Financial position

Principles and objectives of financial management

By pursuing an appropriate financial management strategy, the KION Group makes sufficient cash and cash equivalents 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 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 bargaining position 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 components of this borrowing will become due for repayment in the years 2018 to 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 with the covenants 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.

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 a strong credit profile in the capital and funding markets by rigorously pursuing a value-based strategy, implementing proactive risk management and ensuring a solid funding structure. On 7 April 2014, Moody’s raised the rating of the KION Group and the bonds from Ba3 to Ba2 with a stable outlook. Then, on 15 April 2014, Standard & Poor’s raised its rating for the KION Group from BB- with a positive outlook to BB, still with a positive outlook.

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. To the greatest possible extent, only cash flow hedges were used for this purpose in the reporting year.

Main financing activities in the reporting period

On 15 April 2014, the KION Group repaid early and in full the fixed-rate tranche of the corporate bond issued in 2011, which was due to mature in 2018 and had a volume of €325.0 million, and the floating-rate tranche of the corporate bond issued in 2013, which was due to mature in 2020 and had a volume of €200.0 million. The funds used for the repayment mainly originated from a revolving credit facility maturing in June 2018. Also in April 2014, this revolving credit facility was increased by €198.0 million to a total of €1,243.0 million on the basis of bilateral lending agreements with a group of banks. These additional loans mature in April 2019 and also have a variable interest rate. This credit facility currently has lower interest rates than the two repaid corporate bond tranches. A further core component of the long-term funding of the KION Group is the remaining fixed-rate corporate bond with a volume of €450 million, which is due for repayment in 2020.

In September 2014, KION GROUP AG purchased 51,000 no-par-value treasury shares as part of a share buy-back programme; the shares equated to approximately 0.052 per cent of the total share capital. Together with the 200,000 treasury shares already bought in 2013, these shares were offered from October initially to employees of the German companies of the KION Group participating in the KION Employee Equity Programme in order to enable the employees to share in the benefits from the performance of the business. Employees had acquired 87,438 shares by the end of the year. Over the coming years, it is planned to extend the KION Employee Equity Programme to cover subsidiaries outside Germany.

Analysis of capital structure

Financial debt

Long-term borrowing totalled €648.0 million as at 31 December 2014 (31 December 2013: €975.0 million) and comprised the corporate bond due to mature in 2020 (€450.0 million) and the drawdowns under the revolving credit facility classified as long term (€198.0 million). The fixed-rate bond with a volume of €325.0 million and a maturity date of 2018 was repaid early in April 2014. As at the reporting date, an amount of €204.0 million had also been drawn down from the revolving credit facility on a short-term basis (31 December 2013: €184.4 million). As at 31 December 2014, the unused, unrestricted loan facility stood at €841.0 million or – including unrestricted cash and cash equivalents – at €939.7 million.

At €909.6 million, financial debt was lower overall at the end of 2014 than at the end of 2013 (31 December 2013: €1,198.6 million). The main reason for this was the lower level of short-term borrowing. After deduction of cash and cash equivalents of €98.9 million, the remaining net financial debt came to €810.7 million (31 December 2013: €979.3 million). Net debt was approximately 1.0 times adjusted EBITDA compared with 1.4 times as at 31 December 2013 and declined therefore significantly relative to earnings. > 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 2014, the retirement benefit obligation under defined benefit pension plans amounted to a total of €787.5 million (31 December 2013: €560.1 million). Most of this obligation related to pension plans in Germany. The significant year-on-year increase overall was largely attributable to changes in the discount rate, given the prevailing low level of interest rates. After deduction of the pension plan assets amounting to €21.6 million, the remaining net obligation came to €765.8 million (31 December 2013: €537.7 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 under retirement pension obligations in 2014 totalled €20.4 million, comprising €14.4 million for direct pension payments and €5.6 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

Continuing growth in the leasing business with end customers in 2014 led to a correspondingly higher funding requirement. Lease liabilities under sale-and-leaseback arrangements rose to €707.7 million (31 December 2013: €617.1 million). Of this total, €461.7 million was accounted for by non-current lease liabilities (31 December 2013: €403.7 million) and €246.0 million by current lease liabilities (31 December 2013: €213.3 million).

