 31, 2013 the recognized value of tax-loss carryforwards translated into euros at Further Information Annual Report

128 Notes to the Consolidated Financial Statements Accounting Policies Notes to the Income Statement the closing date was EURk 3,462 (p/y: EURk 6,532), and the unrecognized tax-loss carryforwards which may be utilized for a limited period of time amounted to EURk 17,731 (p/y: EURk 17,734). Further information is provided in note no. 12. The expiration of the unrecognized tax-loss carryforwards, which may be utilized for a limited period of time, is presented below: EURk 31/12/ /12/2012 Within a period of 1 year 2,941 0 Within a period of 2 years 2,632 2,990 Within a period of 3 years 2,820 2,890 Within a period of 4 years 3,388 2,904 Within a period of 5 years 1,497 3,445 Subsequent years 3,953 5,505 Total 17,231 17,734 Expenses relating to defined post-employment pension plans are determined on the basis of actuarial methods. Actuarial valuation is conducted on the basis of assumptions with respect to discount rates, future wage and salary increases, mortality, and future pension increases. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. Consolidated Financial Statements of the PWO Group Development costs are capitalized in accordance with the accounting policy described. The initial capitalization of costs is based on the Group s assessment that the technical and economic feasibility has been established. For the purposes of determining the amounts to be capitalized, the Group makes assumptions as to the project s future cash flows, the applicable discount rates, and the time period over which the expected future benefit will accrue. The carrying amount of capitalized development costs on December 31, 2013 was EURk 4,481 (p/y: EURk 4,161). This amount mainly consisted of investments in the development of steering components. Series orders are on hand for these projects. A modification was made to the valuation of spare parts for tools. Previously, spare parts for tools, which were unusable after 3 years, were full impaired. Due to a change in production logic, product-specific spare parts are no longer produced, but only spare parts for tools for product groups. This reduces the number of variants and can save costs. The final completion of the spare parts for tools is then performed as needed. As a result, a total impairment is no longer appropriate. It is estimated that around 15% of all spare parts for tools can still be used, even after a period of 3 years without use. In the reporting year, an amount of EURk 436 was capitalized as a result of the change in the measurement. Notes to the Income Statement 6 Revenues The breakdown of Group revenue by location and product area is shown in the segment report (see note 28). 128 Annual Report 2013

129 Notes to the Consolidated Financial Statements Notes to the Income Statement 7 Other own work capitalized Own work capitalized is comprised of EURk 1,342 (p/y: EURk 1,551) of development costs subject to mandatory capitalization according to IAS 38. These development costs are related particularly to the development of steering components. Series orders are on hand for these projects. 8 Other operating income Other operating income is divided as follows: EURk Currency gains 2,366 2,545 Income from derecognition of accruals License income Other income 1,800 1,616 Total 4,592 4,507 Non-periodic income amounted to EURk 692 (p/y: EURk 427). Government grants of EURk 78 (p/y: EURk 39) were provided for the creation of new training positions, investments, and development activities. These grants were recognized through profit or loss. 9 Staff costs and employees STAFF COSTS EURk ) Wages and salaries 86,344 81,528 Social security and post-employment costs 18,589 15,775 Total 104,933 97,303 1) Restated due to the effects of the application of IAS 19. NUMBER OF EMPLOYEES BY DIVISION (YEAR-AVERAGE) Consolidated Financial Statements of the PWO Group Development and sales Production and materials 1,668 1,548 Tool center Administration Sub-total 2,452 2,292 Temporary employees Trainees Non-active age-related part-time employees Total 3,069 2,828 Further Information Annual Report

130 Notes to the Consolidated Financial Statements Notes to the Income Statement 10 Other operating expenses Other operating expenses are divided as follows: EURk Costs for temporary employees 11,315 9,942 Maintenance costs 5,286 6,463 Outgoing freight 3,621 3,617 Currency losses 2,520 3,095 Travel costs 1,586 1,541 Rental costs 1,379 1,374 Insurance premiums 1,167 1,225 Legal, audit, and consultancy costs 1,138 1,193 Minimum lease payments for operating leases 1, Other 7,483 6,330 Total 36,501 35,680 Non-periodic expenses occurred in the amount of EURk 136 (p/y: EURk 112). 11 Financial expenses Consolidated Financial Statements of the PWO Group Financial expenses include interest expenses to banks amounting to EURk 3,752 (p/y: EURk 4,460), interest expenses for pension provisions of EURk 1,383 (p/y: EURk 1,515), interest expenses under finance leases in the amount of EURk 540 (p/y: EURk 322), and interest expenses on other provisions of EURk 21 (p/y: EURk 81). Of the interest expenses to banks, financial liabilities which were not recognized at fair value through profit or loss have caused interest expenses of EURk 3,465 (p/y: EURk 4,210). 12 Income taxes Income taxes are divided as follows: EURk ) Actual taxes 5,008 3,873 Deferred taxes -1, Total 3,540 4,499 1) Restated due to the effects of the application of IAS 19. Deferred taxes were not recognized for temporary differences in retained profits from subsidiaries totaling EURk 14,681 (p/y: EURk 7,326), since these profits will be used to fund the further business expansion of the individual locations. The differences between the expected income tax expense based on the calculated tax rate and the actual income tax expense have been outlined in the following reconciliation. The tax rate applied is based on the domestic income tax rate. 130 Annual Report 2013

131 Notes to the Consolidated Financial Statements Notes to the Income Statement EURk ) Earnings before income taxes 16,677 14,929 Theoretical tax expense at 28.08% (p/y: 28.08%) 4,683 4,192 Change in theoretical tax expense due to different tax rates applicable to foreign entities Tax increase due to non-deductible expenses Tax increase (+) / -reduction (-) previous years Tax effects from tax credits -2, Effects from non-capitalized tax-loss carryforwards Other effects Income taxes 3,540 4,499 1) Restated due to the effects of the application of IAS 19. Deferred tax assets and deferred tax liabilities for each balance sheet item are depicted in the following table: Deferred tax assets Deferred tax liabilities EURk ) ) Intangible assets, property, plant, and equipment, and financial assets ,842 4,454 Other assets Tax-loss carryforwards and tax credits 5,331 4, Provisions 5,548 5, Liabilities Sub-total 11,882 10,575 5,345 4,832 Offset -4,289-3,964-4,289-3,964 Amount in the consolidated balance sheet 7,593 6,611 1, ) Restated due to the effects of the application of IAS 19. For further details, please refer to note Earnings per share Consolidated Financial Statements of the PWO Group Earnings per share are computed by dividing net income for the period attributable to PWO AG shareholders by the weighted average number of shares outstanding during the fiscal year. Dilutionary effects did not occur ) Net income for the period in EURk 13,137 10,430 Average number of bearer shares 3,125,000 2,887,153 Earnings per share in EUR ) Restated due to the effects of the application of IAS 19. Further Information Annual Report

