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. As part of its financial management activities, the KION Group aims to continually reduce its financial liabilities and, to an increasing extent, optimise the financing of the long-term lease business. In addition, the KION Group manages 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 generally long-term approach, with an age structure extending until 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.

The KION Group has an investment-grade credit rating that helps it to secure more advantageous funding conditions in the capital markets. Fitch Ratings, for example, awarded a rating of BBB– with a stable outlook in January 2017 and reaffirmed it in October 2019. Furthermore, the rating agency Standard & Poor’s has rated KION GROUP AG at BB+ with a stable outlook since December 2019.

The KION Group has issued guarantees to the banks for all payment obligations and is the borrower in respect of all the payment obligations resulting from the promissory notes.

The KION Group maintains a liquidity reserve in the form of 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 interest-rate risk and the risk of changes in fair value.

Among other stipulations, the contractual terms of some lending agreements 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 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 2018.

Main corporate actions in the reporting period

In April 2019, KION GROUP AG issued a variable-rate promissory note in a nominal amount of €120.5 million. In return, €20.5 million of the fixed-rate tranche of the promissory note from 2018 was repaid ahead of schedule. The liabilities under the acquisition facilities agreement (AFA) were reduced earlier than planned in 2019 by repaying a total of €400.0 million. As at 31 December 2019, the outstanding balance of the AFA, which has a variable interest rate and matures in October 2021, was thus €200.0 million. The early repayment was funded with cash received from operating activities, additional borrowing from banks and the issuance of the aforementioned new promissory note.

As at the end of the year, KION GROUP AG had issued a total volume of €318.0 million under the commercial paper programme that it had launched in November 2019. This amount had been repaid in full by the reporting date.

Between 9 and 20 September 2019, KION GROUP AG repurchased a total of 60,000 shares for use in the KION Employee Equity Programme (KEEP). By 31 December 2019, a total of 67,104 shares had been purchased by staff under KEEP 2019 (2018: 38,691 shares). The number of shares held in treasury stood at 130,644 as at the reporting date.

Analysis of capital structure

Current and non-current liabilities rose by €543.0 million to €10,206.8 million as at the reporting date (2018: €9,663.7 million). The larger volume of business led to a significant increase in liabilities attributable to financing of the long-term lease business. Non-current liabilities included deferred tax liabilities of €570.9 million (2018: €626.7 million).

Financial debt

Non-current financial liabilities were reduced to €1,716.8 million as at 31 December 2019 (2018: €1,818.7 million). This figure can essentially be broken down into promissory notes with a carrying amount of €1,317.3 million (2018: €1,214.3 million) and liabilities to banks of €399.5 million (2018: €604.5 million).

Over the course of 2019, net cash provided by operating activities was used to lower current financial liabilities to €103.7 million as at the reporting date (2018: €226.5 million).

Net financial debt (non-current and current financial liabilities less cash and cash equivalents) thus amounted to €1,609.3 million (2018: €1,869.9 million). This equated to 1.0 times adjusted EBITDA in the year under review (2018: 1.2 times).

As at 31 December 2019, the unused portion of the revolving credit facility stood at €1,150.0 million (2018: €1,048.2 million). > TABLE 019

Retirement benefit obligation

The KION Group maintains pension plans in many countries. These plans comply with legal requirements applicable to 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 2019, the retirement benefit obligation under defined benefit pension plans amounted to a total of €1,263.4 million, which was significantly higher than the figure of €1,043.0 million at the end of 2018 largely owing to lower discount rates. The net obligation under defined benefit pension plans increased year on year to reach €1,211.7 million (2018: €1,009.7 million). Changes in estimates relating to defined benefit pension entitlements resulted in a substantial decrease in equity of €115.9 million (including 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 2019 in connection with the main pension plans totalled €22.0 million, comprising €17.8 million for direct pension payments and €3.6 million for employer contributions to plan assets.

Liabilities from financial services, leases, and rental business

Further expansion of the long-term lease business with end customers again led to a higher overall funding requirement in 2019.

