Independent auditors’ report

To KION GROUP AG, Wiesbaden/Germany

Report on the audit of the consolidated financial statements and the combined management report

Audit opinions

We have audited the consolidated financial statements of KION GROUP AG, Wiesbaden/Germany, and its subsidiaries (Group) – which comprise the consolidated balance sheet as at 31 December 2017, the group income statement, the consolidated statement of comprehensive income, the consolidated statement of cash flows and the consolidated statement of changes in equity for the business year from 1 January to 31 December 2017 as well as the notes to the consolidated financial statements including a summary of significant accounting methods. In addition, we have audited the combined management report on the entity and the Group of KION GROUP AG, Wiesbaden/Germany, for the business year from 1 January to 31 December 2017. In conformity with German legal regulations we have not audited the parts of the combined management report specified in the Chapter “Other information” of our independent auditors’ report with regard to their content.

In our opinion, based on our knowledge obtained during the audit

• the accompanying consolidated financial statements in all material respects comply with the International Financial Reporting Standards (IFRS), as adopted by the EU, and the additional requirements of German commercial law pursuant to Sec. 315e (1) German Commercial Code (HGB) and give a true and fair view of the net assets and financial position in accordance with German principles of proper accounting as at 31 December 2017 as well as its results of operations for the business year from 1 January to 31 December 2017, and
• the accompanying combined management report as a whole provides a suitable view of the Group’s position. In all material respects, this combined management report is consistent with the consolidated financial statements, complies with the German statutory requirements and suitably presents the opportunities and risks of future development. Our audit opinion on the combined management report does not extend to the content of the parts of the combined management report detailed in the Chapter “Other information”.

Pursuant to Sec. 322 (3) Sentence 1 of the German Commercial Code (HGB), we state that our audit has not led to any reservations with respect to the propriety of the consolidated financial statements and the combined management report.

Basis for audit opinions

We conducted our audit of the consolidated financial statements and combined management report in accordance with Sec. 317 of the German Commercial Code (HGB) and the EU Audit Regulation (No. 537/2014, hereinafter “EU Audit Regulation”), and German generally accepted standards for the audit of consolidated financial statements promulgated by the Institute of Public Auditors in Germany [Institut der Wirtschaftsprüfer] (IDW). Our responsibilities under these requirements and principles are further described in the Chapter “Auditors’ responsibility for the audit of the consolidated financial statements and the combined management report” of our independent auditors’ report. We are independent of the group entities in accordance with European and German commercial law and rules of professional conduct and we have fulfilled our other ethical responsibilities applicable in Germany in accordance with these requirements. In addition, pursuant to Article 10 (2) Lit. f) of the EU Audit Regulation, we declare that we have not provided any prohibited non-audit services pursuant to Article 5 (1) of the EU Audit Regulation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions on the consolidated financial statements and the combined management report.

Key audit matters in the audit of the consolidated financial statements

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements for the business year from 1 January to 31 December 2017. These matters were addressed in the context of our audit of the consolidated financial statements as a whole and in forming our audit opinion thereon but we do not provide a separate opinion on these matters.

In the following we present the key audit matters in our view:

1) Recoverability of the goodwill and brand names with indefinite useful life

2) Recognition of leases as regards sales

3) Realisation of revenue regarding construction contracts in the Supply Chain Solutions business segment

Our presentation of these key audit matters has been structured as follows:

a) Description (including reference to corresponding information within the consolidated financial statements)

b) Auditors’ response

1) Recoverability of the goodwill and brand names with indefinite useful life

a. As at 31 December 2017, the goodwill and brand names with indefinite useful life in the consolidated financial statements amount to mEUR 3,382.5 (30.1% of total assets) and mEUR 943.7 (8.4% of total assets), respectively. The goodwill and brand names with indefinite useful life are tested by Management for impairment each year. This impairment test is conducted regardless of whether there are external or internal indicators for an impairment. The impairment test is conducted at the level of the operating entities as cash-generating units by determining the corresponding realisable amount and comparing that realisable amount with the corresponding carrying value. The realisable amount is determined using the discounted cash flow method on the basis of KION GROUP AG’s budget consisting of the operative three-years plan (budget 2018 and medium-term budget 2019 to 2020) as well as of a projection concerning two further years, which is adjusted using assumptions about long-term growth rates. The result of this measurement highly depends on the Legal representative’s estimation of the forecast cash flows of the corresponding operating entities as well as the discount rate used (weighted average cost of capital – WAAC) and, therefore, is subject to great uncertainty. Therefore and due to the underlying complexity of the valuation models applied, this matter was of particular significance in the scope of our audit.