132 Notes to the Consolidated Financial Statements Notes to the Balance Sheet Notes to the Balance Sheet 14 Property, plant, and equipment EURk Land and buildings Technical equipment and machinery Other equipment, operating and office equipment Prepayments and assets under construction Total Acquisition and production costs As at Jan. 1, , ,633 26,813 16, ,913 Additions 4,442 18,985 5,331 9,785 38,543 Reclassifications 2,114 7,861 1,174-11,149 0 Disposals 0-1,802-1, ,936 Currency effects As at Dec. 31, , ,571 32,140 14, ,204 Additions 5,577 11,333 3,281 9,775 29,966 Reclassifications 2,986 9, , Disposals , ,959 Currency effects -1,223-3, ,330 As at Dec. 31, , ,184 34,019 11, ,768 Depreciation As at Jan. 1, , ,664 19, ,457 Additions 2,086 11,815 2, ,423 Consolidated Financial Statements of the PWO Group Reclassifications Disposals 0-1,740-1, ,853 Currency effects As at Dec. 31, , ,692 20, ,925 Additions 2,471 13,527 2, ,952 Reclassifications Disposals , ,615 Currency effects , ,964 As at Dec. 31, , ,671 22, ,298 Net carrying amounts As at Dec. 31, ,331 62,879 11,471 14, ,279 As at Dec. 31, ,474 68,513 11,737 11, ,470 The useful life of buildings is 25 to 50 years. The useful life of technical equipment and machinery is 2 to 10 years and 3 to 14 years for other equipment, operating and office equipment. The useful life of computer hardware and software is 3 to 5 years. The depreciation of technical equipment and machinery at the production sites in Germany in fiscal year 2012 included EURk 542 in impairments, pursuant to IAS 36, for a non-depreciable investment. This was undertaken in order to measure the relevant asset at fair value. This impairment was compensated by a corresponding reimbursement on the part of the customer. The historical acquisition and production costs of property, plant, and equipment, which are fully depreciated but still in use, amount to EURk 127,862 (p/y: EURk 119,568). 132 Annual Report 2013

133 Notes to the Consolidated Financial Statements Notes to the Balance Sheet 15 Intangible assets EURk Contract and customerrelated development services Industrial property rights and similar rights Goodwill Other intangible assets Prepayments Total Acquisition and production costs As at Jan. 1, ,012 12,889 6, ,609 Additions 1,551 1, ,662 Reclassifications Disposals Currency effects As at Dec. 31, ,564 13,695 6, ,946 Additions 1, ,079 Reclassifications Disposals Currency effects As at Dec. 31, ,891 14,241 6, ,843 Amortization As at Jan. 1, ,750 1, ,638 Additions 743 1, ,512 Reclassifications Disposals Currency effects As at Dec. 31, ,403 11,320 1, ,918 Additions 1,010 1, ,240 Reclassifications Disposals Currency effects As at Dec. 31, ,410 12,498 1, ,029 Consolidated Financial Statements of the PWO Group Net carrying amounts As at Dec. 31, ,161 2,375 5, ,028 As at Dec. 31, ,481 1,743 5, ,814 The useful life for software is 3 to 5 years. Development costs of EURk 4,481 (p/y: EURk 4,161) that required capitalization under IAS 38 are amortized using the units of production method as soon as development is complete and production of series parts commences. The residual carrying amount of SAP software is EURk 503 (p/y: EURk 841). The remaining amortization period is 1 to 5 years. The historical acquisition and production costs of intangible assets, which are fully amortized but still in use, amount to EURk 11,807 (p/y: EURk 6,448). Further Information Annual Report

134 Notes to the Consolidated Financial Statements Notes to the Balance Sheet As of December 31, 2013 the goodwill of PWO UNITOOLS CZ a.s. amounted to EURk 4,331 (p/y: EURk 4,331) and the goodwill of PWO Canada Inc. amounted to EURk 1,032 (p/y: EURk 1,154). The decrease at PWO Canada resulted from a change in the currency exchange rates. Accumulated amortization includes EURk 698 from the amortization of goodwill at PWO de México de C.V. in fiscal year Inventories On the reporting date, the total amount of inventories of EURk 62,184 (p/y: EURk 55,790) include spare parts for tools in an amount of EURk 6,703 (p/y: EURk 5,342) accounted for at acquisition and production costs. In fiscal year 2013, a revaluation of EURk 455 (p/y: impairment in the amount of EURk 707) was recognized through profit or loss. 17 Receivables and other assets On December 31, 2013 the allowances for trade receivables and other receivables amounted to EURk 1,143 (p/y: EURk 1,094). The carrying amount of trade receivables and other receivables before valuation allowances was EURk 57,035 (p/y: EURk 53,219). The development of the valuation allowance account is as follows: EURk Valuation allowance as at Jan. 1 1,094 1,309 Additions Utilization 0-18 Releases Consolidated Financial Statements of the PWO Group Valuation allowance as at Dec. 31 1,143 1,094 For receivables of a material amount, allowances are provided for according to uniform standards and at the level of the incurred loss. A potential impairment is assumed in the presence of various factors such as late payments over a specified period, the initiation of compulsory measures, threat of default or insolvency, the filing or commencement of insolvency proceedings, or the failure of restructuring measures. Allowances for doubtful accounts are recorded regularly on separate impairment accounts and lead to an impairment loss through profit or loss. The allocation to, and thus, the increase in the valuation allowance during the year, concerned only a few isolated cases. Definite defaults result in derecognition of the relevant receivable. Since fiscal year 2013, the non-current portion of other assets and the non-current portion of income tax receivables are presented directly within non-current assets. The previous year s figures were adjusted accordingly. 134 Annual Report 2013

