Financial position

Principles and objectives of financial management

By pursuing an appropriate financial management strategy, KION GROUP GmbH ensures that sufficient cash and cash equivalents are available at all times to meet the Group companies' operational and strategic funding requirements. In addition, KION GROUP GmbH optimises its financial relationships with customers and suppliers, manages any collateral security offered and mitigates the financial risk to its enterprise value and profitability, notably currency risk, interest-rate risk, price risk, counterparty risk and country risk.

A syndicated credit facility with a group of international banks and investors meets KION's basic borrowing requirements. In addition, KION avails itself of the funding facilities offered by the public capital markets, having issued a corporate bond of 2011.

The financial resources within the Group are provided based on an internal funding approach. According to this approach, KION collects liquidity surpluses of the Group companies in central or regional cash pools and, where possible, covers subsidiaries' funding requirements with intercompany loans. This central source of funding enables KION to present a united front in the capital markets and strengthens its hand in negotiations with banks and other market participants.

The Group occasionally arranges additional credit lines for KION Group companies with local banks or leasing companies in order to comply with legal, tax and other regulations.

For funding purposes, KION also engages to a small extent in factoring. The volume of non-recourse factoring business amounted to €20 million at the end of 2012 (31 December 2011: €18 million); the Company only uses recourse factoring in isolated cases. The KION Group maintains a liquidity reserve in the form of unrestricted, bindingly committed credit lines and cash in order to ensure financial flexibility and solvency.

The senior facility agreement (SFA), which is the main loan agreement, and the contractual terms and conditions governing the issuance of the corporate bond require, among other things, compliance with covenants. The SFA also requires compliance with specific financial covenants during the term of the agreement. The financial covenants specify required ratios for the financial position and financial performance of the KION Group. If undertakings or financial covenants are breached, this may, for example, give lenders the right to terminate the SFA or permit bondholders to call the corporate bond prior to its maturity date. All the financial covenants were complied with in the past financial year.

KION only uses derivatives to hedge underlying operational transactions; in particular, they comprise currency forwards and interest-rate swaps and are used for hedging purposes to mitigate currency and interest-rate risks. In the year under review only cash flow hedges were used for currency and interest-rate risks.

Main financing activities in 2012

KION's financial position improved substantially in 2012 owing to a number of measures put in place. The steps taken to reduce debt levels will have a positive impact on financial result in future years.

The shareholder loan from Superlift Holding S.à r.l., which had a principal amount of €500 million plus accrued interest of €171 million, was converted into equity on 27 December 2012. On the same date, a contribution of €467 million (including premium) was paid by Weichai Power for the takeover of 25 per cent of the share capital of KION Holding 1 GmbH (see note 28). These two steps, less credit procurement costs, increased the KION Group's equity by €1,133 million, which had been negative as at 31 December 2011. Another positive impact came from Weichai Power's acquisition of 70 per cent of the shares in Linde Hydraulics. This resulted in earnings of €212 million before taxes, which, together with the favourable operating result, boosted net income in 2012 and thereby also helped to increase equity.

Conversion of the shareholder loan improved the borrowing situation. Furthermore, KION GROUP GmbH successfully negotiated with its creditors to extend the maturities of existing loan facilities with a volume of more than €1 billion (see note 30). This also creates greater flexibility with regard to paying back senior facilities agreements (SFAs). The maturity of the existing revolving credit line was also extended from December 2013 to December 2016. Additional commercial and technical changes included a moderate increase in the funds available for acquisitions (acquisition basket). Shareholder loan G, which has a volume of €114 million, was extended from December 2016 to June 2018. By issuing a new corporate bond at the beginning of the new financial year, KION achieved a further extension on its debt maturity profile (see ‘Events after the balance sheet date’).

Analysis of capital structure

Financial debt

KION's total financial liabilities – including the bond issued in 2011 – amounted to €2,352 million as at 31 December 2012, down by €652 million compared with the same date a year earlier. The crucial factor here was the reduction of financial liabilities resulting from cash inflows from the Weichai transaction of €471 million, the repayment of a drawdown of €138 million taken on the revolving credit facility in November 2011, as well as the repayment of the multicurrency capex facility in the amount of €56 million and a decrease in the financial liabilities of local Group companies. This was counteracted by the increase in accrued and unpaid interest (payment in kind, PIK).

