First Signs of an Economic Recovery

In 2003, orders received totaled CHF 1908 million, which corresponds to an increase of 4% (0% in nominal terms). At CHF 1826 million (2002: CHF 1946 million), sales fell by 6% in nominal terms but only by 3% in adjusted terms, as a result of difficult market conditions. The higher level of order backlog at the end of 2003 (+14% to CHF 675 million vs. CHF 592 million in 2002) augurs well for sales growth in 2004.

Net Income and Operating Income Lower than in the Previous Year Due to Special Factors

Exceptionally high contributions from real estate disposals and the divestiture of Sulzer Burckhardt had a very positive impact on the result in 2002, while one-off restructuring costs of CHF 23 million depress the result for 2003. Accordingly, at CHF 62 million, the Corporation's operating income (EBIT) is down against the previous year. (2002: CHF 136 million). Net income therefore fell to CHF 41 million (2002: CHF 83 million).  

Core Divisions' Operating Income Records a 10% Increase Excluding Exceptional Items

Operating income before goodwill amortization (EBITA) for the core divisions amounts to CHF 84 million (2002: CHF 97 million). When adjusted for the one-off restructuring costs of CHF 23 million at Sulzer Pumps, operating income before goodwill amortization stands at CHF 107 million, which corresponds to an increase of 10%. Sulzer Pumps and Sulzer Chemtech improved their operating income considerably.   

Individual Results for the Core Divisions

Sulzer Metco, a provider of surface coating technologies and services, faced extremely difficult market conditions, particularly the aviation and the energy segment lagged simultaneously. At CHF 423 million (2002: CHF 430 million), order intake remained stable overall, thanks to an upswing in business during the fourth quarter; sales, however, fell to CHF 424 million (2002: CHF 465 million) and were thus 10% down from the previous year in adjusted terms. The return on sales (EBITA/sales) dropped from 5.4% to 4%, this decline was caused by insufficient capacity utilization and sustained price pressure. Capacities were reduced accordingly. Sulzer Metco anticipates a slight recovery this year in its core markets and expects to better match expectations in terms of growth and profitability. 

In terms of volume, Sulzer Turbomachinery Services matched its previous year figure, despite major challenges in the North American market. Power utilities frequently postponed maintenance jobs, and the increased activity of OEMs intensified the competition in this segment. Nevertheless, orders for CHF 197 million (2002: CHF 193 million) and sales of CHF 200 million (2002: CHF 194 million) were booked. In adjusted terms, this corresponds to a slight decline of 1% in order intake, while sales remain unchanged. The return on sales (EBITA/sales) is 9.5% (2002: 11.3%), which is a good performance, in view of the market situation in 2003. Sulzer Turbomachinery Services expects a moderate improvement of performance in 2004.

Sulzer Pumps, the largest Sulzer division, reports an increase in orders received and a reduction in sales compared to the previous year. Order intake increased nominally by 1%, (7% in adjusted terms) to CHF 951 million (2002: CHF 942 million). Sales declined to CHF 870 million (2002: CHF 934 million), due in particular to exchange-rate factors. In local currencies, the decrease is 2%. The far-reaching restructuring launched in 2003 had a one-time impact on the return on sales (2.9% vs. 4.1% in the previous year); adjusted for this special factor, the return on sales improved significantly to 5.5%, clearly above the previous year's figure. Part of this rise can be attributed to the initial success of the restructuring program. Sulzer Pumps aims to steadily increase its operating margin to at least 8% by 2006.

Sulzer Chemtech, a major global provider of components and services for separation columns and static mixing, recorded a good development in 2003 and improved virtually all of its key operating figures. At CHF 312 million, orders received are 4%, (adjusted: 8%) up over the previous year (CHF 299 million). Sales rose to CHF 307 (2002: CHF 290 million), which corresponds to growth of 9% in adjusted terms. The return on sales (EBITA/sales) improved substantially to an attractive 7.5% (2002: 4.1%). Sulzer Chemtech looks with confidence onto the current business development and expects to improve its results further in 2004.

Sulzer Hexis has achieved major technological progress with the "HXS 1000 Premiere“ pre-series unit. The service life of the fuel cell stack and the reliability of the entire system have been improved. The development of the near-series product will benefit from these results and will be optimized with regards to lower cost, size, and weight. Build-up costs that are charged to the operating income were contained at CHF 16 million in 2003 (2002: CHF 15 million) without slowing down the development activities. The objective in 2004 is to prove the functioning of several pilot systems under close-to-real operating conditions, in order to plan thereafter the further steps toward commercialization.

