OPPORTUNITIES AND RISKS REPORT

As an organisation that operates throughout the world, the KSB Group is exposed to macroeconomic, sector-typical, financial and company-specific risks. Our risk policy is designed to enable us to grow sustainably and profitably. We aim to reduce the risks associated with our business and where possible avoid them completely. At the same time our global alignment and our extensive product range offer a wealth of opportunities. This includes in particular any opportunities that arise on the basis of our research and development activities, as well as any that are linked to the quality and cost effectiveness of our products. Our competitive position is also being strengthened by optimising our global sales and production network. We always review opportunities to expand our global presence and are able to achieve this through start-ups and acquisition projects.

We see opportunities and risks as possible future developments or events that may lead to forecast or target deviation. The deviation can be both positive and negative. In order to manage the varied opportunities and risks professionally and efficiently, we align our actions accordingly and focus upon the respective situation when selecting the persons responsible. In doing so, Controlling, Finance and Accounting as well as Internal Audits perform important monitoring tasks.

RISK MANAGEMENT SYSTEM

KSB has implemented a Group-wide risk management system for identifying and assessing relevant risks and reporting these to Group headquarters. The risk management process of the KSB Group consists of the successive phases of identification, assessment, management, control, documentation and communication of risks. The six phases form a continuous and IT-based closed-loop system. This is documented in our risk management manual as well as the management responsibility and the description of all relevant tasks.

Managers are encouraged to take timely action to define and implement measures to limit or avoid damage that may result from the occurrence of risk events. All corporate and central functions and Group companies, including Group companies that are not consolidated, are included in the risk management system. The responsible managers are required to supply their relevant key business and financial indicators each month. As well as creating quarterly forecasts on business trends, they also twice a year report the recognised risks for the next 24 months from the reporting date for the categories of market and competitive risks, technological risks, project- and product-related risks, financial risks and procurement risks. Other business risks (environmental, human resources, etc.) are also reported in this cycle to the Risk Managers at the Group headquarters. We classify risks as qualitative and quantitative risks:

Qualitative risks are long-term developments that could have a negative impact on the KSB Group and which cannot or cannot yet be thoroughly quantified due to a lack of precise information. In order to still be able to evaluate them, however, we make estimates of the probability of occurrence and scope. With respect to probability of occurrence, the extent to which the information indicating the potential risk is detailed must be determined. The scope describes the potential influence of the individual risk on the earnings before interest and taxes (EBIT) of the KSB Group or the respective Group company.

Quantitative risks are those risks with possible monetary impact on the earnings of the KSB Group or the respective Group company. They are evaluated taking into account the probability of occurrence in combination with the potential amount of loss.

In order to assess whether qualitative and quantitative individual risks are significant for us, we classify them as acceptable, neutral or significant risks. We consider as material for the KSB Group all individual risks categorised as neutral or significant that are detailed in the “Individually assessed opportunities and risks” section. The relevant classification can be determined from the matrices below:

Qualitative RiskS
Quantitative Risks

Evaluation of the amount of loss is based on just three possible classifications: low, medium and high. The following applies:

Show table
Amount of loss in € thousands
Magnitude Sales revenue Low Medium High
Small companies Up to € 20 million 50 – 125 125 – 250 > 250
Medium-sized companies € 20 to € 80 million 75 – 250 250 – 500 > 500
Large companies, holding companies, organisational units From € 80 million 100 – 500 500 – 1,000 > 1,000

This approach gives us the necessary transparency to identify risks in their entirety and to manage them effectively, professionally and in an economically responsible manner.

The bodies to which specific responsibilities and competencies have been assigned in KSB’s risk management system are shown and explained in the figure below.

RISK MANAGEMENT AT KSB

The overall responsibility for risk management lies with the Board of Management of KSB AG. It reports to the Supervisory Board during regular Audit Committee meetings and is monitored by the latter. The Board of Management is supported by the Chief Compliance Officer and the Group Finance and Accounting department. The latter coordinates the risk management process at Group level and investigates all reported risks to determine whether they are relevant for the financial statements. This ensures that there is a systematic link with the Group accounting process. The Board of Management and the Supervisory Board’s Audit Committee receive at least two risk reports per financial year. These reports include all the risks that are categorised as significant or neutral that exceed pre-defined threshold values individually or collectively, not considering any action that has been taken. Particularly critical topics are reported on an ad-hoc basis by the managers in charge. In contrast, opportunities are not taken into account in this system, but are examined separately in consultation with segment managers and regional managers.