135 Notes to the Consolidated Financial Statements Notes to the Balance Sheet 18 Cash and cash equivalents Deposits at banks bear interest at variable interest rates for short-term call deposits. On December 31, 2013, the Group had undrawn credit lines for which all necessary conditions for use are already met. On December 31, 2013, for purposes of the consolidated statement of cash flows, the balance of cash and cash equivalents of EURk 8,071 (p/y: EURk 7,810) consisted of cash on hand and bank deposits net of bank borrowings due on demand. 19 Subscribed capital and reserves On May 26, 2010, the Annual General Meeting had approved new authorized and contingent Capital. An amount of EURk 1,875 of the total Authorized Capital I/2010 of EURk 3,000 was utilized by issuing 625,000 new shares via a capital increase in May As at December 31, 2013, the fully paid-up and subscribed capital amounted to EURk 9,375 (p/y: EURk 9,375), and was divided into 3,125,000 (p/y: 3,125,000) bearer shares with a par value of EUR 3.00 each. Remaining authorized capital By resolution of the Annual General Meeting of May 26, 2010 and subject to the consent of the Supervisory Board, the Management Board is authorized, until May 25, 2015, to increase the Company s share capital once or several times by up to EURk 1,125 against payment in cash (Authorized Capital I/2010). By resolution of the Annual General Meeting of May 26, 2010 and subject to the consent of the Supervisory Board, the Management Board is authorized, until May 25, 2015, to increase the Company s share capital once or several times by up to EURk 750 against payment in cash (Authorized Capital II/2010). The Annual General Meeting of May 26, 2010 has approved a conditional increase in share capital by up to EURk 3,000 (Contingent Capital 2010). Capital reserves Capital reserves include the premium from the issuance of shares. Retained earnings and other equity Retained earnings include current and previous years earnings of PWO AG and the consolidated subsidiaries, which have not yet been distributed. Consolidated Financial Statements of the PWO Group Differences resulting from the earnings-neutral currency translation of the financial statements of foreign subsidiaries in the amount of EURk -708 (p/y: EURk 1,741) are reported separately. In addition, the portion of the profit or loss is recognized when it results from a cash flow hedging instrument, which has been determined as an effective hedge. Proposed and distributed dividends On December 31, 2013, PWO AG reported unappropriated retained earnings of EUR 5,628, The distributable amounts are based on the unappropriated retained earnings of PWO AG in accordance with commercial law. Further Information Annual Report

136 Notes to the Consolidated Financial Statements Notes to the Balance Sheet It has been proposed to the Annual General Meeting that the unappropriated retained earnings of PWO AG be used as follows: EUR Payment of a dividend of EUR 1.80 per dividend-bearing share 5,625, Carried forward to new account 3, In fiscal year 2013, a total dividend of EUR 5,000, (EUR 1.60 per dividend-bearing share) was paid for the fiscal year The dividend payment in fiscal year 2012 for the 2011 fiscal year amounted to EUR 3,500, (EUR 1.40 per dividend-bearing share). Notifications pursuant to Section 21 (1) of the German Securities Trading Act (WpHG) (1) On November 7, 2013 we were notified by Delta Lloyd Levensverzekering N.V., Amsterdam, The Netherlands that its interest in the voting rights of Progress-Werk Oberkirch AG, Oberkirch, Germany, fell below the threshold of 5% on October 31, 2013 and amounted to 3.31% (103,574 voting rights) on that date. (2) On November 7, 2013 we were notified by Delta Lloyd Houdstermaatschappij Verzekeringen N.V., Amsterdam, The Netherlands, that its interest in the voting rights of Progress-Werk Oberkirch AG, Oberkirch, Germany, fell below the threshold of 5% on October 31, 2013 and amounted to 3.31% (103,574 voting rights) on that date. These voting rights of 3.31% (corresponding to 103,574 voting rights) were attributable to Houdstermaatschappij Verzekeringen N.V. from the shares held by Delta Lloyd Levensverzekering N.V. Consolidated Financial Statements of the PWO Group (3) On November 7, 2013 we were notified by Delta Lloyd L SICAV, Luxemburg, Grand Duchy of Luxembourg, that its interest in the voting rights of Progress-Werk Oberkirch AG, Oberkirch, Germany, exceeded the threshold of 5% on October 31, 2013 and amounted to 6.96% (217,613 voting rights) on that date. 20 Liabilities Pension provisions Provisions for pensions and similar obligations are recognized on the basis of pension plan entitlements for retirement, invalidity, and survivor dependent benefits. The retirement benefits are based on salary and length of service. The direct and indirect obligations include those arising from current pensions as well as benefits for pensions and retirement allowances payable in the future. Plan assets to meet pension obligations do not exist. The vast majority of provisions for defined benefit plans concern the PWO AG. PWO de México S.A. de C.V. accounted for a pension provision amounting to EURk 183 (p/y: EURk 198). The provision to be recognized pursuant to Mexican law includes obligations for employee benefits, depending upon their length of employment and the salary received during their service. The provisions for defined benefit plans are calculated in accordance with IAS 19 using the projected unit credit method. The pension obligations are recognized at the present value of the defined benefit obligations at the measurement date, and take into account likely future increases in pensions and salaries. The Group has defined contribution plans. These resulted in a recognized expense at PWO Canada Inc. in the amount of EURk 62 (p/y: EURk 67) and at PWO UNITOOLS CZ in the amount of EURk 155 (p/y: EURk 140). 136 Annual Report 2013