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

Overall, liabilities from financial services increased to €2,500.2 million as at 31 December 2019 (2018: €1,472.4 million). Of this total, €2,062.9 million was attributable to financing of the direct and indirect long-term lease business (2018: €1,165.3 million). The total also includes residual value obligations resulting from the indirect lease business. These obligations fell to €297.2 million (2018: €319.5 million). Lease liabilities decreased by €308.5 million to €432.1 million as at the reporting date (2018: €740.6 million) because new business has been included in liabilities from financial services since the start of 2018. Overall, liabilities from financial services and lease liabilities together totalling €2,495.0 million were attributable to financing of the direct and indirect long-term lease business (2018: €1,906.0 million).

A sum of €437.2 million, representing some of the financing of the short-term rental fleet, was recognised under liabilities from financial services (2018: €307.1 million). The remaining amount of €178.6 million (2018: €289.9 million) relating to the financing of the short-term rental fleet was recognised under other financial liabilities.

Other financial liabilities also included liabilities from procurement leases amounting to €486.1 million (2018: €421.2 million), for which right-of-use assets were recorded.

Other financial liabilities

Current and non-current other financial liabilities totalled €784.9 million as at the reporting date (2018: €813.2 million).

Contract liabilities

Contract liabilities, of which a large proportion related to the long-term project business, decreased to €504.9 million (2018: €570.1 million). This was mainly due to the incremental fulfilment of customer orders in the long-term project business over their scheduled period.

Equity

Consolidated equity rose to €3,558.4 million as at 31 December 2019 (2018: €3,305.1 million), driven in large part by the increase in net income to €444.8 million. Currency translation effects had a positive impact of €76.1 million. Conversely, equity was reduced by actuarial losses of €115.9 million (after deferred taxes) arising from the measurement of the defined benefit obligation due to the far lower level of interest rates. KION GROUP AG’s dividend payout of €141.5 million also lowered the level of equity. The equity ratio increased to 25.9 per cent as at the reporting date (2018: 25.5 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 €287.4 million in the reporting year (2018: €258.5 million).

Spending in the Industrial Trucks & Services segment continued to be focused on capital expenditure for product development and on the expansion and modernisation of production and technology facilities, including the purchase of a new plant in Pune, India and the start of construction of a new production site in Poland. Capital expenditure in the Supply Chain Solutions segment primarily related to development costs.

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.

Cash and cash equivalents increased by €35.9 million during the reporting year to reach €211.2 million (2018: €175.3 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 €1,357.4 million (2018: €1,219.8 million).

Net cash provided by operating activities totalled €846.3 million, which was much higher than the prior-year figure of €765.5 million. This year-on-year improvement in cash flow from operating activities was due to the higher level of earnings and a reduction in spending on the ongoing renewal and expansion of the short-term rental fleet. Conversely, the growth of net working capital lowered cash flow from operating activities by €146.8 million (2018: by €54.3 million), primarily because of a decline in advance payments from customers in the project business.

Net cash used for investing activities amounted to €277.9 million and was therefore €32.3 million higher than in the previous year (2018: €245.6 million). Within this figure, cash payments for capital expenditure on production facilities, product development and purchased property, plant and equipment rose to €287.4 million (2018: €258.5 million).

Free cash flow – the sum of cash flow from operating activities and investing activities – increased to €568.4 million (2018: €519.9 million).

Net cash used for financing activities came to €534.9 million (2018: €514.5 million), partly due to net repayments of financial debt amounting to €226.0 million. One new promissory note was issued, whereas a further amount was repaid towards the remaining long-term tranches under the AFA. Overall, financial debt taken on during the reporting period reached €2,940.1 million (2018: €1,811.7 million); repayments amounted to €3,166.2 million (2018: €2,042.6 million). Payments made for interest portions and principal portions under procurement leases totalled €126.5 million (2018: €114.0 million). Current interest payments decreased from €42.9 million in 2018 to €36.7 million in 2019 due to a year-on-year fall in average net debt. The payment of a dividend to the shareholders of KION GROUP AG in May 2019 resulted in an outflow of funds of €141.5 million (2018: €116.8 million). The acquisition of employee shares caused a cash outflow of €2.9 million (2018: €3.6 million). > TABLE 020