Schaffner Group Annual Report 2010/11

Transcription

1 Schaffner Group Annual Report 2010/11

2 Structure of the report This integrated report comprises the business review and financial reporting of the Schaffner Group as well as the corporate governance report, which includes the compensation report. The information on the financial position, results of operations and cash flows of the Schaffner Group is based on the requirements of the International Financial Reporting Standards (IFRS) and, where applicable, Swiss law. In this publication the Schaffner Group reports to its stakeholder groups on its economic performance and corporate social responsibility. The scope and content of the sustainability reporting is based on the current report of the Schaffner Group in its capacity as an active member of the UN Global Compact. External audit and opinion Parts of the reporting of the Schaffner Group are audited by third parties. Auditors Ernst & Young AG have audited the consolidated and parent company financial statements and issued an unqualified audit opinion. About the cover photo Schaffner employee Gou Tao at final assembly at the Schaffner plant in Shanghai with an auxiliary transformer intended for use in a locomotive for cargo transportation in China. The Schaffner Group Annual Report is also available in German. Only the German version is legally binding. Contents 1 Introduction 4 Fiscal year 2010/11 6 The Schaffner universe - Markets of the Schaffner Group 8 Technology and markets 15 Global footprint 22 Segments 28 Leadership and values 33 Corporate governance incl. compensation report 53 Financial report 96 Addresses of the Schaffner Group

3 Schaffner profile 1 Energy efficiency and reliability Renewable energy The Schaffner Group is an international leader in the development and production of solutions that ensure the efficient and reliable operation of power electronic systems. The Group s range of offerings includes EMC filters, harmonic filters and power magnetic components as well as the development and implementation of customized solutions. Schaffner components are deployed in energy-efficient drive systems and electronic motor controls, in wind power and photovoltaic systems, rail technology, machine tools and robotics as well as in power supply systems for a wide range of electronic devices in sectors such as medical technology and telecommunications. For the automobile industry Schaffner develops and produces both EMC and power quality components for electric drive systems in vehicles and their charging infrastructure, as well as components for comfort and safety electronics. Schaffner provides on-site service to customers around the world through a global distribution organization and invests heavily in research and development to strengthen its position as international market leader. Energy-efficient drive systems Rail technology EMC Electromagnetic Compatibility The Electromagnetic Compatibility segment (EMC) develops and manufactures components that ensure the immunity of power electronic equipment to line distortion. Key sales markets include energy-efficient drive systems, renewable energy, power supply systems for electronic devices, telecommunications, machine tools and robotics Automotive electronics Power supply systems for electronic devices Machine tools and robotics Telecommunications PQ Power Quality The Power Quality segment develops and manufactures power magnetic components and harmonic filters that guarantee power quality in grids and the reliable functioning of energyefficient systems and equipment. Key sales markets include energy-efficient drive systems, renewable energy and rail technology. AM Automotive The Automotive segment develops and manufactures EMC and power quality components for the drive systems and charging infrastructure of hybrid and electric vehicles, and components for convenience and safety electronics in cars.

4 Key share data / / / / / 11 Number of shares (par value of CHF 32.50) 635, , , , ,940 Weighted average number of hares outstanding (i.e., shares entitled to dividend 616, , , , ,266 Earnings per share In CHF Shareholders equity per share In CHF Share capital reduction through partial repayment of nominal value and of excess share premium, per share In CHF Free float in % Share price 2 High for the year In CHF Low for the year In CHF At end of year In CHF Market capitalization 2 High for the year In CHF million Low for the year In CHF million At end of year In CHF million Subject to approval by the Annual General Meeting on 12 January Fiscal year: 1 October to 30 September. Source of data: Bloomberg 400 Share price performance 1 October 2006 to 30 September 2011 Share price performance 1 October 2010 to 30 September 2011 In CHF In CHF Oct. Nov. Dec. Jan. Feb. Mar. April May June July Aug. Sept. Oct. 1 Source: Thomson Datastream Schaffner registered shares Swiss Performance Index (adjusted) Trading of the Company s securities The registered shares of Schaffner Holding AG are traded on the SIX Swiss Exchange under Securities No Ticker symbol Registered shares: SAHN

5 Key financials of the Schaffner Group 3 In CHF / / / / / 11 Net sales 186, , , , ,686 Electromagnetic Compatibility segment n/a n/a 82, , ,451 Power Quality segment n/a n/a 42,690 60,922 61,610 Automotive segment n/a n/a 8,335 16,550 17,625 Operating profit/(loss) [EBIT] 9,632 13,892-9,193 15,000 12,810 In % of net sales Net profit/(loss) for the period 5,403 9,355-10,935 11,983 10,150 In % of net sales Total assets 147, , , , ,822 Shareholders equity 51,710 58,149 47,305 55,985 56,929 In % of total assets Number of employees 2,375 2,318 1,808 2,393 2,702 1 Pro forma comparative data (excluding effect of IFRS 5) 200 Net sales Operating profit (EBIT) Net profit Free cash flow In CHF million In CHF million In CHF million In CHF million / / /07 07/08 08/09 09/10 10/ /07 07/08 09/10 10/ /07 07/08 09/10 10/11 06/07 07/08 08/09 09/10 10/ Non-recurring restructuring costs -12 Net sales in 2010/11 by region Net sales in 2010/11 by market 57% Europe 35% Asia 8% Americas 4% Telecommunications 22% Efficient drive systems 13% Machine tools and robotics 2% Other 17% Renewable energy 16% Power supply systems for electronic devices 10% Automotive electronics 16% Rail technology

6 Fiscal year 2010/11 4 Well-positioned for growth through strategic groundwork done In fiscal 2010/11 the Schaffner Group laid the groundwork for sustained success. The acquisition of the dry-type transformer division of US company MTC Transformers, Inc. with its own manufacturing site in Wytheville, Virginia, strengthens the Schaffner Group s position in the North American market for power magnetics, while the new plant in Shanghai commissioned in the year expands the Group s operational capabilities. The introduction of a divisional structure in the fiscal year 2011/12 optimizes the Schaffner organization. Investment in research and development has created the foundation for continuing long-term growth, especially in the strategic markets of energy-efficient drive systems and electronic motor controls, renewable energy, rail technology and electromobility. CHF strength and volatile Chinese rail market affect earnings While the first half of 2010/11 brought a pronounced improvement from the year-earlier results, the economic climate deteriorated in the second half of the fiscal year. Thus, the recovery in the markets for photovoltaics and for rail technology in China largely failed to materialize. At the same time, the strength of the Swiss franc against the foreign currencies important for Schaffner weighed on the financial statements. In the fiscal year 2010/11 the Schaffner Group recorded consolidated net sales of CHF million, a decrease of 2.8% from the prior year s CHF million. However, sales grew by 9% in local currencies. Operating profit (EBIT) was CHF 12.8 million (prior year: CHF 15.0 million). Amid the underutilization of the manufacturing plants (caused particularly by the weak demand from China s railway industry), the non-recurring costs related to moving into the new facility in Shanghai and the acquisition-related expenses in the USA, the EBIT margin eased to 7.0% (prior year: 7.9%). Net profit for the year was CHF 10.2 million (prior year: CHF 12.0 million), representing basic earnings per share of CHF and diluted earnings per share of CHF (prior year: basic EPS of CHF and diluted EPS of CHF 18.68). New orders were down by 3.6% in local currencies, amounting to CHF million (prior year: CHF million). The book-to-bill ratio (new orders to sales) was On segment sales of CHF million (prior year: CHF million), the operating margin in the Electromagnetic Compatibility segment was raised to 18.1% from 16.4% through operational improvements. In the Power Quality segment, sales grew to CHF 61.6 million (CHF 60.9 million), while the operating margin of 1.6% (prior year: 5.0%) disappointed as a result of the underutilization of plants induced by the slump in the Chinese rail market and of the costs in connection with moving into the new plant in Shanghai. Sales in the Automotive segment increased from CHF 16.6 million to CHF 17.6 million. As expected, the segment s operating margin was narrowly negative at -2.2% (prior year: positive at 9.4%) as a result of high up-front costs for new products, notably in electromobility. Sound financing structure Net working capital contracted to CHF 33 million (from CHF 38 million at the prior year-end). Net debt increased to CHF 21 million (prior year: CHF 12 million) and the gearing ratio of net debt to equity was 36% (prior year: 21%). With shareholders equity of CHF 57 million (prior year: CHF 56 million), Schaffner s equity ratio of 42% (prior year: 44%) is in the target range. Divisional organization replaces functional structure Since the beginning of the new fiscal year 2011/12 on 1 October 2011, the Schaffner Group is organized into three divi-

7 5 sions: EMC, Power Magnetics and Automotive. In the resulting more efficient organization, the optimized processes are fully aligned with the high quality standards and market requirements. From 1 October 2011 the new Executive Committee consists of Chief Executive Officer Alexander Hagemann, Chief Financial Officer Kurt Ledermann, Chief Operating Officer Ah Bee Goh, and the three division heads, Guido Schlegelmilch (EMC), Eduard Hadorn (Power Magnetics), and Jean-Michel Calleri (Automotive). The former Executive Committee members Fabian Beck and Martin Köppel continue to have functional responsibility for Research & Development and for Quality and Supply Chain Management, respectively. Board changes Long-serving Board member Robert F. Spoerry stepped down for capacity reasons at the end of March The Board of Directors and Executive Committee regret losing him and thank him warmly for his years of valuable service ever since the Schaffner Group s initial public offering in To succeed him as a Board Member, the Board of Directors is nominating Suzanne Thoma for election by shareholders at the Annual General Meeting on 12 January Ms. Thoma, born in 1962, is a Swiss citizen and holds a degree in chemical engineering and a Ph.D. from the Swiss Federal Institute of Technology (ETH). The Board is also nominating Georg Wechsler, a Swiss Certified Accountant, for election as an additional member of the Board of Directors. Mr. Wechsler, born in 1956, is a Swiss citizen. Distribution proposal The Board of Directors of Schaffner Holding AG will propose to the 16 th Annual General Meeting on 12 January 2012 a distribution of CHF 4.50 (prior year: CHF 4.50) per share in the form of a tax-free repayment of capital to shareholders, in line with the target payout ratio of 25% of net profit. Outlook The integration of Schaffner MTC, the business acquired in North America, is progressing as planned. With the move into the new Shanghai operations and production site, the Schaffner Group has strengthened its competitive position, especially in the Chinese market. From the first half of 2011/12 the launch of SAP will drive further process optimization, particularly in material planning and logistics. The Schaffner Group expects that in the course of fiscal 2011/12 the railway market in China and the photovoltaic From left: Alexander Hagemann, Daniel Hirschi market will recover from the lows of the second half of 2010/11. Nonetheless, given the macroeconomic and global political environment, the further trajectory of the sales markets cannot be predicted with confidence. Currently it is not possible to forecast the Group s results for the fiscal year 2011/12. However, the medium-term targets remain in place: an operating profit margin of 10% and sales of more than CHF 200 million. Thank you 2010/11 was an eventful year for the Group. What we achieved was made possible by the confidence of our customers, the loyalty of our shareholders and the great dedication of our staff. We sincerely thank every one of them. Daniel Hirschi Chairman of the Board of Directors Alexander Hagemann Chief Executive Officer

8 The Schaffner universe Markets of the Schaffner Group The Schaffner Group is developing innovative products to meet the growing demand for reliable, energy-efficient solutions for power electronics worldwide. 4% Telecommunications 13% Machine tools and robotics EMC filter FN3280 Four-wire interference suppression For the most exacting requirements in advanced machine tool production Sinusoidal filter FN5040 For protecting electric motors and extending their service life 16% Power supply systems for electronic devices Innovative and versatile plug filter module FN9280 For ensuring electromagnetic compatibility in medical and other technology Compact EMC filter solution For reliable electromobility Antennas and sensors For convenience and safety applications in automobiles 10% Automotive electronics Feedthrough filter FN7611 For high-frequency technology in telecoms infrastructure

9 6/7 22% Energy-efficient drive systems EMC filter FN3268 For ensuring electromagnetic compatibility ECOsine harmonic filter For improving quality and efficiency in grids 17% Renewable energy Combination of transformer and inductor DSC9943 For compliant grid connection of photovoltaic systems DC filter FN2200 For protection of solar modules AM 10% PQ 33% High-quality magnetic components DSC9364 For use in drives and auxiliary systems in trains EMC 57% 16% Rail technology

10 Technology and markets 8 One-stop shop for EMC and power quality solutions As a one-stop shop, Schaffer provides EMC and power quality solutions that ensure the efficient and reliable use of power electronics. Schaffner components can help to reduce power consumption over the long term. This way Schaffner supports both economic and ecological objectives. specific filtration requirements can only be met by fine-tuning the parameters. The advice provided to customers includes an analysis of the application requirements, the development, production and delivery of the components required, and function-testing of the finished products and applications at the customer s premises or in Schaffner s test laboratories. Fifty years experience in handling interference and conformity problems, coupled with a vast knowledge base and extensive application expertise, make Schaffner a strong partner for eliminating interference problems relating to the use of power electronics and tailoring both the mode of operation and the form of its solutions to the most diverse areas of application. Schaffner also has an international production and distribution organization and provides on-site service to its customers around the world. Safeguarding optimum functioning Given the increasingly high density of electrical and electronic devices and systems, guaranteeing their flawless functioning and that of power grids is becoming increasingly important. The use of power electronics causes interference frequencies which flow back into electricity grids through the cable connection and can result in the grids and electrical devices working inefficiently, failing altogether or being damaged. Comprehensive offering The Schaffner Group provides a comprehensive range of solutions to measure, contain and eliminate undesirable interference frequencies in conducted environments. Schaffner s offering ranges from standard components to complex customer solutions to be deployed in energy-efficient drive systems in the generation of renewable energies, in rail technology, automotive electronics, power supply systems of electronic devices, machine tools and robotics as well as in telecommunication. Interference frequencies place strain on public electricity grids The use of power electronics, particu larly in industrial equipment, causes interference frequencies which flow back into the public power grids via the cable connections and result in power grids and electrical equipment working inefficiently or failing altogether. Customized products often represent a technically optimized and cost-effective solution. This is particularly true where: specific requirements have to be met in terms of mechanical design, size, integration or connections compliance with overall specifications for an application must be assured and

11 9 22% Energy-efficient drive systems Nowadays, a large proportion of the electricity drawn from the grid is used by electric motors. The long-term trend towards enhanced energy efficiency is fuelling demand for energy-efficient drive systems. Energy-saving motors and electronic motor controls reduce the power consumption of conventional systems and cut operating costs. By doing so, they also contribute to the ecologically sustainable use of energy. Demand from the market of energy-efficient drive systems grew further in fiscal 2010/11. Its share of sales of the Schaffner Group increased from 18% in the previous year to 22%. The ECOsine TM harmonic filters product line in particular performed extremely well. In the year under review Schaffner acquired projects that included semiconductor production in Korea, mining operations in Australia, cement factories in India, modern office towers in Hong Kong and underground railway lines in China. In 2010/11 Schaffner exceeded average market growth for energy-efficient drive systems and expanded its position in the international market. With the sustainable use of electrical power also gaining in economic and regulatory importance, the demand for solutions with lower energy consumption will continue. Today many industrial systems are still controlled by mechanical variablespeed drives. The motor operates continuously at full power, with up to four-fifths of the electrical power used being lost. Only an electronic speed control system can ensure that the machinery receives just the amount of energy it actually needs for the process. As a result, the system s energy consumption can often be reduced by more than half. Schaffner components support the interference-free integration of electronic speed control systems and other power electronic components in complete systems and thereby protect the power network and neighboring devices from harmful distortion effects. Schaffner s offering includes the requirements analysis, development, manufacture and delivery of components and the testing of their flawless functioning at the customer s premises or in its own development laboratories.

12 Technology and markets 10 17% Renewable energy The generation of renewable energy is a growth market with long-term potential worldwide. More and more countries are committing to harnessing wind and solar power. Schaffner supplies leading global manu facturers of wind turbines and photovoltaic systems with power electronics components such as transformers and filters. Electrical energy from regenerative sources cannot be used directly in power grids but has to be converted by power electronic devices into grid-compatible alternating current before being fed into the grid. In the process, interfering pulses occur which impair the operation of other electrical and electronic devices and may infringe international voltage quality standards. Components made by the Schaffner Group adapt the electricity generated from renewable energy to the requirements of modern power grids. The market for wind turbines expanded slightly in 2011 and is likely to grow further in The costs for new wind turbines, and thus the levelized cost of energy (LCOE, the cost per generated unit of energy taking into account all relevant factors), from on-shore installations have declined substantially and have already made wind turbines in suitable locations competitive today with fossil energy sources. Experts predict that in less than ten years around 12% of the world s electricity will be generated by wind turbines. According to a study conducted by the Global Wind Energy Council, in 2030 wind power could already provide up to 22%, or onefifth, of worldwide energy demand. China is currently the biggest market for wind power. Growth is also expected in view of the trend in technology towards variable-speed wind turbines. As variable-speed turbines pass not just one-third (as was usually the case in the past) but one hundred per cent of the energy to be generated through a converter, the higher demand for power electronics also boosts the market potential for Schaffner. Solar power is also one of the growing markets in the renewable energy sector. After a recent boom, the photovoltaic market is currently showing high overcapacity and is consolidating. However, Schaffner expects that growth will pick up again in the international photovoltaic market from 2012 after its decline in Prices for solar modules have fallen some 40% in US dollar terms since the beginning of the year, and with their lower LCOE, photovoltaic systems have today become an attractive energy generation alternative, especially to cover peak mid-day demand in countries with high levels of sunshine.the influence of state subsidies will continue to decline over the coming years. Europe, Japan and the USA are major players in the field of photovoltaics, but China and India are growing in significance as well. Schaffner aims to continue to capitalize on the growth under way in the renewable energy market and to help shape it with its products. The product line of the Schaffner Group for the renewable energy market comprises magnetic components (chokes, transformers) for wind energy and photovoltaic installations as well as EMC components (suppression chokes, AC and DC filters) for photovoltaic systems. The market for renewable energy accounted for around 17% of Group sales in fiscal 2010/11 (prior year: 19%).

13 11 16% Rail technology As a leading international manufacturer, Schaffner designs and builds magnetic components for use in rail technology and offers broad-based application knowhow from a single source. Schaffner components transformers and power inductors are used in the drive units of locomotives and in self-propelled and other railroad cars. They ensure an efficient flow of energy and reliable operation and also prevent interference in onboard electronics. Schaffner supplies the most important manufacturers worldwide with components for deployment in rail electronics applications, ranging from high-speed trains to subways. Schaffner s range of products includes auxiliary transformers, chokes, harmonic and EMC filters. China remains a prominent market for rail technology. In addition to long-distance connections, demand is also growing particularly in the area of regional and local transportation systems for modern rolling stock for suburban and underground rail systems. The Asia/Pacific region will continue to be the fastest-growing rail technology market in the next five years. This region s as yet underdeveloped railway system does not meet the demands of its economic and population growth and thus has a correspondingly high requirement for investment. After a suspension of orders following China s reorganization of its Ministry of Railways at the beginning of 2011, the first new orders have since been announced. The new multi-year plan in China aims to improve the connections between the country s vast hinterland and its industrialized coastal regions by means of an efficient east-west railway infrastructure. The north-south high-speed train projects, on the other hand, have been brought to a halt, with speeds of between 200 and 250 km/h now being favored for future passenger transportation. There is a lack of modern, efficient and reliable locomotives for cargo transportation in particular, and the first orders are thus currently being put out to tender in this sector. New passenger transportation projects are expected in spring The rising exports of the Chinese rail technology industry also offer additional growth potential. Schaffner expects the market for Chinese rail technology to have bottomed out in the second half of fiscal 2010/11 and believes that orders in this market segment will once again increase in the course of fiscal 2011/12. Demand from the regional and local transportation segment is likely to remain stable. As a partner to major international manufacturers, Schaffner is well positioned in this regard, especially after its acquisition in September 2011 of the plant for dry-type transformers in Wytheville, Virginia, in the USA. In the year under review, 16% (prior year: 17%) of the Group s sales were generated by rail technology.

14 Technology and markets 12 10% Automotive electronics Schaffner is one of the world s leading manufacturers of components for keyless entry systems and is well placed to participate in the emerging growth market of electromobility. Vehicles with electric or hybrid electric drive are now sold by most of the large car manufacturers. Work will continue in the coming years on building up a high-performance infrastructure to enable car batteries to be recharged en route. Experts predict that half of all new cars will have a hybrid or electric drive by Schaffner expects the share of purely electrically driven vehicles to remain very low, while next-generation hybrid drives (so-called plug-in hybrids) and electric vehicles with a range extender (built-in combustion engine for recharging the battery during the journey) will grow quickly from around An independent study indicates that mass production will bring down prices of e-car batteries by two-thirds within a few years from now. This means that e-cars will also become financially attractive to commuters. It has been estimated that about 10% of all new cars will be exclusively battery-powered ten years from now. The Schaffner Group was quick to spot this megatrend towards electromobility and secured a competitive advantage by making substantial investments in research and development and entering into cooperation agreements with prestigious institutions and manufacturers. The Schaffner e-car product offering ranges from individual electronic components to complex filter systems designed to protect e-cars from electromagnetic interference and safeguard the seamless functioning of their computer-controlled systems and electronics. The establishment of an efficient e-car battery-charging infrastructure also offers abundant potential. The charging infrastructure needs to be established before large production series of cars can be brought to market. This means that a large number of fast charging stations for electric vehicles will be built across the world over the next few years. The Schaffner Group has customers in all the major markets and is the first member of CHAdeMO, the key Japanese industrial consortium, to have EMC and power quality expertise. CHAdeMO has developed a standard for the charging infrastructure for e-cars which is also likely to be adopted by European car manufacturers in a modified form. Schaffner is thus well positioned to participate in both the establishment and maintenance of the international charging network and, through rigorous process optimization and innovation, to further strengthen its competitive position in the market for automotive electronics. The share of sales of the Schaffner Group contributed by automotive electronics increased to 10% (9%) in the year under review.

15 13 16% Power supply systems for electronic devices The phenomenon was all too familiar in the past: by switching on the kitchen mixer you interfered with the sound of the radio. EMC filters are used to prevent electrical devices from interfering with each other, and are equally effective against network-related interference. This protection is made possible by Schaffner components in power supply units. As process automation increases along with the complexity of electrical and electronic systems, the risk of a malfunction caused by electromagnetic interference and the need for corresponding EMC filters to ensure flawless functioning are growing. In addition to solutions for traditional areas of application such as office machinery and vending machines, Schaffner develops and produces EMC filters and power quality components to support the reliability of electrical and electronic systems in medical technology. While the West has seen significant growth in medical technology over the last few decades, additional stimulus is expected to come from the vast healthcare markets of the rapidly growing emerging economies, most notably China and India. Highprecision diagnostic and measuring devices, X-ray equipment and MRI scanners must function perfectly at all times and meet the highest standards of safety. The future will see a growing trend towards decentralized diagnosis and treatment, performed in the patient s home or workplace for costefficiency reasons. As a result, experts predict strong growth in the years ahead, both in stationary and mobile medical equipment. In the year under review, power supply systems for electronic devices accounted for 16% (prior year: 15%) of Schaffner Group sales.

