Capital management
Ensuring permanent liquidity is one of the primary objectives of capital management. Measures aimed at achieving these objectives include the optimisation of the capital structure, the reduction of liabilities and ongoing Group cash flow planning and management. The long-term financing requirements were secured through the supplementary agreement to the existing SFA (see 'Credit terms' table).
Close cooperation between local units and the Group head office ensures that the local legal and regulatory requirements faced by foreign group companies are considered in the capital management process.
Bank debt net of borrowing costs – defined as the difference between liabilities to banks and cash and cash equivalents – is the key performance measure used in liquidity planning at Group level. Lease liabilities and other financial liabilities are excluded from this figure, which was €2,640,829 thousand in 2010 (2009: €2,484,299 thousand).
Credit risk
In certain finance and operating activities, the KION Group is subject to credit risk, i.e. the risk that partners will fail to meet their contractual obligations. This risk is limited by diversifying business partners based on certain credit ratings. The Group only enters into transactions with business partners and banks holding a good credit rating and subject to fixed limits. Counterparty risks involving our customers are managed by the individual Group companies.
The following table shows the age structure of receivables as at the reporting date.
Age structure analysis of receivables |
|
|
|
|
| |
|
Carrying amount |
Thereof: Neither overdue nor impaired at the reporting date |
Thereof: Overdue and impaired at the reporting date |
Thereof: Not impaired at the reporting date, but | ||
up to and including 90 days overdue |
more than 90 days overdue | |||||
(€ thousand) |
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Financial receivables |
|
8,117 |
8,117 |
|
|
|
Lease receivables |
|
367,758 |
367,758 |
|
|
|
Trade receivables |
|
633,265 |
493,781 |
10,101 |
114,472 |
13,896 |
Other non-derivative receivables |
|
35,416 |
35,060 |
21 |
− |
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(€ thousand) |
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Financial receivables |
|
6,931 |
6,931 |
|
|
|
Lease receivables |
|
375,353 |
375,353 |
− |
− |
− |
Trade receivables |
|
511,263 |
386,203 |
13,383 |
91,058 |
18,749 |
Other non-derivative receivables |
|
40,441 |
39,993 |
− |
− |
253 |
Impairment losses are based on the credit risk associated with the receivables and is assessed primarily using factors such as a customer credit rating and failure to adhere to payment terms.
Some of the receivables that were overdue as at the reporting date, but for which no impairment losses had been reported, were covered by corresponding trade payables or collateral. Apart from these items, the Group did not hold any significant collateral.
Liquidity risk
Based on IFRS 7, a liquidity risk arises if a company is unable to meet its financial liabilities. The KION Group maintains a liquidity reserve in the form of lines of credit and cash in order to ensure financial flexibility and solvency at all times.
The following table shows all of the contractually agreed payments under recognised financial liabilities as at 31 December 2010, including derivative financial instruments with a negative fair value. Options are only included in liquidity analysis if they have an intrinsic value.
Liquidity analysis of financial liabilities and derivatives | ||||
|
Carrying amount 2010 |
Cash flow 2011 |
Cash flow 2012 - 2015 |
Cash flow from 2016 |
(€ thousand) |
2010 |
|
|
|
|
|
|
|
|
Primary financial liabilities |
|
|
|
|
|
|
|
|
|
Gross liabilities to banks |
2,893,713 |
-192,543 |
-3,132,989 |
-370,561 |
Borrowing costs |
-21,826 |
|
|
|
Net liabilities to banks |
2,871,887 |
|
|
|
|
|
|
|
|
Financial liabilities |
622,250 |
-3,188 |
|
-788,677 |
Trade payables |
508,108 |
-508,108 |
|
|
Lease liabilities |
661,649 |
-278,967 |
-427,041 |
-18,212 |
Other financial liabilities |
156,053 |
-156,053 |
|
|
|
|
|
|
|
Derivative financial liabilities |
|
|
|
|
|
|
|
|
|
Derivatives with negative fair value |
30,033 |
|
|
|
+ Cash in |
|
175,364 |
40,867 |
|
- Cash out |
|
-203,057 |
-41,809 |
|
|
|
|
|
|
(€ thousand) |
2009 |
|
|
|
|
|
|
|
|
|
Carrying amount 2009 |
Cash flow 2010 |
Cash flow 2011 - 2014 |
Cash flow from 2015 |
|
|
|
|
|
Primary financial liabilities |
|
|
|
|
|
|
|
|
|
Net liabilities to banks |
2,947,707 |
-210,103 |
-2,151,679 |
-1,719,540 |
Borrowing costs |
-30,159 |
|
|
|
Net liabilities to banks |
2,917,548 |
|
|
|
|
|
|
|
|
Financial liabilities |
597,438 |
-5,710 |
|
-788,277 |
Trade payables |
356,765 |
-356,765 |
|
|
Lease liabilities |
699,609 |
-247,550 |
-508,848 |
-19,170 |
Other financial liabilities |
137,534 |
-137,557 |
|
|
|
|
|
|
|
Derivative financial liabilities |
|
|
|
|
|
|
|
|
|
Derivatives with negative fair value |
57,343 |
|
|
|
+ Cash in |
|
152,116 |
571,240 |
|
- Cash out |
|
-183,104 |
-598,456 |
|
The calculation of the future cash flows for derivative financial liabilities includes all currency forwards, interest-rate swaps and options (with their intrinsic values) that have a negative fair value as at the reporting date.
