Financial position

Principles and objectives of financial management

By pursuing an appropriate financial management strategy, the KION Group ensures that sufficient cash and cash equivalents are available at all times to meet the Group companies’ operational and strategic funding requirements. In addition, the KION Group 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. In this way, the KION Group creates a stable funding position from which to maintain profitable growth.

The financial resources within the KION Group are provided based on an internal funding approach. 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 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.

As a listed group of companies that also obtains funding using corporate bonds and loan facilities, the KION Group considers the interests of shareholders, bond holders and banks in its financial management. For the sake of these stakeholders, the KION Group makes sure that it maintains an appropriate ratio of internal funding to borrowing.

The KION Group’s borrowing is based on a long-term approach. The core elements – a revolving loan facility of €1,045.0 million and two secured corporate bonds of €325.0 million and €650.0 million respectively – are due to mature between 2018 and 2020. 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.

Among other things, the loan facility and the contractual conditions relating to the issuance of the corporate bonds require compliance with loan conditions ('covenants’). The loan facility also requires compliance with specific financial covenants during the term of the agreement. Non-compliance may, for example, give lenders the right to terminate the loan or permit bondholders to put the corporate bonds back to the issuer prior to their maturity date. All covenants and restrictions were comfortably complied with in the past financial year. The ending of the acquisition finance meant that many restrictions were lifted in the second half of the year, thereby greatly improving flexibility as far as funding is concerned.

Depending on requirements and the market situation, the KION Group will also avail itself of the funding facilities offered by the public capital markets in future. The KION Group therefore seeks to maintain an investment-grade credit rating in the capital and funding markets by rigorously pursuing a value-based strategy, implementing proactive risk management and ensuring a solid funding structure.

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 KION Group only uses derivatives to hedge underlying operational transactions; in particular, hedging for currency and interest-rate risks. Only cash flow hedges were used for this purpose in the reporting year. The interest-rate swaps and currency swaps that had been used in 2012 to hedge interest-rate risk and currency risk arising out of acquisition finance had been terminated in connection with the repayment of this finance by the middle of 2013.

Main financing activities in the reporting period

The placement of 17.2 million new shares at €24.00 per share generated €413.4 million for the KION Group (before deduction of bank charges). A further €328.4 million was generated by a capital increase of 13.7 million shares, which were acquired by Weichai Power immediately before completion of the IPO. In connection with the IPO, Superlift Holding acquired 4.0 million shares at a price of €29.21 per share by way of converting an existing loan and its stake in Superlift Funding into equity. This boosted equity by a further amount of approximately €118.1 million. Overall, equity rose by €859.9 million as a result of the three capital increases. After deduction of transaction costs of €13.9 million (adjusted for tax effects) that were recognised directly in equity, the net increase in the Group’s equity amounted to €845.9 million. The portion of the transaction costs for the capital increases that exceeded the amounts recognised in equity was recognised directly as an expense.

In connection with the IPO, the KION Group agreed a new revolving loan facility with a group of banks for €995.0 million with a term to maturity of five years after the IPO. The loan facility was increased to €1,045.0 million in December 2013. Combined with the current lower level of interest rates, this loan facility offers far more favourable credit terms than the previous funding.

The inflows from the IPO, along with part of the new loan facility and existing cash reserves, was used to repay in full the long-term bank loans under the acquisition finance arrangements (Senior Facilities Agreement or SFA). In addition, the floating rate note, which was due to mature in 2018 and amounted to €175.0 million, was repaid early in full.

Back in February 2013, KION Finance S.A. placed a senior secured bond with a total volume of €650.0 million and a maturity date of 2020. The proceeds, net of the bank commission, were used to refinance all loans maturing in 2014 and 2015.

Following completion of the main funding activities, the KION Group was able to report a healthy equity ratio of 26.7 per cent as at 31 December 2013. As at the reporting date, net debt was roughly 1.4 times adjusted EBITDA for the past twelve months. The remaining long-term financial debt has a comfortable maturity profile.