16 Technology and markets 14 4% Telecommunications Feed-through components and EMC filters for telecommunications infrastructure are designed to suppress interference in the high-frequency range and also improve data security, among other benefits. In all major markets, especially in emerging and newly industrialized economies, mobile networks and the requirements for efficient and fault-free mobile data transmission are increasing in importance. To ensure that the high network quality requirements are met, network providers are having to offer increasingly powerful solutions. Existing 3G networks are being superseded by new technologies such as 4G, with ever faster data speeds. Schaffner develops and produces EMC filters and components for use in mobile network base stations and in distribution systems for fixed networks. The company s product portfolio ranges from standard components through customized solutions to integrated components with monitoring electronics. Some 4% (prior year: 6%) of the Schaffner Group s sales were generated in the telecommunications market in fiscal 2010/11. 13% Machine tools and robotics The machine tools and robotics industry is one of the traditional markets of the Schaffner Group. Experts are forecasting that the demand for machine tools and robotics is set to generate growth in this market, especially in the emerging economies. that ensure that their equipment and robots operate efficiently and faultlessly. Experts forecast a rise in demand for machine tools and robots, most notably in the emerging economies, in sectors such as the automobile industry. New areas of application also harbor growth potential for high-performance machine tools and robotics. New robotic applications are being tested in growth areas such as medical technology, among others. As in the previous year, about 13% of the Group s sales were generated in the machine tools and robotics market in fiscal 2010/11. While fast-growing emerging markets like China and India continue to provide strong momentum, the market for machine tools and robotics in the USA, Brazil and Turkey is also expanding significantly. Schaffner supplies the world s major machine tool manufacturers with EMC and power quality components

17 Global footprint 15 From Shanghai to Virginia: Schaffner s manufacturing operations span the globe With the opening of a new manufacturing plant in Shanghai, China, the Schaffner Group has cemented its worldwide leadership in the development and production of solutions for the efficient and dependable operation of power electronic systems. The company also strengthened its global focus with the acquisition of the dry-type transformer operations of American manufacturer MTC Transformers on 1 September Schaffner now manufactures at five locations in Asia, Europe and the USA and is the first vendor in its field to offer global customers production and development capacities close to home and around the world. The new Schaffner facility in Shanghai Shen Xuelin s fingers are moving over two copper wires while the coil is turning in front of him. The 23-year-old is watching the winding process closely: the wires need to be strung evenly around the core of the transformer that he is helping to produce. Now he is touching the wires lightly to make them go smoothly around the core that is wrapped in white insulation paper. It is 6 am: Xuelin has just started his early shift. He is standing at one of eleven large winding stations for transformers at Schaffner s newly opened plant in Shanghai, China. We have an ultra-modern facility here that is truly state-of-the-art, says Eduard Hadorn, Head of Power Magnetics (PM): In Shanghai, Schaffner manufactures for the Power Magnetics and Electromagnetic Compatibility (EMC) divisions. Their products range from components, active and passive harmonic filters and output filters to transformers and chokes. About 680 workers are busy in three daily shifts in the 18,000 square meter production site which officially opened on 18 October In addition, there are engineers working in research and development, as well as application

18 Global footprint 16 and sales engineers and employees in management and administration. Schaffner has been producing transformers in Shanghai for the last six years. Until recently they were made in the old factory, 12 kilometers from the new site and two thirds the size of the new plant. The old building was not ideal. We could not install overhead cranes to move the transformers that often weigh up to a ton, says Hadorn. When it was time to plan the new factory, the management and engineers had already been thinking for a long time about what features they wanted to see. Working with specialists from a consulting firm, the experts pooled their knowledge and, using simulation software, were able to greatly improve the work flow. It is also important not to have to store materials between production steps, elaborates Hadorn, who was born in Switzerland and has been living in Asia for 25 years. The new facility has allowed the cycle time from preparation of raw materials to completely finished product to be reduced to four days. The new factory was planned according to the Schaffner Manufacturing System, which specifies what constitutes leanness in production (i.e., streamlined processes and efficient plant layout for greater profitability). In contrast to the traditional I-lines, where the workers stand or sit in a straight line one behind the other, Schaffner uses production areas that are U- shaped. The employees in each of these lean cells work together on one workpiece before going on together to the next piece. Also, the input materials are stored on shelves in the production area itself and not in the warehouse. Schaffner uses these lean cells not just in the EMC segment but also unlike its competitors in Power Quality (PM). The fact that a whole team of workers collaborates on a workpiece also strengthens the team members sense of collective responsibility for the product. In Shanghai, Schaffner has created a cutting-edge facility for the production and testing of power electronics systems that sets new standards in the industry worldwide. Schaffner components are deployed in many areas of daily life, such as machines, elevators, telecommunications, technical building equipment, medical and other technology, trains and rail technology, turbines for wind power, and inverters for photovoltaic systems. About three quarters of Shanghai s production serves the Chinese market, one quarter is exported worldwide. We have a very dynamic market with huge potential and high growth opportunities, says Hadorn. The increasingly rapid pace of project development demands faster response times from manufacturers. Up to 1,800 people could work in the new plant if necessary. Soon, the facility is to start production of booster inductors and EMC filter solutions for electric cars. Should future demand require it, an expansion of the new plant from 18,000 to 24,000 square meters is possible. The biggest growth opportunities in China lie in the areas of wind power, photovoltaic systems, energy efficiency, rail technology and electric vehicles, says Alexander Hagemann, CEO Coil winding machine for Power Quality products in Shanghai

19 17 of the Schaffner Group. The top priority is the Chinese market, but exports from China to South-East Asia, Australia and New Zealand will grow more and more significant over the coming years. We bring technological expertise to China and offer a development partnership here both to Chinese and foreign companies, says Hagemann. Adding value locally is becoming increasingly important. Often products are too large and heavy to be transported from abroad. Schaffner s engineers offer onsite sulting services, and the products are manufactured locally. As a result of globalization, more and more companies have operations around the world. We are the first provider in our market that can offer manufacturing and development capabilities to globally active companies both worldwide and close to home, says Hagemann. The global business space is a complex world for which we have to offer solutions, explains Hagemann. With its worldwide presence, Schaffner can supply products and support to a Japanese company that builds trains for the Chinese and US markets, and can do it exactly where the customer needs them. Our engineers and production sites are close to where the customers are, says the CEO. Meanwhile, Shen Xuelin in Shanghai is on his lunch break. Two different meals are offered daily in the cafeteria on the premises: sweeter food for employees from the Shanghai area, and spicier fare for those from the more westerly province of Hunan. We want the employees to be happy here, says Eduard Hadorn in commenting on the dual menu. A carefully trained employee is worth a lot, the division head emphasizes. Highly qualified staff is especially crucial in Power Quality/Power Magnetics (PM). Two-thirds of the workers in the plant in Shanghai were trained by Schaffner and one-third come from other companies. To keep up the high level of quality, in mid-2012 Schaffner will introduce an apprenticeship system similar to that offered in Switzerland. Schaffner will employ about five apprentices who will not only be trained on the machines but will also attend a technical middle school to complete their qualification. We want to offer a solid local training program that will be an asset for the site, explains Hadorn. While Shen Xuelin is having lunch in Shanghai, Janchai Onpotha is busy working in the plant in Thailand. With both hands the 45-year-old is reaching into two blue baskets, taking out two little white plastic pegs. With startling speed she plugs the parts into a square structure lying on the workbench in front of her. A moment of firm pressure from her fingers, and the pegs are in place. Together with two other women and three men, all in white work clothes, Onpotha is working in this lean cell on IEC plugs that ensure electromagnetic compatibility in devices such as medical equipment. She has been at her workstation since 7 am, when she started her shift together with 400 workers. She will finish at 4 pm today. About 800 workers are employed in three daily shifts in the Schaffner plant in Lamphun, Thailand, 600 kilometers north of Bangkok. If necessary, production can be

20 Global footprint 18 raised by at least 20% through overtime. Onpotha and her colleagues are producing filters, components and chokes for the EMC and Automotive divisions. They are manufacturing components for convenience and safety applications for the automobile industry. Components for electric drive systems in electric and hybrid vehicles and for the charging infrastructure are becoming more and more important, too. The customers are in Europe, Asia and the USA. The Schaffner plant in Thailand consists of two buildings totalling about 10,000 square meters. There is also a cafeteria seating 300 and a garden with a basketball court and table tennis. EMC filter line in Hungary Manufacturing of transformers at the Schaffner plant in Büren In Thailand too, the magic words lean manufacturing apply. Introduced three years ago, this concept has improved the productivity of the plant significantly, has reduced costs for storing materials and contributed to enhanced timeliness of deliveries, says Ah Bee Goh, Chief Operating Officer of the Schaffner Group. Traditionally, the production floor was arranged in linear I-lines, with long conveyors which set the pace for the workers. This setup was inflexible and prone to disruption: if one worker was sick or otherwise not performing well, it could jeopardize the productivity of the entire line. By contrast, the lean manufacturing cells are very flexible, being characterized by unique features such as one-piece flow and a pull system. The pull system helps to produce the right quantity at the right time, thus avoiding unnecessary storage costs. Shen Xuelin in Shanghai has gone home by now, but both in China and Thailand the next shift is still working hard. Meanwhile in Büren, Germany, near the city of Paderborn, the early shift has started. Here around 80 workers are producing chokes and transformers for the Power Quality/Power Magnetics division. These products are used in rail technology, wind and solar power plants. The employees in the 5,000-square-meter plant in Büren work in two shifts daily, with night shifts possible when needed. The employees in Büren have first-hand experience of what globalization means: ever since Schaffner bought the former Jacke Transformatoren GmbH in 2006, there has been technology transfer from the plant in Büren to other Schaffner sites in Shanghai and Kecskemet, Hungary, to be able to start production at those plants. The technology for a high-speed train for customers in China was developed in Büren, the parts were manufactured in Hungary, and sent to Germany to be assembled. Then the components were shipped to China and the train s assembly completed locally at the customer. Now,

21 19 however, these products can be manufactured in Shanghai. At the same time, transformer cores are produced at a Schaffner plant elsewhere and brought to Büren to be assembled, enabling the plant in Germany to add value. Thanks to this global manufacturing organization, Schaffner has been able to heighten its competitiveness as well as to raise sales significantly, thus keeping jobs safe in Büren. In fact, there are more people working at the German plant now than before the acquisition in at the moment and want to advance to one of the top spots by 2015, says Hagemann. Around 70 employees are working in Wytheville on the development, manufacture and maintenance of transformers and other power magnetics in a plant that is about 7,000 square meters in size. The plant s operations focus on rail technology, renewable energy and energyefficient drive systems. When the night shift starts in Virginia, Schaffner s staff in Shanghai is already in high gear working the next day s early shift. At Schaffner s site in Hungary the employees are busy as well: 85 kilometers south of Budapest, about 150 workers manufacture parts and components for the Electromagnetic Compatibility and Power Quality/Power Magnetics divisions in a building measuring 7,500 square meters. Normally the plant operates in two shifts from 6 am to 10 pm, but night shifts can be added if necessary. With the newest member of the Schaffner family, US transformer maker Schaffner MTC in Wytheville, Virginia, the Group has strengthened its market position in North America. At the same time, this acquisition by Schaffner has added a production site in the USA to its international manufacturing organization which will expand its position as a global partner in the world market for power electronics systems. The Schaffner Group is on course to meet its strategic goal of achieving a leading market position in Power Quality/Power Magnetics by the middle of the decade. We are number five High-power transformers built at the Schaffner MTC plant in Wytheville

22 Global footprint 20 The Schaffner Group is a global company with a local presence in all key markets. Production facilities in Asia, Europe and North America as well as 18 customer service and application centers ensure rapid turnaround times, relevant consulting and responsive customeroriented engineering. The closeness to customers accelerates both customized application development and product delivery. Comprehensive testing services based on the latest measuring systems are provided directly in the customer s development departments or from the Schaffner laboratories. Schaffner Group engineers and consultants know their customers personally. They understand their individual requirements and are also at home with the cultural diversity of the world s local markets.

23 21 Headquarters Development and production centers Sales and application centers Switzerland China Germany Thailand Hungary USA China Germany Finland France Italy Japan Sweden Switzerland Singapore Spain Taiwan Thailand UK USA

24 Business segments 22 Electromagnetic Compatibility (EMC) The EMC segment develops and manufactures components that ensure the electromagnetic compatibility of electronic devices. Key sales markets include energy-efficient drive systems, renewable energy, power supply systems for electronic devices in sectors such as medical technology, and machine tools and robotics. Renewable energy Energy-efficient drive systems Power supply systems for electronic devices Machine tools and robotics Telecommunications Electronic systems must meet high standards in terms of protection against electromagnetic interference in order to guarantee safe, reliable operation. The Schaffner Group is the world s leading provider of products and solutions for electromagnetic compatibility. Schaffner has the expertise and the most extensive range of products to enable it to identify and isolate potential sources of EMC interference at an early stage, both in the development of new products and during subsequent system optimization. It offers customers a broad range of standard components, efficient measurement services, expert technical consulting and the capacity to develop and produce customized solutions quickly and deliver them in large volumes to all markets worldwide. Compliance with European and international guidelines and standards governing electrical power systems is certified by Schaffner. Increase in profitability The EMC segment recorded sales of CHF million (fiscal 2009/10: CHF million). In local currency terms, sales were 5.0% higher than in the previous year. Segment operating profit rose from CHF 18.3 million to CHF 18.9 million, while the operating margin increased further from 16.4% to 18.1%. The EMC segment accounted for 57% of Group sales (prior year: 59%). Consistent operational improvements, like the successful implementation of lean manufacturing processes and systematic optimization of logistics processes, paid off in a further improvement in operating profitability. In addition, the segment succeeded in expanding its position in high-margin markets. Sustained innovation activity As the world leader in electromagnetic compatibility solutions, Schaffner drove development activities forward in the year under review, launching several product innovations which enable customers to comply with new safety standards and regulations. Among other things, the IEC inlet filter range for integration in medical and laboratory equipment was expanded. In addition, a specially designed safety version of the IEC inlet filter for use in medical equipment was launched in the year under review. Traditional markets for products such as machine tools and robotics were also key drivers of the EMC segment s stable performance. Ongoing expansion of global leadership Schaffner s proven solutions and technical support help customers around the world to comply with EMC guidelines

25 23 and standards. EMC filters improve the efficiency and reliability of power electronic systems. As the world market leader, the Schaffner Group continually invests in the development of new solutions that offer customers additional benefits through higher integration. Schaffner uses efficient procurement and production processes to support customers at their own location anywhere in the world. Schaffner expects that demand for innovative solutions to ensure the efficiency and reliability of electric equipment and systems will continue over the long term and remain a driver of growth and sustained profitability for the Schaffner Group. With a high innovation rate, lean manufacturing processes at every plant and an efficient distribution structure in all strategic markets, the Schaffner Group will consistently expand its leading position in the EMC market. After the introduction of the new divisional organizational structure effective 1 October 2011 (the beginning of the new 2011/12 fiscal year), the EMC segment is now a stand-alone division and will be systematically further expanded under the leadership of Guido Schlegelmilch, previously the Managing Director of Schaffner Germany. Plug filter with integrated main switch Multi-functional filter module for ensuring the equipment reliability in the medicine and laboratory technology, etc. Common-mode chokes Chokes with open construction design allow the space-saving integration of the filter technology in the energy-efficient motor controls

26 Business segments 24 Power Quality (PQ) The PQ segment develops and manufactures power magnetic components and harmonic filters that safeguard power quality in grids and the reliable functioning of energy-efficient devices and systems. Key sales markets include energy-efficient drive systems, renewable energy and rail technology. Renewable energy Energy-efficient drive systems Rail technology If electrical energy is to be used reliably, manufacturers must do more than just ensure the electromagnetic compatibility of their equipment. This is where EMC and Power Quality seamlessly complement one another. The Schaffner Group is the first global single-source provider of EMC and power quality solutions. Harmonic filters stabilize electricity grids by filtering out undesirable signals ( harmonics ) in the electrical power frequency spectrum that are caused by power electronic systems. Power magnetic components are an integral part of high- and ultra-high-performance systems for energy conversion. Segment operating profit impacted by demand slump in Chinese rail market and non-recurring costs Power Quality sales rose slightly from CHF 60.9 million in the prior year to CHF 61.6 million in fiscal 2010/11. In local currencies, sales were 13.2% higher. Amid underutilization of capacity in the factories in Germany and China following the demand decline in the Chinese rail market, segment operating profit fell to CHF 1.0 million (prior year: CHF 3.1 million) and the segment operating margin contracted to 1.6% (prior year: 5.0%). The Power Quality segment generated 33% of Group sales (prior year: 32%). In fiscal 2010/11 the growth in Power Quality sales was mainly driven by the market for harmonic filters. Sales of active harmonic filters (ECOsine TM Active) for interferencefree power supplies in buildings and infrastructure equipment doubled year-on-year to CHF 7 million. This business, which was taken over with the integration of BETEC Engineering in January 2009, has performed extremely well. Schaffner is also among the world s leading manufacturers of auxiliary transformers and other power magnetic components for vehicle drives. With demand in China recovering more slowly than expected following the reorganization of the Ministry of Railways at the beginning of the calendar year, compounded by weak demand from photovoltaic customers in China as a result of fewer orders from Europe, production capacity was underutilized. Moreover, costs for the move to the new factory in Shanghai also impacted Power Quality s segment operating result for 2010/11, which was therefore below expectations. Well positioned in growth markets In the year under review the Schaffner Group significantly strengthened its position in the global market for harmonic filters, particularly in the Asia-Pacific region.

27 25 Schaffner delivered 700 ECOsine TM Active harmonic filters for projects in the mining industry, semiconductor fabrication, oil and gas production, water treatment and sewage plants, cement factories and building services. In the renewable energy sector there was a further shift from the European to the Chinese market, coupled with a continuing technology trend towards variable-speed wind turbines. As variablespeed turbines pass 100% of the energy to be generated through a converter, rather than only one-third as was previously the case, demand for power electronics is growing strongly. An important domestic market is also emerging in China for photovoltaic components for use in solar power technology. Thanks to the strong position in China with the new, efficient lean manufacturing concept in Shanghai, Schaffner is well placed to benefit from these trends even in the face of growing competition in China. Schaffner expects demand in the Chinese rail and photovoltaic markets to recover in the course of 2011/12 from the lows of recent months. High innovation rate and tightened focus strengthen market position In the year under review, Schaffner further expanded its range with new products such as output filters, which help extend the life of electric motors. The increasingly stringent regulations governing grid quality also create further growth potential. In view of the growing risks of grid problems caused by inadequate power quality, intensive efforts are under way worldwide to develop new standards in this area. Schaffner is involved in this process in Europe. The tighter focus made possible by the introduction of a divisional organization as of 1 October 2011 will also strengthen the Power Quality segment. Eduard Hadorn, previously Vice President, Business Development Asia, has been appointed as Head of the new Power Magnetics division. Power Magnetics will focus exclusively on power magnetic components (chokes and transformers), while the harmonic filter business is now integrated in the EMC division. ECOsine TM Active ECOsine Active harmonic filters guarantee flawless functioning of electricity grids at all times.

28 Business segments 26 Automotive (AM) The Automotive (AM) segment develops and manufactures components for convenience and safety electronics in cars, as well as EMC and power quality components for hybrid and electric vehicles. Schaffner components for comfort and safety electronics in cars are found primarily in keyless entry systems. Schaffner antennas ensure secure communication between drivers and vehicles. EMC and power quality solutions are rapidly gaining in importance in the growth market of e-mobility. Schaffner has carved out a competitive advantage in this area and, as partner to the international automotive industry, is involved in the development and production of innovative solutions for the various technology platforms for hybrid and electrically powered vehicles. As the first member of the important Japanese industrial consortium CHAdeMO to have expertise in EMC and power quality solutions, Schaffner is positioned to play a very active international role in building up the charging infrastructure for electrically powered vehicles. Starting in fiscal 2011/12, solutions for e-mobility will have a significant impact on Schaffner s sales, and in the longer term they are expected to become a key revenue driver for the Schaffner Group. 2010/11 results impacted by high pre-production costs At a new total of CHF 17.6 million, sales in the Automotive segment grew slightly in fiscal 2010/11 (prior year: CHF 16.6 million). Measured in local currency terms, sales were up 20.3%. Owing to high pre-production costs for a large number of new products, notably in the e-mobility area, Automotive recorded a small operating loss of CHF 0.4 million (prior year: profit of CHF 1.5 million), representing a negative segment operating margin of -2.2% (prior year: positive margin of 9.4%). In the year under review the Automotive segment accounted for 10% of Group sales (prior year: 9%). Demand for components for keyless access systems continued to grow in the year under review. More and more cars are being fitted with such systems, and Schaffner expanded its customer base in fiscal 2010/11 as a result of greater integration and auxiliary functions such as switches, lighting, etc. About 12 million Schaffner antennas per year are incorporated into cars for convenience and safety electronics applications. With its numerous customers, Schaffner is among the world leaders in this perennially growing market segment. Automotive electronics Ready for the emerging growth market of e-mobility In the fiscal year 2010/11 Schaffner invested heavily in the development of new e-mobility solutions. The development team at Group headquarters in Luterbach was expanded to triple its previous size. At present, more than 20 projects and

29 27 customer inquiries are being processed. With its powerful commitment to development and consulting, Schaffner has created the conditions to enable it to command an important position in this promising market from the outset. Schaffner is collaborating on projects to build an international charging station infrastructure as well as on solutions for the various technology platforms used by the international automotive industry. In the projects to build an efficient charging infrastructure, work on standardizing the interface between the charging station and vehicles is at an advanced stage. The standard championed by the key Japanese industry consortium, CHAdeMO, looks likely to be adopted by European automobile manufacturers. As the first member of CHAdeMO to contribute expertise in EMC and power quality, and with customers in all strategic markets, Schaffner has a wellentrenched starting position in the attractive market for an international charging infrastructure for electric vehicles. Among the different vehicle concepts, such as mild hybrid, full hybrid and fully electric, none has yet emerged as favorite. Importantly for Schaffner, regardless of the concept, many of the power electronics components are identical and will be used in one or several vehicle models. For suppliers, demand for EMC and power quality components is growing. In the year under review, the Schaffner Group developed various components for European manufacturers to the preseries production stage, and a sizeable proportion of Group sales in fiscal 2011/12 is expected to come from the e-mobility market segment. By 2015, Schaffner aims to generate annual sales of around CHF 40 million with products for the automotive industry. As part of the Group s growth strategy, with the adoption of a divisional organization from 1 October 2011, the Automotive segment has become a separate division headed by Jean-Michel Calleri, previously Vice President, Sales Europe. EMC filter applications for: Converter in hybrid applications Converter in electric vehicles Motor management and turbo charger Trunk antenna Doorhandle antenna with touch sensor Immobilizer antenna on keylock housing Low frequency antenna for initiating tire pressure measuring cycle Tire pressure sensor housing with integrated RF antenna

30 Leadership and values 28 Corporate governance For Schaffner, responsible corporate governance means achieving the right combination of entrepreneurial management and transparent reporting for all stakeholders. Board of Directors The number of members of the Board of Directors of Schaffner Holding AG in the fiscal year under review was between three and seven, as required by the Company s Articles of Association. As prescribed by the Swiss Code of Best Practice for Corporate Governance, all members are independent. In fiscal 2011, the Board of Directors of Schaffner Holding AG consisted of the following members: Daniel Hirschi, Chairman, Degree in Engineering Member since 2010, elected until 2013 Herbert Bächler, Degree in Electrical Engineering (MSEE); PhD, Federal Institute of Technology, Zurich Member since 2009, elected until 2012 Hans Hess, Degree in Mechanical Engineering, Federal Institute of Technology, Zurich; MBA, University of Southern California Member since 2006, elected until 2013 Robert F. Spoerry, Degree in Mechanical Engineering, Federal Institute of Technology, Zurich; MBA, University of Chicago Member since 1998 until 31 March 2011 Markus Zenhäusern, Degree in Economics, University of St Gallen; PhD in Political Science, University of Fribourg Member since 2008, elected until 2012 Board committees The Board of Directors of Schaffner Holding AG is supported by two standing committees, whose primary purpose is to prepare decision support for the Board on special subject areas. The committees are made up exclusively of non-executive members of the Board. Audit Committee Members Tenure Markus Zenhäusern, Committee chairman Daniel Hirschi Nomination & Compensation Committee Members Tenure Hans Hess, Committee chairman Daniel Hirschi Group Executive Committee In fiscal 2010/11 the Schaffner Group was functionally organized until including 30 September Effective from the first day of the new 2011/12 fiscal year, the Schaffner Group now consists of three divisions EMC, Power Magnetics and Automotive and the structure of the Executive Committee has been realigned accordingly. Fabian Beck and Martin Köppel, although no longer on the Executive Committee since 1 October 2011, continue to have functional responsibility for Research & Development and for Quality and Supply Chain Management, respectively. Alexander Hagemann, Chief Executive Officer Degree in Mechanical Engineering, RWTH Aachen University Martin Köppel, Vice President, Supply Chain Management, until 30 September 2011 Degree in Precision Engineering, Systems Engineering and Software Engineering. Eduard Hadorn, Vice President, Business Development Asia, until 30 September 2011; Executive Vice President, Power Magnetics division, from 1 October 2011 Business Economist.