As at 31 December 2010, bank guarantee lines (e.g. sureties, performance bonds) had been issued under the ancillary facility agreements for a total amount in the low double-digit millions. They included guarantees payable 'on first demand'. Cases in which such guarantees have been accessed were extremely rare in past years.
The volume of business for which factoring was used in 2010 was €19,853 thousand (2009: €23,246 thousand). Because all material risks and rewards are assigned to the purchaser, these assets are derecognised in full.
Default risk
For financial assets, default risk is defined as the risk that a counterparty will default, and therefore is limited to a maximum of the carrying amount of the assets relating to the counterparty involved.
Specific valuation allowances for defaults are recognised to reflect the risk arising from primary financial instruments. Financial transactions are only entered into with selected partners holding good credit ratings. Investments in interest-bearing securities are limited to investment-grade securities.
Risks from financial services
The KION Group's leasing activities mean that it may be exposed to residual value risks from the marketing of machinery and equipment that is returned by the lessee at the end of a long-term lease and subsequently sold or re-leased. The brand companies therefore constantly monitor and forecast residual values in the markets for used equipment.
The KION Group regularly assesses its overall risk position arising from financial services, recognising write-downs, valuation allowances or provisions to cover the risks it identifies. Any change in residual values is immediately taken into account when calculating new leases.
The risk-mitigating measures taken by the KION Group include managing used equipment on an international basis, steadily increasing the amount of equipment remarketed to end customers and extending lease terms more frequently, which stabilises the residual values of its industrial trucks. It has also increased the proportion of leases with an underlying remarketing agreement because these leases transfer any residual-value risk to the leasing company. Group-wide standards to ensure that residual values are calculated conservatively reduce risk and provide the basis on which to create the transparency required. The KION Group has also refined its management of residual values and implemented an IT system for residual-value risk management.
The KION Group offsets its liquidity risk and interest-rate risk by ensuring that most of its transactions and funding loans have comparable maturities. Long-term leases are primarily based on fixed-interest agreements. The credit facilities provided by various banks ensure that the Group has sufficient liquidity. These risks do not exist in cases where the KION Group offers financial services indirectly via selected financing partners.
In order to eliminate exchange rate risk, the KION Group generally funds its leasing business in the local currency used in each market.
The low default rates among its leasing customers mean that counterparty default risk has not been significant to the KION Group to date. The Group has not identified any material changes between 2009 and 2010. The KION Group's risk of potential default is also mitigated by its receipt of the proceeds from the sale of repossessed vehicles. The Group is not generally exposed to counterparty risk in cases where it offers financial services indirectly via selected financing partners. The KION Group's credit risk management system takes into account the current economic conditions. As part of a more restrictive authorisation process for avoiding potential future risks, the KION Group has increased the requirements that need to be satisfied prior to signing a new lease.
The diversity of the customer base in the Group's leasing business resulted in no significant concentrations of risk at the reporting date.
Exchange rate risk
In accordance with its treasury risk policy, the KION Group hedges exchange rate risks both locally at the level of the individual companies and centrally via KION GROUP GmbH in order to meet the prescribed minimum hedging ratios.
