Financial position

Principles and objectives of financial management

The KION Group pursues a conservative financial policy of maintaining a strong cross-over credit profile with reliable access to debt capital markets. 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. 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 KION Group is a publicly listed corporate group and therefore ensures that its financial management takes into account the interests of shareholders and those of the banks providing its funding. 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 2021.

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. Since June 2016, rating agency Standard & Poor’s has classified the KION Group as BB+ with a negative outlook, while the rating from Moody’s since 1 November 2016 has been Ba1 with a negative outlook. Shortly after the reporting date on 4 January 2017, Fitch Ratings issued the KION Group with a long-term issuer rating of BBB– with a stable outlook. This is the first time that the KION Group has received an investment-grade rating.

The KION Group maintains a liquidity reserve in the form of unrestricted, agreed and confirmed credit lines and cash in order to ensure long-term financial flexibility and solvency. The Group also uses derivatives to hedge currency risk.

Main capital market activities in the reporting period

The KION Group obtained a firm commitment for a bridge loan on attractive terms, originally in an amount of €3.0 billion, to finance the acquisition of Dematic. In July of the reporting year, KION GROUP AG increased its share capital by 10.0 per cent for cash and, including the share premium, generated issue proceeds of €459.3 million. The costs associated with the capital increase amounting to €2.0 million (net) were recognised directly in equity.

Following this capital increase, the agreed financing under the bridge loan was reduced by the amount of the proceeds from the issue and now stands at €2,543.2 million. This loan amount was fully drawn down as at the reporting date. The bridge loan is subdivided into three tranches with staggered maturities from February 2018 to November 2021 and offers the best possible temporary flexibility and security.

In the first quarter of 2016, the KION Group had successfully repaid the financing dating back to the time before the IPO and updated its financing structure with much better terms. The current senior facilities agreement (SFA) comprises a revolving credit facility of €1,150.0 million (maturing in February 2021) and a fixed-term tranche of €350.0 million (maturing in February 2019). KION GROUP AG has issued guarantees to the banks for all of the payment obligations under the new SFA. The new syndicated loan is not collateralised, as is typical in the current market environment for companies that are on the cusp of an investment-grade rating. The contractual terms of the SFA require compliance with certain covenants. All the covenants were complied with as at the reporting date.

In September 2016, KION GROUP AG carried out another share buyback to support its KION Employee Equity Programme (KEEP), purchasing a total of 50,000 of its own no-par-value shares (around 0.046 per cent of the share capital). To do so, KION Group AG used the renewed authorisation granted at the Annual General Meeting on 12 May 2016. In October 2016, the KION Group employees entitled to participate in KEEP were given the opportunity to buy more KION shares. By 31 December 2016, a total of 45,564 shares had been purchased by staff (31 December 2015: 73,512 shares). This increased the number of shares held in treasury to 164,486 as at the reporting date.

Analysis of capital structure

Overall, current and non-current liabilities had risen by €4,232.6 million to €8,824.2 million as at the reporting date. In addition to the acquisition financing, the deferred tax liabilities in connection with the preliminary purchase price allocation for Dematic led to the increase in liabilities. The non-current liabilities of €6,151.7 million (31 December 2015: €2,860.0 million) included deferred tax liabilities of €905.3 million (31 December 2015: €302.7 million). > TABLE 026

Financial debt

The utilisation of the bridge loan meant that the financial liabilities in the statement of financial position as at the reporting date had risen sharply compared with the figure at the end of 2015 (€676.5 million) and now stood at €3,183.0 million. After deduction of cash and cash equivalents of €279.6 million, net financial debt amounted to €2,903.4 million compared with €573.5 million at the end of 2015. This equated to 3.1 times (2015: 0.7 times) the adjusted EBITDA for 2016. It is important to note that the EBITDA figure only included a contribution to earnings from Dematic covering two months. The debt is to be repaid in subsequent financial years using cash flow from operating activities and other sources of funds.

Long-term borrowing net of borrowing costs increased to €2,889.1 million as at the reporting date, a year-on-year rise compared with the figure of €557.2 million at the end of 2015. The bridge loan was classified in full as a non-current financial liability as at the reporting date. One tranche (€343.2 million) is due for repayment in February 2018, followed by a further tranche (€1,200.0 million) in November 2018 and the third tranche (€1,000.0 million) in November 2021. The fixed-term tranche of the SFA maturing in February 2019 has been drawn down in full (€350.0 million). The corporate bond of €450.0 million still included at the end of 2015 was repaid in full in February 2016 together with the old revolving line of credit. As at 31 December 2016, the unused, unrestricted SFA loan facility amounted to €924.7 million and together with the freely available cash and cash equivalents totalled €1,200.8 million. The KION Group works continuously to optimise the financing of the Group (see note [50] in the notes to the consolidated financial statements). > TABLE 027

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 2016, the retirement benefit obligation under defined benefit pension plans amounted to a total of €991.0 million. The increase compared with the figure at the end of 2015 (€798.0 million) was partly attributable to the inclusion of pension provisions at Dematic amounting to €87.7 million; it was also caused by the lower level of interest rates. The provisions predominantly relate to pension plans in Germany. After deduction of the pension plan assets amounting to €12.3 million, the remaining net obligation came to €978.7 million (31 December 2015: €767.8 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 in 2016 in connection with the main pension plans totalled €20.6 million, comprising €13.9 million for direct pension payments and €6.6 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 the notes to the consolidated financial statements.