31 29 From left to right: Alexander Hagemann, Martin Köppel, Eduard Hadorn, Ah Bee Goh, Fabian Beck, Kurt Ledermann, Guido Schlegelmilch, Jean-Michel Calleri Ah Bee Goh, Vice President, Manufacturing, until 30 September 2011; Chief Operating Officer from 1 October 2011 Honours Bachelor of Science in Production Engineering, University of Strathclyde; MSc in Industrial Engineering, National University of Singapore; MSc in Finance, University of Leicester; MBA, University of Surrey. Fabian Beck, Vice President, Research & Development, until 30 September 2011 Degree in Electrical Engineering (MSEE), Federal Institute of Technology, Zurich; Executive Master of Business and Engineering. Kurt Ledermann, Chief Financial Officer MSEE, Federal Institute of Technology, Zurich; Degree in Economics, University of St Gallen. Guido Schlegelmilch, Executive Vice President, EMC division, from 1 October 2011 PhD in Business Engineering, University of Darmstadt. Jean-Michel Calleri, Vice President, Sales Europe, until September 30, 2011; Executive Vice President, Automotive division, from 1 October 2011 Electrical Engineering Diploma ESIGELEC, Rouen; IESTO CNAM, Paris. Detailed information on the Schaffner Group s corporate governance structure can be found in the financial report and corporate governance report (pages 33 to 52) and on our website at

32 Leadership and values 30 Quality principles The management, employees and partners of the Schaffner Group are committed to representing all stakeholder groups and providing them with top-quality service. Quality policy of the Schaffner Group We exceed our customers expectations and win them over with our products, solutions and services. We generate added value for our customers through our activities. We ensure ongoing business growth through innovation, employee training and continuous improvement of our processes. Our suppliers are a key link in our value chain. Together we generate added value for our customers. We pursue environmental protection goals with great dedication and diligence. All Schaffner factories use an ISO 9001-certified quality management system. Schaffner also possesses the ISO/TS quality certification relevant for the automotive industry, and the factory in Shanghai is certified in the IRIS quality management system developed for rail applications. All certifications are reviewed and upgraded from time to time. We develop and implement stable, flexible, streamlined processes that can be adapted quickly to changing market requirements. Corporate citizenship The name Schaffner is synonymous with energy efficiency and reliability, both in innovative customer solutions and in the Group s own practices. Schaffner participates in the UN Global Compact and is committed to implementing its ten principles in the areas of human rights, labor, the environment and anti-corruption ( Schaffner seeks to continuously reduce its carbon footprint by optimizing material flows, and to act as a role model for energy efficiency. All Schaffner Group production sites apply environmental management systems that conform to the international ISO standard. Schaffner production in Asian countries is also compliant with OHSAS (Occupational Health and Safety Assessment Series), a process that supports the systematic improvement of occupational health and safety for employees. Employees Schaffner strongly believes that motivated employees and superior innovative solutions are essential if it is to meet the exacting demands of its customers and assert the Schaffner Group s claim to leadership. Schaffner s aim is therefore to become the sector s preferred employer worldwide. To achieve this, the Group has developed a host of measures designed to attract, retain and develop the best staff. These include healthy and safe workplaces, annual job-specific training and development of employees personal skills.

33 31 Hans Schaffner with his wife Elisabeth Schaffner 50 years of innovation and leadership by Schaffner The engineer Hans Schaffner founded the Schaffner Group in After starting out by producing heat dissipators, electronic relays and flow meters for gas stations, the pioneer in the field of electromagnetic compatibility succeeded a few years later in launching the first EMC network filter and the first EMC measuring devices. Today Schaffer is a global leader in solutions for the efficient and reliable operation of power electronic systems.

34

35 Financial Report and Corporate Governance Schaffner Group Contents 33 Corporate governance incl. compensation report 53 Consolidated financial statement of the Schaffner Group 89 Company financial statements of Schaffner Holding AG

36 Corporate governance 34 Accountability and transparency for all stakeholders Corporate governance forms a key element of Schaffner s corporate strategy and is based on transparency and clearly defined responsibilities. Schaffner fully complies with the directives and standards of the SIX Swiss Exchange, the Swiss Code of Obligations (Swiss corporation law) and the Swiss Code of Best Practice for Corporate Governance. Principles Transparency and well-defined responsibilities are the underpinnings of Schaffner s corporate governance policy: Transparency in financial reporting and clearly assigned duties and accountabilities in the interactions between shareholders, the Board of Directors and Executive Committee. As a company listed on the SIX Swiss Exchange, Schaffner fulfils the requirements of the Directive on Information Relating to Corporate Governance issued by the SIX Swiss Exchange and of section 663b bis and 663c (3) of the Swiss Code of Obligations. Schaffner also follows the applicable standards of the Swiss Code of Best Practice for Corporate Governance, including its Appendix 1 (recommendations for the compensation of boards of directors and executive committees). All relevant corporate governance documents are available on the home page of the Schaffner Group s website under Corporate Governance : investor-relations/corporate-governance.html In addition, Schaffner s general principles of corporate governance are described in the Organizational Regulations of Schaffner Holding AG and in the Articles of Association, which can be viewed at or requested from the Company s head office. As an active participant in the UN Global Compact, the Schaffner Group in its strategy and activities is committed to honouring the ten principles of the UN Global Compact regarding human rights, labour, the environment and anti-corruption. Schaffner expects its employees to be accountable for their actions, to respect people, society and the environment, to follow applicable rules and act with integrity. The Group s current relevant report (Communication on Progress) is available at /10379-Schaffner-Holding-AG Governance-related changes in fiscal year 2010/11 Robert F. Spoerry, after being elected Chairman of the Board of Sonova Holding AG, stepped down from the Board of Directors of Schaffner Holding AG with effect from 31 March A successor will be proposed to the 16 th Annual General Meeting of 12 January 2012 for election. 1 Group structure and significant shareholders 1.1 Group structure Group operating structure In the year under review the Schaffner Group consisted of three operating segments: Electromagnetic Compatibility (EMC), Power Quality (PQ) and Automotive (AM). The following chart shows the Group s operating structure at 30 September 2011: General Meeting of shareholders Board of Directors Audit Committee, Nomination & Compensation Committee Executive Committee Group functions EMC segment PQ segment AM segment The Chief Executive Officer has responsibility for the operational management of the Schaffner Group. He is also the head of the Executive Committee (the Group s top tier of executive management). The management of the Schaffner Group is provided by the Board of Directors and (through the delegation of authority from the Board) by the Chief Executive Officer and the Executive Committee. The Board of Directors and Executive Committee are supported in their work by various central Group functions. The division of responsibilities between the Board, Chief Executive Officer and Executive Committee is described on page 41 of this corporate governance report in section 3.5.

37 Corporate governance 35 The Executive Committee had the following structure at 30 September 2011: Executive Committee Alexander Hagemann Kurt Ledermann, Finance & IT Eduard Hadorn, Business Development Asia Ah Bee Goh, Manufacturing Jean-Michel Calleri, Sales Europe Fabian Beck, Research & Development Martin Köppel, Supply Chain Management Chief Executive Officer Chief Financial Officer Vice President Vice President Vice President Vice President Vice President More information about the Executive Committee is provided on page 43 of this corporate governance report in section 4.1. Conversion to divisional organization effective 1 October 2011 To support its growth strategy, the Schaffner Group with effect from 1 October 2011 (the beginning of the new fiscal year) converted to a divisional organizational structure consisting of the three divisions EMC, Power Magnetics and Automotive. The Executive Committee thus has the following new structure since 1 October 2011: Executive Committee Alexander Hagemann Kurt Ledermann, Finance & IT Ah Bee Goh, Manufacturing Guido Schlegelmilch, EMC division Eduard Hadorn, Power Magnetics division Jean-Michel Calleri, Automotive division Chief Executive Officer Chief Financial Officer Chief Operating Officer Executive Vice President Executive Vice President Executive Vice President The past Executive Committee members Fabian Beck and Martin Köppel will continue to have functional responsibility for Research & Development and for Quality and Supply Chain Management, respectively Listed companies The Schaffner Group maintains an international presence through its own subsidiaries and a network of independent distributors. The parent company of the Schaffner Group is Schaffner Holding AG, whose shares are traded on the SIX Swiss Exchange. Schaffner Holding AG is the only Group company listed on a stock exchange. Schaffner Holding AG is a public limited company incorporated in Switzerland and has its registered office in Luterbach. At 30 September 2011 the share capital consisted of 635,940 ordinary registered shares with a total nominal value of CHF 20,668,050. Registered office 4542 Luterbach, Switzerland Listing exchange and SIX Swiss Exchange, regulatory standard Main Standard Security number ISIN CH Ticker symbol SAHN Nominal value per share CHF Key share data for Schaffner Holding AG can be found on page 2 of this report Non-listed companies The directly and indirectly held companies consolidated in the Group accounts of Schaffner Holding AG are shown on page 87 of this report in the notes to the consolidated financial statements. 1.2 Significant shareholders At 30 September 2011 there were 1,198 shareholders registered with voting rights in the share register of Schaffner Holding AG (prior year: 1,223). Of the issued shares, 99.3% represented free float (prior year: 99.3%). Schaffner held the other 0.8% as treasury shares (prior year: 0.7%). At 30 September 2011, shares of unregistered owners amounted to 15.7% of the issued shares (prior year: 14.7%). Under the Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA, or Stock Exchange Act), any holder of shares of a company listed on the SIX Swiss Exchange must notify the issuer company and the SIX Swiss Exchange whenever the holder s voting rights rise above or fall below one of the following thresholds: 3%, 5%, 10%, 15%, 20%, 25%, 33⅓%, 50% and 66⅔%. This disclosure obligation exists regardless of whether the voting rights can be exercised or not. Therefore, certain derivatives positions, such as options and similar fi nancial instruments, are also notifiable. Upon receiving such notification, the issuer of the shares must relay the informati on to the public through an announcement on the electronic publication platform of the SIX Swiss Exchange. In the fiscal year under review, twelve disclosure notifications were made.

38 Corporate governance 36 Information on significant shareholders is also provided on page 77 in the notes to the parent company financial statements. A complete record of all notifications issued under section 20 Stock Exchange Act is available on the website of the SIX Swiss Exchange at shareholders_en.html?issuer=10529&fromdate= Cross-shareholdings There were no cross-shareholdings between Schaffner and other publicly traded companies. 2 Capital structure 2.1 Issued share capital CHF 20,668,050 The issued share capital consists of 635,940 ordinary registered shares with a nominal value of CHF per share. The issued shares are fully paid. Each share carries one vote at the General Meeting. All shares not held by the Company or by one of its subsidiaries attract dividends. 2.2 Authorized unissued capital CHF 693,550 The authorized but unissued share capital consists of 21,340 ordinary registered shares authorized for the share option plans. Detailed information can be found on page 77 of this report in section 18 of the notes to the consolidated financial statements. The Company had no other authorized unissued capital at 30 September 2011, i.e., no unissued capital authorized for purposes other than the share option plans. 2.3 Changes in equity By a resolution of the Annual General Meeting on 16 January 2008, CHF 3 per registered share was distributed as a partial repayment of nominal value, thus reducing the issued share capital of Schaffner Holding AG from CHF 39 per share to CHF 36 and from a total of CHF 24,801,660 to CHF 22,893,840. The authorized unissued capital was reduced accordingly. By a resolution of the Annual General Meeting on 14 January 2009, CHF 3.50 per registered share was distributed as a partial repayment of nominal value, thus reducing the issued share capital of Schaffner Holding AG from CHF 36 per share to CHF and from a total of CHF 22,893,840 to CHF 20,668,050. The authorized unissued capital was reduced accordingly. The Annual General Meeting on 12 January 2011 resolved to distribute CHF 4.50 per share (exempt from Swiss anticipatory tax) in the form of a repayment of excess share premium. No other distribution to shareholders was made for fiscal 2009/10. The changes in share capital, in share premium, in retained earnings and in the other components of consolidated equity are presented in detail on page 57 of this Annual Report 2010/11, in the consolidated financial statements. The comparative information for the three prior years is found on page 21 of the consolidated financial statements in the Annual Report 2009/10, on page 17 in the Annual Report 2008/09 and page 35 in the Annual Report 2007/ Shares and participation certificates Shares The 635,940 issued shares of Schaffner Holding AG have a nominal value of CHF per share. Each share carries one vote and attracts dividends. Subject to provisions (i), (ii) and (iii) below, the shares are issued in uncertificated form and maintained as book-entry securities. Transfers of or dispositions regarding book-entry securities, including the granting of interests therein as collateral, are subject to the Swiss Federal Act on Book-Entry Securities. If uncertificated shares are transferred by assignment, such transfer is valid only if notified to the Company. (i) Shares maintained as book-entry securities may be withdrawn from the custody system by the Company. Shareholders that are registered in the share register may at any time request from the Company a certification of their ownership of their shares. (ii) Shareholders do not have a right to the printing and delivery of certificates (physical securities) or to the conversion of registered shares issued in one form into another form. The Company may, however, at any time print and deliver certificates (single share cer-

39 Corporate governance 37 tificates, collective certificates or global certificates) or convert uncertificated or certificated shares into another form and may cancel issued certificates that are returned to the Company. (iii) By amending the Articles of Association, the General Meeting of shareholders may at any time convert registered shares into bearer shares or convert bearer shares into registered shares Participation certificates There were no participation certificates of Schaffner Holding AG at 30 September 2011 (participation certificates, or Partizipationsscheine in German, essentially are a type of preference share). 2.5 Dividend right certificates Schaffner Holding AG had not issued any dividend right certificates as of 30 September 2011 (in German: Genussscheine; these essentially are preference shares for related parties). 2.6 Restrictions on transferability and nominee registration Registered shares of Schaffner Holding AG may be acquired by all legal or natural persons. The purchase of Schaffner shares is subject to the following registration restrictions: Shareholders or beneficial owners are deemed to be those persons registered in the Company s share register, i.e., the shareholders of record. Purchasers of shares are upon their request recorded as voting shareholders in the share register by the Board of Directors if the purchasers state explicitly that they have acquired, and will hold, the stock for their own account. By default, the Board of Directors registers nominees as holding voting shares only up to a maximum of 5 % of the registered-share capital recorded in the Swiss commercial register of companies. Above this limit, shares of nominees with voting rights are only registered in the share register if the nominee discloses the names, addresses and holdings of Schaffner shares of the persons for whose account the nominee holds 0.5 % or more of the total registered-share capital that is registered in the commercial register. Nominees are persons who do not expressly declare in their registration application that they have bought and are holding the shares for their own account. To the extent permitted by law, the Board of Directors is authorized to enter into agreements with nominees regarding reporting obligations. The Board may approve exceptions to the nominee rules on a case-by-case basis. Where legal entities or groups with joint legal status are related to one another by capital, voting rights, management or in some other manner, they are deemed to constitute a single purchaser, as are all natural persons, legal entities or groups with joint legal status that by agreement, as a syndicate or in any other way act in a coordinated manner with a view to circumventing the nominee rules. The Company may void registrations in the share register with retroactive effect from the date of registration if they were based on false information given by the purchaser. The purchaser must be informed of the deletion immediately. The registration restrictions described above also apply to shares bought or subscribed through the exercise of pre-emptive rights, options or conversion rights. At the end of the fiscal year under review, % of all issued shares were unregistered or were registered as non-voting shares. 2.7 Convertible bonds and options Convertible bonds There are no outstanding convertible bonds of Schaffner Holding AG Share option plans The share option plans for executive management and members of the Board of Directors of the Schaffner Group (the Employee Share Option Plan and the Performance Option Plan) are described in detail on page 77 in the consolidated financial statements. 3 Board of Directors 3.1 Members of the Board of Directors The Articles of Association require the Board of Directors of Schaffner Holding AG to have between three and seven members. In the prior years and in the first half of the year under review, the Board consisted of five, non-executive members. At 30 September 2011 the Board consisted of four, non-executive members, as Robert F. Spoerry upon his election as Chairman of the Board of Sonova Holding AG retired from the Board of Schaffner Holding AG at the end of March 2011 and the election of his successor is scheduled for the 16 th Annual General Meeting on 12 January All

40 Corporate governance 38 Board members are independent within the meaning of the Swiss Code of Best Practice for Corporate Governance, and in the prior three years (the fiscal years 2007/08, 2008/09 and 2009/10) were neither members of Schaffner s Executive Committee nor of the management of a subsidiary. They maintain no material business relationships with the Schaffner Group. In fiscal 2010/11 the Board of Directors of Schaffner Holding AG had the following members: Daniel Hirschi, Chairman, born 1956, Swiss citizen Board member since 2010, elected until 2013 Degree in Engineering From 2006 to 2009 was Chief Executive Officer and Designated Representative of the Board of Directors of Benninger AG, Uzwil. From 1983 to 2005 served in various management functions at Saia-Burgess, Murten, including Chief Executive Officer from 2001 and Designated Representative of the Board from Herbert Bächler, born 1950, Swiss citizen Board member since 2009, elected until 2012 PhD in Technical Sciences and Master of Science in Electrical Engineering, Federal Institute of Technology, Zurich. In charge of innovation management at ARfinanz Holding AG, Stäfa, and Senior Technical Advisor at Sonova/Phonak AG, Stäfa. From 2002 to 2008 was Chief Technology Officer at Sonova/Phonak AG and from 1981 to 2002 held various management positions in its R&D department. Hans Hess, born 1955, Swiss citizen Board member since 2006, elected until 2013 Degree in Mechanical Engineering, Federal Institute of Technology, Zurich; MBA, University of Southern California. From 8 September 2006 to 31 March 2007 was Interim Designated Representative of the Board of Directors of Schaffner Holding AG. Until 2005 held various management positions in the Leica Group, most recently ten years as Chief Executive Officer and Designated Representative of the Board of Directors of Leica Geosystems, Heerbrugg. Robert F. Spoerry 1, born 1955, Swiss citizen Board member since 1998, elected until 2012 Degree in Mechanical Engineering, Federal Institute of Technology, Zurich; MBA, University of Chicago. Chairman of Mettler-Toledo International Inc., Greifensee, since Since 1983 held various management positions at Mettler- Toledo; CEO from 1993 to Retired with effect from 31 March 2011 Markus Zenhäusern, born 1962, Swiss citizen Board member since 2008, elected until 2012 Degree in Economics, University of St. Gallen; Ph.D., University of Fribourg. Staff role in Group management of Swiss Post, Berne; until 31 October 2011 was Chief Financial Officer and member of the Group Executive Management of Swiss Post. From 2005 to 2008 was Chief Financial Officer and member of the Group Executive Committee of Sika Group, Baar. Previously Chief Financial Officer of North East Asia Ciba SC and Chief Financial Officer of the Habasit Group, Corporate Controller of the Hero Group and consultant and auditor with Coopers & Lybrand. Kurt Ledermann, Secretary of the Board 3.2 Activities and interests outside the Group Daniel Hirschi Member of the Board of Benninger AG, Uzwil; of Carlo Gavazzi Holding AG, Steinhausen; and of Komax Holding AG, Dierikon. Herbert Bächler Other board positions in non-listed companies. Hans Hess Chairman of the Board of Comet Holding AG, Flamatt, and of Reichle & De-Massari Holding AG, Wetzikon, member of the Board of Burckhardt Compression Holding AG, Winterthur, President of Swissmem (the trade association of the Swiss mechanical and electrical engineering industries), and member of the ETH Board. Robert F. Spoerry 1 Chairman of the Board of Sonova Holding AG, Stäfa, Vice Chairman of the Board of Geberit AG, Rapperswil-Jona, and member of the Board of Conzzeta Holding AG, Zurich. 1 Retired with effect from 31 March 2011

41 Corporate governance 39 Markus Zenhäusern Member of the Board of Swiss Post International Holding AG, Berne, and of Post Liechtenstein AG, Schaan. Chairman of the Board of Swiss Post Insurance AG, Vaduz. 3.3 Board elections and terms The members of the Board of Directors are elected individually by the General Meeting, for a term of up to three years, and may be re-elected for consecutive terms. The term of each member is determined at the time of election. Schaffner uses a staggered-board system, which means that in a given year of Board elections, only part of the Board retires (and, to the extent willing, submits itself for re-election). 3.4 Internal organization The Board of Directors of Schaffner Holding AG is responsible for determining the Group s strategy. It reviews the Group s broad plans and objectives and identifies internal and external risks and opportunities. The tasks of the Board and the division of powers between the Board and the Executive Committee are defined in the Swiss Code of Obligations (Swiss corporation law), the Articles of Association of Schaffner Holding AG and its Organizational Regulations Division of responsibilities within the Board Daniel Hirschi has been the Chairman of the Board of Directors since the 2010 Annual General Meeting. The Audit Committee is chaired by Markus Zenhäusern; the Nomination & Compensation Committee is chaired by Hans Hess. The Board has no other standing committees or designated positions Composition, purpose and responsibilities of Board committees The Board of Directors of Schaffner Holding AG maintains the Board committees detailed below. Their principal purpose is to provide decision support to the Board in special subject areas. The committees support the Board of Directors; the Board s duties and powers always remain with the full Board. The Board committees are made up exclusively of non-executive members of the Board. The committees meet as often as necessary and inform the Board of their findings and proposals at the ordinary Board meetings. They may also inform the Chairman of the Board or the Chief Executive Officer at any time on urgent matters. Outside the ordinary Board meetings, the Board committee members also work directly with members of the Executive Committee (which is the Group s top tier of executive management and is not a Board committee). The term of office of committee members normally coincides with their term as Board members. At any time, if required, new committees may be created or existing committees newly staffed or dissolved. Audit Committee Tenure Markus Zenhäusern, Committee chairman Daniel Hirschi The Audit Committee acts solely in an advisory capacity. It assists the Executive Committee in dealing with financial matters. At the same time, on behalf of the Board of Directors, the Audit Committee monitors especially the following areas of responsibility of the Executive Committee: The appropriateness and validity of the Group accounts The financial portion of the annual budget The consolidated annual financial statements Other major responsibilities of the finance department. The Audit Committee, on behalf of the Board, receives the audit reports of the external independent auditors and presents them to the Board for review and comment. Nomination & Compensation Committee Tenure Hans Hess, Committee chairman Daniel Hirschi The Nomination & Compensation Committee acts solely in an advisory capacity. It has the following responsibilities: At the beginning of each term of office, it submits pro posals to the Board concerning the nature and amount of the Board members annual remuneration It also annually submits recommendations to the Board concerning the remuneration of each member of the Executive Committee It develops incentive plans It sets the targets for the Executive Committee, in consultation with the Board of Directors It assesses the performance of the Executive Committee against targets It submits a proposal to the Board for the variable compensation of the Executive Committee.