137 Notes to the Consolidated Financial Statements Notes to the Balance Sheet Employer contributions to the statutory state pension scheme were made in the amount of EURk 7,517 (p/y: EURk 7,349). The following tables present the components of the expenses for retirement benefits recognized in the income statement and the amounts recognized in the balance sheet. The expenses for fiscal year 2012 have been restated in accordance with IAS 19 (revised) and therefore do not correspond to the figures published in the fiscal year 2012 consolidated financial statements. The amounts recognized in the income statement are composed as follows: EURk Service cost 1, Past service cost 1,198 0 Interest expenses for defined benefit obligations 1,383 1,515 Total 3,668 2,297 The expenses from pension obligations are recorded under staff costs and the interest expense is recorded under financing expenses. The following table presents the adjustments recognized in other comprehensive income: EURk Adjustments due to changes in demographic assumptions 0 0 Adjustments due to changes in financial assumptions -2,157 7,381 Experiential adjustments Total -2,126 7,350 The changes in the present value of defined benefit obligations are as follows: EURk Present value of defined benefit obligations as at Jan. 1 42,469 34,271 Service cost 1, Past service cost 1,198 0 Consolidated Financial Statements of the PWO Group Interest cost 1,383 1,515 Pension payments rendered -1,457-1,432 Adjustments due changes in assumptions -2,157 7,381 Experiential adjustments Foreign currency differences Present value of defined benefit obligations as at Dec ,527 42,469 Of the recognized pension provisions, EURk 41,002 (p/y: EURk 40,974) are non-current and EURk 1,525 (p/y: EURk 1,495) are current. Further Information Annual Report

138 Notes to the Consolidated Financial Statements Notes to the Balance Sheet The measurement of the defined benefit obligations is based on the following actuarial assumptions: Interest rate 3.6 % 3.3 % Employee turnover rate 2.5 % 2.5 % Future salary trend > 40 years 2.5 % 2.5 % Future salary trend < 40 years (career trend) 3.5 % 3.5 % Future pension adjustments 2.0 % 2.0 % The defined benefit obligations have an average remaining term of 18 years (p/y: 17 years) in the reporting year. The following table shows a sensitivity analysis with the key assumptions as of December 31, 2013: Assumptions Discount rate Future salary trend (income trend) Future salary trend (career trend) Future pensions adjustments Increase by 1.00 % Decrease by 1.00 % Increase by 0.25 % Decrease by 0.25 % Increase by 0.50 % Decrease by 0.50 % Increase by 0.25 % Decrease by 0.25 % EURk EURk EURk EURk EURk EURk EURk EURk Effect on defined benefit obligations -6,098 7, ,270-1,216 Consolidated Financial Statements of the PWO Group The DBO sensitivity analyses for the relevant actuarial assumptions were carried out using the same measurement procedure (projected unit credit method) used to determine the obligations for employee benefits following a termination of the employment relationship recorded in the balance sheet. The effect of changes in assumptions was determined separately and, therefore, possible correlation effects were not analyzed. To examine the sensitivity of the DBO to a change in the assumed mortality rates, the probability of death was reduced by 10% in a comparison calculation. A 10% reduction in the probability of death extends the average life expectancy of all those entitled to a pension by approximately one year. This results in an increase in the DBO of approximately EUR 1.4 million. The following amounts are expected to be paid as current pensions over the next few years as part of the defined benefit obligation: EURk Within the next 12 months 1,525 1,495 Within 2 to 5 years 6,550 6,315 Within 5 to 10 years 8,910 8,460 Total expected payments 16,985 16, Annual Report 2013

139 Notes to the Consolidated Financial Statements Notes to the Balance Sheet Other provisions Other provisions consist of necessary amounts for employee-related expenses and other identifiable obligations and risks. The provisions recognized in the balance sheet include provisions for employees (obligations for age-related part-time working and anniversary bonuses) and provisions for contingent losses. It is expected that the total amount of obligations for age-related part-time working will accrue within 5 years after the reporting date. Other provisions have developed as follows: Personnel-related provisions Provisions for contingent losses EURk As at Jan. 1 4,696 4, Utilization -1,571-1, Releases Additions 1,092 1, of which accrued interest As at Dec. 31 4,217 4, of which non-current 2,799 3, of which current 1,418 1, Grants from the Federal Employment Agency (Bundesagentur für Arbeit) as part of the retirement agreements of departing employees are reported as other assets in the amount of EURk 554 (p/y: EURk 1,066) and have not been offset against provisions. Interest-bearing borrowings Of the interest-bearing borrowings, EURk 59,991 (p/y: EURk 49,988) have a maturity of less than one year and EURk 4,944 (p/y: EURk 3,642) have a maturity of more than five years. Bank borrowings amounted to EURk 93,584 (p/y: EURk 89,212). The loans were granted at interest rates between 1.31% and 7.20%. Bank borrowings repayable on demand amounted to EURk 11,792 (p/y: EURk 5,146). Of the bank borrowings, EURk 12,750 (p/y: EURk 12,508) are secured by mortgages and EURk 32,449 (p/y: EURk 27,178) by assignment as security. In addition, the usual retention of proprietary rights exists for the supply of raw materials, supplies, and merchandise. Further Information Consolidated Financial Statements of the PWO Group Other liabilities The reclassification of the non-current portion of other liabilities into non-current liabilities as of fiscal year 2013 was due to reasons of improved representation. The previous year s figures were adjusted accordingly. Annual Report

140 Notes to the Consolidated Financial Statements Notes to the Balance Sheet Finance leases and hire-purchase agreements Finance leases are used for various technical equipment and machinery. In some cases, these leases contain a purchase option for the lessor. As of December 31, 2013 the assets had a carrying amount of EURk 12,618 (p/y: EURk 9,380). Due to the structure of the leases, the assets are depreciated over their expected useful life, pursuant to IAS 17.28, rather than according to the term of the lease agreement. The future minimum lease payments under finance leases and hire-purchase agreements are reconciled to their present value as follows: Minimum lease payments Present value of minimum lease payments EURk Residual term up to 1 year 3,207 2,255 2,562 1,884 Residual term 1 to 5 years 10,495 6,784 9,021 6,041 Residual term > 5 years 3,410 1,163 2,559 1,126 Total minimum lease payments 17,112 10,202 14,142 9,051 Less interest cost -2,970-1, Present value of minimum interest payments 14,142 9,051 14,142 9,051 Contingent liabilities and other financial obligations A guarantee to secure age-related part-time working credits amounted to EURk 2,345 (p/y: EURk 2,345). Consolidated Financial Statements of the PWO Group As of December 31, 2013 other financial obligations, including purchase commitments, totaled EURk 13,480 (p/y: EURk 20,837). The following amounts apply to subsequent fiscal years according to maturity: Obligations from noncancellable operating lease and rental agreements Order commitments arising from investment orders* Other financial obligations EURk 2014 ff ff ff ff ff ff. Residual term up to 1 year 1,495 1,682 8,393 15, Residual term 1 to 5 years 996 1, Residual term > 5 years ,680 1,752 Total 2,491 2,812 8,393 15,381 2,596 2,644 * Property, plant, and equipment and intangible assets In some cases, the existing operating leases contain extension and call options. 21 Financial risk management The Group s financial risk management system is focused on the uncertainty of future financial market developments and aims at the minimization of adverse effects for the overall financial strength of the Group. The Management Board has the lead responsibility for this risk management system and also sets out the general principles for risk management and defines the procedures. All significant concentrations of risk are shown in the notes and in the management report. 140 Annual Report 2013