The decrease of order intake and net sales at Other is largely due to the discontinuation of Sulzer International's activities. The 2003 figures refer mainly to Sulzer Innotec. Once again Real Estate recorded a high operating income in the reporting year but, as expected, fewer properties were sold than in the previous year. The operating income for Other is at CHF 25 million (2002: CHF 61 million).

Outlook

Sulzer expects a positive development in order intake over the coming months. The Asian markets are likely to remain buoyant, while the North American and the European markets should recover slowly. Performance in North America will be particularly important for business progress. The high level of order backlog at the end of the year 2003 (CHF 675 million against CHF 592 million in 2002) is a good sign for future sales. In 2003, the Corporation has initiated major operational improvements, some of which have already been implemented. The core divisions expect to increase the operating income; this will impact positively the Corporation's net income.

Dividend

At the annual general meeting of shareholders on April 29, 2004 the board of directors will propose a dividend of CHF 6.00.

A more detailed explanation of Sulzer's annual results can be found in the excerpt listed after the key figures, taken from the "Report by the Chairman of the Board and the CEO".

Key figures of the corporation (in million CHF)

	2003	2002	in %	in %, adjusted1)
Orders received	1908	1917	0	+4
Net sales	1826	1946	-6	-3
Operating income before goodwill amortization   (EBITA)	89	149	-40
Goodwill amortization	27	30	-10
Income from disposal of discontinuing operations	-	17	-
Operating income (EBIT)	62	136	-54
Net income	41	83	-51
Net income per share (in CHF)	12	24	-
Personnel employed as of December 31	8999	9113	-1

¹⁾ adjusted for acquisition, divestiture, and currency effects

Key figures by division (in million CHF)

Orders received	2003	2002	in %	in %, adjusted1)
Core divisions	1883	1864	1	5
Sulzer Metco	423	430	-2	0
Sulzer Turbomachinery Services	197	193	2	-1
Sulzer Pumps	951	942	1	7
Sulzer Chemtech	312	299	4	8
Venture division (Sulzer Hexis)	0	2	-	-
Other	25	51	-51	-
Continuing operations	1908	1917	0	4

¹⁾ adjusted for acquisition, divestiture, and currency effects

Net sales	2003	2002	in %	in %, adjusted1)
Core divisions	1801	1883	-4	-2
Sulzer Metco	424	465	-9	-10
Sulzer Turbomachinery Services	200	194	3	0
Sulzer Pumps	870	934	-7	-2
Sulzer Chemtech	307	290	6	9
Venture division (Sulzer Hexis)	2	2	-	-
Other	23	61	-62	-
Continuing operations	1826	1946	-6	-3

¹⁾ adjusted for acquisition, divestiture, and currency effects

Operating income before goodwill amortiz. (EBITA)	2003	2002	in %
Core divisions	84	97	-13
Sulzer Metco	17	25	-32
Sulzer Turbomachinery Services	19	22	-14
Sulzer Pumps	251)	38	-34
Sulzer Chemtech	23	12	+92
Venture division (Sulzer Hexis)	-16	-15	-
Other	25	61	-59
Continuing operations	93	143	-35
Discontinuing operations	-4	6	-
Total	89	149	-40

¹⁾ After one-time charge of CHF -23 million

Excerpt of the Report by the Chairman of the Board and the CEO

The year 2003 brought major challenges for our company—the first half of the year was affected by a generally slow economy and in particular by the depressed aerospace and power generation markets in the US. Thereafter, signs of a global economic recovery impacted positively on sentiment. Whereas the demand for capital goods in North America remained low, the economic upswing in China was impressive.

Discounting exceptional items, our core divisions increased their overall operating income and currency adjusted order intake in 2003, despite the demanding market situation. Although several special factors caused the company’s net income to remain well below that of the previous year, we remain confident—our strategy and business portfolio are clearly focused, our divisions occupy leading positions in the market and technology, and our financial base is healthy. A number of measures introduced will take effect in the current year, and the market situation should continue to improve. Therefore, we expect an improved performance in 2004.