As at 31 December 2012, the equity and liabilities side of the consolidated statement of financial position continued to be significantly affected by the financial liabilities incurred through KION Group's acquisition financing (SFA).

Non-current financial liabilities stood at €2,301 million as at 31 December 2012 (31 December 2011: €2,777 million), which was primarily due to cash inflows resulting from the Weichai transaction of €471 million, and currency fluctuations. Also included were capital market liabilities of €489 million. These were the liabilities arising from the corporate bond issued in 2011 with a total volume of €500 million. Of this amount, €325 million carried a fixed interest rate and €175 million a floating interest rate. The carrying amount of the bond was reduced by associated borrowing costs of €11 million.

Current financial liabilities, which came to €52 million as at 31 December 2012, largely consisted of the remaining multi-currency capex facility (€18 million) and the financial liabilities of local Group companies (€33 million). The year-on-year decrease (31 December 2011: €176 million) is attributable to the payment of the amount of the revolving credit facility, the partial reduction of the capex facility, and the reclassification of €18 million of non-current financial liabilities to current financial liabilities within the multi-currency capex facility, which were carried out in 2012. The weighted average interest rate on current financial liabilities arising from the multi-currency capex facility was 3.4 per cent as at 31 December 2012 (31 December 2011: 4.4 per cent).

Net financial debt

After deduction of cash and cash equivalents, the remaining net financial debt came to €1,790 million as at 31 December 2012 (31 December 2011: €2,631 million). At €34 million, the borrowing costs included within this were close to the level of the previous year (31 December 2011: €33 million). The sharp decline in net financial debt of 32.0 per cent is due to repayments and the net cash provided by the contributions made as part of the resolution to carry out a capital increase.

Shareholder loan

The shareholder loan from Superlift Holding S.à r.l., which totalled €671 million (principal amount plus accrued interest), was converted into equity in 2012 in connection with the strategic partnership with Weichai. This item had totalled €643 million at the end of 2011.

Retirement benefit obligation

KION supports pension plans in many countries. These plans comply with legal requirements, local practice and the situation in the country in question. They are either defined benefit pension plans, defined contribution pension plans, or multi-employer benefit plans. Provisions for retirement benefit obligations in connection with defined benefit pension plans amounted to €547 million as at 31 December 2012. The net obligation after deduction of assets arising from pensions worth €23 million was €524 million, compared with €363 million at the end of 2011. The rise was caused by the marked reduction in discount rates as a result of the change in market interest rates. This effect was partly offset by the removal of net pension obligations of €65 million as part of the sale of significant portions of the hydraulics business.

Contributions to pension plans that are funded in whole or in part via a pension fund are paid in as necessary to ensure sufficient assets are available and to be able to make future pension payments to pension plan participants. These contributions are determined by various factors, such as the funded status, legal and tax considerations, and local practice. In 2012, payments to pensioners made by KION under pension plans totalled €23 million, which can be broken down into €9 million for employer contributions to plan assets and €14 million for direct pension payments.

Further details about retirement benefit and similar obligations are provided in note 29.

Lease liabilities

As at 31 December 2012, lease liabilities arising from financial services activities amounted to €475 million (31 December 2011: €447 million), and were exclusively the result of sale and leaseback transactions used to finance leases with customers. Of this total, €329 million was accounted for by non-current lease liabilities (31 December 2011: €300 million) and €146 million by current lease liabilities (31 December 2011: €147 million). The rise in non-current lease liabilities is attributable, above all, to new leases, reflecting the growing demand for this type of financing. In addition, short-term rental, indirect leasing and procurement leasing were assigned to the brands in 2012 in the context of the new segmentation. The corresponding liabilities were reclassified accordingly under other financial liabilities (see note 33). Other financial liabilities also include liabilities arising from residual-value guarantees amounting to €21 million. These relate to residual-value guarantees, provided in connection with the sale of assets to leasing companies, where the guaranteed amount is more than 10 per cent of the fair value of the asset in question. The lease liabilities are covered to the furthest extent possible by lease receivables, future inflows of funds from sub-leases with customers and revenue from the sale of used trucks.