With regard to financial risks we also make use of additional risk identification, assessment, management and communication. The central Finance department is responsible for this task which is described in further detail later in this section.

Compliance risks are dealt with by the Chief Compliance Officer, who is assigned to the Legal & Compliance, Patents & Trademarks staff function. The Chief Compliance Officer is supported by the members of the Compliance Committee and the Compliance Managers of the individual companies.

The Internal Audits department is integrated into the risk management system as part of our internal control system. When planning audits, it prioritises areas according to potential risks and is provided with all the necessary information. The internal auditors ensure that all audited units adhere to the applicable guidelines, actively participate in the risk management system, and control or avoid their risks. Information obtained by Internal Audits on both the recognised risks and the countermeasures introduced in response forms an integral part of the reporting to the Board of Management and the Audit Committee of the Supervisory Board.

Our risk management system is regularly reviewed and promptly updated where necessary, for example, in the event of relevant legal or organisational changes. In addition, our auditors examine within the scope of the annual audit the early risk detection system, establishing that it is present and checking that it is fit for purpose.

INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT SYSTEM WITH REGARD TO THE GROUP ACCOUNTING PROCESS

The accounting-related internal control system (ICS) contributes towards ensuring proper financial reporting. The aim is to ensure that the consolidated financial statements and group management report comply with all relevant regulations. Key elements of the ICS are – as well as the risk management system described above – guidelines and regulations, which include standard accounting and measurement policies. They must be applied to the full extent by all our Group companies. Functional separation and the principle of dual control are observed; this is ensured by the audits carried out by our Internal Audits department.

In addition, the Accounting department regularly and analytically validates the plausibility of time series and actual / budget variance analyses. This enables us to identify significant changes early on, which we then examine for accounting and measurement discrepancies. The resulting findings are then discussed at management level.

The responsibility for Group accounting lies with the employees in the central Accounting KSB Group department. We employ the services of qualified external reviewers for certain calculations as part of financial reporting (such as the calculation of complex pension obligations using actuarial assumptions).

Binding schedules and guidelines apply to accounting within the KSB Group and to accounting at each individual subsidiary. The accounting methods that must be applied to compile the consolidated financial statements are defined in writing in a manual that we update and revise on a continual basis. This also includes the guidelines for posting intra-group transactions. We continually analyse new accounting principles and other official announcements with regard to their relevance and impact on the consolidated financial statements. We adapt our guidelines and manual where necessary and communicate any changes immediately to our companies. Accounting KSB Group monitors compliance with these regulations. This enables us to reduce the risk of compiling inappropriate financial statements or failing to publish them by the defined deadlines.

We automatically process the financial statement information for all Group companies using certified and tested standard consolidation software. Systematic checks are implemented to help us validate the data. Employees in Accounting KSB Group verify any warning signals that arise before using the data. The sequence of the processing steps is strictly specified through the use of the consolidation monitor within our IT system. This ensures the correct processing of data.

To enable a seamless and accurate accounting process, we only assign employees to this task who have the appropriate specialist know-how. These employees are trained on a regular basis to make sure that their expert knowledge remains up to date.

We have defined access authorisations for the accounting-related IT system. This protects the data against unauthorised access as well as improper usage and modification. The data is checked at many stages, helping to ensure the processing quality. Alongside regular system reviews by the auditors, these checks contribute to limiting operational risks.

INDIVIDUALLY ASSESSED OPPORTUNITIES AND RISKS

The categories presented below – unless stipulated otherwise – include the qualitative and quantitative gross risks classified as significant or neutral and the main opportunities for our business development. The main influencing factor remains the economic development. All other opportunities and risks are assessed as secondary.

Markets / Competition

  • Risks

  • Our business and the opportunities available to us are affected by changes in the economic and political environments. One of the influencing factors during the current year, from an economic perspective, is the low price of oil. This has a negative impact on the financial strength of the oil-producing countries, limiting their ability to invest. We counter this risk, which is classed as “significant” by intensifying our contacts with companies and institutions that are making purchases within the means available to them. In this way we aim to limit the negative impact on our business.

    There is the risk of falling demand in the petrochemical industry in China, which would negatively impact on order intake for our pumps and valves. We are responding to this risk by monitoring our orders on hand and by offering the available products for other fields of application.

