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 from which to maintain profitable growth.

The financial resources within the KION Group are provided on the basis of 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 was funded in the year under review using a corporate bond and loan facilities, the KION Group considers the interests of shareholders, bond holders and banks in its financial management. For the sake of all 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 bond 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. In April 2015 the KION Group’s credit rating was raised. Rating agency Standard & Poor’s now classifies the KION Group as BB+ with a stable outlook, while the rating from Moody’s is Ba2 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 long-term financial flexibility and solvency.

In 2015, the KION Group used derivative financial instruments in the form of cash flow hedges and a net investment hedge in order to hedge currency risks.

Main capital market activities in the reporting period

In September 2015, KION GROUP AG carried out another share buyback to support its KION Employee Equity Programme (KEEP), purchasing a total of 70,000 of its own no-par-value shares (around 0.07 per cent of the share capital). To do so, the KION Group used the authorisation granted at the Annual General Meeting on 13 June 2013. In October 2015, the KION Group employees entitled to participate in KEEP were given the opportunity to buy more KION shares. By 31 December 2015, a total of 73,512 shares had been purchased by staff (2014: 87,438 shares). This increased the number of shares held in treasury to 160,050 as at the reporting date.

Analysis of capital structure

Financial debt

Long-term borrowing fell by €89.5 million from its level at 31 December 2014 to reach €557.2 million at the end of 2015. As at 31 December 2015, the main components of long-term borrowing were the corporate bond (€450.0 million), which was due to mature in 2020 but was paid back in February 2016, and the amounts drawn down from the revolving credit facility (€90.0 million).

As at 31 December 2015, the unused, unrestricted loan facility had risen to €1,090.8 million or – including cash and cash equivalents – to €1,193.6 million.

Because of the free cash flow generated in 2015, the improved funding structure and the payment received from the sale of 20 per cent of Linde Hydraulics (€77.4 million) the financial debt recognised fell significantly to €676.5 million in comparison with 31 December 2014 (€909.6 million). After deduction of cash and cash equivalents of €103.1 million, net financial debt fell to a historical low of €573.5 million, compared with €810.7 million at the end of 2014. Net debt as at 31 December 2015 was therefore only 0.7 times adjusted EBITDA, compared with 1.0 times in the prior year. > TABLE 025

On 25 January 2016, the Executive Board of KION GROUP AG decided to implement the new funding structure of the KION Group by redeeming the existing syndicated loan dated 23 December 2006 comprising a revolving credit facility of €1,243.0 million and the KION Group corporate bond of €450.0 million that was issued in 2013 and is due to mature in 2020. The associated repayment was made on 15 February 2016 using funds drawn down under the new senior facilities agreement.

Retirement benefit obligation

The KION Group supports pension plans in many countries. These plans comply with legal requirements, standard 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 2015, the retirement benefit obligation under defined benefit pension plans amounted to a total of €798.0 million and therefore remained at almost the same level as at the end of the previous year (31 December 2014: €787.5 million). Most of this obligation related to pension plans in Germany. After deduction of the pension plan assets amounting to €30.2 million, the remaining net obligation came to €767.8 million (31 December 2014: €765.8 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 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 2015 totalled €24.2 million, comprising €15.6 million for direct pension payments and €8.5 million for employer contributions to plan assets. Transfers to external pension funds resulted in payments of €0.1 million.

Further details about the retirement benefit obligation are provided in note [29] in the notes to the consolidated financial statements.

Lease liabilities

Continuing growth in the leasing business with end customers in 2015 led to a correspondingly higher funding requirement. Lease liabilities under sale-and-leaseback arrangements rose to €855.6 million (31 December 2014: €707.7 million). Of this total, €617.7 million was accounted for by non-current lease liabilities (31 December 2014: €461.7 million) and €237.9 million by current lease liabilities (31 December 2014: €246.0 million).

The liabilities from the short-term rental fleet and from procurement leases are reported under other financial liabilities (see note [34] in the notes to the consolidated financial statements). As at 31 December 2015, other financial liabilities included liabilities of €403.2 million (31 December 2014: €339.1 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 €17.8 million (31 December 2014: €18.5 million). The 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

Equity increased to €1,848.7 million (31 December 2014: €1,647.1 million) as a result of the strong net income. The dividend payment of €54.3 million for the 2014 financial year had only a minor impact on equity because of the overall gain of €38.9 million recognised in other comprehensive income. The equity ratio increased to 28.7 per cent (31 December 2014: 26.9 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 €272.7 million as at 31 December 2015 (31 December 2014: €250.8 million; see note [36] in the notes to the consolidated financial statements). In addition, the KION Group sold trade receivables with a total value of €75.1 million (2014: €74.4 million) through factoring transactions and derecognised those receivables in full.

Analysis of capital expenditure

Capital expenditure (excluding leased and rental assets) was again funded using cash flow from operating activities in the reporting year. Capital expenditure rose by 7.1 per cent year on year to reach €142.6 million (2014: €133.1 million). Whereas capitalised development costs in the LMH and STILL brand segments were a little lower, there was an increase in capital expenditure at the Group’s production and technology sites, the bulk of which was attributable to the LMH segment. The main capital expenditure activities were the modernisation of production facilities in Germany and Asia, the construction of a new factory in the Czech Republic and the ongoing optimisation of the IT infrastructure.

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. Cash and cash equivalents went up slightly over the course of 2015 to reach €103.1 million (2014: €98.9 million); €0.3 million of this was restricted. Taking into account the credit facilities that were still available, the unrestricted cash and cash equivalents available to the KION Group as at 31 December 2015 amounted to €1,193.6 million (2014: 939.7 million).

The KION Group’s net cash provided by operating activities totalled €677.9 million, which was significantly higher than the prior-year figure (2014: €603.8 million). This increase, which fully offset the increase in working capital, the rise in the volume of leasing, and higher tax payments, was attributable to higher contributions to operating profit and to one-off incoming payments in the year under review.

The net cash used for investing activities rose to €345.2 million (2014: €297.8 million). Cash payments, particularly for capital expenditure on research and development (R&D) and property, plant and equipment, totalled €142.6 million in 2015 (2014: €133.1 million). Owing to the increase in demand for rental trucks, the KION Group also continued to expand its short-term rental fleet business (net) with a volume of spending of €222.9 million (2014: €183.4 million). The €84.9 million in total net cash used for equity investments, in particular the acquisition of Egemin Automation, was almost completely matched by the €77.4 million inflow of funds from the sale of 20.0 per cent of the shares in Linde Hydraulics to Weichai Power.

Free cash flow – the sum of cash flow from operating activities and investing activities – was up by €26.8 million year on year at €332.7 million (2014: €305.9 million).

At minus €329.1 million, cash flow from financing activities improved significantly on the prior-year figure (2014: minus €428.1 million), which had been affected by the repayment of the corporate bonds and other factors. The financial debt taken up, which came to €911.0 million and was mainly used for the ongoing funding of the working capital and for the funding of acquisitions, was offset by repayments totalling €1,134.9 million as at 31 December 2015. Net cash of €43.3 million was used for regular interest payments (2014: €82.5 million). The distribution of a dividend of €0.55 per share resulted in an outflow of funds of €54.3 million (2014: €34.5 million). The acquisition of employee shares caused a cash outflow of €2.7 million (2014: €1.5 million). > TABLE 027