141 Notes to the Consolidated Financial Statements Notes to the Balance Sheet The key risks are described below: Credit risk The credit risk from trade receivables and other receivables is controlled by Progress-Werk Oberkirch AG and its subsidiaries based on uniform standards, procedures, and controls. The creditworthiness of the customer is regularly checked using credit reports and historical data. The customer s individual credit limits are set on the basis of these findings. Outstanding trade receivables and other receivables are monitored regularly by a diligent management of receivables. Furthermore, commercial credit insurance has been concluded for additional protection and protects a large portion of the receivables. The need for valuation allowances is analyzed at each reporting date and appropriate allowances are made. With regard to investments of cash and cash equivalents as well as the portfolio of derivative financial assets, the Group is exposed to potential losses from credit risks to the extent that financial institutions do not fulfill their obligations. PWO manages the resulting risk exposure through policies and guidelines of the Group Treasury as well as through diversification and the careful selection of financial institutions. In addition, all financial institutions are reviewed at regular intervals, particularly with the aim of quantifying their default risk. Currently, there are no cash and cash equivalents nor derivative financial assets which are overdue or impaired resulting from default. As of December 31, 2013 the maximum credit risk of financial assets in the event of counter-party default was equivalent to the carrying amount of those instruments. Additional commercial credit insurance is being deducted for trade receivables and other receivables. EURk Trade receivables and other receivables 55,892 52,125 Protection from commercial credit insurance -43,049-40,344 Maximum default risk 12,843 11,781 Derivative financial assets with hedging relationship 1,232 1,226 Cash and cash equivalents 8,071 7,810 On December 31, 2013 the analysis of overdue but not impaired trade receivables and other receivables breaks down as follows: EURk Consolidated Financial Statements of the PWO Group Trade receivables and other receivables 55,892 52,125 of which neither overdue nor impaired 47,307 42,548 of which < 30 days overdue (but not impaired) 6,842 5,739 of which > days overdue (but not impaired) 1,401 1,182 of which > days overdue (but not impaired) 26 1,873 of which > days overdue (but not impaired) of which > 360 days overdue (but not impaired) As of the reporting date, there were no indications of impairment on any non-impaired trade receivables or other receivables. Further Information Annual Report

142 Notes to the Consolidated Financial Statements Notes to the Balance Sheet Liquidity risk There are sufficient credit lines available from a number of banks for our current level of business. Financing risks are limited by an appropriate combination of current and non-current borrowings. Long-term customer contracts and the related investments and pre-financing of services are generally financed on a long-term, project-specific basis. The Group has secured nearly half of its financing needs with long-term financing at fixed interest rates. Additional derivative interest-rate hedges have been concluded when necessary. The following table shows the maturities of the undiscounted cash flows resulting from the Group s financial liabilities as at the reporting date: < 1 year 1 to 5 years > 5 years Total EURk Bank borrowings 59,734 50,110 36,319 41,729 2,396 2,593 98,449 94,432 of which repayment of principal 57,429 48,104 33,770 38,592 2,385 2,516 93,584 89,212 of which interest payment 2,305 2,006 2,549 3, ,865 5,220 Liabilities to leasing companies 3,207 2,255 10,495 6,784 3,410 1,163 17,112 10,202 of which repayment of principal 2,562 1,884 9,021 6,041 2,559 1,126 14,142 9,051 of which interest payment , ,970 1,151 Trade payables 24,719 22, ,719 22,061 Derivative financial instruments with hedging relationship ,204 Consolidated Financial Statements of the PWO Group Derivative financial instruments without hedging relationship The amounts of derivative financial instruments with hedging relationship presented in the table above correspond to the undiscounted cash flows on a gross basis. The following table shows the undiscounted cash inflows and outflows: < 1 year 1 to 5 years > 5 years EURk Total Cash inflow 7,809 3,600 4,588 8, ,397 12,518 Cash outflow -8,280-3,958-4,800-9, ,080-13,722 Net balance ,204 Interest-rate risk In order to assess risks arising from changes in interest rates, as a matter of principle, financial instruments must be categorized as either fixed or variable interest rates, in accordance with IAS 32. Risks arising from changes in interest rates exist in the case of variable interest rate loans. These risks are addressed using interest-rate swaps. Interest rate risks are determined by means of a sensitivity analysis. This show the effects of changes in market interest rates on interest payments, interest income and expense, other income components, and where applicable, the effects on equity. 142 Annual Report 2013