The entity’s information on the goodwill and brand names with indefinite useful life is provided in Note [7] and [17] of the consolidated financial statements.

b. During our audit, we, among other things, obtained an understanding of the method applied during the impairment test, the budget process of KION as well as the determination of the cashgenerating units and assessed the determination of the WACC. In this context, we considered the Group’s adherence to the budget process over the past years.

Regarding the impairment test, we audited the appropriateness of the expected future cash flows mainly by comparing the information with the operative budget (2018) approved by the Supervisory Board and with the medium-term budget (2019 to 2020) approved by the Legal representatives and by examining the key valuation assumptions and parameters for plausibility based on expectations about macroeconomic and industry-specific trends. As a significant portion of the value in use has been determined based on projected cash flows for the period following the five-year budget (period of perpetuity), we also audited in particular the sustained growth rate applied for the period of perpetuity based on industry-specific market expectations. With respect to the evaluation of the discount rate, we consulted internal valuation specialists, who convinced themselves of the appropriateness of the discount rate used based on market comparisons. Due to the great significance of the goodwill and the brand names with indefinite useful life in the consolidated financial statements, we finally conducted sensitivity analyses with regard to both the growth expectations of the future cash flows from the operating entities and the applied discount rate.

2) Recognition of leases as regards sales

a. To a great extent, KION uses leases as a sales instrument in the business segment Industrial Trucks & Services. The corresponding agreements comprise contracts, under which the KION entities qualify as contract parties, and those, under which the lease object was sold to external financial partners. The following three contract types are primarily used:

• Single Step Lease: The lease object is directly leased to the consumer.
• Sale and Leaseback Sublease: The lease object is sold to a financial partner and subsequently leased back. At the same time, the lease object is also rented out under a sublease contract to the consumer.
• Indirect consumer financing: The (lease) object is sold to a financial partner, who rents it out to a consumer.

As at 31 December 2017, the carrying value of the lease receivables and of the lease assets amounts to mEUR 875.8 (finance leases) (7.8% of total assets) and mEUR 1,173.7 (operating leases and indirect consumer financing, which does not meet the requirements under IAS 18) (10.5% of total assets), respectively. Single-step leases and sale-and-leaseback sublease contract types are classified as finance leases or operating leases within the meaning of IAS 17. Revenue realisation with respect to the indirect consumer financing is governed by IAS 18 and, consequently, depends on whether the material benefits and risks are transferred to the financial partner. If the requirements for realisation of revenue according to IAS 18 are not met, the purchase price paid by the financing party is recognised as deferred charge and proportionately recognised as revenue over the term of the lease agreement between financing party and consumer.

Group-wide, consistent lease applications shall ensure that the recognition, categorisation and classification of the various contract types according to the IFRS are complete and correct. The determination of the criteria and parameters in these applications are subject to the Legal representative’s judgement. The classification and entry routines of the lease applications are updated, programmed and managed centrally in Germany while the contract input is performed locally in the operating or the Group’s own financial services entities. In the financial year 2017, in this context, a new lease application was introduced in the operating group entities, with this new application replacing the previous applications in selected component areas.

Due to the high transaction volume in connection with the various contract types, any errors in this area may considerably affect the consolidated financial statements. For this reason, the assessment of the accounting for leases was of particular significance in the scope of our audit.

The entity’s information on the accounting for leases is provided in the Notes [7], [18], [19], [22], [31] and [34].

b. As part of our audit, we first updated our understanding of the process including our understanding of the existing contract types as well as the entity’s internal controls regarding leases.

In the light of our understanding of the organisational composition and the overall process, the audit on the one hand focused on the lease applications used and on the other hand on the completeness and accuracy of the data input in the individual component areas.

With respect to the lease applications used, we examined, where required, the appropriateness, implementation and effectiveness of the IT controls in line with our audit strategy. As part of this examination, we consulted internal IT specialists.

In a next step, we obtained an understanding of whether the automated entry and classification routines used in the lease applications comply with the relevant IFRS. To this end, we first examined the KION Accounting Manual, which represents the basis for routine programming, for conformity with the IFRS. In addition, we assessed whether the entry and classification routines have been appropriate. To this end, regarding the lease applications, which have already been used in the prior year, we examined, on the one hand, the revision protocols of the financial year for compliance with the KION Accounting Manual. On the other hand, we made examinations on a sample basis both in the form of random samples and judgemental selections by making sure that all contract types used were subject to the examination. Based on the data inputs, we assessed for each selected contract whether the results of the lease applications comply with the relevant IFRS.

