5.2 Financial position

Principles and objectives of financial management

By pursuing an appropriate financial management strategy, KION Group GmbH ensures that sufficient liquidity is available at all times and mitigates the financial risk to its enterprise value and profitability. As an entity that operates worldwide, the KION Group is exposed to risks in respect of currencies, interest rates, prices, counterparties and countries.

The KION Group provides sufficient financial resources for its day-to-day business, optimises its financial relationships with customers and suppliers, ensures that the necessary liquidity is available to its companies, and manages any collateral security offered. A group of international banks and investors meets the Company's basic borrowing requirements. In addition, the Company availed itself of the funding facilities offered by the public capital markets by issuing its first corporate bond in April 2011. The financial resources required within the KION Group are provided through internal funding. The KION Group 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 the KION Group 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.

The SFA, which is the main loan agreement, and the contractual terms and conditions governing the issuance of the corporate bond require compliance with certain undertakings and covenants among other things. 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. The covenants are expressed in the form of key figures relating to net gearing, available liquidity, EBITDA, interest paid and capital expenditure. These loan terms and conditions were adjusted in line with prevailing market conditions and with the broad consent of the lenders in 2009. In return for adjusting the covenants, the lenders were granted an increase in the interest premium. This premium is mainly payable as a bullet payment at maturity, thereby ensuring that there is no additional adverse effect on the KION Group's liquidity in the meantime. 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.

In addition, investment funds advised by Kohlberg Kravis Roberts & Co. L.P. and Goldman Sachs Capital Partners loaned the KION Group a principal amount of €100 million under the terms of the SFA in order to offer the Company greater strategic flexibility. The loan amount and the associated interest are repayable as a bullet payment at maturity. For funding purposes, the KION Group also engages to a small extent in factoring. The volume of non-recourse factoring business amounted to €18 million at the end of 2011 (31 December 2010: €20 million); the Company only uses recourse factoring in isolated cases. KION Group disposes of a liquidity reserve through unrestricted, bindingly committed credit lines and cash to ensure that it remains solvent and financially flexible.

Cash flow

The key performance indicator for liquidity in the KION Group is free cash flow before tax, which does not include tax payments or interest arising from financing activities, or interest expense and similar charges from leases, or interest and similar income from leases. For further information about free cash flow before tax and other KPIs used to manage the KION Group, see section 4.5 'Financial KPIs for managing the Company's business'.

Cash flow from operating activities jumped by €188 million to €387 million in 2011 (2010: €199 million). The underlying reason for this improvement was that earnings before interest and tax (EBIT) had increased to €213 million (2010: €35 million). The increase in working capital from €661 million in 2010 to €668 million in 2011, which was associated with the larger volume of business, was disproportionately low compared with revenue growth. This also had a positive impact on the cash flow from operating activities.

The net cash used for investing activities in the KION Group increased by 24 per cent to €153 million in 2011 (2010: €123 million). The reason for this was the higher capital expenditure on non-current assets and on property, plant and equipment (capex), for which the total cash payments amounted to €133 million (2010: €123 million). Cash payments relating to acquisitions rose by €25 million to €33 million in 2011. This amount essentially comprised cash payments of €16 million in connection with the acquisition of Voltas Material Handling, India, and payments of €10 million as part of the purchase of the remaining shares (51 per cent) in UK-based dealer Linde Sterling. In addition to a smaller acquisition in Italy, the KION Group invested a further €5 million, primarily in Liftec's business in Russia during the reporting year.

Cash flow from financing activities amounted to a total net cash outflow of €115 million in 2011 (2010: net cash outflow of €290 million). €483 million of the cash received from issuing the corporate bond was used to refinance the senior facility agreement (SFA). The Company also had to make cash payments of €12 million in connection with its bond issue in the reporting year. A further €54 million was used for the scheduled repayment of the credit line (capex facility). Interest payments rose by €13 million to €147 million due to higher interest rates for financial and capital market liabilities. This was counteracted by the €133 million drawdown of the revolving credit facility under the SFA. In 2011, there were also payments of €14 million for currency hedges (2010: 0).

The cash and cash equivalents reported on the face of the balance sheet as at 31 December 2011 amounted to €373 million (31 December 2010: €253 million).

For internal management purposes, free cash flow is much more narrowly defined as the total of cash flow from operating activities plus cash flow from investing activities.

In contrast to the free cash flow of €234 million, free cash flow before tax (the figure used for management purposes) does not include any income tax payments (€43 million) or lease interest payments (€12 million). Cash receipts from financial receivables and interest income (€6 million) and other individual items that are treated differently in accordance with IAS 7 were also reclassified in 2011. Allowing for these items, the free cash flow before tax amounted to €282 million, which was a sharp year-on-year rise of €199 million.