143 Notes to the Consolidated Financial Statements Notes to the Balance Sheet The interest rate sensitivity analysis is based on the following assumptions: Changes in the market interest rates of primary financial instruments with fixed interest rates only affect income if these instruments are measured at fair value. Accordingly, all financial instruments with fixed interest rates measured at amortized cost are not subject to interest-rate risks as defined by IFRS 7. Currency derivatives are not accounted for due to their immateriality in the interest rate sensitivity analysis. PWO is subject to interest rate risk at all locations. If the market interest rates at December 31, 2013 had been 100 basis points higher, earnings before taxes would have been EURk 365 (p/y: EURk 244) lower. If market interest rates at December 31, 2013 had been 100 basis points lower, earnings before taxes would have been EURk 358 (p/y: EURk 236) higher. Currency risk Currency risk is the risk of foreign-exchange-rate-induced fluctuations in the value of balance sheet items. A sensitivity analysis is conducted for each currency that constitutes a significant risk for the Company. This analysis is based on the following assumptions: For the sensitivity analysis, the Group takes into account all monetary financial instruments that are not denominated in the functional currency of the respective separate entities. Thus, exchange rate differences arising from the translation of financial statements into the Group s reporting currency (translation risk) are not considered. According to IFRS, an exchange risk does not arise from financial instruments that are non-monetary items or from financial instruments denominated in the functional currency. Therefore, in the case of derivative financial instruments, only the currency derivatives are included in the sensitivity analysis, since not all interest-rate derivatives are exposed to currency risk. The hypothetical effect on profit or loss and equity for each separate primary item included in the sensitivity analysis is determined by comparing the carrying amount (calculated on the basis of the closing rate) with the translation amount, which in turn is determined by applying a hypothetical exchange rate. If the EUR had appreciated by 10% against the CZK as at December 31, 2013 the earnings before taxes would have been EURk 7 higher (p/y: EURk 239). The net gains (losses) from cash flow hedges recognized in equity would have been EURk 439 lower (p/y: EURk 779). If the EUR had depreciated by 10% against the CZK as at December 31, 2013 the earnings before taxes would have been EURk 8 lower (p/y: EURk 292) and net gains (losses) from cash flow hedges recognized in equity would have been EURk 2,055 higher (p/y: EURk 952). Consolidated Financial Statements of the PWO Group If the EUR had appreciated by 10% against the USD as at December 31, 2013 the earnings before taxes would have been EURk 246 higher (p/y: EURk 85). The net gains (losses) from cash flow hedges recognized in equity would have been EURk 1,197 higher (p/y: EURk 1,725). If the EUR had depreciated by 10% against the USD as at December 31, 2013 the earnings before taxes would have been EURk 300 lower (p/y: EURk 103) and net gains (losses) from cash flow hedges recognized in equity would have been EURk 1,376 lower (p/y: EURk 1,939). If the EUR had appreciated by 10% against the CAD as at December 31, 2013 the earnings before taxes would have been EURk 17 lower (p/y: EURk 150). The net gains (losses) from cash flow hedges recognized in equity would have been EURk 778 higher (p/y: EURk 1,331). If the EUR had depreciated by 10% Further Information Annual Report

144 Notes to the Consolidated Financial Statements Notes to the Balance Sheet against the CAD as at December 31, 2013 the earnings before taxes would have been EURk 21 higher (p/y: EURk 183) and net gains (losses) from cash flow hedges recognized in equity would have been EURk 951 lower (p/y: EURk 1,625). Capital management The primary objective of the Group s capital management is to maintain a high credit rating and a favorable equity ratio. In order to maintain the capital structure, adjustments in dividend payments to shareholders may be made and new shares may be issued. The monitoring of capital is performed via the gearing ratio, which is the ratio of net financial liabilities to equity. According to internal guidelines, the target gearing is in the range of 60% to 80%. This range had been significantly exceeded in 2009 and subsequent years as a result of the economic and financial crisis. The aim is to bring this ratio back into the target range as quickly as possible. No changes were made to the objectives and guidelines as at December 31, 2013 and December 31, Net financial liabilities are defined as interest-bearing borrowings less cash and cash equivalents. EURk Interest-bearing loans 107,726 98,263 Less cash and cash equivalents -8,071-7,810 Net financial liabilities 99,655 90,453 Total equity 102,461 95,148 Gearing ratio 97% 95% 22 Financial instruments As at December 31, 2013 the following interest rate derivatives were still open: Consolidated Financial Statements of the PWO Group EURk Nominal value Redemption 2013 Residual value Interest-rate swaps 21,361 2,184 14,362 Variable rate 1.15% to 4.19% Term Market value 2014 to Currency hedging instruments without hedge accounting 7, ,285 - until Currency hedging instruments with hedge accounting 49, , to As at December 31, 2012 the following derivative financial instruments were open: EURk Nominal value Redemption 2012 Residual value Variable rate Term Market value Interest-rate swaps 23,560 2,015 17, % bis 4.19% 2013 bis Currency hedging instruments without hedge accounting 3, ,789 - Currency hedging instruments with hedge accounting 56, , bis bis Annual Report 2013

145 Notes to the Consolidated Financial Statements Notes to the Balance Sheet The market value changes of derivative financial instruments used to hedge future cash flows were recognized directly in equity, and have taken into account tax effects of EURk 361 (p/y: EURk 264). As part of hedge accounting, EURk 289 (p/y: EURk 99) was derecognized from equity and recognized in profit or loss. Of the amount derecognized, EURk 0 (p/y: EURk 0) was due to hedge in-effectiveness. At the reporting date it was assumed that all planned transactions will occur. Furthermore, it is expected that the hedged cash flows will occur and will affect profits and losses within the period specified in the table above. The following table lists the carrying amounts and fair values according to valuation categories and classes: Valuation category Carrying amount Fair Value EURk pursuant to IAS ASSETS Trade receivables and other receivables LaR 55,892 52,125 55,892 52,125 Other financial assets 1,232 1,226 1,232 1,226 of which derivatives with hedging relationship n.a. 1,147 1,220 1,147 1,220 of which derivatives without hedging relationship FAHfT of which deposits > 3 months LaR Cash and cash equivalents LaR 8,071 7,810 8,071 7,810 LIABILITIES Interest-bearing loans 107,726 98, , ,751 Bank borrowings FLAC 93,584 89,212 96,219 93,790 of which variable interest rate 53,313 45,310 53,313 45,310 of which fixed interest rate 40,271 43,902 42,906 48,480 Liabilities to leasing companies n.a. 14,142 9,051 15,633 9,961 of which variable interest rate 3, , of which fixed interest rate 11,137 8,984 12,628 9,894 Trade payables FLAC 24,719 22,061 24,719 22,061 Other financial liabilities 865 1, ,424 Consolidated Financial Statements of the PWO Group of which derivatives with hedging relationship n.a of which derivatives without hedging relationship FLHfT of which aggregated according to IAS 39 measurement categories: Loans and Receivables (LaR) 63,963 59,935 63,963 59,935 Financial Assets Held for Trading (FAHfT) Financial Liabilities Measured at Amortized Cost (FLAC) 118, , , ,851 Financial Liabilities Held for Trading (FLHfT) Further Information Annual Report