    Import duties in Malaysia are pushing up the sale price of products from the Eta type series. We are offsetting this risk by optimising our procurement costs there.

    The political situation in the Middle East and in North Africa remains critical. The destabilisation of Syria, Libya, Yemen and Iraq following internal and external conflicts is also affecting these countries’ neighbours. Both private companies and government institutions are understandably reticent with regard to investment in new plant. It is possible that the conflicts could spread further, which would place additional constraints on our business opportunities in this region.

    Given the political differences between Russia and the USA, and between Russia and most European countries, we have seen a clear deterioration in East / West relations. This is also evident in economic life, with Russian companies increasingly ordering products that have been made in Russia or involve a high proportion of local value added. Our KSB company in Moscow has reacted to this development, setting up a local assembly site in leased premises for industrial and water engineering pumps. Additionally, we are also planning to establish our own production site.

    In South Africa, political tensions in conjunction with economic shortcomings are hampering progress. This is affecting the business prospects of our local production and sales company. Consequently, it is intensifying its sales activities in other countries in southern Africa, primarily Angola and Zambia.

    We manage the risk of fluctuations in the economy and in demand by remaining active in several market sectors and industries with different economic cycles. Furthermore we are monitoring the development of the economic environment for our market sectors. If necessary, we adjust capacities, relocate production facilities and implement cost-cutting measures.

    Asia remains our most important sales market for power plant equipment, including pumps and valves. Competition in China has, however, continued to intensify, creating greater price pressure for the KSB Group and representing a “significant” risk. In order to tap into the Asian market more widely, we have agreed a strategic alliance with our long-term partner, the Chinese SEC Group, in late 2015. This aims at closer cooperation so that KSB can achieve success in Asian power plant projects outside of China. A first contract, awarded at the end of 2015 to fit out an Indian power plant, will serve as a test case for further joint projects in the future.

  • Opportunities

  • Specific opportunities will arise in relation to our valves if large-scale projects for the supply of water are realised in the Middle East, Africa and Asia. These generally relate to the construction or renewal of pipelines that are fitted with butterfly valves with very large diameters.

    With regard to sales of slurry pumps to the mining sector, we still see opportunities to acquire market share despite the current difficulties in the sector. Our partnership with a global provider of machinery and systems for the mining industry, agreed during the reporting year, will be beneficial in this area. Furthermore, following the commissioning of a new specialist foundry in the USA, we can now supply large high-quality pumps more quickly than in the past.

    The trend towards a greater focus on energy efficiency can result in customers increasingly requesting services for the analysis of existing systems and retrofit measures.

    The lifting of the embargo on Iran opens up new sales prospects. Until the political decision to exclude Iran as a trading partner, we primarily supplied customers in the petrochemical and other industrial sectors with pumps and valves, and we were also well represented with our products in water supply facilities. Currently, opportunities are emerging as we increase the size of our team at our Tehran office, and from contacts with Iranian companies that are turning to German products again after their experience with some Chinese producers.

    Unexpected sales opportunities may also arise if India accelerates the expansion of its water and waste water infrastructure as a result of improved financing options.

    Projects / Products

  • Risks

  • The markets’ requirements for our products are constantly changing. We will only succeed if we meet our delivery deadlines and offer technically advanced products in good quality at affordable prices. To minimise the risk of delivery delays, which can lead to an adverse effect on our reputation with customers and also result in financial penalties, we constantly monitor our sales and manufacturing operations. If we discover that machinery needs to be renewed or capacities expanded, we examine these investment projects as part of a step-by-step approval process. By doing this, we counter the risk of schedule and cost overruns.

    Regular market analysis and monitoring minimise the risk that our products will become technically obsolete or that we offer them at prices not acceptable in the market. At the same time, we are exposed to the risk posed by cheap products from Eastern Europe and Asia that compete with KSB’s portfolio. This calls for continuous quality management, which we have introduced across the Group.

    In our business, there are special requirements when it comes to the processing of large-scale projects with long terms. There are also always associated risks. There may be cost overruns, tighter import regulations, staff shortages, technical difficulties or quality problems – including possible penalties – that reduce our margins. For this reason, we specially train our employees in project management. This enables them to identify the risks associated with longer-term orders at an early stage. Our project managers are provided with appropriate management tools. Decisions are made in conjunction with clearly structured authorisation processes.

