Business Development and Results of Operations

The business position continued to improve owing to increased investment activity of customers in key sales markets. This applied, in particular, to the industry and transport markets and to the construction / building services sector.

KSB made the most of market opportunities via the global KSB sales organisation, supported by its global manufacturing network, its service organisation and national dealership networks.

Translation-related exchange rate effects had a significantly negative impact in the 2018 financial year.

ORDER INTAKE

The volume of incoming orders booked was increased by € 38.2 million (+ 1.7 %) to € 2,303.5 million in the financial year. This growth was weighed down by an exchange rate effect of € – 96.8 million over the previous year. Adjusted for currency translation effects, growth comes to 6 %.

Significant increases were recorded, in particular, with customers in the following markets: manufacturing at € + 58.3 million – mainly in the Pumps segment – and transport at € + 19.9 million. € 14.7 million of the performance in the transport market segment alone was accounted for by the Valves segment. Moreover, the order intake grew by € + 9.9 million in the construction / building services market and by € + 9.6 million in the chemicals / petrochemicals sector. This equates to growth of 4 %.

In regional terms, the companies in the Region Asia / Pacific made a significant contribution to growth at € + 35.8 million (+ 7.5 %). The development in India was outstanding at € 32.1 million (+ 21.9 %). This growth is supported by an Indian large power plant in the energy supply market with € + 22.9 million in the Pumps segment. The companies in Europe also reported slight increases (+ 1.3 %). However, the order intake of KSB SE & Co. KGaA declined by € – 15.1 million. Compared with the previous year, a lower project volume in the project-driven energy market, in particular, had a significant impact. The companies in the Americas closed the financial year with a stable result compared with the previous period, with full growth offset by a negative currency translation effect of € – 45.7 million. The same applies to the companies in the Region Middle East / Africa, whose modest growth was € – 14.0 million below the previous year’s figure due to currency translation effects. The restricted Iran business also had a pronounced negative effect on the Region’s growth.

Pumps

In the Pumps segment, sales revenue was € 1,506.2 million, up by € 32.6 million (+ 2.2 %). A key driver was double-digit growth of € + 47.1 million (+ 11.6 %) in the general industry market, primarily in the European companies. Taken together with the growth in building services of € + 8.9 million (+ 5.5 %) and in transport of € 3.5 million (+ 18.5 %), the substantial decline of € – 14.2 million in the energy supply market was more than offset in the European companies, in particular. The mining market was stable at the previous year’s level while customer orders in the water / waste water and chemicals markets were more muted.

Valves

In the Valves segment, order intake was € 355.6 million, up by € 12.1 million (+ 3.5 %). This development was primarily attributable to the resurgence of the transport market, which posted growth of € 14.7 million. A significant increase was also recorded by the mining market at € + 3.6 million (+ 42.4 %) and the chemicals / petrochemicals market at € + 3.0 million (+ 7.7 %). In the Valves segment, too, the lower demand from the energy sector had an effect of € – 16.4 million. This was due to the substantial decline in activity in the area of major projects.

Service

At € 441.7 million (– 1.5 %), the order intake in the Service segment was slightly below the previous year. Here, too, a major decline in the energy supply market of € – 21.9 million (– 16.2 %) was observed, which is making itself felt primarily in the European companies. Strong growth was reported in the general industry market at € + 10.9 million (+ 10.2 %) and the chemicals / petrochemicals market at € + 8.3 million (+ 12.4 %).

SALES REVENUE

Consolidated sales revenue grew by € + 40.9 million (+ 1.9 %) to € 2,245.9 million. Growth was also significantly burdened by currency translation effects of € – 92.6 million. Excluding the effects from exchange rates, the increase would have amounted to € 133.5 million (+ 6.1 %).