Equity

The KION Group's equity rose by €1,148 million year on year to €660 million (31 December 2011: minus €488 million). The main contributing factor here was the conversion of the shareholder loan into equity, as well as the contribution made by Weichai Power for the acquisition of 25 per cent of the shares in KION Holding 1 GmbH by way of a capital increase (see Group structure, organisation, and management section). The increase in the balance of retained earnings and net income from minus €806 million to minus €648 million was due to the encouraging level of net income.

Funding vehicles not reported on the statement of financial position

KION makes limited use of funding vehicles not reported on the statement of financial position. As part of its financing activities KION has, both for its own use and to be transferred on to its customers, entered into lease agreements that in accordance with the relevant IFRS requirements are not reported as either an asset or a liability on the statement of financial position. The nominal amount of the contractual obligations arising from such leases not reported on the statement of financial position was €194 million as at 31 December 2012 (31 December 2011: €205 million, see note 34).

Analysis of capital expenditure

Capital expenditure (excluding leasing and rental assets) was funded by cash flow from operating activities and by withdrawals from the revolving part of the SFA in 2012.

The total volume of investment was €155 million, which represents a year-on-year rise of 16.6 per cent (2011: €133 million). The main reasons for this rise were product developments and production modifications, ongoing modernisation of the IT infrastructure and the construction and expansion of production facilities, particularly in China and Brazil. In both segments, LMH and STILL, capital expenditure increased.

The bulk of capital expenditure went on the development of new counterweight trucks, electric forklift trucks and reach trucks (see Research and development section) – partly to comply with stricter environmental regulations – and on innovations such as hybrid technology. Operational investments predominantly related to equipment and machinery for the production of new industrial trucks and components. IT investment projects related to areas such as central sales management.

Current capital expenditure projects do not incur any significant subsequent financial obligations.

Analysis of liquidity

Liquidity management is an important aspect of central financial management. The sources of liquidity are cash and cash equivalents (including pledged cash deposits), cash flow from operating activities and lines of credit available under the SFA. Cash and cash equivalents totalled €562 million as at 31 December 2012 (31 December 2011: €373 million). Taking into account the available multi-currency revolving credit facility, KION had access to cash and cash equivalents amounting to €931 million as at the reporting date, compared with €499 million as at 31 December 2011.

Cash flow from operating activities increased from €387 million in 2011 to €414 million in 2012. This was due to the €337 million increase in EBIT, which had been influenced to some extent by non-recurring items (see Earnings section). Overall, this more than offset the decrease in cash flow caused by the net increase in leased and rental assets (after the deduction of writedowns).

Cash flow from investing activities resulted in the amount of €104 million (2011: net cash outflow of €153 million). The outflows of cash for the acquisition of the outstanding shares in Linde Creighton and for investment in plant and machinery as well as office equipment – predominantly in Brazil and China – were offset by net inflows of €260 million from the sale of the hydraulics business.

Due to the influencing factors described, free cash flow (see Value-based management section) rose to €518 million (2011: €234 million).

Cash flow from financing activities amounted to a total net cash outflow of €330 million in 2012 (2011: net cash outflow of €115 million). Repayment of the finance facilities resulted in an outflow of cash of €665 million, of which €138 million was used to repay the multi-currency revolving credit facility and €56 million to repay the multi-currency capex facility. Interest payments amounted to €130 million, compared with €147 million in 2011. Of the moderate cash outflow of €10 million, €8 million occurred in connection with the acquisition of the remaining shares in Voltas MH. The inflow of cash from the contribution made as part of the resolution to carry out the capital increase had a positive effect on cash flow.

This caused cash and cash equivalents to rise sharply, from €373 million at the end of 2011 to €562 million at the reporting date (see Net assets section).