42 Corporate governance 40 The Nomination & Compensation Committee also submits recommendations to the Board regarding: Requests for the promotion of employees to the Executive Committee. Requests for the new hiring or removal of Executive Committee members. In the case of new hiring, members of the Nomination & Compensation Committee participate in the evaluation of prospective staff as required Procedures of the Board and of Board committees The Board of Directors meets at the invitation of its Chairman or the member representing the Chairman, or of one of the other Board members. Board meetings are called at least ten days before the meeting date. From among its members, the Board appoints the Chairman of the Board. It also appoints the Secretary of the Board, who need not be a Board member. The deliberations and decisions of the Board are recorded in the meeting minutes, which are signed by the meeting s chairman and the Secretary. The Board convenes at least four times per year, usually once in every quarter, for a meeting that is about four hours in length. In the reporting period the Board met seven times. The following overview shows the individual Board members attendance at Board and Board committee meetings, as well as the meetings average length: BD AC NCC Number of meetings in 2010/ Daniel Hirschi Herbert Bächler 7 Hans Hess 6 Robert F. Spoerry Markus Zenhäusern 6 2 Average meeting length in hours Retired with effect from 31 March 2011 BD Board of Directors AC Audit Committee NCC Nomination & Compensation Committee Urgent business was discussed by telephone conference call. The Chief Executive Officer and Chief Financial Officer attend the ordinary meetings of the Board. For the discussion of specific matters, the Board requests members of the Executive Committee, other management staff or external advisors to attend its meetings as required. In the year under review, no external advisors were called to any significant extent. In a timely manner before the meetings, the Board receives written information on the agenda items, which are set by the Chairman or at the request of the Executive Committee. The Board Chairman and the Chief Executive Officer of the Schaffner Group work closely together. In addition to its inalienable statutory duties set out in section 716a of the Swiss Code of Obligations, the Board of Directors of Schaffner Holding AG has, in particular, the following responsibilities and powers: Strategic direction, organization and leadership of the Group Structuring of finance and accounting and provision of financial planning and control Appointment and removal of the Executive Committee and authorized signatories Regular review of business activities Decisions on matters not reserved for or transferred to another body by law, by the Articles of Association or by the Organizational Regulations Formulation and preparation of resolutions for consideration by the General Meeting. The Board of Directors has a quorum when the majority of its members participate in oral discussions and votes. Members may also participate by telephone or via electronic media (e.g., videoconferencing). Resolutions are passed by a simple majority of votes. In the event of a tie, the meeting chairman (this is normally the Board Chairman) has the casting vote. For the purpose of resolutions concerning capital increases, the Board has a quorum irrespective of the number of members present. The Board may also adopt resolutions by written ballot, unless a member requests an oral discussion. In a vote by written ballot, passage of a resolution requires the support of the majority of all Board members. The Audit Committee is composed of two non-executive members of the Board of Directors. The Committee chairman should have experience in finance and accounting. The Board appoints the chairman of the Audit Committee. The Committee s current members are Markus Zenhäusern (Committee chairman) and Daniel Hirschi. The Audit Com-

43 Corporate governance 41 mittee convenes as often as business requires, and not less than twice per year. It invites the Chief Executive Officer and Chief Financial Officer of the Schaffner Group to its meetings and, as required, calls in other staff members of the finance department. The external independent auditors are present at all meetings for the relevant agenda items. The roles and responsibilities of the Audit Committee are specified in the Organizational Regulations of Schaffner Holding AG. The Audit Committee supports the Board of Directors in the supervision of finance and accounting. It oversees the internal and external financial reporting by management and evaluates the effectiveness of the system of internal control. The Committee reviews the performance, effectiveness and independence of the external auditors. It reviews the fees for the external audit activities and the compatibility of these activities with other, advisory mandates. The Audit Committee also assesses compliance with legal requirements. The Committee reports to the Board of Directors. The Nomination & Compensation Committee is composed of two non-executive members of the Board. It currently consists of Hans Hess, Committee chairman, and Daniel Hirschi. The Nomination & Compensation Committee as a rule convenes two times per year. The roles and responsibilities of the Nomination & Compensation Committee are specified in the Organizational Regulations of Schaffner Holding AG. The Nomination & Compensation Committee supports and advises the Board of Directors in matters of the appointment, terms of service or employment, and compensation, of Board members, Executive Committee members and other key staff in the Group. In particular, the Committee recommends the principles relating to performance-based compensation. To an extent consistent with the applicable legal provisions and the Company s Articles of Association, the Board of Directors has delegated the operational management of the Schaffner Group to the Executive Committee, led by the Chief Executive Officer. The Executive Committee is responsible for implementing the Group s strategy within the framework set by the Board of Directors. The responsibilities and powers of the Executive Committee are specified in the Organizational Regulations. Its main responsibilities are: Operational management Optimization of internal organization and processes External representation of the Schaffner Group Internal and external communication. The Chief Executive Officer has primary responsibility for formulating Group strategy for the approval of the Board of Directors, for the operational management of the Group, its overall financial results and the implementation of the strategy and plans of action adopted by the Board. The Chief Financial Officer has responsibility for financial, tax and capital management and for ensuring the development and implementation of risk control principles, rules and limits. The Chief Financial Officer is also responsible for creating transparency regarding the financial results and ensuring highquality, timely financial reporting. 3.5 Delineation of areas of authority The Board of Directors of Schaffner Holding AG is the highest-level management and supervisory body of the Company and Group. It provides overall direction, supervision and control of the Group s executive management (the Executive Committee). The Board is responsible primarily for decisions on Group strategy and organizational structure and for setting corporate policy. The Board s role includes the appointment and removal of members of the Executive Committee, determination of the structure of finance and accounting, and the approval of multi-year plans and annual and investment budgets.

44 Corporate governance Monitoring and control in respect of the Executive Committee Board of Directors The Executive Committee provides the Board with a monthly written report on the Group s financial results. The reporting consists of the consolidated balance sheet, income statement, statement of changes in equity and cash flow statement. The data are compared against the prior-year results and budgeted figures. The Board of Directors regularly discusses the monthly reports at its meetings. The Chief Executive Officer and Chief Financial Officer attend the meetings. The Executive Committee carries out a risk assessment at least once per year and reports on the findings to the Board of Directors. In this assessment, general risks are analyzed and rated. Monitoring-and-control points and processes are defined based on the risk assessment and implemented by the respective process owner. The Board of Directors monitors the assessment of the Group s risks and verifies the implementation of risk management. Other tools for the monitoring and control of the Executive Committee are the following: Periodic communication of its forecasts for revenue and for the key earnings and financial position data Annual strategic analytical reviews of the Group and the segments (or divisions, from fiscal year 2011/12 onward), and a rolling multi-year plan updated by the Executive Committee Special reports by the Executive Committee on significant investments, acquisitions and partnerships. The Chief Executive Officer briefs the Chairman of the Board on significant events. Chairman of the Board The Board Chairman regularly meets with the Chief Executive Officer to discuss current business performance and activities. Audit Committee The Audit Committee provides regular and comprehensive reports to the Board of Directors on matters of finance and accounting, financial reporting standards, compliance (with laws, regulations and procedures), and external audit activities. It focuses especially on auditing the financial reporting processes. Internal audit In view of its size, the Schaffner Group elects not to maintain a dedicated internal audit function. 4 Executive Committee The Executive Committee is the Group s highest-level executive management team. In the fiscal year, led by the Chief Executive Officer, the then still functionally structured Executive Committee consisted of the Chief Executive Officer, the Chief Financial Officer and the five Vice Presidents for Business Development Asia, Manufacturing, Research & Development, Sales Europe and Supply Chain Management. The Global Marketing function is headed by the Chief Executive Officer. Effective 1 October 2011, the beginning of the new fiscal year, Schaffner switched from a functional to a divisional organizational structure. Reflecting this new structure, the reorganized Executive Committee, headed by the Chief Executive Officer, consists of the CEO, the Chief Financial Officer, Chief Operating Officer and three Executive Vice Presidents as heads of the three divisions, Automotive, EMC and Power Magnetics. The Executive Committee is responsible for implementing Group strategy within the framework set by the Board, and in particular for achieving the annual targets and medium- and long-term objectives. It is also responsible for process planning, controllership functions and the implementation of Group-wide standards. The Chief Executive Officer formulates Group strategy for the approval of the Board of Directors and is responsible for strategy implementation. He sets the business targets for all units of the Group. The Chief Financial Officer devises the framework for all strategic and operational controllership activities, ensures the Group s financing, optimizes its financing and tax structure, and supports the Chief Executive Officer and the other Executive Committee members in all financial matters. The Vice Presidents (the three division heads, from fiscal year 2011/12 onward) are accountable for achieving the objectives set for their respective areas of responsibility. These targets and goals include, in particular, achieving a leading market position as well as continuous innovation to support lasting competitiveness.

45 Corporate governance Executive Committee In the fiscal year 2010/11 the Executive Committee of the Schaffner Group had the following members: Alexander Hagemann, born 1962, German citizen Degree in Mechanical Engineering, RWTH Aachen University. Joined the Schaffner Group as Chief Executive Officer on 1 March Previously held a number of management positions at the Schott Group, including Executive Vice President, Optics for Devices; earlier, worked in management roles in production and logistics at BMW. Kurt Ledermann, born 1968, Swiss citizen MSEE Degree in Electrical Engineering, Federal Institute of Technology, Zurich; Master of Arts HSG, University of St. Gallen. Joined the Schaffner Group as Chief Financial Officer on 1 June Previous roles include Executive Vice President, Finance & IT, RUAG Aerospace; Head of Finance & Accounting, Schaffner Group; Chief Financial Officer, Medivision; Group Controller and Head of Investor Relations, Sika Group. Fabian Beck, born 1969, Swiss citizen MSEE Degree in Electrical Engineering, Federal Institute of Technology, Zurich; Executive Master of Business and Engineering. With the Schaffner Group since 1994; Vice President, Research & Development from 1 March Previously Head of Research and Development, EMC Test Engineer, Quality Engineer and Applications Engineer. Jean-Michel Calleri, born 1956, French citizen Electrical Engineering Diploma ESIGELEC, Rouen; IESTO CNAM, Paris. With the Schaffner Group since 1999; Vice President, Sales Europe from 1 July General Manager of Schaffner EMC S.A.S., Argenteuil. Previously held a number of management positions in Marketing & Sales, Thomson Passive Components. Ah Bee Goh, born 1950, Singaporean citizen Honours Bachelor of Science in Production Engineering, University of Strathclyde; MSc in Industrial Engineering, National University of Singapore; MSc in Finance, University of Leicester; MBA, University of Surrey. Joined the Schaffner Group as Vice President, Manufacturing, on 1 July Previously Managing Director at Leica Instruments; various management roles at Maxtor Peripherals, Seagate Technology and Tandon/Western Digital. Eduard Hadorn, born 1956, Swiss citizen Business Economist. With the Schaffner Group since 2003; Vice President, Business Development Asia from 1 March Managing Director, Schaffner EMC Ltd., Shanghai. Previously was General Manager, Technology division at Diethelm & Co., and Head of Marketing & Sales at Beringer Hydraulik. Martin Köppel, born 1960, Swiss citizen Degree in Precision Engineering, Systems Engineering and Software Engineering. With the Schaffner Group since 1996; Vice President, Supply Chain Management since 1 March Previously Head of Production Components and Modules and Head of Technology and Planning at the Schaffner Group; Project Manager, Swatch Group; Project Manager, Logotrans; responsible for Robotics at Schaffner Elektronik. With the introduction of the divisional organizational structure, the Executive Committee of the Schaffner Group has the following members since 1 October 2011: Alexander Hagemann, born 1962, German citizen Degree in Mechanical Engineering, RWTH Aachen University. Joined the Schaffner Group as Chief Executive Officer on 1 March Previously held a number of management positions with the Schott Group, including Executive Vice President, Optics for Devices; earlier, worked in management roles in production and logistics at BMW. Kurt Ledermann, born 1968, Swiss citizen MSEE Degree in Electrical Engineering, Federal Institute of Technology, Zurich; Master of Arts HSG, University of St. Gallen. Joined the Schaffner Group as Chief Financial Officer on 1 June Previous roles include Executive Vice President, Finance & IT, RUAG Aerospace; Head of Finance & Accounting, Schaffner Group; Chief Financial Officer, Medivision; Group Controller and Head of Investor Relations, Sika Group.

46 Corporate governance 44 Ah Bee Goh, born 1950, Singaporean citizen Honours Bachelor of Science in Production Engineering, University of Strathclyde; MSc in Industrial Engineering, National University of Singapore; MSc in Finance, University of Leicester; MBA, University of Surrey. Joined the Schaffner Group on 1 July 2007 as Vice President Manufacturing; Chief Operating Officer from 1 October Previously Managing Director at Leica Instruments; various management roles at Maxtor Peripherals, Seagate Technology and Tandon/Western Digital. Jean-Michel Calleri, born 1956, French citizen Electrical Engineering Diploma ESIGELEC, Rouen; IESTO CNAM, Paris. With the Schaffner Group since 1999; Vice President, Sales Europe since 1 July General Manager, Schaffner EMC S.A.S., Argenteuil. Executive Vice President, Automotive division from 1 October Previously held a number of management positions in Marketing & Sales, Thomson Passive Components. Eduard Hadorn, born 1956, Swiss citizen Business Economist. With the Schaffner Group since 2003; Vice President, Business Development Asia from 1 March Managing Director, Schaffner EMC Ltd., Shanghai. Executive Vice President, Power Magnetics division from 1 October Prior to this, was General Manager, Technology division at Diethelm & Co., and Head of Marketing & Sales at Beringer Hydraulik. Guido Schlegelmilch, 1964, German citizen Degree in Business Engineering, Ph.D., University of Darmstadt. Joined the Schaffner Group on 1 February 2009 as Managing Director, Schaffner Deutschland. Executive Vice President, EMC division from 1 October Previously, held various management positions at Philips Semiconductors and NXP Semiconductors. 4.2 Activities and interests outside the Group Alexander Hagemann Member of the Board of Directors of Wicor Holding AG, Rapperswil-Jona. Kurt Ledermann Vice Chairman of the Board of Anlagestiftung Winterthur AWi, Zurich (an investment foundation for occupational pensions) The other members of the Executive Committee do not hold any positions in governing or supervisory bodies of any significant organization, institution or foundation under private or public law, nor do they hold any permanent management or consultancy position in significant interest groups or any public or political office. 4.3 Management contracts Schaffner Holding AG and its Group companies have no management contracts with third parties. 5 Compensation report 5.1 Guiding principles The remuneration of the Board of Directors and Executive Committee is linked to the generation of sustainable earnings for shareholders and creates incentives conducive to the Schaffner Group s lasting financial success. Based on the conviction that the performance of the Schaffner Group depends in large measure on the quality and commitment of its people, the compensation policy is designed to attract, motivate and retain qualified employees for the long term. The performance-related compensation is intended as an incentive for entrepreneurial thinking and action. The most important principles underlying the remuneration system are: Compensation includes a performance-related element and is competitive with market levels Promotion of the financial and business success of the Group Fairness and transparency in decisions on compensation Appropriate balance of short-term and long-term compensation.

47 Corporate governance 45 The information set out below describes the compensation system and the compensation paid to the members of the Board of Directors and of the Executive Committee of the Schaffner Group. The compensation report is explained every year at the Annual General Meeting. The information presented is consistent with section 5 of the Directive on Information Relating to Corporate Governance issued by the SIX Swiss Exchange. Schaffner also observes the applicable standards of the Swiss Code of Best Practice for Corporate Governance, including its Appendix 1 (recommendations for the compensation of boards of directors and executive committees). The compensation and shareholdings within the meaning of section 663b bis and 663c (3) of the Swiss Code of Obligations are also disclosed and discussed in the consolidated financial statements of the Schaffner Holding AG. 5.2 Responsibility and procedures for determining compensation The Board of Directors maintains a Nomination & Compensation Committee, which consists of two independent members of the Board. The members of the Nomination & Compensation Committee at 30 September 2011 were: Hans Hess, member of the Board of Directors, Committee chairman Daniel Hirschi, Chairman of the Board of Directors. The Nomination & Compensation Committee: Performs its duties generally without involving external advisors At the beginning of each term of office, recommends to the Board the nature and amount of the Board members annual remuneration Annually recommends to the Board the remuneration of each member of the Executive Committee Determines incentive plans Sets the targets for the Executive Committee, in consultation with the Board of Directors Assesses the performance of the Executive Committee against targets and submits a proposal to the Board for the variable compensation of the Executive Committee. The Board of Directors: Annually approves the fixed remuneration of each member of the Board based on recommendations of the Nomination & Compensation Committee Annually determines the variable compensation under the Schaffner share option plans for the individual members of the Board of Directors and executive management of the Schaffner Group; for further information on the Schaffner share option plans, see page 77 of this report in the notes to the consolidated financial statements Annually determines the fixed and variable cash compensation of the Chief Executive Officer based on a recommendation of the Nomination & Compensation Committee Annually, together with the Chief Executive Officer, determines the fixed and variable cash compensation of the other members of the Executive Committee based on recommendations of the Nomination & Compensation Committee Approves the compensation system Sets the performance targets for the Executive Committee, in consultation with the Nomination & Compensation Committee Approves the actual award of variable compensation to the Executive Committee according to performance against targets, based on recommendations of the Nomination & Compensation Committee Approves the introduction of new incentive systems, based on recommendations of the Nomination & Compensation Committee. 5.3 Compensation system Board of Directors Non-executive members of the Board For their service on the Board primarily for preparing for and participating in Board meetings and working on the Board committees the non-executive members of the Board receive a fixed annual fee, a flat expense allowance, and (on a variable basis) options over shares of Schaffner Holding AG under the Schaffner share option plans. The amount of the fixed fee and variable share award for each individual is set by the Board of Directors in its discretion, based on the amount of responsibility assigned, the complexity of the duties involved, the required professional and personal qualifications and the expected demands on the Board member s time. In determining compensation levels, the Board also considers publicly available information on remuneration at Swiss manufacturing companies of similar size listed on the SIX Swiss Exchange that have an international production and marketing organization. The base fee (excluding flat expense allowances) for the Board Chairman is CHF 112,000 and that for each other member of the Board is CHF 47,000. No signifi-

48 Corporate governance 46 cant compensation in kind is provided. Detailed information on the compensation paid in the year under review and the prior year, including the share-based payments expense, is given on page 92 of this report in the notes to the parent company financial statements Executive members of the Board The Board of Directors of Schaffner Holding AG consists only of non-executive members Executive Committee The compensation of the members of the Executive Committee consists of a fixed portion, a variable cash component related to individual and corporate performance, and options under the Schaffner share option plans. The Nomination & Compensation Committee annually reviews the compensation of the Executive Committee members. The fixed component consists of the monthly salary, the extra month s salary paid in most years at the end of the year, and flat expense allowances. A fixed contribution is also paid to the management pension plan. In individual cases, Executive Committee members receive benefits in kind and other fringe benefits, which are disclosed when they individually exceed CHF 50,000 in the fiscal year under review. The fixed base salary is determined on a discretionary basis, taking into account the individual s duties, amount of responsibility, formal qualifications and experience required, as well as the market environment. The process for determining base salaries includes taking into consideration market levels of pay relevant to the respective country, based on the latest Mercer Total Remuneration Survey. The variable performance-related cash compensation is determined on the basis of personal performance against individual targets and of the Group s financial and business performance against the corporate targets set by the Board of Directors. At the beginning of the fiscal year, measurable personal performance targets are agreed between the Chairman of the Board and the Chief Executive Officer, and between the Chief Executive Officer and the members of the Executive Committee. Performance relative to these targets is evaluated after the end of the fiscal year. In its performance target structure, Schaffner seeks an appropriate balance of financial performance and volume productivity performance (such as turnover of product, for instance), taking into account the specific area of responsibility of the individual member of the Executive Committee. The additional targets, tailored to the particular position of the Executive Committee member, represent a mix of financial and in some cases non-financial objectives. The variable compensation depends on the financial results of the Schaffner Group and ranges from 25% to 40% of base salaries. For Executive Committee members, 70% to 80% of variable compensation is determined by the achievement of the budget targets of the business area for which they have responsibility, and 20% to 30% is dependent on performance against personal qualitative and quantitative targets. Depending on the degree of target achievement, between 0% and 260% of the target variable compensation is paid. The financial and business success of the Group is measured by the following financial value drivers: Organic growth Operating profit (EBIT) Free cash flow Net profit for the period Efficiency metrics related to net working capital and production Various metrics related to production, development and marketing/sales. The allotment of options over shares of Schaffner Holding AG under the Schaffner share option plans is variable and is performed annually based on the recommendation of the Nomination & Compensation Committee and at the discretion of the Board of Directors. Detailed information on the compensation paid in the year under review and the prior year is provided on page 92 of this report in the notes to the parent company financial statements Share ownership plans Share ownership plans contribute to aligning the mediumand long-term interests of senior management with those of shareholders. Since 1 October 1998, options to purchase registered shares of Schaffner Holding AG with a value of CHF 500,000 to CHF 900,000 have been granted annually under the Schaffner share option plans to executive management and members of the Board of Directors. The awarding of such options is based on the Schaffner Holding AG Employee Share Option Plan

49 Corporate governance (ESOP) before and after the changes to the ESOP on 13 November 2006 and on the Schaffner Holding AG Performance Option Plan (POP). The shares reserved to satisfy the obligations under the ESOP and POP comprise both (i) authorized unissued share capital of CHF 693,550, consisting of 21,340 shares of Schaffner Holding AG with a nominal value of CHF per share, and (ii) treasury shares. Detailed information on the individual plans can be found on page 77 of this report in the notes to the consolidated financial statements Employee Share Option Plan (ESOP) options issued before the plan amendment of 13 November 2006 Equity-settled share options granted under the pre-amendment ESOP ordinarily vested in five annual installments of 20%, beginning one year after the grant date. Five years after the grant date, all granted options are thus ordinarily vested. The options were granted over three years in equal annual tranches. This resulted in a different vesting period for each tranche. Unexercised options expire ten years after the grant date ESOP options issued after the plan amendment of 13 November 2006 Equity-settled share options granted after the plan amendment become vested ordinarily in four annual instalments of 25 % each, beginning one year after the grant date. Four years after the grant date, all granted options are thus ordinarily vested. Unexercised options expire seven years after the grant date Performance Option Plan (POP) 100 % of equity-settled POP share options ordinarily vest (provided that the non-vesting conditions are satisfied) if the performance target is reached at 30 September Under the non-vesting conditions, plan participants must, over the life of the plan, acquire a specified number of shares in Schaffner Holding AG that is proportionate to the number of options which they hold; restricted shares are counted towards the required number of shares. The performance target is a clearly defined corporate financial target set by the Board of Directors. Participation in the Performance Option Plan is reserved for members of the Executive Committee. Unexercised options expire ten years after the grant date Restricted shares The members of the Executive Committee and other senior executive management are ordinarily entitled to subscribe for restric ted shares, in a quantity determined by the Board of Directors, at a discount of 20 % to the quoted market price of the Company s shares. These shares are subject to a holding period of four years; however, the grantee has the dividend rights and voting rights from the grant date Employment contracts and special benefits There are no employment contracts with notice periods of more than twelve months. Members of the Board or of the Executive Committee do not have a contractual entitlement to termination benefits. In the year under review, no termination benefits were paid to persons who ceased to be a member of the Board of Directors or Executive Committee in the year under review or in prior years. As well, no compensation was paid to persons related to them. 5.4 Compensation for the year under review By decision of the Board of Directors, options over shares of Schaffner Holding AG were awarded for the year under review under the Schaffner share option plans. The Board decided at its meeting on 29 November 2010 to award 8,620 options over shares of Schaffner Holding AG at an exercise price of CHF The basis for the exercise price was the closing price on the date of the grant. The Enhanced American Model used to estimate the fair value of the granted share options (a sophisticated binomial model) is explained in detail on page 77 of this report in the notes to the consolidated financial statements. The compensation of the Board of Directors and Executive Committee disclosed below includes the compensation in respect of the full year under review, subject to the following qualifications and supplementary information: The variable compensation elements shown relate to the year under review The variable compensation is ordinarily allotted and paid after the annual financial statements have been adopted by the Annual General Meeting. When new members join the Board of Directors or Executive Committee, they are compensated in this capacity generally from the month in which they take up the position. Where members move from the Executive Committee to the Board

50 Corporate governance 48 of Directors or vice versa, the individual s entire compensation for the year under review is reflected and disclosed under the new position. When a member leaves the Board of Directors, compensation is paid until and including the month of departure. When a member leaves the Executive Committee, compensation is paid until the date of departure. Depending on their specific position and country of residence, members of the Executive Committee are in some cases provided with a company car. Additional compensation is paid for postings to other countries (i.e., to expatriates). The value of any company car privileges and out-of-country allowances is reported under other compensation. All payments to pension plans, contributions to management pension plans and contributions in the form of premium reductions for insurance are reported within pension costs. Some members of the Executive Committee are also members of boards of directors of Group subsidiaries. To the extent that board member fees are paid by the subsidiaries for these board functions, the compensation is paid not to the members of the Executive Committee but to the Company, which remunerates these individuals in their capacity as Executive Committee members. In the year under review the Group did not provide any sureties or guarantees on behalf of members of the Board of Directors or Executive Committee. Neither Schaffner Holding AG nor another Group company waived repayment of any debt outstanding from a member of the Board of Directors or Executive Committee. In the year under review the members of the Board of Directors and Executive Committee did not receive any fees or compensation for any additional services rendered to Schaffner Holding AG or another Group company Members of the Board of Directors and Executive Committee of Schaffner Holding AG A detailed analysis of the total compensation of the Board members and Executive Committee members including shares, share options and conversion rights, as well as their holdings of shares and share options, is provided on page 92 of this report in the notes to the parent company financial statements Members of the Executive Committee of Schaffner Holding AG In the fiscal year 2010/11 the variable portion of the compensation of the Executive Committee members on average represented 28 % (prior year: 39 %) of their total compensation, with cash making up 50 %-points (prior year: 63 %-points) of the variable portion and share options or shares representing 50 %-points of the variable portion (prior year: 37 %-points) Former members of management Robert F. Spoerry, who until 31 March 2011 was a member of the Board of Directors, received total compensation of CHF 24,000 in the fiscal year 2010/ Related parties In the year under review, no fees or other compensation for services rendered to the Schaffner Group or to one of its subsidiaries were paid to or accrued by parties related to members of the Board or of the Executive Committee. 5.5 Loans In the fiscal year 2010/11 the Schaffner Group did not provide any sureties on behalf of, nor provide any loans, advances or other forms of credit to, former or current members of the Board of Directors or Executive Committee or parties related to such members. As well, no such commitments or receivables were outstanding at the end of the fiscal year. 5.6 Management transactions Since 1 July 2005, Schaffner Holding AG reports to the SIX Swiss Exchange the transactions in Schaffner shares and options concluded by members of the Board of Directors, Executive Committee, or by parties related to them, including the name and position of the persons concerned. Transactions exceeding the disclosure threshold of CHF 100,000 per reportable person per calendar month were published anonymously on the website of SIX Swiss Exchange. SIX Swiss Exchange did not publish any collective announcements of transactions below the disclosure threshold of CHF 100,000 in any calendar month. With effect from 1 April 2011 the SIX Swiss Exchange s rules on the disclosure of management transactions were revised to make them simpler and create greater transparency for market players. The revisions included the elimination of the disclosure threshold of CHF 100,000 for notification of management transactions.

