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 implement proactive risk management by rigorously pursuing its corporate strategy and to maintain an investment-grade credit rating in the capital and funding markets by 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 enters into interest-rate swaps in order to hedge risks attaching to financial liabilities.

Among other stipulations, the contractual terms of the senior facilities agreement (SFA), the acquisition facilities agreement (AFA) and the promissory notes set out certain covenants. In addition, there is a financial covenant that involves ongoing testing of adherence to a defined maximum level of leverage. 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 2017.

Main corporate actions in the reporting period

In January 2018, the term of the revolving credit facility of €1,150.0 million agreed under the SFA was extended by a year, which means the KION Group can now utilise this credit facility until February 2023. The KION Group issued a further promissory note in June 2018. Split into fixed-rate and variable-rate tranches, it has a volume of €200.0 million and will mature in June 2025. The risk of a change in fair value has been hedged using an interest-rate swap with matching maturity. The hedging transaction is recognised as a fair value hedge. The funds generated by this promissory note were used to repay part of the long-term tranche under the AFA. Following further repayments using funds from operating activities, the only outstanding liability in connection with the AFA entered into in order to fund the acquisition of Dematic is the floating-rate long-term tranche in a residual amount of €600.0 million (31 December 2017: €1,000.0 million), which is due to mature in October 2021. As a result of the early repayment, deferred borrowing costs of €1.9 million had to be recognised under financial expenses. The KION Group has issued guarantees to the banks for all of the payment obligations under the SFA and AFA and it is the borrower in respect of all the payment obligations resulting from the promissory notes.

In October 2018, the KION Group employees entitled to participate in KEEP were given the opportunity to buy more KION shares. By 31 December 2018, a total of 38,691 shares had been purchased by staff (31 December 2017: 36,294 shares). The number of shares held in treasury therefore stood at 165,558 as at the reporting date (31 December 2017: 160,829).

Analysis of capital structure

At €9,663.7 million, current and non-current liabilities had risen by €318.4 million as at the reporting date (31 December 2017: €9,345.4 million). An increase in current financial liabilities during the year was more than offset by repayments in the second half of the year. Non-current liabilities included deferred tax liabilities of €626.7 million (31 December 2017: €702.4 million).

Financial debt

Non-current financial liabilities (net of borrowing costs) decreased to €1,818.7 million (31 December 2017: €2,024.8 million). This figure can essentially be broken down into promissory notes with a total volume of €1,210.0 million and the remaining floating-rate long-term tranche of €600.0 million drawn down under the AFA.

Over the course of 2018, current financial liabilities fell by €17.4 million to €226.5 million (31 December 2017: €243.9 million). In the first six months of the year, higher drawdowns from the revolving credit facility were needed to fund net working capital as a result of the temporary bottlenecks at individual suppliers. These were repaid in the second half of 2018, taking current financial liabilities to below the level as at 31 December 2017.

Net financial debt (non-current and current financial liabilities less cash and cash equivalents) was therefore reduced to €1,869.9 million (31 December 2017: €2,095.5 million). This equated to 1.2 times the adjusted EBITDA in the year under review.

The unused, unrestricted loan facility under the SFA stood at €1,048.2 million as at the reporting date (31 December 2017: €965.3 million). > TABLE 020

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 2018, the retirement benefit obligation under defined benefit pension plans amounted to a total of €1,043.0 million, which was only slightly higher than the figure at the end of 2017 of €1,002.7 million. The net obligation under defined benefit pension plans increased year on year to reach €1,009.7 million (31 December 2017: €978.5 million). Changes in estimates relating to defined benefit pension entitlements resulted in a marginal decrease in equity.

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 2018 in connection with the main pension plans totalled €37.3 million, comprising €17.5 million for direct pension payments and €19.7 million for employer contributions to plan assets. The latter predominantly comprised a one-off payment of €17.8 million that was made in the United States in order to better meet statutory minimum funding provisions.

Liabilities from financial services

Further expansion of the long-term leasing business with end customers in 2018 again led to a higher total funding requirement in the form of liabilities from financial services and lease liabilities.

Liabilities from financial services comprise all liabilities from financing the leasing business and the short-term rental fleet on the basis of sale and leaseback sub-leases from 1 January 2018 onwards, as well as the liabilities that arise from financing the leasing business by means of lease facilities and the use of securitisations. Furthermore, liabilities from financial services arising from the leasing business include residual value obligations resulting from the indirect leasing business.

Overall, liabilities from financial services increased to €1,472.4 million as at 31 December 2018 (31 December 2017: €437.4 million). Of this total, €1,165.3 million was attributable to financing of the direct and indirect long-term leasing business (31 December 2017: €437.4 million). The total also includes residual value obligations of €319.5 million (31 December 2017: €340.7 million) resulting from the indirect leasing business.

