Annual Report

Shareholders' letter,
Tim Summers, Chairman

Dear Shareholders,

It gives me great pleasure to report on a very successful year for your company. 2012 was a transformational year for Oerlikon in which the portfolio was significantly streamlined, the balance sheet was refinanced, operational performance was very good, profitability improved and cash generation was strong.

The sale of our Solar Segment and the announced divestment of the Natural Fibers and Textile Components Business Units have recast the portfolio. These transactions reduce the cyclicality and simplify the Group.

The capital markets have rewarded our strategic and operational achievements with a share price increase of more than 100 %.

2012 also saw a structural transformation of the balance sheet. We have a significant cash position as a result of both divestments and operational performance, and have materially reduced the cost of financing for the company. The refinancing, completed in July, includes a new unsecured credit facility and, for the first time, a Swiss bond. The structure, which demonstrates renewed market confidence in the company, greatly increases flexibility and reduces financing costs by almost half.

The Board of Directors believes the company is well positioned to create sustainable value; the dividend policy introduced last year was a clear indication of this. I am pleased to announce that the Board will recommend a dividend of CHF 0.25 per share for 2012, an increase of 25 % over the last year, to the Annual General Meeting of Shareholders.

Looking forward, the achievements of 2012 have laid the foundation for the next phase in Oerlikon’s history. Through disciplined use of cash we will stimulate profitable growth through R&D investment, operational excellence and by entering new markets and regions.

We continue to face economic uncertainties in many interrelated markets and industries. The Eurozone crisis appears to have calmed for the moment, but sovereign debt, sluggish growth and consumer confidence remain issues around the world. Given our focus on operational excellence, higher-margin growth markets and the diversity of our global footprint, which is extensive relative to Oerlikon’s size, I believe the company is well positioned to manage these challenges and will successfully navigate through uncertain times.

On behalf of the Board, I would like to thank our shareholders, our employees, customers and business partners for the commitment and the support they have invested in Oerlikon.

March 4, 2013

Sincerely,

Tim Summers

Chairman of the Board of Directors

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Shareholders' letter,
Dr. Michael Buscher, CEO

Dear Shareholders,

While in 2012 our agenda to strategically transform the Oerlikon Group became obvious, we continued to deliver strong operational results. We increased profitability once again by generating EBIT of CHF 421 million representing an EBIT margin of 14.5 %. Despite a challenging global economic environment, we were able to increase sales in continuing business by more than 6 % to CHF 2.9 billion. While securing high-quality orders, our order intake totaled CHF 2.8 billion, close to the same level as the previous year. The strong operational performance and the cash proceeds from divestments resulted in a net liquidity for the Group of CHF 339 million. The continued strengthening of our financial position is also reflected in the equity ratio, which increased from 35 % to 45 %.

Nearly all Segments contributed to this positive performance. Key drivers were the Textile Segment – which will from now on focus solely on the manmade fiber business – and the Coating Segment. Both Segments are at Best-in-Class level relative to peers in their respective industries. The Drive Systems Segment once again made progress in terms of profitability, with further growth and earnings potential. The performance of the Vacuum Segment in a challenging market environment was not satisfactory and decisive actions have been taken. On a Group level, we also made significant strides in our effort to gain a Best-in-Class position against our peers.

The key factors in our strong performance were the systematic implementation of operational and strategic measures in the areas of:

Innovation: Investments in research and development are paying off – take the WINGS technology used to produce manmade fibers as an example. Since the system’s market introduction, we have sold more than 10 000 units and thus increased our market share in manmade fibers to over 45 %.
Regional expansion: in 2012, we again moved ahead with our global positioning by building up new coating centers in Asia, putting our new Drive Systems plant in China into operation and opening our new corporate headquarters for China in Shanghai.
Operational excellence: we continued to work on optimizing our operational processes and cost base; for example, supplier On Time Delivery has increased to more than 99 %.
Portfolio shaping: in addition to the major transactions in the Solar and Textile Segments, the divestment of our stake in Pilatus Flugzeugwerke AG, the Melco business and property in Arbon, Switzerland, has enabled Oerlikon to fully focus on operations.

These achievements established a good starting position for 2013 and years to come. Despite macroeconomic challenges, we believe that Oerlikon still has further growth opportunities. Unrealized potential will be rigorously addressed in applications and industry fields we have not systemically approached in the past – specifically identified opportunities are under review in the Drive Systems, Vacuum and Coating Segments. We will also continue to exploit cost-saving opportunities in areas such as procurement and in manufacturing, through execution of operational excellence measures to further improve our underlying performance and profitability.

For these reasons, we are cautiously optimistic about the future and will meet these challenges and take advantage of these opportunities by continuing to systematically apply our strategy based on innovation, regional expansion, operational excellence and portfolio shaping.

I would like to express my deep gratitude to all of our dedicated and highly qualified employees at our about 160 locations around the world for their hard work and support. They are the reason for our success.

March 4, 2013

Best regards,