Europe remains the region with the strongest sales revenue at 56 %. The European companies’ sales revenue was down 0.6 % from the previous year. The decline of € – 18.8 million to € 762.0 million in the largest unit, KSB SE & Co. KGaA, which serves the European market and the market outside Europe, was for the most part offset by growth in other parts of Europe, in particular Europe West. The companies in Asia / Pacific recorded the strongest growth with an increase of € + 29.7 million (+ 6.6 %) followed by the legal units in the Americas with a gain of € 18.9 million (+ 5.8 %). The companies in the Region Middle East / Africa fell slightly short of the prior-year level by € – 0.5 million, essentially due to the negative currency translation effects.

Sales revenue by segment

Pumps

Sales revenue in the Pumps segment increased by € 25.1 million (+ 1.7 %) to € 1,469.4 million. Substantial growth compared with the previous year was recorded by the Region Americas with € + 18.9 million and the Region Asia / Pacific with € + 14.8 million. Growth in the Region Americas was supported primarily by the US company GIW with its main business in the mining market. Growth in Asia / Pacific was spread across several units. Sales revenue of the European companies fell short of the previous year by € – 10.3 million.

Valves

In the Valves segment, order intake growth could not yet be translated into sales revenue of the same volume. Growth of € 2.0 million (+ 0.6 %) was posted here. The financial year closed with sales revenue of € 340.8 million. Whereas the companies in the Regions Asia / Pacific and Americas recorded an increase of € + 3.1 million and € + 2.0 million, respectively, despite significant currency translation effects, the companies in Europe and in the Middle East / Africa fell short of the previous year’s figures by € – 2.1 million and € – 1.0 million, respectively.

Service

The Service segment showed the largest relative growth (+ 3.3 %) and closed the year with an increase of € 14.0 million to € 435.7 million. The Regions Asia / Pacific and Europe posted growth in the segment over the previous year. The largest absolute increase was generated by the companies in Asia / Pacific with € + 11.8 million. By contrast, the Regions Middle East / Africa and Americas posted an overall decline of € – 3.0 million.

Earnings before finance income / expense and income tax (EBIT)

The KSB Group achieved earnings before finance income / expense and income tax (EBIT) of € 74.7 million (previous year: € 116.4 million). The Pumps segment contributed € 90.6 million to this figure, the Valves segment € – 37.4 million and the Service segment € 21.5 million.

The previous year’s forecasts referred to earnings before interest and income tax; consequently, the comparative figures in the year under review are also presented below according to the previous year’s definition. Earnings before interest and income tax total € 76.4 million (previous year: € 117.2 million). The development of earnings before interest and income tax in the Pumps segment had a positive effect at € 85.8 million (previous year: € 79.9 million). This means that the forecast made in the previous year’s report (considerable increase) was accurate as an increase of 7.4 % was recorded. As reported in the half-year financial report, EBIT was weighed down by expenses in the amount of € 25 million from an additional provision for a legacy project in the United Kingdom. The pension plans of German companies concluded before 2009 solely provided for the payment of accumulated amounts in the form of a monthly pension for life upon retirement. A lump-sum option was introduced for these plans in December 2018. Under this, every employee is entitled to apply at any time during the ongoing employment relationship for payment in capital, either as a single payment or in ten annual instalments. Recognition of the exercising of this lump-sum option has resulted in one-off income of € 46.4 million in total based on past service cost, resulting in a reduction of provisions for pensions and similar obligations. The Pumps segment accounts for income from the lump-sum option of € 32.4 million. Contrary to the forecast of a stable performance, earnings before interest and income tax in the Valves segment fell from € 0.1 million in the previous year to € – 37.1 million in the year under review. Among other factors, this is due to the impairment on the goodwill of KSB Seil Co., Ltd., South Korea, amounting to € 20.6 million. The impairment is attributable to the generally limited business performance of the company owing to the economic development of the long-cycle shipbuilding industry. Impairment losses on property, plant and equipment of the French production company KSB S.A.S. totalling € 10.6 million also weighed on earnings. The impairments relate to two valve ranges from which no long-term cash flows are expected any longer. Income from the lump-sum option of € 5.9 million had the opposite effect. A substantial increase had been forecast for EBIT of the Service segment, instead of which it recorded a decline of 25.7 % to € 27.7 million. A key reason for this was the goodwill impairments of two French cash-generating units amounting to € 7.6 million due to their dependence on a single major customer. Income of € 8.1 million resulting from the introduction of the lump-sum option is included.

