Financial Position and Net Assets

FINANCIAL POSITION

The financial position of the KSB Group remains as solid as ever on account of one-time special effects, as evidenced by a consistently high equity ratio of 38.2 % (previous year: 39.3 %).

Liquidity

KSB generated cash flows from operating activities of € 61.4 million, a year-on-year decrease of € 59.3 million. This was primarily attributable to the high commitment of funds in inventories. This contrasted with higher liabilities.

The outflows from investing activities increased by € 82.3 million compared with 2017. While the return of term deposits and commercial papers increased cash flows considerably in the previous year, the addition of fixed-term deposits and payments for the acquisition of consolidated companies led to a decline in cash flow in the year under review. Accordingly, cash flows from investing activities changed from € – 8.2 million in the previous year to € – 90.5 million in the year under review.

Negative cash flows from financing activities fell strongly, totalling € – 9.4 million compared with € – 106.0 million in the previous year. This is due to lower payments for financial liabilities because no partial redemption of the loan against borrower’s note took place in the year under review, in contrast to the previous year.

Cash and cash equivalents from all cash flows fell sharply from € 289.5 million to € 255.5 million. Exchange rate effects amounting to € + 4.6 million (previous year:  € – 6.8 million) contributed significantly to this.

The KSB Group assumes that, in future, it will continue to be able to meet its outgoing payments largely from operating cash flow. From the current perspective its financial management is meeting the goal of ensuring its liquidity at all times essentially without any additional external financing measures. In addition, there has been a syndicated loan agreement of KSB SE & Co. KGaA and KSB Finanz S.A. since December 2018 to hedge liquidity risk and cover the need for bank guarantees of the KSB Group. The credit line can be used at any time and has a fixed term of five years with the option to renew twice by one year each time.

For more information on liquidity management (such as credit lines) see the section on Risk Reporting on the Utilisation of Financial Instruments elsewhere in this group management report.

Investments

As in the previous year, the additions for tangible assets amounting to € 13.0 million (previous year: € 12.5 million) primarily concerned internally generated tangible assets. Advance payments for a new software to be deployed in Sales was reclassified to this balance sheet item in the year under review.

Investments in property, plant and equipment in the reporting year amounted to € 66.6 million, considerably down on the figure of € 89.4 million for the previous year. The highest additions at € 21.5 million (previous year: € 29.0 million) relate to plant and machinery. A further € 20.3 million related to other equipment, operating and office equipment (previous year: € 21.8 million). As in 2017, the focus of investment activities was Europe, and predominantly Germany and France. Outside Europe, the highest additions were made at the plants in the USA, India and China. The policies for measuring depreciation and amortisation were maintained in the year under review.

255
 Net financial position in € millions

Net financial position

Due to a decline in cash and cash equivalents, the net financial position at € 255.0 million, down from € 288.0 million in the previous year, is lower than forecast twelve months ago (significantly above the previous year). This development is essentially attributable to an increase in inventories and higher payments for materials.

Contingencies and commitments

The KSB Group’s off-balance sheet contingent liabilities totalled € 10.7 million as at the reporting date (previous year: € 7.2 million). These arise mainly from performance guarantees.

There are no other extraordinary obligations and commitments beyond the reporting date. Other financial obligations arise only within the normal scope from long-term rental, lease and service agreements (in particular IT and telecommunications) necessary for business operations and from purchase commitments amounting to € 12.4 million (previous year: € 12.2 million).

38.2
 Equity ratio in percent

NET ASSETS

Around 27.5 % is attributable to fixed assets (previous year: 28.5 %). Intangible assets and property, plant and equipment with a historical cost of € 1,476.2 million (previous year: € 1,424.3 million) have carrying amounts of € 587.7 million (previous year: € 614.3 million). In intangible assets, goodwill impairment of the South Korean company KSB Seil Co., Ltd. reduced the value by € 20.6 million and that of the French cash-generating units reduced the value by € 7.6 million. The advance payments made decreased by € 24.5 million year on year and the internally generated intangible assets increased by € 30.2 million. This development essentially resulted from the reclassification of a selection software for the standard pump programme and of a project whose objective is to introduce an end-to-end e-sales process. The amounts for these two projects previously included in advance payments are reported under internally created intangible assets in the year under review. Overall, intangible assets decreased from € 108.1 million to € 91.1 million due to the above-mentioned impairment on goodwill. With investments in property, plant and equipment (€ 66.6 million) lower than write-downs this year (€ 71.2 million), this balance sheet item contracted by € 9.6 million. The carrying amount of financial assets, investments accounted for using the equity method and long-term other non-financial assets rose by a total of € 0.2 million to € 28.5 million. The investments accounted for using the equity method accounted for € + 1.7 million. Deferred tax assets decreased to € 80.4 million (previous year: € 91.7 million).

Inventories totalled € 544.4 million, up € 82.6 million from the 2017 year end. Raw materials, consumables and supplies as well as work in progress, finished goods and goods purchased and held for resale increased. This increase was primarily attributable to higher inventories of work in progress for orders on hand (€ + 15.6 million), higher raw materials, consumables and supplies (€ + 19.6 million) and the effect resulting from the first-time application of IFRS 15 on the inventories presented (€ + 42.2 million). Inventories tied up around 24 % of resources (previous year: 20 %).