146 Notes to the Consolidated Financial Statements Notes to the Balance Sheet Financial instruments carried at fair value are classified in the fair value hierarchy as follows: Level 1 Level 2 Level 3 Total TEUR Assets carried at fair value Other financial assets 0 0 1,232 1, ,232 1,226 of which derivatives with hedge relationship 0 0 1,147 1, ,147 1,220 of which derivatives without hedge relationship Assets for which a fair value is disclosed Trade receivables and other receivables ,892 52, ,892 52,125 Cash and cash equivalents 0 0 8,071 7, ,071 7,810 Liabilities carried at fair value Other financial liabilities , ,424 of which derivatives with hedge relationship of which derivatives without hedge relationship Consolidated Financial Statements of the PWO Group Liabilities for which a fair value is disclosed Fixed-interest rate borrowings from banks ,906 48, ,906 48,480 Variable-interest rate borrowings from banks ,313 45, ,313 45,310 Fixed-interest rate borrowings from leasing companies ,628 9, ,628 9,894 Variable-interest rate borrowings from leasing companies 0 0 3, , Trade payables ,719 22, ,719 22,061 There were no reclassifications between assessments at fair value of Level 1 and Level 2 and no reclassifications into or from values at fair value of Level Annual Report 2013

147 Notes to the Consolidated Financial Statements Notes to the Balance Sheet The following total comprehensive income and expenses arose with respect to the position of financial instruments in the portfolio measured at fair value: Assets Liabilities EURk Recognized in the income statement: Derivatives without hedge relationship Recognized in equity: Derivatives with hedge relationship 1,108 1, The income or expenses resulting from the fair value measurement of derivatives without a hedge relationship is reported in other operating income or other operating expenses. The following table shows the net gains or losses on financial instruments, which are recognized in the income statement (excluding derivative financial instruments, which are included in hedge accounting): EURk Loans and Receivables (LaR) of which due to disposal of which due to remeasurement 0 0 of which due to impairment/impairment reversal of which due to currency effects Financial Assets Held for Trading (FAHfT) of which due to disposal 0 0 of which due to remeasurement Financial Liabilities Measured at Amortized Cost (FLAC) of which due to disposal of which due to remeasurement 0 0 of which due to impairment/impairment reversal 0 0 of which due to currency effects Consolidated Financial Statements of the PWO Group Financial Liabilities Held for Trading (FLHfT) Further Information of which due to disposal of which due to remeasurement Annual Report

148 Notes to the Consolidated Financial Statements Additional Information Additional Information 23 Research and development costs Research costs were not incurred. Of the EURk 9,460 (p/y: EURk 9,390) in customer-related development costs, EURk 1,342 (p/y: EURk 1,551) were capitalized as intangible assets. 24 Total remuneration of the Management Board and the Supervisory Board In the 2013 fiscal year, the total remuneration of the Management Board (short-term remuneration) amounted to EURk 1,697 (p/y: EURk 1,529). These included performance-related components of EURk 919 (p/y: EURk 783). In fiscal year 2013, service costs for pension benefits for the members of the Management Board were incurred in the amount of EURk 179 (p/y: EURk 140). The total remuneration of the Supervisory Board (short-term remuneration) in fiscal year 2013 amounted to EURk 184 (p/y: EURk 173). The Group management report contains the remuneration report along with the individual remuneration of the Management Board and Supervisory Board. Pension payments to former members of the Management Board of PWO AG and their surviving dependents amounted to EURk 240 (p/y: EURk 234). As of the reporting date, corresponding pension provisions amounted to EURk 2,057 (p/y: EURk 2,146). 25 Auditor s fee Consolidated Financial Statements of the PWO Group The auditor s fee for the fiscal year which was recognized as an expense according to Section 314 (1) no. 9 HGB comprised the following: EURk Audit Tax consultancy services Other services Total The auditor s fee that was expensed in the year under review included non-periodic expenses of EURk 2 (p/y: EURk 17). Further certification and valuation services were not utilized. 26 Related party disclosures Related parties include the Group s ultimate parent company as well as the members of the Management Board and Supervisory Board. In the course of the fiscal year, there were no transactions between the Group and the ultimate parent company. There were no relationships with related parties with regard to the supply of goods or the rendering of services. Please refer to the final declaration in the Dependency Report which is included in the Group management report. 148 Annual Report 2013

149 Notes to the Consolidated Financial Statements Additional Information According to IAS 24, reportable compensation of related parties of the Group includes the remuneration of the Management Board and the Supervisory Board. The Group management report contains the remuneration report along with the individual remuneration of the Management Board and Supervisory Board. 27 Additional information on the statement of cash flows In the statement of cash flows, cash flows are presented on the basis of IAS 7. Cash funds reported in the cash flow statement comprise cash and cash equivalents as well as bank borrowings due on demand. Bank borrowings payable on demand amounting to EURk 11,792 (p/y: EURk 5,146) have been included in the balance sheet as current interest-bearing borrowings. 28 Segment reporting In line with the Group s internal management system, the individual production locations provide the basis for the segment reporting. The Group s main decision-making body is defined as the Management Board of PWO AG. The segments are determined according to the location of the Group s assets. Accordingly, the revenues of these segments are also allocated according to the location of assets. The regions are categorized as Germany, Rest of Europe, the NAFTA Area, and Asia. The NAFTA Area is comprised of the locations in Canada and Mexico. Earnings, assets, liabilities, depreciation and amortization among the individual segments are eliminated in the column titled consolidation effects. This column also contains items that cannot be allocated to individual segments. The segment data is calculated in accordance with the accounting policies applied in the consolidated financial statements. As at December 31, 2013 and as at December 31, 2012 no customers were identified with whom the Group had achieved 10 percent or more of revenues. Further Information Consolidated Financial Statements of the PWO Group Annual Report