Between 28 August and 26 September 2013, KION GROUP AG used cash and cash equivalents to buy treasury shares for an employee share programme. As at 31 December 2013, 0.2 million shares were held in treasury. The volume of funding required was €5.6 million.

Analysis of capital structure

Financial debt

Following its full repayment of the acquisition finance of €1,078.1 million and the floating rate note with a volume of €175.0 million, the KION Group’s long-term borrowing has comprised two secured corporate bonds with a total volume of €975.0 million. The bond issued in the reporting year consisted of a fixed-rate tranche with a volume of €450.0 million and a floating-rate tranche with a volume of €200.0 million. The fixed-rate tranche of a bond issued in 2011, which has a volume of €325.0 million and a maturity date of 2018, remains unchanged.

As at the reporting date, €184.4 million had been drawn down under the newly agreed revolving loan facility of €1,045.0 million – including other loan liabilities of individual Group companies outside Germany and contingent liabilities. The KION Group therefore had unused loan facilities worth €860.6 million that it could draw down at short notice as at 31 December 2013. Gross financial debt totalled €1,215.3 million on the reporting date; including capitalised borrowing costs, the financial debt recognised in the statement of financial position stood at €1,198.6 million. After deduction of cash and cash equivalents, the remaining net financial debt came to €979.3 million as at 31 December 2013 (31 December 2012: €1,790.1 million). >> Table 025

Retirement benefit obligation

The KION Group 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. As at 31 December 2013, the retirement benefit obligation under defined benefit pension plans amounted to €560.1 million. The moderate year-on-year rise was largely due to ongoing additions to pension provisions. After deduction of pension assets amounting to €22.4 million, the net obligation stood at €537.7 million (31 December 2012: €524.8 million).

Contributions to pension plans that are entirely or partly funded via funds 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. The payments made by the KION Group to retired employees in 2013 totalled €25.1 million, which included €13.1 million for direct pension payments and €11.6 million for employer contributions to plan assets. Transfers to external pension funds resulted in further payments of €0.4 million.

Further details about the retirement benefit obligation are provided in note [28] in the notes to the consolidated financial statements.

Lease liabilities

Lease liabilities arising from financial services activities totalled €617.1 million as at 31 December 2013 (31 December 2012: €475.0 million). These resulted solely from sale and leaseback transactions used to finance leases with external customers. Of this total, €403.7 million was accounted for by non-current lease liabilities (31 December 2012: €329.2 million) and €213.3 million by current lease liabilities (31 December 2012: €145.8 million). The rise in non-current lease liabilities is attributable, above all, to new leases and the first consolidation of the dealer Willenbrock.

Short-term rentals and procurement leases are allocated to the brand companies. The corresponding liabilities are reported under other financial liabilities (see note [32] in the notes to the consolidated financial statements). These include, among other things, liabilities of €327.5 million from sale and leaseback transactions used to finance the short-term rental fleet. They also contain liabilities arising from residual-value guarantees amounting to €17.3 million. These residual-value liabilities relate to residual-value guarantees, provided in connection with the sale of assets to leasing companies, where the guaranteed amount is more than 10.0 per cent of the fair value of the asset in question. The lease liabilities are mostly covered by lease receivables, future inflows of funds from sub-leases with customers and revenue from the sale of used trucks.

Equity

Equity rose substantially due to the capital increases carried out during the reporting year. It stood at €1,610.0 million on 31 December 2013, compared with €660.7 million at the end of 2012. There was an even greater increase in the equity ratio, which went up from 10.6 per cent at the end of 2012 to 26.7 per cent at the end of 2013, because of the simultaneous reduction of debt. >> Table 026

Funding vehicles not reported on the statement of financial position

The KION Group makes limited use of funding vehicles not reported on the statement of financial position. As part of its financing activities, the KION Group has entered into leases both for its own use and for transfer to customers. In accordance with the relevant IFRS requirements, such leases 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 in the statement of financial position was €206.0 million as at 31 December 2013 (31 December 2012: €194.2 million; see note [33] in the notes to the consolidated financial statements).