51 Corporate governance 49 A compilation of the management transactions in the fiscal year under review is available on the website of the SIX Swiss Exchange at the following link: management_transactions_en.html?issuerid=10529& fromdate= &preloadresults=true An overview of the holdings of shares, options and conversion rights of the members of the Board of Directors and Executive Committee at 30 September 2011 and 2010 is provided on page 93 of this report in the Company financial statements of Schaffner Holding AG. 6 Shareholder participation rights 6.1 Voting rights restrictions and proxy voting At 30 September 2011 there were 1,198 shareholders registered in the share register. Each share of Schaffner Holding AG, with the exception of shares held by the Company (treasury shares), carries one vote at the General Meeting of shareholders. There are no restrictions on voting rights. Upon presentation of a written proxy, shareholders may be represented at the General Meeting by another shareholder having voting rights, by the Company-appointed proxy, the independent proxy, or a custodian (a bank). Partnerships and legal entities may be represented by authorized signatories, and minors and wards by their legal representatives, even if these proxies are not shareholders. Shareholders represented by a proxy may issue instructions regarding each agenda item and also regarding motions not included in the invitation, stating whether they wish to vote for or against a motion or abstain. The proxy appointed by the Company represents only shareholders who are approving the motions of the Board of Directors; proxy mandates accompanied by other instructions are turned over to the independent proxy. Unless explicitly instructed otherwise, the independent proxy will vote in support of the motions of the Board of Directors. 6.2 Quorums under the Articles of Association Except as otherwise required by law or the Articles of Association, the General Meeting passes its resolutions and conducts its elections by a majority of the valid votes represented. If an election is not completed in the first round and there is more than one candidate, a second round of voting is held, which is decided by a relative majority. The Articles of Association of Schaffner Holding AG do not provide for special quorums that go beyond the provisions of Swiss corporation law. 6.3 Calling of the General Meeting The General Meeting is called by the Board of Directors no later than 20 days before the day of the meeting by issuing a notice in the Company s official gazette for statutory notices. Notice of the meeting may additionally be sent in a letter to all shareholders registered in the share register. In addition to the meeting date, time and place, the notice must state the items of business to be discussed and the resolutions proposed by the Board of Directors and by shareholders that have requested a General Meeting or have put forward an item for discussion at the meeting. Resolutions cannot be passed on matters that have not been announced in this manner, except for motions to call an Extraordinary General Meeting or conduct a special audit. Shareholders representing at least one-tenth (10 %) of the share capital may submit a request binding on the Company to call an Extraordinary General Meeting. Such a request must be in writing and state the business to be discussed and the proposed resolutions. 6.4 Placing business on the General Meeting agenda One or more shareholders who together represent at least 5 % of the share capital, or shares with a nominal value of at least CHF 1,000,000, whichever is less, may by their written request have business placed on the agenda of a General Meeting. Such a written request must be received by the Company at least 45 days before the General Meeting. 6.5 Registration in the share register For the purposes of the legal relationship with the Company, shareholders or beneficial owners of shares are recognized as such only if they are registered in the Company s share register. Purchasers of registered shares are upon their request recorded as voting shareholders in the share register by the Board of Directors if the purchasers state explicitly that they have acquired, and will hold, the stock for their own account. By default, the Board of Directors registers nominees as holding voting shares only up to a maximum of 5 % of the registered-share capital recorded in the Swiss commercial register of companies. Above this limit, shares of nominees with vot-

52 Corporate governance 50 ing rights are only registered in the share register if the nominee discloses the names, addresses and holdings of Schaffner shares of the persons for whose account the nominee holds 0.5 % or more of the total registered-share capital that is recorded in the commercial register. For the purposes of this provision, nominees are persons who do not expressly declare in their registration application that they have bought and are holding the shares for their own account. To the extent permitted by law, the Board of Directors is authorized to enter into agreements with nominees regarding reporting obligations, and the Board may approve exceptions to the nominee rules on a case-by-case basis. Where legal entities or groups with joint legal status are related to one another by capital, voting rights, management or in some other manner, they are deemed to constitute a single purchaser, as are all natural persons, legal entities or groups with joint legal status that by agreement, as a syndicate or in any other way act in a coordinated manner with a view to circumventing the nominee rules. The Board may, after hearing the affected party, void the party s registration in the share register as a voting shareholder if the registration was the result of false information supplied by the purchaser, and instead register the affected party as a non-voting shareholder. The purchaser must be informed of the deletion immediately. These registration restrictions also apply to shares bought or subscribed through the exercise of pre-emptive rights, options or conversion rights. In the invitation to the General Meeting, the Board of Directors announces the record date at which registration in the share register is required for participation in and voting at the meeting. 7 Changes in control and measures to prevent hostile takeovers 7.1 Requirement to make a public purchase offer for shares The Articles of Association of Schaffner Holding AG contain neither an opting-out clause nor an opting-up clause. This means that any person or entity acquiring one-third (33 ⅓%) or more of the voting rights of Schaffner Holding AG must, under section 32 of the Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA, or Stock Exchange Act), make a public tender offer to purchase the remaining shares. 7.2 Provisions on changes in control The participants in the Schaffner Holding AG Employee Share Option Plan 1998 (ESOP) and Schaffner Holding AG Performance Option Plan (POP) have the right to exercise immediately any portion or all of their options without regard to the holding periods, in either of the following two cases: Any person or entity directly or indirectly acquires a number of shares in the Company that, under section 32 of the Stock Exchange Act, triggers the acquirer s obligation to make an offer to acquire all other outstanding shares of the Company, or Schaffner Holding AG sells all or a substantial portion of the Company s assets. 8 Auditors 8.1 Duration of audit firm s engagement and tenure of lead audit partner Date of beginning of current audit engagement The external independent auditor is appointed annually by the General Meeting. Ernst & Young AG, Berne, have been the external independent auditors of Schaffner Holding AG since the fiscal year 2002/ Date of first appointment of lead audit partner responsible for current external audit engagement The lead audit partner at the external auditors (the person in charge of the audit engagement), Ms. Bernadette Koch, has held this position since the fiscal year 2009/10. By law, the lead audit partner s tenure is limited to seven years. 8.2 Audit fees In the fiscal year 2010/11, Ernst & Young AG charged the Schaffner Group fees totalling CHF 389,000 (prior year: CHF 413,000) for services in connection with the auditing of the Company financial statements of Schaffner Holding AG and the consolidated financial statements of the Schaffner Group.

53 Corporate governance Additional fees In addition, Ernst & Young AG charged the Schaffner Group CHF 37,000 (prior year: CHF 35,000) for other services, which had the following composition: Tax consulting CHF 17,000 Prior year: CHF 10,000 IT consulting CHF 18,000 Prior year: CHF 23,000 Other CHF 2,000 Prior year: CHF 2, Monitoring the external independent auditors The Audit Committee, on behalf of the Board of Directors, annually reviews the license, performance, fees and independence of the external auditors and recommends to the Board which external auditors to propose for election by the General Meeting. It also ensures the compliance with the legal requirement for rotation of the lead audit partner. The external auditors in the course of their audit activities regularly communicate to the Audit Committee their findings and any suggestions for improvement. The results are reported through a management letter to the Board of Directors (prepared after the audit of the annual financial statements) and through the reports of the external auditors to the General Meeting. The Audit Committee meets with the external auditors at least two times per year, sets the scope and objectives of the audits, and annually assesses the work of the external audit firm through a performance evaluation process. This process takes into account the Committee s experience in working with the external audit firm and the audit firm s own quality assurance measures in respect of the engagement. The Audit Committee obtains assurance that the lead audit partner has the necessary technical qualifications and fulfills the requirements as to independence. The Chief Executive Officer and Chief Financial Officer also attend these meetings with the external auditors. The Board of Directors is kept informed by the Audit Committee. 9 Communication policy Schaffner follows a policy of open and active communication with the public and the financial markets. The communication policy also adheres to the rules of the SIX Swiss Exchange and the applicable legal requirements. The Schaffner Group s financial reporting complies with International Financial Reporting Standards (IFRS) and Swiss corporation law. As a company listed on the SIX Swiss Exchange, Schaffner also publishes information (so-called ad-hoc disclosures) relevant to the share price in accordance with section 72 of the Listing Rules. In the course of its communications the Schaffner Group makes forward-looking statements. These statements are always based on management s judgment, at the time the statement is made, regarding the current and future position and performance of the Company. It is not the policy of Schaffner Holding AG to update information published in the past. The Schaffner Group reports on its financial and business performance on a half-yearly basis. All publications are made available in electronic format; the Annual Report is also available in hard copy. The Half-Year Report is published on the Company s website and printed on request. The investor relations activities of the Schaffner Group include the following events (among others), conducted in compliance with the ad-hoc-disclosure requirements of the SIX Swiss Exchange: Annual General Meeting Presentation of the full-year results Conference calls focusing on the publication of the halfyear results or other news Meetings with shareholders, investors and analysts during road shows Themed investor days for shareholders, investors and analysts. Media releases remain available on the Schaffner website for at least two years after publication and can be accessed via the following link: ad-hoc-notices.html Annual and half-year reports remain available on the website for at least five years and are displayed at: The corporate governance and compensation report can be found at the following link: corporate-governance.html

54 Corporate governance 52 Annual and half-year reports, corporate governance and compensation reports, media releases and presentations for shareholders, investors and analysts are published on the Group s website at and archived there by publication date. The latest ad-hoc disclosures of the Schaffner Group can also be received by , promptly and free of charge, by registering for the news service at specifically at: Primary responsibility for corporate communications rests with the Chief Executive Officer. He is supported in investor relations by the Chief Financial Officer. The Company s official gazette for the publication of statutory and regulatory news is the Swiss Official Gazette of Commerce, or SOGC. Investor relations contacts Alexander Hagemann, Chief Executive Officer alexander.hagemann@schaffner.com; T Kurt Ledermann, Chief Financial Officer kurt.ledermann@schaffner.com; T Financial calendar The fiscal year-end of Schaffner Holding AG is 30 September. 12 January th Annual General Meeting 14 May 2012 Publication of Half-Year Report 2011/12 (half-year results) 6 December 2012 Publication of Annual Report 2011/12 (full-year results) 14 January th Annual General Meeting Publications in connection with maintaining the listing of the Company s shares on the SIX Swiss Exchange are effected in accordance with the Listing Rules of the SIX Swiss Exchange. The Listing Rules can be obtained at A current source of information is Schaffner s corporate website at with detailed information on the Group, products and contacts.

55 Financial Report 53 Contents Consolidated financial statements of the Schaffner Group 54 Consolidated balance sheet 55 Consolidated income statement 55 Consolidated statement of comprehensive income 56 Consolidated cash flow statement 57 Consolidated statement of changes in equity 58 Notes to the consolidated financial statements 88 Report of the statutory auditors on the consolidated financial statements Company financial statements of Schaffner Holding AG 89 Company balance sheet 89 Company income statement 90 Notes to the company financial statements of Schaffner Holding AG 94 Proposal for the appropriation of retained earnings 95 Report of statutory auditor

56 Consolidated financial statements of the Schaffner Group 54 Consolidated balance sheet In CHF 000 Note Intangible assets 3 24,051 14,773 Property, plant and equipment 4 18,202 14,916 Other non-current assets 5, 21 11,817 12,202 Deferred tax assets 16 2,683 2,196 Non-current assets 56,753 44,087 Inventories 6 29,069 31,134 Trade receivables 7, 21 32,426 36,885 Income tax receivables Other receivables, prepaid expenses and accrued income 8, 21 3,680 5,715 Other current financial assets Cash and cash equivalents 21 14,235 8,061 Current assets 80,069 82,556 Total assets 136, ,643 Equity attributable to equity holders of Schaffner Holding AG 56,929 55,985 Shareholders equity 56,929 55,985 Non-current provisions 9 6,556 7,080 Deferred tax liabilities 16 1,935 2,664 Non-current borrowings 10, ,137 Non-current liabilities 8,932 27,881 Current provisions 9 3,521 4,882 Current borrowings 10, 21 34,559 1,749 Income tax payables 1,928 1,867 Trade and other payables 11, 21 30,953 34,279 Current liabilities 70,961 42,777 Total liabilities 79,893 70,658 Total liabilities and shareholders equity 136, ,643 The accompanying notes are an integral part of the consolidated financial statements.

57 55 Consolidated income statement (year ended 30 September) In CHF 000 Note 2010 / / 10 Net sales , ,939 Cost of sales -126, ,669 Gross profit 57,511 59,270 Other income Marketing and selling expense -16,354-15,934 Research, development and application expense -14,100-12,582 General and administrative expense -14,033-14,662 Restructuring costs Operating profit before amortization of customer relationships 13,379 15,612 Amortization of customer relationships Operating profit [EBIT] 12,810 15,000 Finance income 15 10,680 1,100 Finance expense 15-12,613-4,087 Profit before tax [EBT] 10,877 12,013 Income tax Net profit for the period 10,150 11,983 Earnings per share in CHF 19 Basic Diluted In a strict classification by function of expense, amortization of customer relationships would be presented under marketing and selling expense. Consolidated statement of comprehensive income (year ended 30 September) In CHF / /10 Net profit for the period 10,150 11,983 Exchange differences -4,028-3,213 Movement in cash flow hedges Income tax 0 0 Total comprehensive income for the period 5,816 8,655 The accompanying notes are an integral part of the consolidated financial statements.

58 Consolidated financial statements of the Schaffner Group 56 Consolidated cash flow statement (year ended 30 September) In CHF 000 Note 2010/ /10 Net profit for the period 10,150 11,983 Depreciation and impairment of property, plant and equipment 4 3,374 3,468 Amortization and impairment of intangible assets 3 1,916 1,937 (Gain)/loss on disposal of property, plant and equipment and intangible assets Change in provisions 9-1,137 2,143 Change in inventories 344-7,986 Change in receivables 6,406-19,739 Change in current liabilities -3,529 15,860 Change in deferred tax 16-1,214-2,456 Finance expense for convertible bond Share-based payments expense Exchange differences on intra-group items 650 1,508 Change in deferred consideration payable Other non-cash income 0-30 Cash flow from operating activities 17,805 7,358 Purchase of property, plant and equipment 4-6,901-5,306 Disposal of property, plant and equipment Purchase of intangible assets 3-1,434-1,423 Acquisition of subsidiaries or businesses, and contingent consideration 2-10, Change in loan receivables and non-current financial assets Cash flow from investing activities -18,736-6,015 Purchase of treasury shares 20-7,356-1,094 Disposal of treasury shares Proceeds from exercise of share options and purchase of restricted shares by staff 20 4, Repayment of excess share premium -2,842 0 Proceeds from borrowings 13,360 19,771 Repayment of borrowings 0-42,716 Cash flow from financing activities 7,599-23,820 Effect of exchange rates on cash and cash equivalents Change in cash and cash equivalents 6,174-22,564 Cash and cash equivalents at 1 October 8,061 30,625 Cash and cash equivalents at 30 September 14,235 8,061 Free cash flow 1 9, Included in cash flow from operating activities: Interest paid ,789 Interest received Income tax paid Cash flow from operating activities less net investment in property, plant and equipment and in intangible assets. The accompanying notes are an integral part of the consolidated financial statements.

59 57 Consolidated statement of changes in equity In CHF 000 Share capital Share premium Translation reserve Retained earnings Treasury shares Hedging reserve Total shareholders equity At 1 October ,668 59,326-8,854-23, ,305 Exchange differences -3,213-3,213 Movement in cash flow hedges Net profit for the period 11,983 11,983 Total comprehensive income 0 0-3,213 11, ,655 Treasury shares Issue of restricted shares Share option plans Redemption of convertible bond At 30 September ,668 60,202-12,067-11, ,985 Exchange differences -4,028-4,028 Movement in cash flow hedges Net profit for the period 10,150 10,150 Total comprehensive income 0 0-4,028 10, ,816 Treasury shares -2,034-1,181-3,215 Repayment of excess share premium 1-2,842-2,842 Issue of restricted shares Share option plans At 30 September ,668 58,249-16,095-3,855-1, ,929 1 CHF 4.50 per share. Share capital The issued share capital of Schaffner Holding AG consists of 635,940 ordinary registered shares with a nominal value of CHF per share. The issued shares are fully paid. Each share carries one vote at the General Meeting. All shares not held by the Company or one of its subsidiaries attract dividends. There is also authorized unissued capital of 21,340 shares with a total nominal value of CHF 693,550. This is reserved for the Schaffner share option plans (see note 18 on page 77). Translation reserve Shareholders equity is carried at historical exchange rates. The resulting foreign exchange differences are recognized directly in shareholders equity as a separate line item until the disposal of the subsidiary in question. The accompanying notes are an integral part of the consolidated financial statements. Share premium The share premium (also known as additional paid-in capital) represents the excess of the issued share capital s market value over its nominal value. The increase in share premium in the year under review resulted from the granting of conversion rights under the share option plans (see note 18 on page 77). In the reporting period, share premium was reduced by CHF 2,842,000 through the repayment of CHF 4.50 per dividend-bearing registered share from this capital reserve.

60 Notes to the consolidated financial statements 58 Accounting policies Basis of preparation The consolidated financial statements comprise the individual financial statements of Schaffner Holding AG (the Company ) and its subsidiaries (together, Schaffner, the Group or the Schaffner Group ) as at 30 September 2011, drawn up in accordance with the uniform accounting policies of the Group. The consolidated financial statements have been prepared under the historical cost convention, except for certain items (such as derivatives) that are stated at fair value, as further detailed in the accounting policies below. The consolidated financial statements comply with Swiss law and have been prepared in accordance with International Financial Reporting Standards (IFRS) and their interpretations (IFRIC) issued by the International Accounting Standards Board (IASB). The presentation currency of the consolidated financial statements is the Swiss franc. The consolidated financial statements are prepared in German and translated into English. The English version is provided solely for readers convenience. Only the German version is definitive and legally binding. Changes in accounting policies The Schaffner Group applied the same accounting policies as in the prior year, except as modified by newly issued or changed standards and interpretations. The following changes to and interpretations of IFRS took effect at 1 October 2010: IFRS 1 Amendments Additional Exemptions for First-time Adopters IFRS 2 Amendments Group Cash-settled Share-based Payment Transactions IAS 32 Amendments Classification of Rights Issues IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments Annual Improvements to IFRSs 2009 (changes which became effective on 1 January 2010) Annual Improvements to IFRSs 2010 (changes which became effective on 1 July 2010) None of the IFRS changes and interpretations which became effective on 1 October 2010 have a material effect on the financial position, results of operations and cash flows of the Schaffner Group. IFRS standards becoming effective after the reporting period The following new or amended standards and interpretations have been issued, but are not effective until subsequent periods and have not been applied early in these consolidated financial statements. Their impact on the consolidated financial statements of the Schaffner Group has not yet been systematically analyzed. However, based on a preliminary assessment, the expected impact of each standard and interpretation is presented in the following table.

61 59 Preliminary assessment of effects of new or changed standards and interpretations becoming effective in future periods Assessment Effective date Planned adoption by Schaffner Group IFRS 1 Amendments Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters * /12 IFRS 7 Amendments Disclosures: Transfers of Financial Assets ** /12 IFRS 9 Financial Instruments *** /14 IFRS 10 Consolidated Financial Statements *** /14 IFRS 11 Joint Arrangements * /14 IFRS 12 Disclosure of Interests in Other Entities * /14 IFRS 13 Fair Value Measurement *** /14 IAS 1 Amendments Presentation of Items of Other Comprehensive Income *** /13 IAS 12 Amendments Deferred Tax: Recovery of Underlying Assets * /13 IAS 19 Amendments Employee Benefits *** /14 IAS 24 Amendments Related Party Disclosures *** /12 IAS 27 Amendments Separate financial statements * /14 IAS 28 Investments in Associates and Joint Ventures * /14 IFRIC 14 Amendments Prepayments of a Minimum Funding Requirement ** /12 IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine * /14 Annual Improvements to IFRSs 2010 ** /12 * There is expected to be no, or no significant, impact on the consolidated financial statements. ** The impact on the consolidated financial statements is expected to take the form mainly of additional disclosures or of changes in presentation. *** The impact on the consolidated financial statements cannot yet be determined with sufficient reliability. Estimates The consolidated financial statements of the Schaffner Group contain assumptions and estimates which affect the reported financial position, results of operations and cash flows. These assumptions and estimates were made on the basis of management s best knowledge at the time of preparation of the accounts. Actual results could differ from the values presented. The following estimates have the largest effects on the consolidated financial statements: Intangible assets: For acquisitions, the fair value of the acquired net assets (including acquired intangible assets) is estimated. Any amount paid in excess of this estimate represents goodwill. Intangible assets with a finite life are written off over the expected period of use; those with an indefinite life (primarily goodwill) are not amortized, but tested annually for impairment. The valuation of goodwill and other intangibles and the estimation of useful life have an effect on the consolidated financial statements. Provisions: Provisions are recognized only if the specific criteria under IFRS for doing so are met. Provisions represent obligations arising from a past event and are recognized only if their amount can be estimated reliably. Nevertheless, provisions are based on assumptions, which may later prove to be incorrect. Pension obligations/assets: The calculation of the pension obligations/assets of the defined benefit plans is based on actuarial assumptions that may not match actual outcomes and that may thus have an impact on the financial position, results of operations and cash flows. Income tax: The Schaffner Group is subject to income tax in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are transactions and calculations for which the ultimate effective tax assessment is uncertain at the time of preparation of these financial statements. The recognition of deferred tax assets is based on management s judgment. Deferred tax assets for tax loss carryforwards are only recognized to the extent that it is probable they can be utilized. Their utilization depends on the ability to generate future taxable profits against which existing loss carry-forwards can be applied. Judging the probability of future utilization requires estimates of various factors, such as the future earnings situation. If the actual outcomes differ from the estimates, this can lead to changes in the assessed fair value of the deferred tax assets.

