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Annual Report 2018

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Finance

Operating Income

million

CHF

Operating Income GROWTH

increase

from 2017

FOUNDATION EQUITY

million

CHF

Financial overview

Despite leaner operations and greater efficiency, the Net Result was negatively impacted by the financial performance of our portfolio due to market decline in the latter months of 2018.

Helped by the full implementation of the AO educational events management process (AO Global Education Process - GEP), third party income increased by 61% compared to the previous year. Higher expenses in the current year negatively impacted the Operating Result, which was CHF 6 million lower compared to the previous year, amounting to CHF -29 million.

A Financial Result of CHF -98 million was due to the performance of the global financial market in late 2018. Impacted by this, the Net Result reached a level of CHF -127 million, which in turn led to a decline of the Foundation's Equity to CHF 1,245 million by the end of 2018.

AO financial overview

Income statement

The 2018 financial results

AO Financial Overview 2017 2018 Variance A18/A17
in million CHF abs abs abs %
Operating Income 89 98 9 11%
Operating Expenses 111 127 16 14%
Operating Results -23 -29 -6 27%
Financial Result 166 -98 -264 -159%
Net Result 143 -127 -270 -189%
Equity per 31.12. 1,372 1,245 -127 -9%
Operating income
Operating income includes the income from the Cooperation Agreements with DePuy Synthes of CHF 64.7 million and third-party income amounting to CHF 33.6 million. The increase of +61% versus the previous year is mainly a result of the full implementation of new finance flows, a sub-process of the AO Global Education Process.
Operating expenses
Operating expenses, excluding ‘Unforeseen’, ‘Strategy Fund’, 'AO Alliance' contribution, and 'AOIT Projects', amounted to CHF 120.6 million (+18% versus the previous year). The largest operating expenditures (70%) were related to ‘Education’ (CHF 59.9 million) and ‘R&D’ (CHF 24.6 million). 'Education' spending increased by 26% on the previous year, showing the impact of the full implementation of the new processes for management of AO educational events. This was partly compensated by additional income in 'Education' and further optimization and cost reduction measures in ‘Global & Regional Boards’ (-14%).

Breakdown 2018 actual, CHF 120.6m

Growth versus 2017 actual

Income statement

Income statement

The 2018 income statement is as follows in comparison to the previous year and budget:

Profit & Loss Statement Consolidated 2017 Actual 2018 Actual 2018 Budget Variance A18/B18 Variance A18/A17
in million CHF abs % abs % abs % abs % abs %
Cooperation Agreements 67.7 76% 64.7 66% 64.7 66% 0.0 0% -3.0 -4%
3rd Party Income 20.9 24% 33.6 34% 33.4 34% 0.2 1% 12.8 61%
Total Operating Income 88.5 100% 98.3 100% 98.1 100% 0.2 0% 9.8 11%
R&D 23.2 21% 24.6 19% 29.3 22% -4.6 -16% 1.4 6%
AOTK System 4.4 4% 4.5 4% 4.6 3% -0.1 -2% 0.1 2%
Community Development 5.6 5% 6.3 5% 6.2 5% 0.1 2% 0.7 12%
Education 47.6 43% 59.9 47% 63.0 46% -3.1 -5% 12.2 26%
General & Administrative 14.4 13% 15.7 12% 14.7 11% 0.9 6% 1.3 9%
Global & Regional Boards 4.7 4% 4.1 3% 4.4 3% -0.3 -8% -0.6 -14%
Others 11.4 10% 12.3 10% 13.4 10% -1.0 -8% 1.0 8%
Total Operating Expenses 111.3 100% 127.3 100% 135.5 100% -8.1 -6% 16.0 14%
Operating Results -22.8 -29.0 -37.4 8.4 -22% -6.2 27%
Financal Results 166.3 -98,4 35.0 -133.4 -381% -264.7 -159%
Net Result 143.5 -127.5 -2.4 -125.1 n/a -270.9 -189%
The Cooperation Agreements were CHF 64.7 million as budgeted (+0%) and slightly below the previous year (-4%). In contrast to last year, when we achieved a strong financial performance, in the current year there was a negative Financial Result of CHF 98.4 million. Operating Expenses at CHF 127.3 million, reflect a budget underspent by 6%, but is above the previous year's amount. The variance to budget is mainly due to lower expenses in 'Education' and 'R&D', and lower expenses in various operational areas.

Employees

Income statement

The number of permanent staff increased to 276.5 full-time equivalents (FTEs), an increase of 12.5 FTEs or 5% versus 2017.