150 Notes to the Consolidated Financial Statements Additional Information Segment information by location FISCAL YEAR 2013 EURk Germany Rest of Europe NAFTA Area Asia Consolidation effects Group Total revenue 252,974 45,107 86,703 14, ,878 Inter-segment revenue -15,569-4, , ,431 External revenue 237,405 40,976 86,405 12, ,447 Total output 255,226 46,339 88,215 14,556-20, ,244 Other income 4, , ,638 4,592 Other expenses (aggregated) 233,456 38,971 80,655 14,979-22, ,331 Depreciation and amortization 12,218 2,622 5,274 1, ,192 Earnings before interest and taxes (EBIT) 14,029 5,403 3, ,313 Financial income Financial expenses 3,403 1,082 1, ,696 Earnings before taxes (EBT) 11,251 4,332 2,547-1, ,677 Income taxes 4,038-1, ,540 Net income for the period 7,213 5,666 1,722-1, ,137 Assets 159,472 50,622 63,155 41,856-15, ,384 of which non-current assets 67,382 26,632 36,850 25, ,284 Consolidated Financial Statements of the PWO Group Liabilities 22,111 10,529 17,365 42, , ,923 Investments 15,439 3,142 9,743 3, , Annual Report 2013

151 Notes to the Consolidated Financial Statements Additional Information Segment information by location FISCAL YEAR 2012 EURk Gemany 1) Europe Rest of NAFTA Area Asia Consolidation effects Group 1) Total revenue 247,819 37,693 82,755 6, ,775 Inter-segment revenue -12,905-3, ,703 External revenue 234,914 34,642 82,025 6, ,072 Total output 251,230 40,029 83,779 7,319-15, ,624 Other income 4, , ,589 4,507 Other expenses (aggregated) 226,201 34,978 78,035 9,722-17, ,941 Depreciation and amortization 11,302 2,291 4, ,935 Earnings before interest and taxes (EBIT) 17,807 3,619 2,550-2, ,255 Financial income Financial expenses 3,722 1,249 1, ,378 Earnings before taxes (EBT) 14,774 2,371 1,439-3, ,929 Income taxes 4, ,499 Net income for the period 10,567 2, , ,430 Assets 151,055 46,761 59,265 34,436-12, ,303 of which non-current assets 64,614 26,133 34,573 23, ,307 Liabilities 22,558 6,548 15,293 32, , ,155 Investments 19,560 5,051 9,514 7, ,205 1) Some amounts deviate from the amounts reported in the consolidated financial statements for fiscal year 2012 due to adjustments of the application of IAS 19 (see note 4). The segment assets and segment liabilities correspond to the values in the financial statements of the individual Group companies. The Germany segment contains significant non-cash items in an amount of EURk 3,276 (p/y: EURk 2,701). Further Information Consolidated Financial Statements of the PWO Group The following table shows the breakdown of external revenues into the three strategic product areas. The product areas are discussed in the Group management report and can be found in the Company Profile section. Annual Report

152 Notes to the Consolidated Financial Statements Additional Information Segment information by product area REVENUE EURk Mechanical components for electrical and electronic applications 86,514 86,198 Safety components for airbags, seats, and steering 116, ,752 Structural components and subsystems for vehicle bodies and chassis 174, ,122 Total 377, , Corporate Governance The Declaration of Conformity with the German Corporate Governance Code issued by the Management Board and Supervisory Board in December 2013 is permanently available to shareholders via the Company s website. 30 Events subsequent to the balance sheet date No events of significant importance have occurred after the end of the fiscal year. Oberkirch, March 13, 2014 The Management Board Consolidated Financial Statements of the PWO Group Karl M. Schmidhuber Bernd Bartmann Dr. Winfried Blümel (Chairman) 152 Annual Report 2013

153 Audit Opinion Audit Opinion The following audit certificate was awarded by Ernst & Young GmbH for the consolidated financial statements and consolidated management report which was amalgamated with the company management report: We have audited the consolidated financial statements prepared by Progress-Werk Oberkirch Aktiengesellschaft, Oberkirch comprising the income statement, statement of comprehensive income, balance sheet, statement of changes in equity, cash flow statement and notes as well as the consolidated management report amalgamated with the company management report for the fiscal year from January 1 to December 31, It is the responsibility of the legal representatives of the Company to prepare the consolidated financial statements and consolidated management report in accordance with International Financial Reporting Standards as applicable in the EU and with the supplementary provisions of German commercial law applicable pursuant to Section 315a, (1) of the German Commercial Code (HGB). Our task is to deliver a judgment on the consolidated financial statements and consolidated management report on the basis of the audit we have undertaken. We have conducted our audit of the consolidated financial statements in accordance with Section 317 of the German Commercial Code (HGB) in consideration of the German auditing standards defined by the Institut der Wirtschaftsprüfer (IDW). These require the audit to be planned and conducted in such a manner as to detect, with adequate certainty, any inaccuracies or infringements which may have a significant impact on the impression of the assets, financial and earnings situation, as conveyed by the consolidated financial statements in consideration of the applicable accounting standards, and by the consolidated management report. In determining the actions to be taken as part of the auditing procedure, consideration was given to the knowledge of the business activities of the Group and its economic and legal environment, as well as to the possible errors likely to be encountered. In the course of the audit, the effectiveness of the internal accounting control system and proof of the information contained in the consolidated financial statements and consolidated management report, were assessed on the basis of random samples. The audit encompasses an appraisal of the annual financial statements of the companies integrated into the consolidated accounts, the demarcation of the group of consolidated companies, the accounting and consolidation principles applied, and the principal assessments made by the officers legally entitled to represent the Company, as well as an evaluation of the overall presentation of the consolidated financial statements and consolidated management report. We are of the opinion that our audit forms an adequately secure foundation on which to base our judgment. Our audit has caused us to raise no objections. In our judgment based on the findings of our audit, the consolidated financial statements comply with International Financial Reporting Standards as applicable in the EU and with the supplementary provisions of German commercial law applicable pursuant to Section 315a, (1) of the German Commercial Code (HGB) and in consideration of these standards convey an image of the assets, financial and earnings position of the Group which concurs with the true circumstances. The consolidated management report is consistent with the consolidated financial statements and overall presents an accurate image of the position of the Group and the opportunities and risks of future development. Consolidated Financial Statements of the PWO Group Freiburg i. Br., March 18, 2014 Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft Further Information Nietzer (Auditor) Schmelzle (Auditor) Annual Report

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155 FURTHER INFORMATION Governing Bodies Proposal for the Appropriation of Profits Further Information Annual Report