The main hedging instruments employed are foreign-currency forwards, provided that there are no country-specific restrictions on their use.
At the entity level, hedges are entered into for highly probable future transactions on the basis of rolling 15-month forecasts, as well as for firm obligations not reported in the statement of financial position. In accordance with IAS 39, these hedges are generally classified as cash flow hedges for accounting purposes (see note 35).
Foreign-currency forwards are also employed to hedge the exchange rate risks resulting from internal financing.
The following table shows an overview of the foreign-currency forwards entered into by the KION Group.
Foreign-currency forwards |
|
Fair Value |
Notional amount | ||
(€ thousand) |
|
2010 |
2009 |
2010 |
2009 |
|
|
|
|
|
|
Foreign-currency forwards (assets) |
Hedge |
3,762 |
1,894 |
109,653 |
47,901 |
|
Trading |
19,824 |
1,938 |
639,473 |
47,267 |
|
|
|
|
|
|
Foreign-currency forwards (liabilities) |
Hedge |
4,236 |
1,503 |
89,900 |
76,947 |
|
Trading |
3,595 |
19,556 |
79,335 |
626,322 |
The currency options bought and sold in 2008 for a notional amount of US$ 780,000 thousand each with strike prices of USD/EUR 1.5139 and USD/EUR 1.1825 had a negative fair value on the reporting date of €1,433 thousand (31 December 2009: €14,209 thousand). Options that are not part of a formally documented hedge are recognised in line with the general rules specified in
IAS 39.
Significant exchange rate risks from financial instruments are measured on the basis of value at risk (VaR) as part of internal Group management. VaR figures are calculated using historical variance-covariance analyses. Correlations and volatilities are calculated on the basis of the
250 working days prior to the reporting date (unweighted).
Exchange rate risks from financial instruments, as defined by IFRS 7, are only included in calculating value at risk if the financial instruments are denominated in a currency other than the functional currency of the reporting entity concerned. This means that exchange rate risks resulting from the translation of the separate financial statements of subsidiaries into the Group reporting currency, i.e. currency translation risk, are not included.
Value-at-Risk |
|
|
(€ thousand) |
2010 |
2009 |
|
|
|
Currency risk |
19,968 |
31,946 |
As at 31 December 2010, the value at risk for currency risk was €19,968 thousand (31 December 2009: €31,946 thousand). Value at risk is the loss that is not expected to be exceeded over a holding period of one year with a confidence level of 97.7 per cent (2009: 97.7 per cent).
Interest rate risk
Interest rate risk within the KION Group is managed centrally. The basis for decision-making includes sensitivity analyses of interest rate risk positions in key currencies.
The following table shows the cumulative effect of a 100 basis point (bps) shift up or down in the relevant yield curves:
Interest sensivity analysis |
+100 bps |
-100 bps |
+100 bps |
-100 bps |
(€ thousand) |
2010 |
2010 |
2009 |
2009 |
|
|
|
|
|
Other comprehensive income |
34,714 |
-32,600 |
38,903 |
-26,786 |
Net income |
-17,226 |
18,454 |
-10,009 |
4,038 |
The Group essentially funds itself by drawing down loans under its agreed credit facilities. The resulting interest rate risk is hedged using interest rate derivatives, generally interest rate swaps and interest rate caps denominated in various currencies.
Interest-rate swaps |
|
Fair Value |
Notional amount | ||
(€ thousand) |
|
2010 |
2009 |
2010 |
2009 |
|
|
|
|
|
|
Interest-rate swaps (assets) |
Hedge |
46 |
− |
70,000 |
− |
|
Trading |
− |
− |
− |
− |
|
|
|
|
|
|
Interest-rate swaps (liabilities) |
Hedge |
20,769 |
36,254 |
2,493,706 |
1,598,378 |
|
Trading |
− |
31 |
− |
844 |
The interest rate caps bought in 2009 with a notional value of €1,250,000 thousand and a strike price of 1.75 per cent per annum had a fair value on the reporting date of €76 thousand (31 December 2009: €4,268 thousand). Based on the rules specified in IAS 39, only the intrinsic value of interest rate caps may be included in a hedge. Any changes in fair value must be recognised directly in the income statement.