Analysis of capital expenditure

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

Capital expenditure amounted to €125.8 million in 2013, down by 18.9 per cent on 2012 (€155.1 million). The decrease was mainly attributable to the sale of the hydraulics business at the end of 2012, which had high levels of capital expenditure. Another reason for the decrease was the ending of special projects, which in 2012 were the construction of a new plant in São Paulo and the relocation of production in Europe. By contrast, there were no special projects of comparable magnitude in the LMH and STILL segments in 2013. Capital expenditure on developing products and expanding production sites and on the ongoing modernisation of the IT infrastructure increased slightly year on year.

A significant portion of capital expenditure went on the development and refinement of counterbalance trucks, reach trucks and other warehouse trucks and on innovations such as lithium-ion batteries. 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 standardisation of the global sales systems.

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 amounts available under loan facilities. Cash and cash equivalents totalled €219.3 million as at 31 December 2013. The figure for the previous year of €562.4 million had been boosted by inflows from the transactions with Weichai Power at the end of 2012. Taking into account the loan facility that was still available, the KION Group had access to cash and cash equivalents amounting to €1,079.6 million as at the reporting date, compared with €930.9 million as at 31 December 2012.

Net cash provided by the KION Group’s operating activities totalled €336.1 million (2012: €414.0 million). The significant decrease was largely due to one-off tax payments of €57.7 million in connection with the sale of the hydraulics business in 2012. EBIT of €549.1 million in 2012 included, among things, income of €211.8 million from the sale of the hydraulics business that did not impact on cash flow from operating activities.

Net cash used for investing activities totalled €133.5 million. By contrast, the net cash provided by investing activities in 2012 came to €104.1 million, which included proceeds of €259.7 million from the sale of the hydraulics business. Cash payments for capital expenditure on non-current assets and property, plant and equipment, which make up the biggest outflow of funds, fell from €155.1 million in 2012 to €125.8 million in 2013. In both the Linde Material Handling and STILL operating segments, the volume of capital expenditure was below that of the comparable prior-year period, which for the LMH segment had still included the hydraulics business and for the STILL segment the new plant in Brazil. Major projects related to improvement of the performance of the global spare parts warehouse in Kahl, the expansion of production and development capacities in China in the LMH segment and various measures to modernise the German sites in the STILL segment. Capital expenditure (excluding leased and rental assets) was again funded in the reporting year.

Net cash used for acquisitions amounted to €25.1 million (after deduction of the cash received). The acquisitions were the Arser Group in Turkey (€3.9 million) and 51.0 per cent of the shares in the German dealer Willenbrock Fördertechnik (€21.2 million). In the previous year, €9.7 million of the outflow of funds was attributable to the acquisition of a majority stake in Linde Creighton. The main inflows from investing activities related to dividend payments from equity investments, interest income and net inflows from non-current assets.

Free cash flow – the sum of cash flow from operating activities and investing activities – was €202.6 million in the reporting period. This was below the prior-year figure of €518.1 million, which had been affected by non-recurring items.

Cash flow from financing activities amounted to minus €538.6 million. Inflows resulted from the issuance of the corporate bond in February 2013 (€649.0 million), capital contributions in connection with the IPO (€741.8 million) and a drawdown from the new loan facility (€184.4 million). Gross repayments of all financial liabilities, including the early redemption of the 2011/2018 floating rate note, amounted to a total outflow over the period as a whole of €2,201.6 million. This amount was partly offset by taking up financial debt of €1,095.9 million – including the corporate bond issued in 2013. Cash and cash equivalents of €5.6 million were used to buy 200,000 shares for an employee share programme. The cash payments for costs incurred in connection with the debt and equity transactions mentioned above amounted to €56.3 million (2012: €15.6 million). Regular interest payments were €10.1 million lower than in 2012 and amounted to €119.6 million in the reporting period. These interest payments included a non-recurring outflow of funds of €14.4 million resulting from the termination of interest-rate hedging instruments in connection with the previous acquisition finance arrangements. The net cash outflow from financing activities in 2012 (€330.1 million) was also largely attributable to the repayment of loans. The positive free cash flow and the existing cash from 2012 were predominantly used for the repayments. >> Table 027