    There are also technical and financial risks to orders with newly designed products. We limit technical risks to the extent that we define intermediate steps for development work and subject partial solutions to assessments. This also applies to pumps that we provide within the framework of a major contract running over a number of years for the construction of a new type of power plant in China. We minimise financial risks by using appropriate contractual clauses, and ensure that advances cover the costs incurred.

    We set aside suitable provisions for warranty obligations and contractual penalty risks. These amounted to € 52 million in the consolidated financial statements for 2015 compared with € 45 million in the previous year; beyond this there is no other major residual risk (net risk).

  • Opportunities

  • In mid-June 2015 we began work on the construction of a new competence centre for mechatronics in Ankara, where we will in future be manufacturing all variable speed glandless pumps used in building services and also system components. The manufacturing programme will include the Calio series, which is still being produced in Switzerland at present. The cost benefits that this relocation will generate can help to improve our competitive position on the heating and air-conditioning market from as early as the second half of 2016. In addition, the expansion of the Calio series, as detailed in the Research and Development section, extends our opportunities for providing customers with state-of-the-art products from our own production.

    We also believe that our high-pressure pumps offer additional market opportunities. We now offer these in an extended range of sizes. In 2015 many customers were already ordering this pump set, which offers greater value for money than its predecessors, for use in water engineering or industrial plants.

    The world’s first measurement and balancing valve using ultrasound technology, which we launched in 2015, is also generating keen interest. It simplifies the task of measuring flow, especially in heating and air-conditioning systems.

    The KSB Sonolyzer app, introduced in 2015, is also opening up new opportunities to win contracts. The app helps customers to review the efficiency of their pump system quickly and easily. If a plant frequently operates under low-flow conditions, and thus uneconomically, the link to KSB contact persons provides analysis, consultancy and system optimisation options.

    Finance / Liquidity

  • Risks

  • As a group with global operations, we are exposed to a wide variety of currency risks. We counter these with foreign exchange hedges. However, our global manufacturing network also offers us the opportunity to benefit from currency effects and to use these where appropriate in competition with other manufacturers. In addition to uncertainties regarding exchange rates, interest rate developments on the capital markets play a role for us. We use bank loans subject to variable interest rates to counter the interest rate risk by hedging our future interest payment flows accordingly.

    Alongside the euro, the most important currencies for the KSB Group are the US dollar, the Indian rupee, the Brazilian real and the Chinese yuan. If the exchange rate deviates from our assumptions, this would have positive or negative effects upon our business volumes and our earnings. A strict receivables management system and the use of trade credit insurance helps us avoid situations where receivables cannot be collected from customers.

    Risks regarding margins and liquidity are typical of the project business. As well as the continued pressure on our selling prices, which is reducing our profit margins, these include unfavourable contract conditions such as reduced advances and tougher contractual penalties. As we comply exactly with our approval processes in the quotation phase and constantly monitor our net financial position, we minimise this risk. At the same time, this enables us to recognise and avoid liquidity shortages. Where necessary, we secure sufficient liquidity by agreeing appropriate credit lines early on.

    Persistent recessions or newly emerging crisis may adversely affect the financial situation of our customers. Delayed payments and credit losses as a result of this can place a burden upon our results of operations. The same effect might occur if the foreign exchange regulations become stricter for individual countries. We counter this by means of a strict receivables management system and intensive customer contacts. Our Italian company, whose product range includes high-efficiency motors, experienced a deterioration in its financial situation during the reporting year. Some service companies in France also suffered as a result of the persistently difficult economic situation in the country, with an impact on business development and thus on economic and financial solvency, as well as medium-term business prospects. We are therefore reviewing the strategic direction and organisational structures of our service activities there.

    Changing market circumstances mean that our existing business models need to be fundamentally reviewed. During the past financial year we therefore carried out a reassessment of the prospects for canned motor pumps and re-assessed our activities. Our findings were that the current market opportunities are poor, with the result that we will be adjusting our product range accordingly.

    As regards tax matters, the global orientation of our activities must be taken into consideration. Based on our operative activities in numerous countries with varying tax laws and administrative interpretation, differentiated assessment is required for measuring our tax obligations. Uncertainty may arise due to different interpretations by taxable entities on the one hand and local finance authorities on the other. These may come to light during audits. By cooperating closely with external local tax specialists, we counteract the risk of having to pay back taxes. As we continually monitor unclear issues, we can generally classify the probability of occurrence. Should a need for subsequent payment arise, we create the corresponding provisions in good time. In the 2015 consolidated financial statements, we set aside € 1.3 million for circumstances that are classified as a significant or neutral risk.