Strategy
Following fundamental reorientation of the Sulzer Corporation between 1999 and 2001, a policy of continuous, focused strategic development has been pursued since 2002. The Corporation’s business portfolio provides attractive opportunities for value creation. The measures to highlight this potential in income have two focal points: operating improvements and profitable growth.

The divisions are constantly working to improve operations and increase operating income. A prime example of this is the restructuring program at Sulzer Pumps. Although the operating performance of this division was much better in 2003 than in the previous year, we decided to undertake more extensive measures. The potential of this division clearly exceeds the historical return on sales of 4 to 5%. We aspire to convert this potential for value enhancement into real profit. We consider the consistent fostering of profitable growth to be another important means with which to enhance value. Taking the economic situation and the currency impact into account, the organic growth of the core divisions has developed well over the last three years. This development underlines the quality of the products, services, and customer relationships of our divisions.

We intend to supplement this sound basis further by means of acquisitions. During the last year, we have made just two out of ninety reviewed acquisition candidates. This supposed contradiction can be explained by the fact that we have an ambitious, albeit disciplined, strategy. In order for us to carry out an acquisition, it must satisfy strategically, operationally, and financially high standards. In the interests of our shareholders, we feel obliged to resist the temptation of rapid but value-diluting growth. Instead, we consistently pursue sustainable increase in the company’s value. You can be sure that Sulzer’s management will continue to do all it can to actively expand the Corporation—while ensuring to carefully employ the funds with which it is entrusted.

Results
At first glance, direct comparison of the company’s key figures with those for the previous year is disappointing: sales, operating income, and net income are down from 2002. On closer inspection, the overall picture is better.

Orders received—an indicator of future sales—totaled CHF 1908 million and were thus approximately on par with the prior year level. However, if this figure is adjusted to account for exchange rates, divestitures, and acquisitions, growth equals 4%, and even 5% for the core divisions. At CHF 1826 million, consolidated net sales fell by 6% in nominal terms against the previous year’s figure. This reflects the low order backlog at the start of the year and a negative currency effect. In local currency and adjusted for acquisitions/divestitures, the decline is 3%; 2% in the core divisions, where the gross margin is 28.2%, slightly higher than in 2002 (27.9%). The high order backlog at the end of the year in review (CHF 667 million, 2002 CHF 581 million) gives us confidence for sales growth in 2004.

Operating income before goodwill amortization (EBITA) is CHF 89 million and is therefore clearly below the previous year’s figure. Several factors have contributed to this decline. The previous year’s figure included significant contributions from real estate sales. In 2003, one-off exceptional expenses of CHF 23 million for restructuring at Sulzer Pumps negatively impacted the result. If the operating performance of the core divisions is compared without this exceptional cost, operating income rose by 10% from CHF 97 million to CHF 107 million. Correspondingly return on sales rose from 5.1% to 5.9%. This increase can be attributed to the clear improvements at Sulzer Pumps and Sulzer Chemtech, which more than compensated for the disappointing development recorded by Sulzer Metco. Thanks to good project management and prudence, the CHF 16 million deficit of Sulzer Hexis was only slightly above that of the previous year (CHF 15 million). As expected, “Other” operating income fell very sharply from CHF 61 to 25 million, due primarily to the much higher contribution last year of the real estate business as a result of extraordinary large block sales. The loss of CHF 4 million from discontinuing operations refers to the cost from phasing out additional operations. In the prior year there was a profit from the sale of Sulzer Burckhardt. Following ordinary goodwill amortization charges of CHF 27 million, the operating income (EBIT) amounts to CHF 62 million.

As a result of the special factors mentioned, net income fell to CHF 41 million (2002 CHF 83 million). This corresponds to earnings per share of CHF 12 compared to CHF 24 in 2002. During the reporting year, cash flow from operating and investing (including proceeds from real estate sales) activities came to CHF 126 million and CHF –67 million respectively. The latter includes spending for acquisitions of CHF 32 million. The balance of cash on hand and marketable securities shrank within twelve months from CHF 407 million to CHF 385 million. But once equally declining debts of CHF 247 million (2002 CHF 335 million) are deducted, net liquidity improved to a remarkable CHF 138 million. Along with the consistently high equity content (53% of the balance sheet total), this not only highlights the solid financial position, but also forms the good foundation from which to achieve ambitious growth targets.

The comparatively low income for the year is not particularly representative of business development in 2003. Therefore, in view of the healthy level of equity capital in the balance sheet, the high net liquidity, and the clearly positive cash flow, the Board of Directors decided to once again propose to the Annual General Meeting of Shareholders a dividend of CHF 6 per share.