62 60 Definitions A subsidiary is a company over which Schaffner Holding AG, Luterbach, directly or indirectly exercises control. An associated company, or associate, is a company over which Schaffner Holding AG directly or indirectly exercises significant influence. The term non-current liabilities refers to all liabilities with remaining maturities of more than one year; current liabilities refers to all liabilities with remaining maturities of one year or less. Current liabilities thus also include that portion of noncurrent borrowings maturing within one year. All interest-bearing liabilities are included under borrowings. Methods of consolidation The consolidated financial statements include, by full consolidation, the financial statements of Schaffner Holding AG and of its subsidiaries. Their assets, liabilities, income and expenses are fully included, and the interests of minority shareholders in subsidiaries ( non-controlling interests, previously known as minority interests) are reported separately in the balance sheet and income statement. The purchase or sale of non-controlling interests by the Group is recognized directly in equity. All intra-group balances, income and expenses are eliminated on consolidation. This also includes intra-group profits on inventories and on non-current assets. Companies acquired during the reporting period are included in the consolidated financial statements from the effective date of their acquisition. Companies divested during the reporting period remain included in the consolidated financial statements until the effective completion of the divestment transaction. Translation of subsidiaries functional currencies into the Group s presentation currency All assets and liabilities in the balance sheets of foreign subsidiaries drawn up in foreign currencies are translated into Swiss francs (CHF) at period-end exchange rates (i.e., at closing rates for the reporting period). Expenses, income and cash flows are translated into Swiss francs at weighted average exchange rates for the period, which approximate the actual transaction rates. Foreign exchange differences arising from the variation in applicable exchange rates are recognized in the consolidated statement of comprehensive income, where they are accumulated in the item exchange differences. Foreign currency transactions Foreign currency transactions of subsidiaries are translated into the functional currency of the subsidiary at exchange rates prevailing at the transaction date (i.e., at transaction rates). Their foreign currency balances are translated at period-end exchange rates. Gains and losses arising from the recovery, settlement or translation of foreign currency monetary assets and liabilities are recognized as income or expense in the income statement. Intangible assets Intangible assets are stated at historical cost less any amortization and impairment. Intangible assets other than goodwill (which is not amortized) are amortized on a straight-line basis over the following estimated useful lives: Trademarks, technology and rights Software Customer relationships 10 years 3 8 years 10 years Acquisitions and goodwill Companies are consolidated from the date at which control is acquired. Business combinations are accounted for using the acquisition method. The cost of an acquisition is calculated as the aggregate of the consideration transferred measured at fair value at the acquisition date and the amount of any noncontrolling interest in the acquired company. For each business combination, the non-controlling interest in the acquired entity is measured either at fair value or at the proportionate share of the acquired company s identifiable net assets. Acquisition costs incurred are recognized as an expense. Any contingent consideration payable is recognized at the acquisition date at fair value. Subsequent changes to the fair value of a contingent consideration which is deemed to be an asset or liability are recognized either in the consolidated income statement or in the consolidated statement of comprehensive income. If the contingent consideration is classified as equity, it is not remeasured and its eventual settlement will be recognized in equity. If the acquisition cost of the company exceeds the market value of the acquired identifiable assets, liabilities, contingent liabilities and non-controlling interests, the difference is recognized as goodwill. Any negative goodwill is recognized in the income statement in the period of acquisition.

63 61 Goodwill is assessed for impairment annually and any impairment is charged to the consolidated income statement. When a subsidiary is sold, the difference between its sale price and its net assets, plus cumulative exchange differences, is reported as operating income or expense in the consolidated income statement. Research and development costs Development costs for new products are not capitalized, as a future economic benefit can be demonstrated only after a successful market launch. Development costs for software are capitalized as intangible assets, provided that the software will generate a future economic benefit through sale or through use within the Group and that its cost can be reliably estimated. Other conditions for capitalization are the technical feasibility of the asset and the intention and ability to complete its development and either use or sell it. Intangible assets recognized for development costs of software are amortized on a straight-line basis over their estimated useful life. The capitalized costs are tested annually for impairment for as long as the software is not yet in use, or when there are objective indications of impairment. Property, plant and equipment Items of property, plant and equipment are stated at historical cost less depreciation and impairment. They are depreciated on a straight-line basis over their estimated useful life, which is as follows: Land Buildings Machinery and equipment Furniture and fixtures Vehicles Information technology hardware Tools Not depreciated years 5 10 years 5 10 years 3 6 years 3 5 years 1 5 years Leases under which the lessee has substantially all the benefits and risks of ownership are classified as finance leases. Where a Group company is a lessee under a finance lease, the leased asset is capitalized at the lower of its fair value or the present value of the lease payments, and a liability of the same amount is recognized in borrowings. The interest portion (the finance charge) of the lease payments is charged to the income statement. Payments made under operating leases are recognized as an expense in the income statement in equal installments over the life of the lease. Impairment of assets The recoverable amount of an asset is estimated whenever there is an indication of impairment. If the asset s carrying amount exceeds the recoverable amount, the difference is recorded as an impairment charge in the income statement. The recoverable amount is the higher of an asset s net selling price and its value in use. An asset s value in use is the present value of the estimated future cash flows from the asset. Inventories Products purchased for resale, and raw materials, are measured at cost of purchase. Internally produced goods are measured at the cost of conversion, including related production overhead. Inventories in the balance sheet, and the charge to the income statement for the conversion cost of goods sold (cost of sales), are measured using the standard cost method. The standard costs are regularly reviewed and, when necessary, brought into line with current circumstances. Inventories that are slow-moving or have a lower market value are written down. Unsaleable inventory is fully written off. Inventory is thus not measured at more than its net realizable value. Trade receivables The carrying amount (also known as carrying value) of trade receivables is their nominal value less a provision for doubtful debts, i.e., for impairment. Securities held as current assets Securities held as current assets are divided into two categories: listed securities and other securities. Listed securities are shares quoted on a stock exchange and are measured at market value. Other securities are measured at fair value where possible, or otherwise at cost. Treasury shares are presented as a deduction from shareholders equity. Cash and cash equivalents Cash and cash equivalents consist of cash in hand, bank deposits in postal and other bank accounts, bankers acceptances, and shortterm time deposits with original maturities of up to 90 days. Provisions Provisions are recognized when Schaffner has an obligation to a third party as a result of a past event, the amount of the obligation can be estimated reliably and it is probable that an outflow of resources will be required to settle the obligation. Provisions for warranty claims are as a rule determined and recognized based on historical experience.

64 62 Where the effect of the time value of money is material, provisions are measured at the present value of the expected future expenditures. Restructuring provisions are recognized if the costs attributable to a restructuring plan can be determined reliably and represent a contractual obligation or a constructive obligation created by communication. Revenue recognition and interest income Net sales represent the revenue from goods sold and services rendered to third parties, net of discounts and other price reductions. Sales are recognized at the time that the benefits and risks of ownership of the products sold are transferred to the customer or that the service is rendered; this timing depends on the agreed shipment terms. Revenue is recognized if an economic benefit is likely to accrue to the Group and the amount of revenue can be reliably determined. Interest income is recognized on a time-proportion basis by the effective interest method unless the claim to the interest is in doubt. Pension obligations The Schaffner Group operates a number of pension plans in various countries worldwide. The pension plans are generally financed by contributions from employees and the respective Group companies. The plans assets are as a rule held in legally separate trustee-administered funds, the management of which takes into account the recommendations of independent qualified actuaries. Where plan assets are not held in such segregated funds, those assets which serve to secure future pension obligations are recognized as other non-current assets in the Group s consolidated balance sheet and the corresponding pension obligation is recorded in liabilities as a provision. For defined benefit plans, the future pension costs are assessed using the projected unit credit method. Under this method, the cost of providing future pensions is charged to the income statement in such a way as to spread the regular cost over the expected service lives of employees. The amount of these costs and their distribution over employees service lives are determined in accordance with the advice of independent qualified actuaries. The Schaffner Group s contributions to its pension plans are charged to the income statement in the year to which they relate. Accumulated unrecognized actuarial gains or losses exceeding the 10% corridor (10% of the greater of the present value of the defined benefit obligation or the fair value of the plan s assets) are amortized in the income statement over the average of the remaining working lives of the participating employees. This recognition begins in the year following the year in which the corridor is exceeded. Borrowing costs Borrowing costs are recognized as an expense in the period in which they are incurred. Segment reporting The Schaffner Group consisted of three reportable segments: Electromagnetic Compatibility, Power Quality and Automotive. This delineation of segments is consistent with the internal reporting on the basis of which the chief operating decision maker allocated resources to these segments and assessed their profitability. The Schaffner Group has identified the Executive Committee as the chief operating decision maker. Income tax Current income tax is recognized on the basis of reported profits, in the period in which the profits arise. Tax is calculated in conformity with the applicable tax laws in the individual countries. Deferred income tax is recognized using the liability method. Under this approach, the income tax effects of temporary differences between carrying amounts in the financial statements and their tax bases used in the calculation of taxable income are recorded in non-current liabilities or noncurrent assets, using the tax rates that are expected to apply to the period when the asset is recovered or the liability settled. The change in deferred tax assets and liabilities is recognized as deferred income tax expense or benefit. Deferred income tax liabilities are calculated on all taxable temporary differences. Deferred tax assets, including assets for unused tax loss carry-forwards, are only recognized to the extent that it is probable that future taxable profits will be available against which the assets can be utilized. The determination of the amount of deferred tax assets to be recognized requires a significant degree of judgment on the part of management. It involves assumptions and estimates as to the likely timing and amounts of future taxable profits and as to future tax planning strategies.

65 63 Financial assets and liabilities Financial assets and liabilities are classified into the following five categories: Financial assets and liabilities at fair value through profit or loss (these are assets classified as held for trading, and certain financial assets and liabilities designated as at fair value through profit or loss) Financial investments held to maturity Loans and receivables Financial assets available for sale (this represents all financial instruments not assignable to one of the catego ries above). Financial liabilities mainly consist of borrowings, which are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method. Liabilities arising from trading activities and derivatives are measured at fair value. Financial assets are initially measured at fair value (including transaction costs, except in the case of financial assets at fair value through profit or loss, which are measured net of transaction costs). All purchases and sales of financial assets are recognized at the transaction date. Financial assets at fair value through profit or loss are subsequently measured at their fair value. Any value changes are recorded in finance income or expense in the reporting period in which they occur. Financial instruments held to maturity, loans and receivables are initially measured at cost and subsequently measured at amortized cost using the effective interest method. Financial assets available for sale are subsequently measured at fair value, with changes in value (after income tax) recorded in shareholders equity. Upon sale, impairment or other disposal of the assets, the accumulated gains and losses recorded in shareholders equity are reported in finance income or expense in the current period. Assets not measured at fair value are tested for impairment at every balance sheet date. Financial assets are derecognized when Schaffner ceases to control them, i.e., when the related rights have been sold or have lapsed. Financial liabilities are derecognized when the contractual obligation is discharged, canceled or expires. Non-current financial liabilities are measured by the effective interest method. The interest expense therefore includes not only the actual interest payments but also the amounts for the unwinding of discount and for proportional transaction costs. Derivative financial instruments and hedging The Group uses derivative financial instruments to hedge its interest rate risks. Such derivatives are recognized at their fair value both at the date of the derivative contract s inception and at every subsequent measurement. Derivatives with positive fair values are recorded as assets; derivatives with negative fair values are recorded as liabilities. Any gains or losses arising during the year from changes in fair value of derivatives positions that were not entered into for hedging purposes are taken directly to the income statement. Cash flow hedges Cash flow hedges are used to hedge exposure to variability in cash flows resulting from interest rate risks of a financial instrument. The effective portion of the gain or loss on the hedging instrument is recognized directly in the consolidated statement of comprehensive income, while any ineffective portion is recorded immediately in the income statement. Amounts recognized in the consolidated statement of comprehensive income are transferred to the income statement in the period in which the transaction occurs or is no longer expected to occur. At the inception of a hedge relationship, the Group formally designates and documents the relationship, including documenting the risk management objective and strategy. The documentation also includes the identification of the hedge instrument, the hedged item or transaction, the nature of the risk being hedged and how the effectiveness of the hedge is to be assessed. If the hedging instrument expires or is sold or cancelled or its designation as a hedge is revoked, amounts previously recognized in the consolidated statement of comprehensive income remain there until the forecast transaction occurs. Share-based payments The fair value of granted share options is calculated using the Enhanced American Model (a sophisticated binomial model) at the grant date. Their fair value is expensed over the relevant vesting periods and also recorded as an increase in equity. All options can only be exercised through the purchase of shares and are not cash-settled.

66 64 1 Foreign currencies In the consolidation of Group companies separate financial statements, the following exchange rates were applied in translating foreign-currency-denominated accounts into Swiss francs: Balance sheet Income statement Country or region Currency In CHF In CHF 2010/11 In CHF 2009/10 In CHF China CNY EU EUR UK GBP Hungary HUF Japan JPY Sweden SEK Singapore SGD Thailand THB Taiwan TWD USA USD Business combinations At 1 September 2011 the Group acquired the dry-type transformer division of US company MTC Transformers, Inc. under an asset purchase agreement. Through the acquisition, the Schaffner Group strengthens its North American market position in the Power Quality segment and expands the international manufacturing organization by the Company s own plant in the USA. The acquisition was accounted for using the acquisition method. Production synergies and combined distribution channels and product portfolios justify the goodwill. The provisionally determined fair values of the identifiable assets and liabilities at the acquisition date were as follows: Acquired net assets Fair value recognized at acquisition date In CHF 000 Customer relationships 2,903 Technology 2,258 Software 34 Property, plant and equipment 657 Inventories 908 Trade receivables 2,188 Other receivables, prepaid expenses and accrued income 36 Total assets 8,984 Trade and other payables -2,043 Total liabilities 2,043 Net assets 6,941 Goodwill 3,724 Total consideration 10,665 Satisfied by: Cash paid 10,052 Contingent consideration 613 Cash flow on acquisition: Net cash outflow in the reporting period 10,052

67 65 The fair value and gross amount of trade receivables was CHF 2,188,000. None of the trade receivables were impaired and the contractual amounts are expected to be recoverable. The goodwill from the acquisition is tax-deductible. The purchase price allocation is still subject to uncertainty. All its items are therefore still provisional. In addition to the cash component shown above, the purchase price contains an earn-out component of up to USD 800,000 (CHF 645,000), payable in two installments on 30 September 2012 and 30 September The actual annual earn-out component is determined based on the amount by which EBITDA exceeds a fixed target of USD 1,200,000; the earn-out component is limited to a maximum of USD 400,000 per year. The transaction costs of CHF 591,000 were recognized as an expense and are presented within general and administrative expense. In the period from the acquisition until 30 September 2011, the acquired company contributed CHF 1,170,000 to net sales and CHF 52,000 to net profit for the period. If the business combination had occurred at the first day of the fiscal year, the net sales of the Schaffner Group would have been higher by CHF 12.6 million and net profit for the period would have been higher by CHF 799,000. In the fiscal year under review, CHF 505,000 (prior year: CHF 44,000) was paid as deferred consideration from the 2009 acquisition of BETEC-Engineering. The remaining provision of CHF 515,000 covers the expected residual payments to be made by 31 December 2011 (see note 9 on page 69). The acquisition-date fair value of the contingent consideration was estimated at CHF 613,000. This represented the present value of the maximum earn-out component. 3 Intangible assets Trademarks, technology and rights Software Goodwill Customer relationships Intangible assets under construction In CHF 000 Cost at 1 October ,272 8,313 4,817 6, ,939 Additions purchased separately Additions developed internally Disposals ,094 Exchange differences Cost at 30 September ,886 7,816 4,817 5,745 1,073 22,337 Additions purchased separately ,119 Additions acquired through business combinations 2, ,724 2,903 8,919 Additions developed internally Reclassifications 25 1,578-1,603 0 Exchange differences Cost at 30 September ,385 9,818 9,012 8, ,204 Accumulated amortization and impairment at 1 October , , ,104 Amortization ,691 Impairment Disposals ,094 Exchange differences Accumulated amortization and impairment at 30 September ,069-4, , ,564 Amortization , ,916 Exchange differences Accumulated amortization and impairment at 30 September ,235-5, , ,153 Net book value at 30 September ,817 3,577 4,817 3,489 1,073 14,773 Net book value at 30 September ,150 4,513 9,012 5, ,051 Total

68 66 The goodwill from prior years remained allocated to the Electromagnetic Compatibility (EMC) operating segment. The goodwill newly acquired in the fiscal year 2010/11 in connection with the purchase of the dry-type transformer division of US firm MTC Transformers, Inc., was allocated to the Power Quality (PQ) segment. The recoverable amount was determined from the present value of the future cash flows. The cash flow projections for this purpose cover a five-year period and are based on financial budgets approved by the Executive Committee and Board of Directors for the fiscal year 2011/12 and on a multi-year forecast. Cash flows beyond the five-year period are extra polated using a growth rate of 0%. The cash flow projections are based on historical experience and take into account potential variances from the underlying assumptions. The pre-tax discount rate applied of 9.4 % (9.3 % in the case of PQ goodwill) corresponds to an after-tax rate of 7.0% and is based on a risk-free ten-year bond plus risk premiums for the risks of the EMC and PQ operating segments. The sensitivity analysis conducted shows that a reduction of 10% in operating profit or in cash flows, or an increase of 10% in the discount rate, does not lead to impairment of goodwill. Furthermore, using the forecast cash flows with a zero growth rate would not lead to an impairment of EMC goodwill. For PQ goodwill, using the cash flows with a zero growth rate would lead to an impairment. As there is no indication at the time of this reporting that the assumptions underlying the calculation of the multi-year forecast could be significantly in error, Schaffner has elected not to adjust the calculation or recognize impairment on the PQ goodwill. Technology was capitalized for the first time at 5 January 2009, using the relief-from-royalty method to value the active harmonic filter technology acquired with BETEC- Enginee ring. The technology is amortized on a straight-line basis over a useful life of ten years. At 30 September 2011 its residual carrying amount was CHF 1,511,000 (prior year: CHF 1,706,000) and its remaining useful life was seven years and three months. In connection with the acquisition of the dry-type transformer division of US company MTC Transformers, Inc., the acquired dry-type transformer technology was measured at and capitalized from 1 September Its value was measured by the relief-from-royalty method and is amortized on a straightline basis over ten years. At 30 September 2011 the residual carrying amount was CHF 2,522,000 and the remaining useful life was nine years and eleven months. As a result of unrealized currency translation gains, the residual carrying amount at the balance sheet date was higher than the amount determined in the purchase price allocation. Customer relationships were capitalized for the first time at 3 November 2006, using the excess earnings method for the valuation of the existing customers at the ac quisition date of what was then Schaffner Jacke GmbH (now Schaffner Deutschland GmbH). The customer relationships are amortized on a straight-line basis over a useful life of ten years. At 30 September 2011 their residual carrying amount was CHF 2,660,000 (prior year: CHF 3,489,900) and their remaining useful life was five years and one month. Existing customer relationships were also capitalized as part of the purchase price allocation of the acquired dry-type transformer division of MTC Transformers, Inc. The initial measurement of these customer relationships was made at 1 September Determined using the excess earnings method, the item is amortized on a straight-line basis over a useful life of ten years. At 30 September 2011 the residual carrying amount was CHF 3,243,000 and the remaining useful life was nine years and eleven months. As a result of unrealized currency translation gains, the residual carrying amount at the balance sheet date was higher than the amount determined in the purchase price allocation. In the fiscal year 2007/08 a project was launched with the goal of implementing a Group-wide SAP system. Until the commissioning (the going live) of a given phase of the system, the external investment and internal development costs related to that phase are capitalized as intangible assets under construction and are not amortized. The first phase was commissioned in the fiscal year 2008/09. The useful life of the core system is estimated at five years and that of the country-specific programming at eight years. In the fiscal year 2010/11, two further phases of the project were commissioned. In the consolidated income statement, amortization of intangible assets is included within cost of sales, marketing and selling expense, research, development and application expense, general and administrative expense and amortization of customer relationships.

69 67 4 Property, plant and equipment In CHF 000 Land and buildings Plant and machinery Information technology hardware Furniture and fixtures Vehicles Assets under construction Cost at 1 October ,830 28,797 4,296 2,450 1, ,387 Additions purchased separately 325 4, ,306 Disposals ,646 Reclassifications Exchange differences ,294 Cost at 30 September ,931 31,507 4,298 2,381 1, ,753 Additions purchased separately 2,525 3, ,901 Additions acquired through business combinations Disposals -34-1, ,343 Reclassifications Exchange differences , ,786 Cost at 30 September ,874 32,383 4,395 2,346 1,116 1,068 51,182 Total Accumulated depreciation and impairment at 1 October ,953-19,755-3,715-2, ,465 Depreciation , ,468 Disposals ,389 Exchange differences Accumulated depreciation and impairment at 30 September ,197-21,103-3,707-2, ,837 Depreciation , ,355 Disposals ,180 Impairment Exchange differences 408 1, ,052 Accumulated depreciation and impairment at 30 September ,462-21,014-3,791-1, ,980 Net book value at 30 September ,734 10, ,916 Net book value at 30 September ,412 11, ,068 18,202 Property, plant and equipment are covered by a Group-wide insurance policy. The maximum insured amount is CHF 70 million per claim. At the end of the fiscal year there were commitments to purchase property, plant and equipment in the amount of CHF 280,000 (prior year: CHF 414,000).

70 68 Operating leases The future minimum payments under non-cancelable operating leases (mainly rent for office and manufacturing space), and future minimum sublease income under non-cancelable subleases, are presented in the table below: In CHF Operating leases Minimum lease payments due: Within 1 year 2,976 3,221 In more than 1 year and not more than 5 years 11,261 8,671 Thereafter 2,812 4,276 Total minimum payments 17,049 16,168 Subleases Total future minimum sublease income 1,194 1,251 Total minimum income 1,194 1,251 In the fiscal year 2010/11, total operating lease expenses were CHF 4,432,000 (prior year: CHF 4,733,000). Total sublease income in 2010/11 was CHF 308,000 (prior year: CHF 221,000). 5 Other non-current assets In CHF Present value of defined benefit assets and IFRIC 14 asset 1 10,378 10,647 Rental/utility security deposits and guarantees 1,439 1,555 Total other non-current assets 11,817 12,202 1 See note 14 on page Inventories In CHF Raw materials 14,026 16,518 Work in process and semi-finished goods 3,274 3,532 Finished goods 11,769 11,084 Total inventories 29,069 31,134 Inventory provisions In CHF / /10 At 1 October 3,547 3,885 Amounts created 1,674 1,405 Amounts used -1, Reversal of unused amounts ,041 Exchange differences At 30 September 2,779 3,547

71 69 7 Trade receivables In CHF Trade receivables, gross 32,748 37,051 Provision for doubtful debts Total trade receivables 32,426 36,885 8 Other receivables, prepaid expenses and accrued income In CHF Other receivables 2,877 5,125 Prepaid expenses and accrued income Total other receivables, prepaid expenses and accrued income 3,680 5,715 9 Provisions Warranty provisions Provisions for employee benefits 1 Restructuring provisions Other provisions In CHF 000 At 1 October ,906 2,140 4,593 11,339 Amounts created 1, ,612 4,418 Amounts used , ,936 Reversal of unused amounts Unwinding of discount Transfer Exchange differences ,007 At 30 September ,300 3,502 1,715 4,445 11,962 Amounts created 1, ,287 3,219 Amounts used ,010-2,364 Reversal of unused amounts ,952-2,089 Unwinding of discount Exchange differences At 30 September ,845 3,505 1,201 2,526 10,077 Non-current provisions 1,583 3,490 1, ,080 Current provisions ,736 4,882 Total provisions at 30 September ,300 3,502 1,715 4,445 11,962 Non-current provisions 1,825 3, ,556 Current provisions 1, ,116 3,521 Total provisions at 30 September ,845 3,505 1,201 2,526 10,077 1 See note 14 on page 71. Total Current provisions relate to cash outflows expected to occur within twelve months. Non-current provisions relate to outflows occurring after more than twelve months; where the time value of money is significant, the expected cash flows are discounted. Warranty provisions The warranty provisions were created primarily for the warranty risks inherent in the nature of the business activities. Warranty provisions are measured based on historical experi-

72 70 ence regarding repairs and returns and adjusted to reflect current sales volumes. The outflows are expected to occur within one to three years. Provisions for employee benefits Employee benefit provisions consist mainly of pension provisions for unfunded defined benefit plans in Germany, Thailand and France. Restructuring provisions The restructuring provisions were created after the discontinuation of production at the Luterbach site and relate to resulting unused leased factory space that is not sublet. In the year under review, CHF 0.5 million of this provision was used. Schaffner believes that, until the expiration of the current lease for this space, a considerable portion will not be successfully sublet. The discounted provision at the balance sheet date was CHF 1.2 million. The cash outflows are expected to occur within one to five years. Other provisions From the acquisition of the employees, technologies and assets of German company BETEC-Engineering in 2009 and of the dry-type transformer division of US company MTC Transformers, Inc. in the fiscal year 2010/11, there were total provisions at the end of the fiscal year of CHF 1.1 million for contingent consideration, including current provisions of CHF 0.9 million (see note 2 on page 64). Also included in other provisions are provisions of CHF 0.8 million for tax risks and onerous contracts. The other provisions are likely to involve cash outflows in one to three years. In the fiscal year completed, the provision accrued in the prior year for customs risks was released after a favorable ruling by the arbitration authority of first instance (CHF 1.3 million). 10 Borrowings The average interest rate payable on borrowings in the fiscal year 2010/11 was 3.0% (prior year: 3.8%). The composition of borrowings is shown in the following table: In CHF 000 Effective interest rate at Bank loans in Switzerland LIBOR % 28,500 18,000 Bank loan in China 7.53% 5,800 0 Bank overdrafts 4.125% 4.75% 259 1,749 Interest rate swap % Total borrowings 35,000 19,886 Of which: Current borrowings 34,559 1,749 Non-current borrowings ,137 The debt financing of the Schaffner Group is assured through credit lines with four banks, with a credit limit of CHF 15 million per facility. These credit agreements are tied to covenants, which were fulfilled at the balance sheet date. The maturities of the Group s individual bank borrowings at the balance sheet date ranged from five months to repayable on demand. Under the credit agreements, they can be rolled over continuously until at least 29 February At the balance sheet date all these borrowings were presented as current liabilities, as the agreements to renew the facilities had not yet formally been concluded at the balance sheet date.