Trade payables decreased from € 613.3 million at the 2017 year end to € 518.1 million. This decline resulted mainly from receivables recognised by PoC that were no longer recorded in the reporting period. The receivables recognised by PoC in the previous year correspond to the contract assets from the application of IFRS 15 that are shown as a separate item in the year under review. Contract assets total € 74.5 million. Overall – taking into account the change in total assets – this balance sheet item accounts for approximately 23 % (previous year: 27 %) of total assets.

Other financial assets declined from € 117.0 million to € 103.4 million. This change essentially results from reduced other receivables and other current assets (€ – 8.9 million).

In contrast, other non-financial assets rose by € 12.1 million. Here, recoverable taxes, essentially in France, Germany and the USA, rose by € 9.3 million to € 40.1 million.

Cash and cash equivalents account for around 11 % of assets, totalling € 255.5 million (previous year: € 289.5 million).

Total assets fell by 0.5 % to € 2,242.2 million. Considerable decreases were recorded for both non-current assets and current assets. Inventories in current assets were the exception, recording a drastic increase.

Equity

The KSB Group’s equity amounts to € 856.8 million (previous year: € 885.4 million). This includes KSB AG’s subscribed capital of € 44.8 million as in the previous year. The capital reserve remains unchanged at € 66.7 million. Revenue reserves declined to € 577.8 million (previous year: € 611.9 million) essentially as a result of the transition to IFRS 15 and IFRS 9 and negative currency translation differences; this figure includes the proportion of earnings after income tax attributable to shareholders of KSB SE & Co. KGaA of € 11.3 million (previous year: € 37.2 million). € 167.6 million (previous year: € 162.1 million) is attributable to non-controlling interests. Due to these developments, the equity ratio fell to 38.2 % (previous year: 39.3 %) despite the 0.5 % decline in total equity and liabilities year on year.

Expenses in statement of comprehensive income
Balance sheet structure

The non-controlling interests mainly relate to the following companies: KSB Limited, India, and KSB Shanghai Pump Co., Ltd., China, as well as the PAB subgroup. The latter consists of Pumpen- und Armaturen-Beteiligungsgesellschaft mbH, Frankenthal, and its US subsidiaries.

Inflation and exchange rate effects

Of the Group’s consolidated companies only the annual financial statements of an Argentinian company had to be adjusted for the effects of inflation. At € 0.3 million, this has not resulted in any material impact on our net assets, financial position or results of operations.

The translation of financial statements of consolidated companies that are not prepared in euro gave rise to a difference of € – 13.8 million (previous year: € – 54.1 million). The total of currency translation differences was taken directly to equity.

Liabilities

The largest item under liabilities continues to be provisions for employee benefits, including, also as the largest item, pension provisions, which decreased by € 33.3 million from € 586.9 million to € 553.6 million. This development results primarily from the lump-sum option in the pension plans of the German companies applicable since 2018. Details and information on the impact on EBIT are set out in the Business Development and Results of Operations section.

On 2 October 2018, Heubeck AG published the new Heubeck 2018 G mortality tables. These contain the latest statistics of statutory pension insurance schemes and of the German Federal Statistical Office and reflect the most up-to-date developments on mortality, disability, marriage and fluctuation probabilities.

The new tables now take into account the statistically verifiable relation between life expectancy and the amount of pension paid. This is achieved via a general marking down of mortality rates. In addition, the new mortality tables reflect changed disability rates, as there has been a decline for more than ten years in the age range from 58 years.

The first-time application of the new mortality tables resulted in an addition of € 4.8 million in the balance sheet; the closing balance of pension provisions in the year under review is € 553.6 million.

Obligations for current pensioners and vested benefits of employees who have left the company account for about 45 % of the amount recognised in the balance sheet. The rest relates to defined benefit obligations for current employees.

To understand the explanations on provisions and liabilities compared with the previous year, it should be kept in mind that from the 2018 financial year accounting principles were amended so that some items previously allocated to provisions are now classified as liabilities. This did not have an impact on earnings. The reclassification was performed retrospectively for the balance sheet figures of the previous financial year. Further information on the impact on individual balance sheet items is presented in the Notes to the consolidated financial statements.

Non-current liabilities fell by € 24.2 million to € 30.1 million, due to the reclassification of the tranche of the loan against borrower’s note due in 2019 to current financial liabilities. The loan against borrower’s note, which still amounts to € 48.0 million, is expected to be repaid in 2019 and 2021.

Current liabilities rose overall by € 74.3 million to € 765.0 million compared with € 690.7 million at the 2017 year end.

Other provisions for employee benefits rose to € 34.4 million (previous year: € 28.0 million).

Other provisions also increased from € 70.2 million in 2017 to € 84.9 million. While provisions for warranty obligations and contractual penalties as well as provisions for restructuring measures decreased, provisions for other obligations rose by € 20.7 million. This is essentially attributable to additions to provisions from a legacy project in the United Kingdom totalling € 25 million, as mentioned earlier.

Trade payables rose to € 270.2 million (previous year: € 241.6 million). Other non-financial liabilities decreased by € 108.9 million. Advance payments received on orders, which were stated under this item at € 97.7 million in the previous year, are shown under contract liabilities in the year under review. Other financial liabilities fell by € 48.7 million. In the previous year this item included advance payments from PoC of € 49.4 million, which are also stated under contract liabilities in the year under review. Current financial liabilities increased by € 26.8 million. This is attributable to the tranche of the loan against borrower’s note due in 2019, which was reclassified from non-current financial liabilities to current financial liabilities in the year under review. Taking into account the decline in total equity and liabilities, the share of current liabilities in total equity is 34.1 % (previous year: 30.7 %).

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