Short-term rentals and procurement leases are allocated to the brand companies. The corresponding liabilities are reported under other financial liabilities (see note [33] in the notes to the consolidated financial statements). As at 31 December 2014, other financial liabilities included liabilities of €339.1 million (31 December 2013: €327.5 million) arising from sale-and-leaseback transactions used to finance the short-term rental fleet. The item also included liabilities from residual value guarantees amounting to €18.5 million (31 December 2013: €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.

Equity

The level of equity changed only marginally in the reporting year. As at the reporting date, equity amounted to €1,647.1 million, an increase of 2.3 per cent year on year (31 December 2013: €1,610.0 million). In addition to the positive effect from net income there were significant negative effects recognised in other comprehensive income amounting to €112.7 million, primarily as a result of the reduction in the discount rate used for pension obligations. The equity ratio nevertheless improved slightly to 26.9 per cent (31 December 2013: 26.7 per cent). > TABLE 026

Funding vehicles not reported on the statement of financial position

The KION Group also makes use of funding vehicles not reported in 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 €250.8 million as at 31 December 2014 (31 December 2013: €206.0 million; see note [34] in the notes to the consolidated financial statements).

Analysis of capital expenditure

Capital expenditure (excluding leased and rental assets) was again funded using cash flow from operating activities in the reporting year. The volume of capital expenditure went up by 5.9 per cent year on year to €133.1 million (2013: €125.8 million). As was the case in 2013, one major item of capital spending took the form of capitalised development costs in the Linde Material Handling and STILL segments, for example in relation to the enhancement of electric forklift trucks, warehouse technology products, innovative intralogistics solutions and lithium-ion technology. In addition, the KION Group continued to modernise its production and technology sites, especially in Germany and Asia. Another area of capital expenditure was the ongoing improvement of the IT infrastructure, including standardisation of the global sales systems.

The volume of capital expenditure rose in both brand segments, above all due to the modernisation of equipment and production facilities. The construction of the new plant in the Czech Republic will only have a material impact on the volume of capital expenditure from 2015 onwards.

Analysis of liquidity

Liquidity management is an important aspect of central financial management. The sources of liquidity are cash and cash equivalents, cash flow from operating activities and amounts available under credit facilities. As at 31 December 2014, cash and cash equivalents had declined to €98.9 million owing to better utilisation of intra-group cash on hand outside Germany (31 December 2013: €219.3 million). Taking into account the undrawn credit facilities, the KION Group had unrestricted cash and cash equivalents of €939.7 million at the end of 2014, compared with €1,079.6 million as at 31 December 2013. Net debt decreased by €168.6 million.

The KION Group’s net cash provided by operating activities totalled €603.8 million, which was significantly higher than the prior-year figure of €506.3 million after restatement to reflect the rental assets. The main reason for this was the €68.8 million decrease in tax payments, which had a positive impact on cash flow. This decrease was due to the fact that there had been one-off tax payments in connection with the sale of the hydraulics business. A higher level of working capital at the reporting date had the effect of reducing cash flow.

Net cash used for investing activities was lower than in the previous year at €297.8 million (2013: net cash used of €310.7 million). Capital expenditure on developments (R&D), property, plant and equipment, and the rental fleet business (net) rose by €20.5 million year on year. In the previous year, net cash totalling €25.1 million had been used to acquire Arser and the remaining shares in Willenbrock. The main inflows from investing activities related to the disposal of an equity investment of the Willenbrock Group, dividend payments and net inflows from disposals of property, plant and equipment.

Free cash flow – the sum of cash flow from operating activities and investing activities – increased by €110.3 million to €305.9 million in the reporting period (2013: €195.6 million). As in 2013, a large part of it was used for repayments.

At minus €428.1 million, cash flow from financing activities was down significantly on the prior-year figure (2013: minus €531.6 million), which had been particularly affected by the IPO and the restructuring of financial debt. The net repayment of financial debt in the year under review totalled €301.2 million (2013: €1,105.7 million). The financial debt taken up during the year, which came to €1,375.2 million, was more than offset by repayments totalling €1,676.4 million. These repayments included €525.0 million in respect of the early redemption of the bond tranches plus early repayment charges of €14.8 million. Net cash of €82.5 million was also used for regular interest payments (2013: €112.6 million). The distribution of a dividend for 2013 of €0.35 per share resulted in an outflow of funds of €34.5 million, while the acquisition of a further 51,000 shares for employees in 2014 generated an outflow of €1.5 million. > TABLE 027