Lease liabilities

Continuing growth in the long-term leasing business with end customers in 2016 led to a correspondingly higher funding requirement. Lease liabilities arising from sale and leaseback transactions to fund the long-term leasing business with end customers increased to €1,007.2 million (31 December 2015: €855.6 million) in line with the growth of the business. Of this total, €722.0 million related to non-current and €285.2 million to current lease liabilities.

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 2016, other financial liabilities included liabilities of €440.0 million (31 December 2015: €403.2 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 €16.7 million (31 December 2015: €17.8 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

Consolidated equity was higher than at the end of 2015, advancing by €686.4 million to €2,535.1 million as at 31 December 2016 (31 December 2015: €1,848.7 million). This rise was predominantly attributable to the capital increase implemented in July 2016 (€457.3 million) and the net income for the year (€246.1 million). However, the continuing low level of interest rates resulted in a negative impact on pensions, as a result of which equity declined by €50.1 million. Other positive effects recognised in other comprehensive income (€109.1 million, of which a positive impact of €110.4 million from currency translation) and the dividend payment (€76.0 million) led to an overall increase in equity of €33.1 million. The equity ratio was 22.3 per cent as at the reporting date (31 December 2015: 28.7 per cent).

Analysis of capital expenditure

The KION Group’s total capital expenditure on property, plant and equipment and on intangible assets (excluding leased and rental assets) came to €166.7 million in the reporting year, compared with €142.6 million in 2015. Once again, the main areas of spending in the Industrial Trucks & Services segment were capitalised development costs in the LMH EMEA and STILL EMEA operating units and the expansion and modernisation of production and technology sites. This included continuing capital spending at the STILL facilities in Hamburg and the LMH facilities in Aschaffenburg, for which a total of €83 million will be made available up to 2021. This is intended to lead to improved material flows in production and logistics, and to more cost-effective production processes. Capital expenditure in the Supply Chain Solutions segment mainly related to capitalised development costs as well as software and licences.

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 by €176.5 million over the course of 2016 to reach €279.6 million (31 December 2015: €103.1 million); €3.5 million of this was restricted. Taking into account the credit facility that was still available, the unrestricted cash and cash equivalents available to the KION Group as at 31 December 2016 amounted to €1,200.8 million (31 December 2015: €1,193.6 million.)

The KION Group’s net cash provided by operating activities totalled €414.3 million, which was below the comparable prior-year figure of €455.0 million. The positive trend in EBIT was offset by cash outflows in connection with the Dematic deal. In addition to the cash transaction costs incurred by KION GROUP AG, Dematic itself also incurred pre-contract expenses in connection with the acquisition by the KION Group that were then reflected in Dematic cash flows after the acquisition date. Growth in business led to a year-on-year increase in working capital and the volume of leases, thereby reducing cash flow by a total of €52.4 million. The net change of minus €158.2 million arising from the expansion of the rental business (including finance lease liabilities) was close to the prior-year level of minus €155.9 million. Higher tax payments of €108.7 million (2015: €84.8 million) reduced the level of cash flow from operating activities.

The net cash used for investing activities totalled € 2,264.3 million in the year under review (2015: €122.3 million). Cash payments for development (R&D) and for property, plant and equipment amounted to €166.7 million (2015: €142.6 million). In particular, the purchase considerations relating to the acquisitions of Dematic and Retrotech in the reporting period led to a net cash outflow of €2,118.7 million (after deduction of cash and cash equivalents acquired). Net cash of €2,091.1 million was used for the acquisition of Dematic, and €23.2 million for the acquisition of Retrotech. Cash payments for the acquisition of equity investments in the prior year (€84.9 million) had largely been in connection with the acquisition of Egemin Automation. This amount was partly offset by an inflow of funds of €77.4 million generated by 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 – amounted to minus €1,850.0 million as a result of the outflow of funds for the Dematic acquisition (2015: plus €332.7 million).

Cash flow from financing activities was well into positive territory at €2,026.3 million (2015: minus €329.1 million) following the financial liabilities taken on in connection with the acquisitions. The net drawdown of financial debt in the year under review totalled €1,744.0 million. The additional gross borrowings in 2016 amounted to €4,362.5 million. These borrowings arose as a result of the reorganisation of the financing structure in February 2016 and the need to pay the purchase consideration for the acquisition of Dematic. At the same time as taking on this new debt, the KION Group redeemed liabilities of €2,618.5 million in the reporting year. These redemptions consisted of the early repayment of a bond of €450.0 million and the repayment of the revolving credit facility of €1,243.0 million, which was replaced by the new SFA. In addition, the net cash proceeds from the capital increase (€456.7 million) were used to reduce the amount that needed to be made available under the bridge loan. The costs of obtaining financing in the year under review amounted to €23.2 million (2015: €5.6 million). The distribution of a dividend of €0.77 per share resulted in an outflow of funds of €76.0 million (2015: €54.3 million). The net cash used for current interest payments rose to a total of €76.3 million in the year under review (2015: €50.4 million). This figure included the interest payments in connection with the early redemption charge (€15.2 million) levied because of the early repayment of the corporate bond. The acquisition of employee shares caused a cash outflow of €2.8 million (2015: €2.7 million). > TABLE 028