Financial position

Principles and objectives of financial management

The KION Group pursues a conservative financial policy of maintaining a strong 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 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, promissory note investors and 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 individual tranches of this borrowing will become due for repayment in the years 2021 to 2027.

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 September 2017, rating agency Standard & Poor’s has classified the KION Group as BB+ with a positive outlook, while the rating from Fitch Ratings has been BBB– with a stable outlook since January 2017. The KION Group thus has an investment-grade credit rating, helping it to secure more advantageous funding conditions in the capital markets.

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. In addition, it uses derivatives to hedge currency risk. It also entered into interest-rate swaps in 2017 in order to hedge interest-rate risk arising on floating-rate financial liabilities.

Among other stipulations, the contractual terms of the senior facilities agreement (SFA), bridge loan (AFA) and promissory note set out certain covenants. In addition, there is a financial covenant that involves ongoing testing of adherence to a defined maximum level of leverage (the ratio of financial liabilities to EBITDA). Non-compliance with the covenants or with the defined maximum level of leverage as at a particular reporting date may potentially give lenders a right of termination or lead to an increase in interest payments.

All covenants were complied with in the past financial year, as had been the case in 2016.

Main corporate actions in the reporting period

The bridge loan (AFA) agreed for the acquisition of Dematic, which was still drawn down in an amount of €2,543.2 million at the end of 2016, was significantly reduced in 2017 as a result of the successful placement of a promissory note with a nominal amount of €1,010.0 million in the first quarter of 2017. The promissory note is divided into several tranches that mature in May 2022, April 2024 and April 2027 and have floating-rate or fixed coupons. The interest-rate risk resulting from the floating-rate tranches is hedged using a number of interest-rate derivatives (cash flow hedges). Another important funding activity was the capital increase in May 2017, which generated gross proceeds of €602.9 million. By the end of 2017, tranche A2 (€343.2 million) and tranche B (€1,200.0 million) of the bridge loan and the fixed-term tranche (€350.0 million) of the senior facilities agreement (SFA) had been repaid in full.

In November 2017, the KION Group employees entitled to participate in KEEP were given the opportunity to buy more KION shares. By 31 December 2017, a total of 36,294 shares had been purchased by staff (31 December 2016: 45,564 shares). The number of shares held in treasury therefore stood at 160,829 as at the reporting date (31 December 2016: 164,486).

Analysis of capital structure

Current and non-current liabilities fell by €721.7 million to €8,079.6 million as at the reporting date (31 December 2016: €8,801.3 million). The main reason was the repayment of non-current liabilities following the corporate actions carried out in the year under review. Non-current liabilities also included deferred tax liabilities of €665.2 million, which were down significantly compared with the end of the previous year (31 December 2016: €882.5 million) owing to the lowering of the corporate income tax rate that was approved in the United States. This, combined with the netting of deferred tax assets, reduced the deferred tax liabilities by €92.2 million. Deferred tax assets and liabilities also decreased by €13.1 million owing to the Dematic purchase price allocation being finalised. > TABLE 027

Financial debt

By using the proceeds from the capital increase carried out in May 2017 and making other repayments, the KION Group reduced its current and non-current financial liabilities to €2,268.7 million (31 December 2016: €3,183.0 million). After deduction of cash and cash equivalents, net financial debt amounted to €2,095.5 million (31 December 2016: €2,903.4 million). This equated to 1.7 times the adjusted EBITDA on an annualised basis.

Long-term borrowing (net of borrowing costs) was reduced by €864.2 million to €2,024.8 million as at the reporting date. This sum includes the promissory note with a volume of €1,010.0 million that was issued in the first quarter of 2017. Tranche A2 of the AFA (€343.2 million), tranche B of the AFA (€1,200.0 million) and the fixed-term tranche of the SFA (€350.0 million) were repaid in full in the year under review. The long-dated tranche (€1,000.0 million) of the bridge loan is still outstanding and is due to mature in October 2021. The €50.1 million decrease in current financial liabilities compared with the end of 2016 was mainly due to the reduction in the drawdowns under the revolving credit facility. > TABLE 028

Retirement benefit obligation

The KION Group supports pension plans in many countries. These plans comply with legal requirements, standard local practice and thus 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 2017, the retirement benefit obligation under defined benefit pension plans amounted to a total of €1,002.7 million, which was only slightly higher than the figure at the end of 2016 of €991.0 million.

The net obligation under defined benefit pension plans was almost unchanged year on year at €978.5 million (31 December 2016: €978.7 million). Changes in estimates relating to defined benefit pension entitlements resulted in an €18.7 million increase in equity (after deferred taxes).

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 2017 in connection with the main pension plans totalled €28.2 million, comprising €17.9 million for direct pension payments and €10.0 million for employer contributions to plan assets. This included contributions of €8.9 million that had to be paid under existing minimum funding provisions for defined benefit pension plans in the United Kingdom and US. Transfers to external pension funds resulted in payments of €0.3 million.