73 71 11 Trade and other payables In CHF Trade payables 19,570 18,856 Other payables 2,510 4,911 Accrued expenses 8,873 10,512 Total 30,953 34, Contingent liabilities and pledged assets In respect of obligations of its German subsidiary, the Group was the guarantor under an outstanding parent guarantee in the amount of EUR 218,000. The Group operates internationally and therefore inherently incurs tax risks (such as from transfer prices). As these tax risks currently cannot be estimated, no provision has been recognized for them. As a company with worldwide operations, Schaffner is exposed to numerous legal risks. The outcome of currently pending legal proceedings cannot be predicted with certainty. Provisions are established inasmuch as the financial consequences of a past event can be estimated reliably and the estimate can be confirmed by independent expert opinion. Assets of CHF 47,000 (prior year: CHF 161,000) were pledged as collateral for electricity consumed. There are no other terms and conditions associated with the use of collateral. 13 Staff costs and number of employees In CHF / /10 Wages and salaries 39,165 41,232 Share-based payments Social security and other costs 11,532 10,027 Pension costs for defined benefit plans 1, Total staff costs 53,080 53,043 Number of employees in full-time equivalents (average for the year) 2,702 2, Post-employment and other long-term employee benefits In addition to the statutory social insurance plans (which include pension plans), the Group maintains employee benefit plans that are defined benefit plans under IAS 19. The plan assets and defined benefit obligations are remeasured every year and were valued by independent actuaries at 30 September Accumulated unrecognized actuarial gains or losses exceeding the 10% corridor (10% of the greater of the present value of the defined benefit ob ligation or the fair value of the plan s assets) are amortized in the income statement over the average of the remaining working lives of the participating employees. A pension plan surplus is capitalized when there is an economic benefit to the Group from the overfunding of a pension plan under IAS 19. This economic benefit is calculated on the basis of future reductions in contributions, in accordance with IFRIC 14. The plan assets are largely held in separate funds external to the Group (referred to as funded plans ). To the extent that plans are not held in such segregated funds (i.e., to the extent that they are unfunded ), the plan assets and liabilities are recognized in the balance sheet.

74 72 In CHF Funded plans Fair value of defined benefit assets 31,888 31,777 Present value of defined benefit obligations -28,623-29,833 Unrecognized actuarial loss 5,123 6,617 Net defined benefit plan assets 8,388 8,561 Unfunded plans and employee benefits Provisions for pensions -3,035-3,081 Present value of pension obligations recognized in the balance sheet -3,035-3,081 Other Provisions for other employee benefits Present value of other pension obligations recognized in the balance sheet In CHF / /10 Movement in present value of defined benefit obligations At 1 October -33,961-32,816 Current service cost of employer -1,102-1,082 Employee contributions Interest cost ,010 Actuarial gain/(loss) 3,008-3,031 Effect of curtailment/disposal 0 3,580 Benefits paid Exchange differences At 30 September -32,128-33,961 In CHF / /10 Movement in fair value of defined benefit assets At 1 October 31,777 33,634 Expected return on plan assets 1,079 1,160 Actuarial loss -1, Employer contributions Employee contributions Effect of curtailment/disposal 0-3,580 Benefits paid At 30 September 31,888 31,777 In CHF / /10 Amounts recognized in the balance sheet Present value of defined benefit assets 1,990 2,086 Net defined benefit plan assets 8,388 8,561 Provisions for pensions -3,035-3,081 Other employee benefits

75 73 In CHF / /10 Amounts recognized in the income statement Current service cost of employer -1,102-1,082 Interest cost ,010 Expected return on plan assets 1,079 1,160 Recognized actuarial loss Pension cost -1, / /10 Return on plan assets and actuarial assumptions Actual rate of return on plan assets -1.6% 1.9% Discount rate 2.5% 2.5% Expected rate of return on plan assets 3.6% 3.4% Expected rate of salary increases 1.0% 1.4% Expected rate of increase in future pensions 0.0% 0.5% Rate of experience gain on defined benefit obligations 0.8% 1.9% In CHF / /10 Allocation of plan assets Equities 8,992 9,104 Bonds 12,819 13,254 Property 4,879 4,589 Other assets 5,198 4,830 Fair value of defined benefit assets 31,888 31,777 The expected return on plan assets is based on the asset allocation at the beginning of the year and the following expected rates of return for each asset class: liquid assets 0.50%, Swiss bonds 2.00%, foreign currency bonds 3.00%, mortgages 2.50%, property 4.00%, Swiss equities 6.00%, foreign equities 6.20%, and alternative investments 4.00%. Returns in the subsequent year are expected to be in line with those of the year under review. History of defined benefit plans and experience adjustments In CHF / / / / /07 Fair value of defined benefit assets 31,888 31,777 33,634 40,066 45,969 Present value of defined benefit obligations -32,128-33,961-32,816-39,494-40,269 Plan (deficit)/surplus , ,700 Experience (loss)/gain on plan assets -5.0% -1.8% -0.5% -17.0% 2.0% Experience gain/(loss) on defined benefit obligations 0.8% 1.9% 1.2% 3.5% -2.2% In total, the Group expects to contribute CHF 1.4 million to all post-employment benefit plans in the subsequent year (year under review: CHF 1.5 million).

76 74 15 Finance income and expense Finance income In CHF / /10 Interest income Foreign exchange gains 10,600 1,031 Total finance income 10,680 1,100 Finance expense In CHF / /10 Interest expense ,170 Foreign exchange losses -11,543-2,165 Other finance expense Total finance expense -12,613-4, Income tax In CHF / /10 Current tax in respect of the current year -1,817-2,541 Adjustments in respect of prior periods Current tax -1,941-2,486 Current tax -1,941-2,486 Deferred tax 1,214 2,456 Income tax Deferred tax consisted of i) deferred tax assets of CHF 1,236,000 (prior year: CHF 2,150,000) from the origination and reversal of temporary differences and the resulting recognition of tax loss carryforwards, and ii) deferred tax liabilities of CHF 22,000 (prior year: deferred tax assets of CHF 306,000) from changes in tax rates. Deferred tax liabilities of CHF 1,049,000 (prior year: CHF 957,000) for temporary differences in connection with reinvested profits in subsidiaries were not recognized at the end of the fiscal year, as the Group is able to control the timing of reversal of these differences. Unused tax losses for which no deferred tax asset was recognized in the balance sheet were as follows: In CHF / /10 Expiry in 1 year 0 0 Expiry in 2 years 0 0 Expiry in 3 years 0 0 Expiry in 4 years Expiry in 5 years Expiry in more than 5 years 19,002 22,386 Total unused tax loss carryforwards 19,714 23,052

77 75 Reconciliation of earnings before tax to income tax expense: In CHF / /10 Profit before tax reported in the income statement 10,877 12,013 Nominal tax rate 17% 13% Expected income tax at nominal tax rate -1,811-1,592 Effect of non-recognition of tax loss carryforwards Effect of tax rates other than nominal tax rate Effect of expenses not deductible for tax purposes Effect of non-taxable income Utilization of previously unrecognized tax losses or gains 426 1,385 Adjustments in respect of prior periods Non-refundable witholding taxes Change in recognition of tax loss carryforwards Effect of changes in tax rates or of new taxes Other Income tax expense reported in the income statement Within this item, a gain of CHF 332,000 related to the acquisition made in the fiscal year under review, as existing tax loss carryforwards of Schaffner EMC Inc. can be utilized against future earnings of the new Group company, Schaffner MTC LLC. The Group s nominal tax rate for 2010/11 is 16.65% (prior year: 13.25%). This is calculated as the weighted average of the products of multiplication of each Group company s earnings before tax with the respective local statutory tax rate. At the balance sheet date, the deferred tax liabilities and assets were attributable to items in the balance sheet as follows: In CHF Intangible assets ,054 Property, plant and equipment Other non-current assets -1,543-1,542 Inventories 936 1,005 Trade receivables 13 6 Provisions Trade and other payables Tax loss carryforwards 1, Net deferred tax assets/(liabilities) Of which: Reported in the balance sheet as deferred tax liabilities -1,935-2,664 Reported in the balance sheet as deferred tax assets 2,683 2,196

78 76 17 Operating segments In the fiscal year under review the Schaffner Group consisted of three reportable segments: Electromagnetic Compatibility, Power Quality and Automotive. They represented the organizational units for which results were reported to the Executive Committee (the Group s chief operating decision maker). Segment operating profit includes all operating income and expenses incurred directly in the respective segment. Electromagnetic Compatibility (EMC) segment The EMC segment develops and manufactures standard and custom-made components designed to ensure the electromagnetic compatibility of electrical and electronic equipment and systems. Power Quality (PQ) segment The PQ segment develops and manufactures magnetic components and harmonic filters designed to ensure power quality in electric grids and the reliable operation of energy-efficient equipment and systems. Automotive (AM) segment The AM segment develops and manufactures components for safety and convenience features in automobiles, and EMC filters for hybrid and electric vehicles. The Corporate column comprises all costs for Group functions that cannot be allocated to a particular segment. These are primarily the expenses of Schaffner Holding AG and the acquisition costs. No operating segments have been aggregated to form these reportable operating segments. No reconciliation of the management reporting data to the financial reporting data is required or provided, as the internal and external reporting are governed by the same accounting policies. In CHF 000 EMC 2010/11 PQ 2010/11 AM 2010/11 Corporate 2010/11 Group 2010/11 Net sales 104,451 61,610 17, ,686 Segment operating profit/(loss) 18, ,425 13,023 Other income 355 Amortization of customer relationships -568 Operating profit [EBIT] 12,810 Finance income 10,680 Finance expense -12,613 Profit before tax [EBT] 10,877 Income tax -727 Net profit for the period 10,150 In CHF 000 EMC 2009/10 PQ 2009/10 AM 2009/10 Corporate 2009/10 Group 2009/10 Net sales 111,467 60,922 16, ,939 Segment operating profit/(loss) 18,255 3,066 1,548-6,777 16,092 Other income 469 Restructuring costs -949 Amortization of customer relationships -612 Operating profit [EBIT] 15,000 Finance income 1,100 Finance expense -4,087 Profit before tax [EBT] 12,013 Income tax -30 Net profit for the period 11,983

79 77 Information by region In the analysis below, net sales with external customers are allocated to regions according to the domicile of the Schaff ner company which generated the revenue. The non-current assets consist of property, plant and equipment and intangible assets in the respective countries. 2010/11 In CHF 000 Switzerland Rest of Europe Europe Asia North America Group Net sales 7, , ,552 52,375 14, ,686 Non-current assets 7,247 11,477 18,724 12,785 10,743 42, /10 In CHF 000 Switzerland Rest of Europe Europe Asia North America Group Net sales 6, , ,770 51,256 12, ,939 Non-current assets 7,322 12,117 19,439 10, ,689 Information by customer No single external customer represented 10% or more of net sales. 18 Share option plans Since 1 October 1998, the Group has been granting options over ordinary registered shares of Schaffner Holding AG to key executive management and to members of the Board of Directors. The awarding of such options is based on the Schaffner Holding AG Employee Share Option Plan 1998 (ESOP) before and after the changes to the ESOP on 13 November 2006 and on the Schaffner Holding AG Performance Option Plan (POP). The shares allocated to satisfy the combined obligations under the ESOP and POP comprise both (i) authorized unissued share capital of CHF 693,550, consisting of 21,340 registered shares of Schaffner Holding AG with a nominal value of CHF per share, and (ii) treasury shares. ESOP options issued after the plan amendment of 13 November 2006: Equity-settled share options granted after the plan amendment become vested ordinarily in four annual installments of 25% each, beginning one year after the grant date. Four years after the grant date, all granted options are thus ordinarily vested. Unexercised options expire seven years after the grant date. Performance Option Plan (POP): 100% of equity-settled POP share options ordinarily vest (when the non-vesting conditions are satisfied) provided that the performance target is reached at 30 September Unexercised options expire ten years after the grant date. Employee Share Option Plan (ESOP) options issued before the plan amendment of 13 November 2006: Equity-settled share options granted under the pre-amendment ESOP ordinarily vested in five annual installments of 20%, beginning one year after the grant date. Five years after the grant date, all granted options are thus ordinarily vested. The options were granted over three years in equal annual tranches. This resulted in a different vesting period for each tranche. Unexercised options expire ten years after the grant date.

80 78 Number of share options outstanding Average exercise price in CHF Number of share options outstanding Average exercise price in CHF At 1 October 88, , Granted in the year 8, , Exercised in the year -21, Expired/cancelled in the year -9, , At 30 September 66, , Of which: Vested 20, , Covered by authorized unissued share capital 21,340 21,340 Covered by treasury shares 4,791 4,391 Uncovered 40,291 62,382 At the balance sheet date, 11,896 of the vested share options were in the money (prior year: 23,240). The number of treasury shares required to satisfy obligations under share options is monitored on an ongoing basis and the number of shares held available is adjusted accordingly. In the year under review, share options with an exercise price of CHF were granted on 29 November 2010 (prior year: CHF and CHF ). The option grants made in the year under review will vest on 29 November The expiry date of the options issued in the year under review is 29 November The terms of the share options outstanding at the end of the fiscal year were as follows: Expiry date Number of share options Exercise price in CHF Number of share options Exercise price in CHF , , , , , , , , , , , , , , , , , , , , , , , , Total share options outstanding 66,422 88,113

81 79 The Enhanced American Model (a sophisticated binomial model) used to determine the fair value of the options granted is based on the following parameters: 2010/ /10 ESOP grant date ESOP grant date ESOP grant date Share price at grant date in CHF Expected volatility % 32.85% 32.85% Expected dividend yield 0.47% 0.47% 0.47% Risk-free interest rate 0.96% 1.64% 1.64% Expected life of option 5.07 years 5.07 years 5.07 years Expected staff departure rate per year after vesting period 5.00% 5.00% 5.00% Exercise price in CHF Fair value in CHF The expected volatility is calculated from historical long-term volatilities. These volatilities are based on daily returns from Schaffner s IPO (June 1998) to the respective grant date. The annualization of the volatility assumes 252 trading days. In the year under review, CHF 827,000 (prior year: CHF 748,000) was charged to the income statement for share option plans. Restricted share plans At 8 April 2008, key staff members in the ongoing SAP project were granted 850 restricted shares. This award vested subject to the condition that, at 30 June 2011, the beneficiaries were still employed at Schaffner and had worked successfully on the SAP project during the intervening period. Three of the employees left the Group during the vesting period; 692 restricted shares remained outstanding at the end of the fiscal year under review. The fair value of these restricted shares of CHF per share was charged to the income statement over the term of 39 months. In the year under review, CHF 37,000 (prior year: CHF 50,000) was charged to the income statement. At 28 January 2009, key staff members of the acquired BETEC-Engineering were granted 620 restricted shares. These shares carry full voting and dividend rights. The award will vest provided that the grantees are still employed at Schaff ner after four years. The fair value of these restricted shares of CHF 145 per share is charged to the income statement over the term of four years. In the year under review, CHF 22,000 (prior year: CHF 22,000) was charged to the income statement. At 1 September 2011, key staff members of the acquired division of MTC Transformers, Inc. were granted 570 restricted shares. These shares carry full voting and dividend rights. The award will vest provided that the grantees are still employed at Schaff ner after four years. The fair value of these restricted shares of CHF 258 per share is charged to the income statement over the term of four years. In the year under review, CHF 3,000 (prior year: CHF 0) was charged to the income statement. The members of the Executive Committee and other senior executive management are ordinarily entitled to subscribe for restricted shares, in a quantity determined by the Board of Directors, at a discount of 20% to the quoted market price of the Company s shares. These shares are subject to a four-year holding period. The difference between the fair value at the grant date and the amount paid by the staff member is recorded immediately in staff costs. In the year under review the participants purchased 933 such shares (prior year: 771), at an aggregate discount of CHF 61,000 (prior year: CHF 24,000).

82 80 19 Earnings per share Basic earnings per share Basic earnings per share are calculated by dividing the net profit for the period attributable to shareholders of Schaffner Holding AG by the weighted average number of ordinary shares outstanding during the reporting period, excluding ordinary shares purchased by the Group and held as treasury shares. 2010/ /10 Basic earnings per share Net profit for the period, in CHF ,150 11,983 Weighted average number of shares outstanding entitled to dividend 633, ,131 Basic earnings per share in CHF Diluted earnings per share Diluted earnings per share are calculated by dividing the net profit for the period attributable to shareholders of Schaffner Holding AG by the weighted average number of ordinary shares outstanding during the reporting period, including all shares that would result from the exercise of all potentially dilutive outstanding share options. 2010/ /10 Diluted earnings per share Net profit for the period, in CHF ,150 11,983 Relevant share options outstanding, in number of shares 24,525 6,379 Weighted average number of shares outstanding used in calculation of diluted earnings per share 657, ,510 Diluted earnings per share in CHF Treasury shares Number of shares Average share price in CHF At average price in CHF 000 At 1 October Purchase 1 5,639 1,094 Shares utilized for Employee Share Option Plan Shares utilized for restricted share plans Valuation differences -47 At 30 September , Purchase 1 23,127 7,356 Disposal Shares utilized for Employee Share Option Plan 2-21,124-4,115 Shares utilized for restricted share plans 1-1, Valuation differences -2,034 At 30 September , ,617 1 At share prices quoted at transaction date. 2 At exercise price.

83 81 21 Financial instruments The Schaffner Group has a variety of financial assets that arise directly from its own business operations (such as cash and cash equivalents, receivables, prepaid expenses and accrued income), as well as other non-current assets. At the balance sheet date, the fair values of the Group s financial assets did not differ from their carrying amounts. Financial assets Carrying amount Fair value In CHF Cash and cash equivalents 2 14,235 8,061 14,235 8,061 Receivables, prepaid expenses and accrued income 2 36,106 42,600 36,106 42,600 Other financial assets 1,2 1,652 1,555 1,652 1,555 Total financial assets 51,994 52,216 51,994 52,216 1 Excluding defined benefit assets and IFRIC 14 asset. 2 Classified to the loans and receivables category. The main financial liabilities of the Schaffner Group are bank borrowings and trade payables. These financial liabilities are principally intended to ensure the financing of the Group s dayto-day business operations. The fair values of the financial liabilities as a rule do not differ from their carrying amounts. At 30 September 2011 Schaffner also had an open interest rate swap position with a negative fair value of CHF 441,000 (prior year: CHF 137,000). The swap was designated as a cash flow hedge of future vari able interest payments. The variable interest payments relate to the Group s debt financing. The hedge was contracted on the following terms in July 2010: At the balance sheet date the management of the Schaffner Group considers that the credit facility will remain drawn in the amount of CHF 12 million until at least the expiry of the swap. In view of this circumstance and the matching other critical terms of the credit facility and the hedge, the Schaffner Group assesses this hedge as highly effective at the balance sheet date. The variable interest rate payments are due every quarter; the final such payment under this hedge is expected to occur in July In the year under review, as the hedge relationship is deemed highly effective, an unrealized loss of CHF 306,000 (prior year: CHF 115,000) was recognized in the statement of comprehensive income rather than in profit or loss. No hedging reserves had to be removed from equity and taken to profit or loss. Notional principal amount: CHF 12 million Maturity date: 26 July 2015 Reference rate: CHF 3-month LIBOR Fixed rate: %

84 82 Financial liabilities (including derivatives) Carrying amount Fair value In CHF Non-current borrowings , ,000 Current borrowings 1 34,559 1,749 34,559 1,749 Trade and other payables 1 30,953 34,279 30,953 34,279 Derivative financial instruments Total financial liabilities, including derivatives 65,953 54,165 65,953 54,165 1 Measured at amortized cost. 2 Classified as financial liabilities at fair value through profit or loss. The financial assets and liabilities measured at fair value are categorized into the following fair value hierarchy according to the valuation technique used: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Techniques for which all inputs that have a significant effect on the recorded fair value are based on directly or indirectly observable market data. Level 3: Techniques using inputs that have a significant effect on the recorded fair value and are not based on observable market data. Analysis by level in the fair value hierarchy 2010/ /10 In CHF 000 Level 2 Total Level 2 Total Liabilities measured at fair value Derivative financial instruments Total liabilities measured at fair value In the reporting period the Group had no financial assets or liabilities that were classified as Level 1 or Level 3 in the fair value hierarchy. There were also no reclassifications between levels.

85 83 Financial instruments In CHF 000 Loans and receivables Financial liabilities at amortized cost Financial liabilities at fair value through profit or loss Carrying amount at 30 September ,994 65, Interest income/(expense) Foreign exchange losses Net other finance expense Change in provision for doubtful debts Net loss recognized in the income statement , ,059 Net loss recognized in equity Total net loss in 2010/11-1,070-1, ,419 Carrying amount at 30 September ,216 54, Interest income/(expense) 69-1, ,101 Foreign exchange losses -1,134-1,134 Net other finance expense Change in provision for doubtful debts Net loss recognized in the income statement , ,758 Net loss recognized in equity Total net loss in 2009/10-1,372-1, ,206 1 From valuation of equity-like loans. 2 The foreign exchange gains/losses from intra-group loans are as a rule classified to the loans and receivables category. Total The most significant risks in connection with the Group s financial instruments are interest rate, foreign currency, credit and liquidity risk. The Audit Committee approves and reviews the guidelines for the monitoring, reporting and control of all these risks, which are summarized below. Interest rate risk The Schaffner Group s exposure to risk from fluctuations in interest rates was related primarily to short-term interestbearing financial assets and financial liabilities such as bank loans. In the reporting period the Group entered into hedges in the form of interest rate swaps in order to reduce the interest rate risk on bank loans, which is tied to 3-month LIBOR. The table below presents the sensitivity of profit before tax (EBT) to a reasonably possible change in interest rates when all other variables are held constant. The change in interest rates in basis points is based on the actual range of fluctuation observed during the respective fiscal year. 2010/ /10 Decrease in basis points Effect on EBT in CHF 000 Decrease in basis points Effect on EBT in CHF 000 CHF EUR USD An increase in interest rates by the same number of basis points as that shown in the preceding table produces an effect equal and opposite to that shown.