  • Opportunities

  • Every time the US dollar gains in value over our Group currency, the euro, our imported European products become cheaper for our customers in the USA. At the same time, there is the possibility that contracts that we post in US dollars, after conversion to our Group currency, result in higher amounts than if exchange rates had remained unchanged.

    Procurement

  • Risks

  • Commodity prices and procurement times are subject to strong market-related fluctuations. This may adversely affect our earnings situation if we do not manage to make up for cost increases or pass them onto our customers. Delays or bottlenecks in our supply chain for raw materials and components may negatively impact our business operations. If we do not benefit promptly from declining procurement prices, the persistent pressure on the selling price of our products would have a negative effect on our earnings.

    Our suppliers are also further developing their product ranges. In some cases, this results in changes to the specifications for the materials that we require. We consistently monitor any potential impact on the quality of our products. Should risks emerge, we reserve higher volumes based on the original material structure, where possible, and assess alternative procurement sources.

  • Opportunities

  • To reduce procurement costs, we continue to look for quality suppliers in Eastern Europe and Asia as part of a targeted process. Where we are able to source products more favourably than in the past, this helps to strengthen our competitive position in sales markets exposed to high levels of price pressure. In cross-functional teams, we look for ways of cutting our material costs, also pursuing technical approaches.

    Since 2015 we have been using a supplier portal, which was tried and tested in Germany, to simplify the order process between KSB and its suppliers in Brazil, China, France, South Africa and the USA. We will also be integrating our Indian suppliers into this portal during the current year. By successively expanding our use of this platform, we can reduce the activities in our Group that do not create any value added.

    Technology / Research and Development

  • Risks

  • It is essential to our future success that we have a product and service range that is suited to the market in terms of technology, price and delivery time. The changing needs of our customers and new standards and regulations – especially in promising markets such as China – require that we continuously develop and improve our products and services. Research and development required for adjustments consumes significant financial and human resources, with no guarantee of success in either the medium or the long term.

    To avoid any negative impact on earnings, it is important to recognise the market-related or technical risks early on. To this end, we are constantly updating our development process, which incorporates various control levels. As sales employees are regularly included in this process, risks arising from changes in markets or applications can be taken into account in good time in the evaluation. This close integration also enables us to respond to new market trends more quickly than our competitors.

  • Opportunities

  • By permanently observing the market and technology, and keenly exchanging ideas and information in our international network with technology partners, customers and suppliers, we identify principles and approaches that enable us to offer new or extended services. In this way, KSB is able to ensure that its products are distinctive in a positive way and to improve market prospects.

    In a continuation of our drive system and motor campaign, we are developing appropriate technologies for different individual cases. These can take the form of elementary components that improve the energy efficiency of our customers’ systems and lead to us being awarded new contracts.

    We are also working on Industry 4.0 projects with our customers and partners. These provide a foundation on which new business models can be developed. By harnessing modern production technologies, and making use of the digital value creation chain in particular, it will be easier for us to provide our customers with the right product at the right time. With this in mind, we are working to devise new logistics concepts and production technologies.

    Other business-specific risks – Environment

  • Risks

  • Our business activities, primarily in the area of production, are subject to numerous environmental protection laws and regulations. Environmental damage of any kind (for example, groundwater contamination, renovation needed due to outdated construction materials or unpleasant odours arising from the use of chemicals) may result in losses not covered by an insurance policy. Therefore, at all company sites officers monitor compliance with laws and regulations as well as with internal KSB rules, which in some cases exceed the prescribed environmental standards. If we discover any contamination, we set aside provisions to meet the liabilities for the necessary clean-up work. In the 2015 consolidated financial statements, these amounted to just under € 1 million for significant or neutral risks, which was unchanged on the previous year.

    As part of acquisition projects, we examine properties for possible contamination before purchase. We take account of critical issues by way of corresponding contractual regulations with the seller and implement appropriate measure in consultation it.

    In markets where environmental regulations are becoming more stringent, there is a risk that our products and own or purchased services may cause infringements that lead to us losing our market authorisation and which damage our reputation. A change in rules on liability in environmental protection can also increase the risks for our business success. As a member of national and international professional associations we become aware of imminent changes in environmental law early on. We also continually update the legal frameworks that are in place in our Operational Units, enabling us to ensure that our employees always abide by the applicable law. This is also monitored by external auditors as part of the management certifications.