Divisions
Sulzer Metco provides surface technology equipment, systems, materials, and services. These are used mainly in aerospace, gas turbines, automotive manufacturing, and various other strategic growth industries. Despite its leading position, Sulzer Metco continued to suffer under difficult market conditions in 2003, as in the previous year. This was due to the adverse business climate in the aerospace and industrial gas turbine industries, two of its major target markets. As a result, sales and operating income fell short of the prior year level. Although the return on sales remained positive at 4%, the figure is disappointing on the whole. Capacity adjustments were made in various sites. Since the fourth quarter, there has been a gradual increase in orders received. We are confident that in 2004, Sulzer Metco will better meet the expectations in terms of growth and profitability.

Sulzer Turbomachinery Services, our provider of maintenance and repair services for gas and steam turbines and compressors, had to overcome a comparably difficult market climate in North America. As a result of the market weakness in new machines, new equipment manufacturers (OEMs) focused increasingly on the service business, leading to considerably intensified competition. Customers continued to display reluctance with regard to power generation plant maintenance. Thanks to rapid adjustments, the effect on the result was limited. European and Asian operations developed favorably and impressive growth was recorded even in this demanding year. While sales practically stagnated at the prior year level, operating income fell slightly. However, the return on sales of almost 10% is certainly respectable in this market climate. In the current year, we expect an improvement of the most important key figures.

Under new management, Sulzer Pumps has performed the necessary change in direction. The year 2003 brought a weak market in North America, an acceptable demand in Europe, and a booming Asian region. Whereas currency adjusted sales decreased slightly (2%) to CHF 870 million, orders received rose markedly at 7%. The impact of operating measures introduced during the reporting year has already been felt, with operating income before goodwill amortization and special charges as a result of restructuring climbing to CHF 48 million (2002 CHF 38). Consequently, Sulzer Pumps increased the return on sales on this basis to 5.5% (2002 4.1%) and generated a high level of operating net cash flow. The farreaching program of improvements announced in December 2003 causes restructuring costs of CHF 23 million in 2003, but is necessary to achieve a return of 8% in 2006. We are confident that Sulzer Pumps, as the biggest division, will fulfill its role underpinning the Corporation with solid profits and cash flow.

Sulzer Chemtech is the second-largest provider of separation columns and a leading supplier of static mixing technologies. This division returned a very pleasing performance last year. Following the recent turnaround, important key operating figures improved. In addition to the significant growth in order intake (8% adjusted), the increase in the return on sales to over 7% should be highlighted in particular. Both the technological and the market position in the core businesses of separation and mixing are excellent. Should the economic situation in Europe and North America pick up, we expect results to once again improve.

Sulzer Hexis, our venture division, made important technical progress and retains a leading position in fuel cells for residential applications. The service life of the fuel cell stack was extended markedly as a result of various changes to design, materials, production, and systems integration. The reliability of the pre-series systems was improved significantly. The further development of the next-generation system will profit from the results of the current field tests with the “HXS 1000 Premiere” units. The new model will be smaller, lighter, and if in larger production lots, more cost-effective. Already this year, the first pilot units are to be installed in a laboratory environment and to be tested in a realistic setting. We remain confident that investment in this long-term project will prove successful for the Corporation and therefore for our shareholders.

Other Activities
The Sulzer International sales organization was disbanded last year through divestment or integration into the core divisions. Having successfully restructured itself as a market-oriented service provider of technology in 2002, a steep decline in demand led to a loss in the reporting year for Sulzer Innotec. Jobs in the affected research and development services group had to be shed. We believe that break-even operation will be reached again in 2004.

After 2002, which was characterized by large block sales, Sulzer Real Estate achieved in 2003, as expected, lower but still remarkable sales of property worth about CHF 80 million. With net proceeds of over CHF 50 million, the Real Estate unit again made an important contribution to corporate financing.

Outlook
In 2003 key operating improvements were implemented or clearly defined with the costs accounted for by means of provisions, like in the case of Sulzer Pumps. In the core divisions, we have therefore planned a clear increase in results, which should also be apparent in the net income.

There is also growing confidence for economic recovery, the most important factor in the short-term development of the Sulzer Corporation. All of our divisions will profit directly from improved momentum in Europe and, in particular, North America.