A sum of €307.1 million, representing some of the financing of the short-term rental fleet, is recognised under liabilities from financial services (31 December 2017: €0.0 million); the remaining financing of the short-term rental fleet, which amounts to €289.9 million (31 December 2017: €515.7 million), is recognised under other financial liabilities.

Lease liabilities

Lease liabilities fell by €390.5 million to €740.6 million as at the reporting date (31 December 2017: €1,131.1 million) because new business has been included in liabilities from financial services since 1 January 2018.

Overall, liabilities from financial services and lease liabilities together totalling €1,906.0 million were attributable to financing of the direct and indirect long-term leasing business (31 December 2017: €1,568.5 million).

Other financial liabilities

As at the reporting date, other financial liabilities included liabilities of €289.9 million (31 December 2017: €515.7 million) arising from sale and leaseback sub-lease transactions used to finance the short-term rental fleet.

This item also included liabilities from procurement leases amounting to €421.2 million (31 December 2017: €369.1 million), for which right-of-use assets were recorded. Overall, current and non-current other financial liabilities came to €813.2 million (31 December 2017: €962.2 million).

Contract liabilities

Contract liabilities, of which a large proportion related to the long-term project business, increased to €570.1 million (31 December 2017: €324.4 million) due to higher advance payments from customers in connection with new orders.

Equity

Equity increased substantially to €3,305.1 million (31 December 2017: €2,992.3 million). Net income of €401.6 million was partly offset by the dividend of €116.8 million paid by KION GROUP AG in May 2018. Given the stable level of interest rates, actuarial effects on pensions had a negligible impact on equity. Exchange differences at the reporting date boosted equity by €35.5 million. The total effects recognised directly in equity amounted to €16.8 million. The equity ratio increased to 25.5 per cent (31 December 2017: 24.3 per cent).

Analysis of capital expenditure

The KION Group’s total capital expenditure on property, plant and equipment and on intangible assets (excluding right-of-use assets from procurement leases) totalled €258.5 million in the reporting year (2017: €218.3 million). This increase is primarily attributable to the rise in capitalised development costs (see ‘Research and development’), which came to €84.0 million and were thus up by 11.5 per cent on 2017.

Spending in the Industrial Trucks & Services segment continued to be focused on capital expenditure on product development and on the expansion and modernisation of the Operating Units’ production and technology facilities. Capital expenditure in the Supply Chain Solutions segment mainly related to development costs as well as software and licences.

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. At €175.3 million, cash and cash equivalents were virtually unchanged year on year (31 December 2017: €173.2 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 €1,219.8 million (31 December 2017: €1,138.0 million).

Net cash provided by operating activities totalled €765.5 million, which was higher than the prior-year figure of €711.9 million. The year-on-year improvement in earnings played a significant part in this increase. The temporary rise in liquidity tied up in inventories was partly reversed in the fourth quarter once most of the bottlenecks at individual suppliers had been resolved. Higher advance payments from customers in the project business of the Supply Chain Solutions segment made up for the increase in inventories in the Industrial Trucks & Services segment. Overall, the smaller increase in net working capital compared to the previous year made a positive contribution of €58.9 million to cash flow from operating activities. By contrast, further expansion of the leasing and rental business and, as budgeted, higher tax payments of €193.2 million (2017: €136.3 million) resulting from the positive earnings performance of KION Group companies reduced the level of cash flow from operating activities.

Net cash used for investing activities amounted to €245.6 million and was therefore higher than in the previous year (2017: €237.6 million). Within this figure, cash payments for capital expenditure on product development and on property, plant and equipment (excluding right-of-use assets related to procurement leases) rose to €258.5 million (2017: €218.3 million).

Free cash flow – the sum of cash flow from operating activities and investing activities – increased to €519.9 million (2017: €474.3 million).

Net cash used for financing activities came to €514.5 million (2017: €568.5 million). The net repayment of financial debt in the period under review totalled €230.9 million. The gross repayment amount of €2,042.6 million consisted of the repayment of a further tranche of the long-term AFA in an amount of €400.0 million as well as the repayment of loan facilities drawn down in order to fund the temporary increase in inventories. There was also new borrowing of €1,811.7 million that was largely attributable to utilisation of the revolving credit facilities and to the issuance of a promissory note with a volume of €200.0 million. Payments made for interest portions and principal portions under procurement leases amounted to €114.0 million in the reporting year (2017: €109.0 million). The net cash used for current interest payments decreased from €58.1 million in 2017 to €42.9 million in 2018 due to lower average net debt during the year. The dividend paid by KION GROUP AG in the second quarter of €0.99 per share resulted in an outflow of funds of €116.8 million (2017: €86.9 million). The acquisition of employee shares caused a cash outflow of €3.6 million (2017: €4.3 million). > TABLE 021