  • Opportunities

  • Based on a global environmental management system, we recognise in good time the hazards for humans and nature that may arise from our activities, and where necessary take protective measures. It gives us great opportunities to prevent damage and the financial consequences thereof. By having our production and service plants checked by auditors and certified according to international standards, we and our customers are both assured that KSB companies respect the environment. This is an important prerequisite for many business relations. It offers KSB the opportunity to present itself to the market as an environmentally sound company. Our commitment to the UN Global Compact, too, allows us to meet the expectations of our customers and thus improve our sales prospects.

    In 2015 we conducted energy audits at all of our major sites in Europe, complying with the implementation, at national level, of an EU regulation. Ultimately, this analysis revealed new potential for additional energy savings by renovating our production halls, through smart management of our production facilities and through instructions to the operators of the machine tools.

    The newly revised ISO 14001 international environmental management standard has been in force since November 2015 subject to a three-year transitional period. As we have already started early in 2016 to have our production facilities certified in line with the new requirements, we have the opportunity to take account of new environmental protection aspects from an early stage and to present us to the public as a company that takes its responsibility for the environment and for society very seriously.

    The trend towards greater environmental protection and higher energy efficiency will continue to have a positive influence on demand for our products and services. Customers can use our FluidFuture concept to reduce their electricity consumption. A system analysis is used to ensure that pumps and valves are properly designed and to provide information on the benefits of using high-efficiency pumps, valves and drives.

    Other business-specific risks – Human resources and legal aspects

  • Risks

  • To achieve our growth and profitability business objectives, we need qualified employees at all our locations, including technical specialists. Due to the demographic change in some countries, the competition for these and other highly skilled professionals is increasing, and will intensify if economic recovery sets in. We counter this risk with demand-oriented measures, systematic human resources planning and international recruitment processes.

    Changing market conditions can have a negative impact on the funded status of our pension obligations. Strong fluctuations in the evaluation of capital market interest rates to be paid may have a considerable impact on the Group’s earnings and the equity carried on the balance sheet. To limit this risk, we validate alternative models.

    Other potential risks associated with the activities of our employees include dishonest conduct or violations of laws, that could damage the image of KSB. We counter these risks and safeguard our reputation among our customers by organising regular compliance training and through individual initiatives in critical regions.

    Legal disputes cannot always be avoided within the framework of our business activities. These are usually disputes arising from operations, generally involving unclear warranty issues. If as a result of these issues we expect negative effects on the success of our business, we set aside corresponding provisions, which cover not only the anticipated amount of loss, but also the costs of proceedings. To rule out a net risk, the 2015 consolidated financial statements include about € 4 million for those cases classified as significant or neutral risks. We have also created provisions for litigation with authorities and for staff matters. These total a further € 1 million to cover any cases we classify as significant or neutral within our risk assessment methodology.

    The manipulation and loss of electronic data can lead to serious commercial disadvantages. We limit this risk by means of adequate security systems and access procedures. An increased centralisation of the IT systems of our various operating units assists us in this. In this way, we implement high security standards and thus reduce the risk of data loss or corruption.

  • Opportunities

  • Since 2014, we have made more use of online social media as a means of initiating contact with potential employees. These communication channels will increase our chances of finding a suitable selection of candidates and recruiting professionals internationally. At the same time, using these media we can target young people who are interested in apprenticeships, dual work/degree programmes or executive trainee programmes. We give them an insight via online media into the company’s activities including social activities at KSB. This can increase the attractiveness of our company as an employer for key target groups, and improve our chances in the battle for the “best brains”.

    In 2015, we continued to renew our central infrastructure, as well as further standardising and automating our IT services. This will allow us to provide employees with the required services more cheaply and quickly.

    IMPORTANT OPPORTUNITIES AND RISKS BY SEGMENT

    As in the previous year, the opportunities and risks for the Pumps, Valves and Service segments are most influenced by economic development. The future development of China, for example, is important to KSB. Uncertainty regarding political risk is of great significance to the Pumps and Valves segments, and to a lesser degree to Service. The lack of certainty surrounding future oil prices and worsening payment morale harbour risk potential for future business transactions. A quicker-than-expected return to political stability, combined with a calming of the currency turmoil, would probably have positive repercussions. We would always expect benefits from an unexpectedly early recovery of the oil price. Conversely, a continuation of the political uncertainty, combined with persistent depreciation tendencies among some currencies or a permanently low oil price, would have a sustained negative impact on our business. As regards our main influencing factor, the economic situation, we estimate the risk to be slightly higher compared with the previous year. We nonetheless hope that our measures, intended to foster growth, will provide us with considerable support in achieving our goals. We see positive signs of this and thus better opportunities for our project business, despite possible currency uncertainties. Furthermore, the political crises and future development of the oil price mean both opportunities and risks for all segments. Our customers are also often affected by recessions and more intense competition, which can decrease their ability to pay in individual cases.