FTE weighted permanent 2017 Actual 2018 Actual Var.
abs in % abs in % abs
Total located in Switzerland 230.9 87% 239.6 87% 8.7
Asia Pacific 14.3 5% 15.7 6% 1.4
Latin America 11.0 4% 13.2 5% 2.2
North America 7.8 3% 8.0 3% 0.2
Total worldwide 264.0 100% 276.5 100% 12.5

2018 FTE overview by area (weighted permanent)

Course activities by region
The total number of courses offered increased to 832, essentially on the same level as in 2017. Overall, the number of participants increased by 7%, as did the number of participant days, which increased by 2%.
Income statement

Number of Courses Number of Participants Number of Participant Days
2018 Share vs.2017 2018 Share vs.2017 2018 Share vs.2017
Asia Pacific 186 22% -3% 15,457 27% 1% 31,259 27% 2%
Europe 285 34% 0% 15,469 27% 17% 33,789 29% 5%
Latin America 180 22% 9% 13,729 24% 15% 22,519 20% 9%
Middle East and Africa 69 8% -10% 3,074 5% -10% 6,584 6% -13%
North America 73 9% -4% 4,697 8% -13% 10,644 9% -11%
International 39 5% 11% 5,692 10% 16% 9,890 9% 2%
Total 832 100% 0% 58,118 100% 7% 115,684 100% 2%

Asset management

The asset management result of CHF -93.5 million reflects an actual return of -7.1% on the underlying financial assets, amounting to CHF 1,220 million by the end of 2018.
All asset classes had negative performance in the reporting period. Shares saw the greatest decline (-10.2%), with Emerging Markets the worst performers, at -13.7%. The segments "Switzerland" and "Developed" declined -11.1% and -8.5% respectively. At the end of 2018, investments in equities comprised 56.4% of the portfolio. The underperformance relative to the benchmark was mainly due to the exposure to Small & Mid Cap Equities. The exposure to commodities as part of "Alternative" investments also had a negative impact. The cumulative performance of the portfolio since January 2008 was 53.9%.
Equity evolution 2010-2018
Due to unfavorable financial market developments in 2018, the AO Foundation's equity decreased to a value of CHF 1,245 million by December 2018.

Equity category

Equity evolution 2010-2018

Transparency section

According to its Transparency Policy, the AO Foundation publishes annually the total remuneration of the AO Foundation Board (AOFB), international boards of the clinical divisions, and the AO Executive Management, in addition to disclosing all scientific grants to third parties.
Remunerations per board
The total remunerations summarized for all governance activities of the International Funding Boards in 2018 were CHF 1,344,500 (2017: CHF 1,406,124) which is 1.1% (2017: 1.3%) of the total Operating Expenses of the AO Foundation and its institutions. The table below shows the total remuneration of each individual International Board in absolute amounts CHF and as a percent of the total amount of individual Operational Expenses, as well as the absolute amount of the highest individual remuneration amount within each board in 2018:
Income statement

2017 2018
AO Foundation Board 10 members 10 members
Total AOFB 317,500 355,000
% of total Operating Expenses AOF 0.3% 0.3%
Highest remuneration AOFB 75,000 75,000
AOTrauma International Board 10 members 9 members
Total AOTIB 375,000 337,500
% of total Operating Expenses AOT 1.3% 0.9%
Highest remuneration AOTIB 75,000 75,000
AOSpine International Board 11 members 11 members
Total AOSIB 393,750 337,500
% of total Operating Expenses AOS 2.0% 1.6%
Highest remuneration AOSIB 100,000 75,000
AOCMF International Board 9 members 8 members
Total AOCMFIB 275,000 262,500
% of total Operating Expenses AOCMF 3.6% 3.0%
Highest remuneration AOCMFIB 100,000 75,000
AOVET International Board 9 members 9 members
Total AOVETIB 44,874 52,000
% of total Operating Expenses AOVET 1.5% 1.4%
Highest remuneration AOVETIB 30,000 30,000
Grand Total 1,406,124 1,344,500
Remuneration of the Executive Management
The total annual compensation of ten members of the AO Executive Management in 2018 was CHF 2,773,288 (2017: CHF 2,686,715). The highest individual compensation was CHF 331,575 resulting in a 1/5.1 relative ratio between the highest and the lowest paid individual compensation (permanent employees).
Assignment of scientific and other grants to third party organizations
In 2018, AO Foundation funded research projects with scientific and other grants in a total of CHF 1,741,819 in 51 different third-party organizations (2017: CHF 1,607,707).