2.2
 Consolidated sales revenue in € billions

Total output of operations

The above increase in sales revenue is also reflected in a higher total output of operations, totalling € 2,275.8 million compared with € 2,210.5 million in the previous year. Work in progress and inventories of finished goods increased by € 22.6 million. Other work performed and capitalised amounts to € 7.3 million and is therefore 30.4 % up on the previous year.

Income and expenses

Other income declined from € 69.2 million to € 33.1 million, essentially due to high insurance compensations included in the previous year and lower income from the disposal of assets.

The cost of materials increased more sharply than the total output of operations, resulting in an increase in the cost of materials as a percentage of total output of operations from 40.2 % in the previous year to 41.1 % in the year under review. Overall, the cost of materials increased to € 934.5 million compared with € 887.8 million in the previous year. Among other factors, this is due to outsourcing.

Staff costs fell by 3.9 % to € 765.5 million. Staff costs as a percentage of total output of operations dropped by 2 percentage points. The key factor was € 46.4 million in income from the lump-sum option in the pension plans of the German companies. Compared with 2017, the number of employees rose by 258, taking the total figure at the end of the year under review to 15,713. The sharpest increase was posted by the North American companies with 159 people, due among other things to the acquisition of the assets and liabilities of the Dubric Group. The biggest declines were recorded at the French and South American sites. The KSB Group employed on average 90 more people than in the previous year. Based on the 3.0 % increase in total output of operations and simultaneous rise in the number of employees, the average output per employee improved from € 142 thousand in the previous financial year to € 146 thousand.

The ratio of other expenses to total output of operations rose from 17.8 % to 18.3 %. In absolute terms, this represents a change from € 392.4 million to € 416.9 million. The increase was attributable to higher expenses for warranties and contractual penalties (€ + 20.4 million) due to the provision for a legacy project in the United Kingdom mentioned earlier, as well as higher expenses for repairs, maintenance and third-party services (€ + 22.0 million). By contrast, other staff costs fell by € 12.5 million.

Finance income / expense improved by € 3.0 million, reflecting higher income from equity investments accounted for using the equity method and lower financial expense, particularly interest expense.

Earnings

The KSB Group generated earnings before income tax (EBT) of € 65.6 million, compared with € 104.2 million in 2017. This means that the previous year’s forecast of a substantial increase in earnings did not materialise on account of the one-time special effects described above. Correspondingly, the return on sales before tax decreased from 4.7 % in the previous year to 2.9 %, also falling short of expectations outlined in the previous year. The income tax rate rose substantially and is now 63.5 % after 50.0 % in the previous year. This rise was attributable to considerably higher deferred tax expenses. Adjusted for the effects resulting from deferred taxes on loss carryforwards, which cannot be capitalised, and impairment losses on the goodwill of KSB Seil Co., Ltd., South Korea, and the French cash-generating units, the adjusted income tax rate is 31.8 %. Earnings after income tax, which totalled € 23.9 million (previous year: € 52.1 million) fell by 54.1 % and thus more sharply than earnings before income tax (EBT) (– 37.0 %).

65.6
 Consolidated earnings (EBT) in € million

At € 12.6 million, earnings attributable to non-controlling interests declined by € 2.3 million compared with the previous year. Relative to earnings after income tax, there was therefore a change from 28.6 % to 52.7 %.

Earnings attributable to shareholders of KSB SE & Co. KGaA (€ 11.3 million) were € 25.9 million lower than in the previous year (€ 37.2 million).

Earnings per ordinary share were € 6.26, compared with € 21.10 in the previous year, and € 6.64 per preference share, compared with € 21.36 in 2017.

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