    Negative currency changes in growth countries could threaten our exports, in particular those from our European plants. But this would also enable our production facilities in the countries affected to benefit from such developments and to increase their export volumes.

    RISK REPORT ON THE UTILISATION OF FINANCIAL INSTRUMENTS

    Central financial management in the KSB Group performs its duties within the framework of the guidelines laid down by the Board of Management. We base the nature and scope of all financial transactions exclusively on the requirements of our business and do not lend ourselves to business of a speculative nature. The aim is to ensure liquidity at all times and to finance our activities under optimal conditions. With respect to our export business, we hedge foreign exchange and credit risks to the greatest extent possible. We continuously improve our receivables management methods with the goal of settling our outstanding amounts by their due dates.

    We are exposed to the following financial risks as a consequence of our business activities:

    On the one hand, we are exposed to credit risk. We define credit risk as potential default or delays in the receipt of contractually agreed payments. We are also exposed to liquidity risk, which is the risk that an entity will be unable to meet its financial obligations, or will be unable to meet them in full. Finally, we are exposed to market risk. The risk of exchange rate or interest rate changes may adversely affect the economic position of the Group. Risks from fluctuations in the prices of financial instruments are not material for us.

    We use foreign exchange hedges to reduce the risks from transactions involving different currencies. These are generally currency forwards, which we use both for transactions that have already been recognised and for future cash flows from orders still to be processed. At year end, the notional volume of currency forwards used to hedge exchange rate risks was € 254.0 million (previous year: € 235.0 million). Foreign currency items denominated in USD account for the major volume hedged by forwards. By strengthening our production sites worldwide, we can realise “natural” currency hedging in currency markets that continue to be volatile.

    To minimise interest rate risks, we concluded interest rate swaps to hedge cash flows from underlyings amounting to € 39.5 million (previous year: € 60.6 million). Underlyings and hedge transactions share the same variable interest rates and maturities (1 to 3 years).

    We limit all these risks through an appropriate risk management system, defining how these risks are addressed through guidelines and work instructions. In addition, we monitor the current risk characteristics and continuously provide the information obtained in this way to the Board of Management and the Supervisory Board in the form of standardised reports and individual analyses.

    For more information on the three risk areas and the impact on the balance sheet, see the Notes, section VI. Additional Disclosures on Financial Instruments.

    OVERALL ASSESSMENT OF OPPORTUNITIES AND RISKS BY THE BOARD OF MANAGEMENT

    The opportunities and risks for the KSB Group are mainly derived from macroeconomic influencing factors and their effects on the global mechanical engineering markets and the competition.

    The overall risk situation has not changed materially in comparison with the previous year, but there has been a change in the assessment of various individual risks as a result of our measures and, in part, of other internal and external aspects. Overall, we assume there will be moderate economic recovery over the next year. Our structural measures will afford us additional support in achieving our objectives. However, an economic slowdown in the growth markets as well as negative developments that could stem from the regions in Eastern Europe, the Middle East or parts of Africa experiencing political unrest present risks. This similarly applies to future changes in the price of oil, as well as to volatile currencies. Such circumstances would have a negative effect on our business volumes as well as our planned earnings.

    In this environment, the KSB Group continues to rely on its ability to match capacities and resources to the changing market conditions. For us, a solid financial position and an efficient cost structure are vital in order to maintain our long-term competitiveness. We are convinced that we can continue to successfully overcome the risks arising from the above-mentioned challenges.

    The risk management system in place as well as the related organisational measures allow the Board of Management to identify risks in a timely manner and to take adequate measures. In view of the somewhat uncertain situation, the focus of activities in 2016 will continue to be on the management of market risks. The Board of Management states that, based on the risk management system established by the KSB Group, at present there are no risks that could lead to a lasting and significant impact on the net assets, financial position and results of the KSB Group.

    To top