86 84 Foreign exchange risk Its worldwide activities and focus on exports expose the Schaffner Group to currency risks arising from the purchase and sale of goods in foreign currencies which are not invoiced in the functional currency of the respective subsidiary. This foreign exchange risk arising from business operations can be reduced by buying and selling primarily in the subsidiary s own foreign currency (natural hedging). As well, on a monthly basis, Schaffner analyzes and quantifies the foreign exchange risks and assesses the need for risk management measures under internally defined foreign exchange guidelines, which require an intervention whenever the calculated value-at-risk exceeds 10% of budgeted EBIT. The table below shows the sensitivity of profit before tax (EBT) and of shareholders equity to a reasonably possible movement in the exchange rates of the euro, US dollar and Thai bath against the Swiss franc when all other variables are held constant. Increase in % 2010/ /10 Effect on EBT in CHF 000 Effect on equity in CHF 000 Increase in % Effect on EBT in CHF 000 Effect on equity in CHF 000 EUR / CHF 13 1, USD / CHF THB / CHF A decrease in exchange rates by the same percentage amounts shown in the preceding table produces an equal, opposite effect on EBT and equity. The percentage movement in exchange rates is based on the actual range of fluctuation during the respective reporting period. The calculation of foreign currency risk includes all material holdings of financial instruments that are not reported in the functional currency of the respective Group company. The effect on equity arises from foreign exchange differences on equity-like loans between Group companies denominated in euros and US dollars. Credit risk Cash and cash equivalents When investing cash, the Schaffner Group is exposed to losses from credit risks in the event that financial institutions do not fulfill their obligations. In order to minimize this risk, the Group spreads its cash and cash equivalents among a number of banks and invests only in safe instruments with low default risk. The table below shows the amounts of cash and cash equivalents held at the three largest counterparties at the balance sheet date. Creditworthiness of key counterparties In CHF 000 Rating Balance Rating Balance Bank A A 3,017 A 1,413 Bank B A 2,605 A 1,214 Bank C BBB 2,341 AA- 565 Other counterparties 5,406 4,831 Total cash and cash equivalents, other than cash in hand and banker s acceptances 13,369 8,023

87 85 Trade receivables The Schaffner Group markets a wide range of products. Concentration risks in connection with trade receivables are limited as a result of the Group s large, diverse and global customer base. The Group companies locally regularly assess and monitor receivables balances and adherence to payment terms. Impairment risks on receivables are provided for collectively on the basis of historical experience, and through individual impairment provisions. Receivables are only written off when there is sufficient evidence that no further payment is likely. Past experience has shown the risk of trade receivables impairment to be relatively low. Provision for doubtful debts In CHF / /10 At 1 October Additions Amounts used Reversal of unused amounts Exchange differences At 30 September The ageing of trade receivables is detailed in the following table: Total Not overdue Overdue less than 30 to to 90 more than In CHF days days days 90 days Trade receivables at 30 September ,426 24,368 4,776 1, ,045 Trade receivables at 30 September ,885 28,646 4,947 2, The Schaffner Group s maximum exposure to credit risk at 30 September 2011 amounted to CHF 52.0 million (prior year: CHF 52.2 million), which represented all financial assets. Liquidity risk Liquidity risk is the risk that the Schaffner Group will no longer be fully able to meet its financial obligations. The Schaffner Group monitors its liquidity risk and strives to avoid liquidity shortages through prudent liquidity management. In addition, six-month bottom-up rolling liquidity and cash flow forecasts are generated monthly. The following table provides an overview of the maturity structure of the Schaffner Group s financial liabilities at the balance sheet date based on all contractual payment obligations (undiscounted).

88 86 Carrying amount Total Cash outflows due in less than 1 month 1 to 3 months 3 to 12 months 1 to 5 years In CHF 000 Non-current financial liabilities Interest rate swap Current financial liabilities 2 65,512 66, ,717 38, Of which hedged loans 1 12,441 12, , Of which unhedged loans 5,616 5, ,616 0 Total financial liabilities at 30 September ,953 66, ,717 39, Non-current financial liabilities 18,137 18, ,571 Of which hedged 1 12,137 12, ,535 Interest rate swap Of which unhedged 1 6,000 6, ,036 Current financial liabilities 36,028 36,028 19,538 7,579 8,911 0 Total financial liabilities at 30 September ,165 54,962 19,640 7,579 9,172 18,571 1 Including interest margin. 2 At the balance sheet date all bank borrowings of the Schaffner Group are presented as current liabilities. In this table the associated outflows are therefore shown in the 3 to 12 months column, although a renewal of these facilities is probable at the balance sheet date. Capital management The primary objectives of capital management in the Schaffner Group are to safeguard the business as a going concern and ensure sustained growth in the Group s value. In its financial management the Group uses a system of financial ratios and other metrics. These control parameters, which are tailored to the business model, relate to liquidity, growth and profitability. To monitor its capital structure, the Schaffner Group uses a gearing ratio, defined as the ratio of net debt to shareholders equity. The capital structure is designed to ensure sufficient equity to cover the business risks and secure the Group s financial flexibility. Borrowings must not exceed an amount that the Group can repay in the medium term out of free cash flows. In CHF Non-current borrowings ,137 Current borrowings 34,559 1,749 Cash and cash equivalents -14,235-8,061 Net debt 20,765 11,825 Shareholders equity 56,929 55,979 Gearing ratio 36% 21% 22 Related parties All transactions with related parties are conducted at arm s length. All transactions with subsidiaries were completely eliminated on consolidation. Compensation of Executive Committee and Board of Directors The following compensation was paid to members of the Executive Committee: In CHF / / 10 Short-term compensation (base salaries, variable cash compensation and benefits in kind) 2,593 3,305 Share-based payments expense Contributions to pension plan Total compensation of Executive Committee 3,200 3,958 1 The expense for the options granted is spread over the vesting period (see note 18 on page 77). The market value of the 3,420 options granted in the year under review, at an exercise price of CHF (prior year: 4,950 options at an exercise price of CHF ), was CHF 261,000 (prior year: CHF 233,000).

89 87 In the year under review, members of the Board of Directors were paid fees and expense allowances (including flat expense allowances) of CHF 304,000 (prior year: CHF 354,000) and were granted 1,620 share options (prior year: one installment of 1,000 options and one installment of 2,000 options) at an exercise price of CHF (prior year: CHF and CHF , respectively). Disclosures under the Swiss Code of Obligations on compensation of the Executive Committee and Board of Directors are set out on page 92 in the notes to the Company financial statements of Schaffner Holding AG. Swiss pension funds The Group s pensions in Switzerland are administered by legally separate funds in the form of foundations. In the year under review a total of CHF 1.5 million (prior year: CHF 1.5 million) was paid to these foundations. At the balance sheet date the Group had a net receivables balance of CHF 34,322 with the foundations (prior year: CHF 86,619). As in the prior year, at the balance sheet date the pension fund held no ownership interests in Schaffner Holding AG. 23 Risk assessment The Board of Directors of Schaffner Holding AG evaluates the risks to the Group through systematic risk identification and analysis. On this basis, risk management measures are formulated and their implementation and results are continually monitored. The Group uses a risk management system which is designed for the timely detection, evaluation and mitigation of risks. 24 Release of the consolidated financial statements for publication The consolidated financial statements were released by the Board of Directors of Schaffner Holding AG on 2 December 2011 for publication and will be presented to shareholders for adoption at the Annual General Meeting on 12 January Events after the balance sheet date No events have occurred after the balance sheet date that have a material effect on the amounts in the consolidated financial statements. 26 Companies of the Schaffner Group The following companies results were included in the Schaffner Group s consolidated financial statements at 30 September 2011: Company Registered office Capital in 000 Group s interest in % Schaffner Holding AG Luterbach, Switzerland CHF 20, Schaffner Trading AG Luterbach, Switzerland CHF Schaffner EMV AG Luterbach, Switzerland CHF 14, Schaffner Oy Lohja, Finland EUR Schaffner EMC S.A.S. Illzach, France EUR 5, Schaffner Ltd. Wokingham, UK GBP Schaffner EMV Hungary Kft. Kecskemét, Hungary HUF 8, Schaffner EMC S.r.l. Milan, Italy EUR Schaffner Deutschland GmbH Büren, Germany EUR Schaffner EMC AB Sollentuna, Sweden SEK Schaffner EMC Inc. Edison, NJ, USA USD 1, Schaffner MTC LLC Wytheville, VA, USA USD 2, Schaffner EMC Ltd. Shanghai, China CNY 52, Schaffner EMC K.K. Tokyo, Japan JPY 10, Schaffner EMC Pte. Ltd. Singapore SGD 1, Schaffner EMC Co. Ltd. Lamphun, Thailand THB 140, Schaffner EMV Ltd. (Taiwan Branch) Taipei, Taiwan TWD 5,

90 Report of the statutory auditor on the consolidated financial statements 88 To the General Meeting of Schaffner Holding AG, Luterbach As statutory auditor, we have audited the consolidated financial statements of Schaffner Holding AG, which comprise the balance sheet, income statement, statement of comprehensive income, cash flow statement, statement of changes in equity and notes (pages 54 to 87) for the year ended 30 September Board of Directors responsibility The Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Opinion In our opinion, the consolidated financial statements for the year ended 30 September 2011 give a true and fair view of the financial position, the results of operations and the cash flows in accordance with IFRS and comply with Swiss law. Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors. We recommend that the consolidated financial statements submitted to you be approved. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards and International Standards on Auditing (ISA). Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Berne, 2 December 2011 Ernst & Young AG Bernadette Koch Licensed audit expert (Auditor in charge) Pascal Kocher Licensed audit expert

91 Company financial statements of Schaffner Holding AG 89 Balance sheet In CHF Loan to Schaffner EMV AG 3,000 9,000 Investments in subsidiaries 85,251 85,251 Non-current assets 88,251 94,251 Receivables from subsidiaries 1, Other receivables, and prepaid expenses with non-group entities Securities and term deposits Cash and cash equivalents Current assets 2,479 1,754 Total assets 90,730 96,005 Share capital 20,668 20,668 General legal reserve 4, Reserve for treasury shares 1, Share premium 47,515 50,357 Retained earnings 13,881 17,153 Net (loss)/profit for the period -1,193 1,263 Shareholders equity 86,622 90,659 Liabilities to subsidiaries 2,983 3,493 Non-current borrowings Current borrowings Other liabilities to non-group entities Accrued expenses 966 1,105 Total liabilities 4,108 5,346 Total liabilities and shareholders equity 90,730 96,005 Income statement (year ended 30 September) In CHF / / 10 Other income 5,303 6,494 Total income 5,303 6,494 Staff costs -3,457-3,287 Operating expenses -2,738-2,266 Interest expense Other finance expense Interest income 455 1,429 Foreign exchange losses on financing, net Income tax Net (loss)/profit for the period -1,193 1,263

92 Notes to the Company financial statements 90 Guarantees and pledged assets In CHF Guarantees 49,500 33,348 Of which utilized in subsidiaries in respect of credit obligations 34,559 19,749 As the Group s Swiss companies are treated as a single entity for the purposes of value-added tax, Schaffner Holding AG has joint and several liability for the Swiss subsidiaries VAT obligations to the Swiss federal tax authority. Under Group-wide agreements with Commerzbank and Credit Suisse, Schaffner Holding AG as a participant in the Group s cash pool has joint and several liability to the extent of its free reserves. Issued share capital The Company has issued share capital of CHF 20,668,050, consisting of 635,940 ordinary registered shares with a nominal value of CHF per share. The issued shares are fully paid. Each share carries one vote at the General Meeting. All shares not held by the Company or one of its subsidiaries attract dividends. Authorized but unissued capital The Company has authorized but unissued share capital with a total nominal value of CHF 693,550 (21,340 ordinary registered shares at CHF per share). This capital is allocated to satisfying obligations under the share option plans. At 30 September 2011 there were 66,422 share options outstanding, each relating to the purchase of one share of Schaffner Holding AG. In the year under review no options were exercised out of authorized unissued share capital. Direct investments in subsidiaries Schaffner EMV AG, Luterbach, Switzerland: 100% of the share capital of CHF 14 million. Schaffner Trading AG, Luterbach, Switzerland: 100% of the share capital of CHF 0.25 million. Schaffner EMV Hungary Kft., Kecskemét, Hungary: 2% of the share capital of HUF 8 million. Release of the Company financial statements for publication The Company financial statements were released by the Board of Directors of Schaffner Holding AG on 2 December 2011 for publication and will be presented to the shareholders for adoption at the Annual General Meeting on 12 January Information about treasury shares The reserve for treasury shares was CHF 1,617,489. In the balance sheet at 30 September 2011, treasury shares were measured at the average exercise price of the share options (CHF ). In the year under review, 21,124 options were exercised, at an average price of CHF each.

93 91 Number of shares Fair value per share in CHF Average price per share in CHF At fair value in CHF 000 At average price in CHF 000 At 1 October Purchase 1 5,639 1,094 1,094 Shares utilized for Employee Share Option Plan Shares utilized for restricted share plans Value changes At 30 September , Purchase 1 23,127 7,356 7,356 Disposal Shares utilized for Employee Share Option Plan 3-21,124-4,115-4,115 Shares utilized for restricted share plans 1-1, Value changes 2-2,732-2,034 At 30 September , ,617 1 At share prices quoted at transaction date. 2 Year-end closing price or average exercise price of the options, whichever was less. 3 At exercise price. Significant shareholders Number of shares Equity interest Number of shares Equity interest Alpine Select AG 1 131, % 156, % Sarasin Investmentfonds AG "SaraSelect" 61, % 61, % Buru Holding AG 50, % 47, % UBS 30, % 32, % SUVA (Swiss National Accident Insurance Fund) 20, % 20, % Axa Swiss Institutional Fund 17, % 20, % Corisol Holding AG 16, % 21, % Shareholders with interests of less than 3% 302, % 272, % Free float 631, % 631, % Treasury shares 4, % 4, % Total shares outstanding 635, % 635, % 1 Including Sumara AG and Fabrel AG (together forming an organized group within the meaning of section 10 of the Ordinance of the Swiss Financial Market Supervisory Authority on Stock Exchanges and Securities Trading). Compensation of the Executive Committee and Board of Directors The remuneration of the members of the Board of Directors and Executive Committee consist primarily of fees, salaries, variable compensation, options under the share option plans, and other compensation, such as contributions to rental or travel costs. The variable compensation is dependent upon corporate financial results and the achievement of personal performance targets. It is paid out after the Board of Directors, based on recommendations of the Nomination & Compensation Committee, has confirmed the extent of target achievement. The variable compensation is ordinarily allotted and paid after the annual financial statements have been adopted by the Annual General Meeting. All variable compensation is presented on an accrual basis, which means that any variable compensation shown under a given fiscal year was accrued in that fiscal year. The expense for share-based payments consists of the market value of granted share options attributable to the respective fiscal year.

94 92 Board of Directors in 2010/11 Cash fees and base salaries 3 Variable compensation Pension costs Share-based 2 payments expense 1 Other compensation In CHF 000 Daniel Hirschi, Chairman Herbert Bächler Hans Hess Robert F. Spoerry (retired 31 March 2011) Markus Zenhäusern Total compensation of Board of Directors Total Executive Committee in 2010/11 In CHF 000 Alexander Hagemann Total for all other members of the Executive Committee 1, ,305 Total compensation of Executive Committee 1, ,141 1 At market value in accordance with IFRS 2 (see note 18 on page 77). 2 Including for Alexander Hagemann CHF 26,000 and for the other members of the Executive Committee, CHF 28,000 for discounts under the restricted share plan (see note 18 on page 77). 3 Excluding flat expense allowances. Board of Directors in 2009/10 Cash fees and base salaries 3 Variable Pension costs Share-based compensation 2 payments expense 1 Other compensation In CHF 000 Daniel Hirschi, Chairman (appointed ) Leo Steiner (retired 13 January 2010) Herbert Bächler Hans Hess Peter E. Rued (retired 13 January 2010) Robert F. Spoerry Markus Zenhäusern Total compensation of Board of Directors Total Executive Committee in 2009/10 In CHF 000 Alexander Hagemann ,033 Total for all other members of the Executive Committee 1, ,925 Total compensation of the Executive Committee 1,922 1, ,958 1 At market value in accordance with IFRS 2 (see note 18 on page 77). 2 Including, for the other members of the Executive Committee, CHF 24,000 for discounts under the restricted share plan (see note 18 on page 77). 3 Excluding flat expense allowances.

95 93 Holdings of shares, options and conversion rights Number of shares held Number of share options held Number of shares held Number of share options held Vested Not vested Total Vested Not vested Total Board of Directors Daniel Hirschi, Chairman ,410 1, ,000 1,000 Herbert Bächler Hans Hess 1, ,033 1,033 1, ,150 1,750 Robert F. Spoerry (retired 31 March 2011) 1,200 1,660 1,190 2,850 Markus Zenhäusern , ,000 Total holdings of the Board of Directors 2, ,083 4,833 3,440 2,385 4,715 7,100 Executive Committee Alexander Hagemann, Chief Executive Officer 1,000 1,437 13,618 15, ,000 13,725 14,725 Kurt Ledermann, Chief Financial Officer ,458 5, ,313 4,608 Fabian Beck, Vice President, Research & Development ,823 4, ,610 3,940 5,550 Jean-Michel Calleri, Vice President, Sales Europe ,125 1, ,420 1,130 2,550 Ah Bee Goh, Vice President, Manufacturing ,150 4, ,100 4,400 Eduard Hadorn, Vice President, Business Development Asia ,125 4, ,165 4,950 Martin Köppel, Vice President, Supply Chain Management ,698 3, ,210 3,740 4,950 Total holdings of the Executive Committee 3,949 4,026 34,997 39,023 2,693 6,620 35,113 41,733 In the year under review, Schaffner did not grant any loans or other credit to current members of the Board of Directors, members of the Executive Committee or parties related to them. Risk assessment The Board of Directors of Schaffner Holding AG evaluates the risks to the Group through systematic risk identification and analysis. On this basis, risk management measures are formulated and their implementation and results are continually monitored. The Group uses a risk management system which is designed for the timely detection, evaluation and mitigation of risks.

96 Proposal for the appropriation of retained earnings 94 The Board of Directors proposes to the Annual General Meeting to allocate retained earnings as follows: In CHF / /10 Net (loss)/profit for the period -1,193 1,263 Earnings brought forward 14,621 17,957 Change in reserve for treasury shares Retained earnings available for distribution 12,690 18,416 Allocation to general legal reserve 0-3,795 Earnings carried forward 12,690 14,621 The Board of Directors also proposes to the Annual General Meeting to allocate share premium (the reserve for additional paid-in capital) as follows: In CHF / /10 Distributable share premium reserve brought forward 0 0 Transfer from share premium account to distributable share premium reserve 2,840 2,862 Distribution of CHF 4.50 per share entitled to dividends, exempt from Swiss anticipatory tax -2,840-2,862 Distributable share premium reserve carried forward 0 0 Total shares outstanding 635, ,940 Treasury shares -4,791-4,391 Shares entitled to dividends 1 631, ,549 1 Shares entitled to dividends are those shares not held by the Company or one of its subsidiaries.

97 Report of the statutory auditor on the financial statements 95 To the General Meeting of Schaffner Holding AG, Luterbach As statutory auditor, we have audited the financial statements of Schaffner Holding AG, which comprise the balance sheet, income statement and notes (pages 89 to 93) for the year ended 30 September Board of Directors responsibility The Board of Directors is responsible for the preparation of the financial statements in accordance with the requirements of Swiss law and the company s articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements for the year ended 30 September 2011 comply with Swiss law and the company s articles of incorporation. Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 Code of Obligations (CO) and article 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements according to the instructions of the Board of Directors. We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company s articles of incorporation. We recommend that the financial statements submitted to you be approved. Berne, 2 December 2011 Ernst & Young AG Bernadette Koch Licensed audit expert (Auditor in charge) Pascal Kocher Licensed audit expert

98 Selected addresses of the Schaffner Group 96 Headquarters and global innovation and development center Switzerland Schaffner Group Nordstrasse Luterbach T F info@schaffner.com Sales and application centers China Schaffner EMC Ltd. Shanghai T20-3, No 565 Chuangye Road Pudong New Area Shanghai T F / 02 cschina@schaffner.com Germany Schaffner Deutschland GmbH Schoemperlenstrasse 12B Karlsruhe T F germanysales@schaffner.com Finland Schaffner Oy Tynninkuja Lohja T F finlandsales@schaffner.com France Schaffner EMC S.A.S. 112, Quai de Bezons Argenteuil T F francesales@schaffner.com Italy Schaffner EMC S.r.l. Via Galileo Galilei, Cinisello Balsamo (MI) T /47 F italysales@schaffner.com Japan Schaffner EMC K.K. Mitsui-Seimei Sangenjaya Bldg. 7F , Kamiuma, Setagaya-ku Tokyo T F japansales@schaffner.com Sweden Schaffner EMC AB Turebergstorg 1, Sollentuna T / 22 F swedensales@schaffner.com Switzerland Schaffner EMV AG Nordstrasse Luterbach T F sales@schaffner.ch Singapore Schaffner EMC Pte Ltd. Blk 3015A Ubi Road Kampong Ubi Industrial Estate T F singaporesales@schaffner.com Spain Schaffner EMC España Calle Caléndula 93, Miniparc III, Edificio E El Soto de la Moraleja, Alcobendas Madrid T spainsales@schaffner.com Taiwan Schaffner EMV Ltd. 6th Floor, No 413 Rui Guang Road Neihu District Taipei City 114 T F taiwansales@schaffner.com Thailand Schaffner EMC Co. Ltd. Northern Region Industrial Estate 67 Moo 4 Tambon Ban Klang Amphur Muang P.O. Box 14 Lamphun T F thailandsales@schaffner.com UK Schaffner Ltd. 5 Ashville Way Molly Millars Lane Wokingham Berkshire RG41 2PL T F uksales@schaffner.com USA Schaffner EMC Inc. 52 Mayfield Avenue Edison, New Jersey T F usasales@schaffner.com

99 Important note regarding forward-looking statements This report contains forward-looking statements, which may be identified by the use of expressions such as could, propose, opens up opportunities, outlook, attracti ve, or similar wording. Such forward-looking statements reflect management s current opi nion and are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achie vements of the Schaffner Group to differ mate rially from those contained or implied in such statements. These include, but are not limited to, risks related to the success of and demand for the Group s products, the potential for its products to become obsolete, the Group s abi lity to protect its patents, the Group s ability to develop and market new products quickly enough, the rapidly changing and competitive environment in which the Group operates, the regulatory environment, fluctuation in foreign exchange rates, the Group s ability to genera te revenue and net profits, and its ability to carry out expansion or cost control projects in a timely manner. Should one or more such risks or uncertainties materialize or come to bear, or should underlying assumptions prove incorrect, the actual results could differ ma terially from the outcomes suggested in this report. The information in this report repre sents Schaffner s best knowledge at the time of publication. Schaffner does not undertake any obligation to update any forward-looking statements contained herein, whether as a result of new information, future events or otherwise. About this report Schaffner Holding AG, December 2011 Publication and production: Schaffner Holding AG; Luterbach Concept and consulting: apr AG; Zollikon-Zürich Text: apr AG; Zollikon-Zurich, Iris Kallin; Berlin Design concept and prepress: W4 Marketing AG; Zürich/Wettingen/Dresden Printing: Köpfli & Partner AG; Neuenhof Photography: flamisch photography, Düsseldorf, istockphoto, Shutterstock images Translation of non-financial sections: CLS Communication; Basel Translation of financial report, corporate governance section and management s preface: Martin Focken; North Bay, Canada

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