The total carrying amount for liabilities in connection with share-based remuneration was €38.1 million as at 31 December 2017 (31 December 2016: €37.4 million).

Lease liabilities

Further expansion of the long-term leasing business with end customers in 2017 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 €1,131.1 million (31 December 2016: €1,007.2 million). Of this total, €798.2 million related to non-current and €332.9 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 the reporting date, other financial liabilities included liabilities of €493.8 million (31 December 2016: €440.0 million) arising from sale-and-leaseback transactions used to finance the short-term rental fleet. This item also included liabilities from residual value guarantees amounting to €18.2 million (31 December 2016: €16.7 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 2016, rising by €653.1 million to €3,148.8 million as at 31 December 2017 (31 December 2016: €2,495.7 million). The capital increase caused a net increase of €599.9 million. Net income (€426.4 million) and actuarial effects on pensions also boosted the Group’s equity. However, there was a negative impact of €315.2 million resulting from exchange differences at the reporting date, which meant that negative effects of €282.8 million were recognised overall in other comprehensive income. Finalisation of the purchase price allocation led to equity as at 31 December 2016 being retrospectively lowered by €39.4 million. The equity ratio increased from 22.1 per cent at the end of 2016 to 28.0 per cent as at 31 December 2017.

Analysis of capital expenditure

The KION Group’s total capital expenditure on property, plant and equipment and on intangible assets (including capitalised development costs and excluding leased and rental assets) came to €218.3 million in the reporting year. The main areas of spending were capitalised development costs (see the ‘Research and development’ section) and the expansion and modernisation of production and technology sites in the Industrial Trucks & Services segment. This included a large-scale project to update Linde Material Handling’s Aschaffenburg site, where a total of €60 million is being spent on optimising the material flow in production and logistics and will result in more cost-effective production processes by 2021. Capital expenditure in the Supply Chain Solutions segment related to capitalised development costs and, above all, software, licences and the new production facility in the Czech Republic.

Analysis of liquidity

Liquidity management is an important aspect of central financial management in the KION Group. The sources of liquidity are cash and cash equivalents, cash flow from operating activities and amounts available under credit facilities. Using cash pools, liquidity is managed in such a way that the Group companies can always access the cash that they need. The optimisation of cash management caused cash and cash equivalents to fall to €173.2 million at the end of 2017 (31 December 2016: €279.6 million). Taking into account the credit facility that was still freely available, the unrestricted cash and cash equivalents available to the KION Group as at the reporting date amounted to €1,138.0 million (31 December 2016: €1,200.8 million).

Net cash provided by operating activities totalled €615.8 million, which was significantly above the prior-year figure of €414.3 million because Dematic had only made a contribution to operations for the months of November and December in 2016. Furthermore, expenses of €63.1 million in connection with the Dematic transaction had been recognised and negatively impacted cash flow from operating activities at the end of 2016. The rise in earnings and margins in 2017 was offset by a growth-related increase in net working capital and the volume of leasing, which meant cash flow was down by a total of €181.9 million year on year. The net change of minus €205.8 million arising from the expansion of the rental business (including liabilities from finance leases) was bigger than the prior-year net change of minus €158.2 million. Higher tax payments of €136.3 million resulting from improved earnings at the KION companies (2016: €108.7 million) reduced the level of cash flow from operating activities.

The net cash used for investing activities amounted to €237.6 million. This was significantly less than the prior-year figure of €2,264.3 million, which had been heavily influenced by the net cash outflow of around €2.1 billion for the acquisition of Dematic. Smaller acquisitions were carried out in 2017, the total cash payments for which came to €13.3 million net. By contrast, cash payments for development (R&D) and for property, plant and equipment were up significantly year on year at €218.3 million (2016: €166.7 million), mainly due to the inclusion of Dematic for the full year.

Free cash flow – the sum of cash flow from operating activities and investing activities – amounted to €378.3 million (2016: minus €1,850.0 million).

The net cash used for financing activities of €472.5 million was primarily due to the net repayment of financial debt in an amount of €914.7 million, which outweighed the inflows from the capital increase of €598.6 million. The gross repayment amount of €3,340.0 million included the repayment in full of tranches A2 (€343.2 million) and B (€1,200.0 million) of the bridge loan and the fixed-term tranche of the SFA (€350.0 million). The additional gross borrowings in 2017 amounted to €2,425.3 million and included the issuance of the promissory note with a volume of €1,010.0 million in the first quarter of 2017. The net cash used for current interest payments rose to a total of €58.1 million in 2017 due to higher average net debt during the year (2016: €46.7 million excluding early repayment charges paid of €29.6 million). The non-recurring interest payments in 2016 had related to the charges for early redemption of the KION Group’s corporate bond and early repayment of a bond of Dematic. The dividend paid in May 2017 of €0.80 per share resulted in an outflow of funds of €86.9 million. The acquisition of employee shares caused a cash outflow of €4.3 million (2016: €2.8 million). > TABLE 029