We examined the data inputs made in the financial year in the individual component areas for accuracy directly in the operating entities on a sample basis in the form of mathematical and statistical methods and extrapolated any identified deviations to the corresponding basic population. In this context, apart from the accuracy, we audited the appropriate cut-off and completeness of the data inputs on the basis of the original contracts. Where required, we received confirmations of third parties to assess the completeness of the entered contracts.

Due to the introduction of a new lease application in selected group entities in the financial year, we additionally examined the required migration of the historical contract data for completeness and accuracy and the entry and classification routines for appropriateness. This examination was performed in the form of a reconciliation of the assessed results of the lease applications and comparison between the transferred and the migrated contract data.

3) Realisation of revenue regarding construction contracts in the Supply Chain Solutions business segment

a. In the business segment Supply Chain Solutions, KION’s revenue increased from mEUR 364.7 to mEUR 2,001.8 in the financial year 2017 primarily due to the acquisition of the Dematic group in November 2016. Accordingly, the business segment’s contribution to the Group’s total revenue increased from 6.5% to 26.2% due to the full-year effect.

Construction contracts, the determination of which is based on the percentage of completion of the individual projects, make up a significant portion of the revenue in the business segment Supply Chain Solutions as they amount to mEUR 1,725.6 and account for 86.2% of the business segment’s total revenue. The percentage of completion is determined based on the proportion of the contract costs that have already been incurred to the total estimated contract costs as at the balance sheet date.

The revenue highly depends on estimations subject to the legal representative’s judgement particularly concerning the total contract costs and the resulting percentage of completion. Also taking into account the high amount of revenue related to construction contracts in the consolidated financial statements, this matter is of particular significance in the scope of our audit.

The information in the notes to the consolidated financial statements concerning revenue realisation from construction contracts in the business segment Supply Chain Solutions is provided in Notes [7] and [8].

b. As part of our audit, we deepened our knowledge of the processes concerning the project business including our understanding of the corresponding internal controls of the Group. We examined the appropriateness of the internal controls’ design and implementation regarding the estimation of the percentage of completion and continued review of contract costs.

Based on that, we assessed the estimations made for individual projects, which were selected based on risk considerations. To this end, we examined the current cost reports and project calculations taking into account the customer contracts with respect to the percentage of completion of the selected projects. To this end, we additionally consulted the employees responsible for the relevant projects on matters such as the current project phase, any risks including penalties and changes to original assumptions and requested declarations on unexpected project developments, which were compared with supplementary evidence. In addition, we have convinced ourselves, where required, of the project progress on site and have taken into account the adherence to the budget planning based on retrospective analyses of selected projects.

Other information

The legal representatives are responsible for the other information. The other information comprises the following documents received prior to the date of this independent auditors’ report:

• the Group’s statement on business management specified in the combined management report,
• The assurance pursuant to Sec. 297 (2) Sentence 4 German Commercial Code (HGB) to the consolidated financial statements and assurance pursuant to Sec. 315 (1) Sentence 5 German Commercial Code (HGB) to the Group management report, and
• The remaining parts of the annual report, with the exception of the audited consolidated financial statements and combined management report as well as our independent auditors’ report.

In addition, the other information comprises the separate non-financial Group report, which is expected to be published to KION GROUP AG’s website by 30 April 2018.

Our audit opinions on the consolidated financial statements and the combined management report do not extend to cover the other information, and accordingly we do not issue an audit opinion or any other form of assurance conclusion thereon.

In connection with our audit, our responsibility is to read the other information and, in doing so, to consider whether the other information

• is materially inconsistent with the consolidated financial statements, the combined management report or our knowledge obtained in the audit, or
• otherwise appears to be substantially misstated.

Responsibilities of the legal representatives and the Supervisory Board for the consolidated financial statements and the combined management report

The legal representatives are responsible for the preparation of the consolidated financial statements, which comply with the requirements of the IFRS, as adopted in the EU, and the additional requirements of German commercial law pursuant to Sec. 315e (1) German Commercial Code (HGB) in all material respects, so that the consolidated financial statements in accordance with German principles of proper accounting give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. In addition, the legal representatives are responsible for the internal controls they have identified as necessary in order to enable the preparation of consolidated financial statements that are free from material misstatements, whether intentional or unintentional.

In preparing the consolidated financial statements, the Legal representatives are responsible for assessing the Group’s ability to continue as a going concern. Furthermore, they have the responsibility to disclose matters related to going concern, as applicable. In addition, they are responsible for using the going concern basis of accounting, unless this conflicts with the Group’s intention to liquidate the Group or wind down operations or there is no realistic alternative.

In addition, the Legal representatives are responsible for the preparation of the combined management report, which as a whole provides a suitable view of the Company’s position, is consistent with the consolidated financial statements in all material respects, complies with German legal regulations and suitably presents the opportunities and risks of future development. Furthermore, the Legal representatives are responsible for such arrangements and measures (systems) which it has deemed necessary in order to enable the preparation of a combined management report in accordance with the German commercial law to be applied and to furnish sufficient and appropriate evidence for the statements in the management report.

The Supervisory Board is responsible for overseeing the Group’s financial reporting process for the preparation of the consolidated financial statements and the combined management report.

Auditors’ responsibility for the audit of the consolidated financial statements and the combined management report

Our objectives are to obtain reasonable assurance about whether the combined financial statements as a whole are free from material misstatements, whether intentional or unintentional, and whether the combined management report as a whole provides an appropriate view of the Group’s position and, in all material respects, is consistent with the findings of the audit, is in accordance with German legal regulations, and appropriately presents the opportunities and risks of future development, as well as to issue an independent auditors’ report that includes our opinions on the consolidated financial statements and the combined management report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Sec. 317 of the German Commercial Code (HGB) and the EU Audit Regulation and German generally accepted standards for the audit of financial statements promulgated by the Institute of Public Auditors in Germany (IDW), will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and the combined management report.

As part of an audit, we exercise professional judgement and maintain professional scepticism. We also

• identify and assess the risks of material misstatements in the consolidated financial statements and in the combined management report, whether intentional or unintentional, design and perform audit procedures responsive to those risks and obtain audit evidence that is sufficient and appropriate to provide a basis for our audit opinion. The risk of not detecting a material misstatement resulting from fraud is higher than one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• obtain an understanding of internal control relevant to the audit of the consolidated financial statements and the arrangements and measures relevant to the audit of the combined management report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of these systems.
• evaluate the appropriateness of the accounting policies used by the Legal representatives and the reasonableness of accounting estimates and related disclosures made by the Legal representatives.
• conclude on the appropriateness of the legal representative’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that there is a material uncertainty, we are required to draw attention in our independent auditors’ report to the related disclosures in the consolidated financial statements and combined management report, or, if such disclosures are inadequate, to modify our corresponding opinion. Our conclusions are based on the audit evidence obtained up to the date of our independent auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.
• evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures and whether the consolidated financial statements represent the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the net assets and financial position as well as the results of operations of the Group in accordance with the IFRS, as applicable in the EU, and the additional requirements of German commercial law pursuant to Sec. 315e (1) German Commercial Code (HGB).
• obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express opinions on the consolidated financial statements and the combined management report. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinions.
• evaluate the consistency of the combined management report with the consolidated financial statements, its legal consistency and the view provided of the Group’s position.
• perform audit procedures on the forward-looking information presented by the Legal representatives in the combined management report. On the basis of sufficient appropriate audit evidence, we particularly evaluate the significant assumptions underlying the forward-looking information by the Legal representatives and evaluate the correct derivation of forward-looking information from these assumptions. We do not issue an independent opinion on the forward-looking information or on the underlying assumptions. There is a significant unavoidable risk that future events will differ materially from the forward-looking information.

We communicate with those charged with governance, among other matters, the planned scope and timing of the audit and significant audit findings, including any deficiencies in internal control, which we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current reporting period and are therefore the key audit matters. We describe these matters in our independent auditors’ report on the consolidated financial statements unless law or regulation precludes public disclosure about the matter.

Other legal and regulatory requirements

Other information pursuant to Article 10 EU Audit Regulation

We were appointed by the annual general meeting on 11 May 2017 to audit the consolidated financial statements. We were engaged by the Supervisory Board on 16 May 2017 and 20/27 November 2017. We have been engaged continuously as the auditor of the consolidated financial statements of KION GROUP AG, Wiesbaden/Germany, which was named KION 1 Holding GmbH until 12 June 2013, since the business year 2007. Since the financial year 2013, the entity has been a public interest entity within the meaning of Sec. 319a (1) Sentence 1 German Commercial Code (HGB).

We confirm that the audit opinions contained in this independent auditors’ report are consistent with the additional report to the audit committee pursuant to Article 11 EU Audit Regulation (“Prüfungsbericht”).

Responsible Auditor

The auditor responsible for the audit is Kirsten Gräbner-Vogel.

Frankfurt am Main/Germany, 21 February 2018

Deloitte GmbH
Wirtschaftsprüfungsgesellschaft