Additional disclosures on financial instruments

The changes in the consolidated Group did not have any material impact on the below disclosures on financial instruments; the same would have been reported in the prior-period consolidated financial statements.

Financial instruments – Carrying amounts and fair values by measurement category:

The carrying amounts and fair values of all financial assets measured at amortised cost are identical. This also applies to finance lease liabilities, trade payables and other liabilities. This is mainly due to the short maturities of these financial instruments.

In the case of financial liabilities excluding finance lease liabilities, the fair values are determined as the present value of the cash flows associated with the liabilities. We apply an appropriate yield curve to arrive at this present value.

The fair values of the current and non-current financial instruments presented in the table above are based on prices quoted in active markets. The fair values of derivates included and not included in hedging relationships are determined on the basis of input factors observable either directly (i.e. as a price) or indirectly (i.e. derived from prices).

The interest presented above is a component of financial income / expense; the other gains and losses are partly reported in other operating income and other operating expenses.

The AfS measurement category resulted in a remeasurement loss of € 8 thousand (previous year: gain of € 47 thousand), which was recognised directly in equity. As in the previous year, no withdrawals were made from equity and realised in the year under review.

Financial risks

We are exposed to certain financial risks as a consequence of our business activities. These risks can be classified into three areas:

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 securities prices are not material for us.

We limit all of these risks through an appropriate risk management system. We define how these risks are addressed through guidelines and work instructions. In addition, we monitor the current risk characteristics continuously and regularly 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.

The three risk areas are described in detail in the following. You will also find additional information in the Group management report, in particular in the Net Assets, Financial Position and Results of Operations and Risk Management sections.

Credit risk

The primary credit risk is that there is a delay in settling a receivable, or that it is not settled in part or in full. We minimise this risk using a variety of measures. As a matter of principle, we run credit checks on potential and existing counterparties. We only enter into business relationships if the results of this check are positive. In addition, we take out trade credit insurance policies primarily through our European companies. In exceptional cases we accept other securities (collateral) such as guarantees. The insurance policies primarily cover the risk of loss of receivables. Moreover, cover is also taken out against political and commercial risks in the case of certain customers in certain countries. For both types of insurance, we have agreed deductibles, which represent significantly less than 50 % of the insured volume. As part of our receivables management system, we continuously monitor outstanding items, perform maturity analyses and establish contact with customers at an early stage if delays in payment occur. In the case of major projects, our terms and conditions provide for prepayments, guarantees and – for export transactions – letters of credit. These also mitigate risk. Impairment losses are recognised for the residual risk remaining in trade receivables. We examine regularly the extent to which individual receivables need to be written down for impairment. Indications of this are significant financial difficulties of the debtor, such as insolvency or bankruptcy. We also cover the credit risk of receivables that are past due by providing for the risk involved on the basis of historical loss experience. Receivables are written off if it is reasonably certain that receipt of payment cannot be expected.

Impairment losses on “Trade receivables” are the only material impairment losses in the KSB Group. They changed as follows:

The maturity structure of trade receivables is as follows:

With regard to the trade receivables that are neither past due nor individually impaired, there are no indications at the reporting date that our debtors will not meet their payment obligations.

The maximum default risk, excluding collateral received, corresponds to the carrying amount of the financial assets.

There is no concentration of risk because the diversity of our business means that we supply a considerable number of customers in different sectors.

Liquidity risk

Our liquidity management ensures that this risk is minimised in the Group, and that solvency is ensured at all times. There are no concentrations of risk because we work together with a number of credit institutions, on which we impose strict creditworthiness requirements.

We generate our financial resources primarily from our operating business. We use them to finance investments in non-current assets. We also use them to cover our working capital requirements. To keep these as low as possible, we monitor changes in our receivables, inventories and liabilities regularly using a standardised Group reporting system.

In response to the extraordinary situation that arose in the wake of the global financial and economic crisis, and to provide for the risk of the crisis being of a prolonged nature, in 2009 we successfully placed a loan against borrower’s note with a 3-year and 5-year maturity as an added precaution.

The reporting system additionally ensures that the Group’s centralised financial management is continuously informed about liquidity surpluses and requirements. This enables us to optimally meet the needs of the Group as a whole and the individual companies. For our German companies, for example, we use a cash pooling system. We are also in the process of rolling out our receivables netting procedure within the KSB Group so as to minimise the volume of cash flows and the associated fees. In addition, we always ensure that credit facilities are sufficient; we identify the need for these on the basis of regular liquidity plans.

The following tables present the contractual undiscounted cash flows of primary and derivative financial liabilities. Interest payments on fixed-rate liabilities are determined on the basis of the fixed rate. Floating-rate interest payments are based on the last floating interest rates fixed before 31 December. Net payments on derivatives result both from derivatives with negative fair values and from derivatives with positive fair values. Projections for future new liabilities are not included in the presentation. Based on our current state of knowledge, it is neither expected that the cash flows will take place significantly earlier, nor that the amounts will deviate significantly.

Market risk

Our global business activities expose us primarily to currency and interest rate risk. Any changes in market prices here can affect fair values and future cash flows. We use sensitivity analyses to determine the theoretical effects of such market price fluctuations on profit and equity. In doing so, we assume that the portfolio at the reporting date is representative for the full year.

Currency risk mainly affects our cash flows from operating activities. It arises when Group companies settle transactions in currencies that are not their functional currency. We minimise this risk using currency forwards and options. You will find further information on this in the “Derivative financial instruments” section of the Notes. As a rule, we do not hedge currency risk from the translation of foreign operations into the Group currency (EUR).

The most significant foreign currency in the KSB Group is the USD. The volume of trade receivables denominated in USD amounts to around € 29 million (previous year: approximately € 27 million). The volume of trade payables denominated in USD amounts to around € 7 million (previous year: approximately € 5 million).

For the currency sensitivity analysis, we simulate the effects based on the notional volume of our existing foreign currency derivatives and our foreign currency receivables and liabilities at the reporting date. For the analysis, we assume a 10 % increase (decrease) in the value of the euro versus the other currencies.

At the reporting date, equity and the fair value of the derivatives would have been € 7.2 million lower (higher); € 3.6 million results from USD and € 3.6 million from the other currencies.

At the previous year’s reporting date, equity and the fair value of the derivatives would have been € 4.2 million lower (higher); € 2.9 million would result from USD and € 1.3 million from the other currencies.

The theoretical effect on profit in the year under review would have been a decrease (an increase) of € 0.2 million. € 0.7 million would be attributable to USD and € – 0.9 million to the other currencies.

The theoretical effect on profit in the previous year would have been an increase (decrease) of € 0.8 million. € 1.1 million would be attributable to USD and € – 0.3 million to the other currencies.

Floating rate financial instruments are exposed to interest rate risk. In the case of long-term loans, we hedge against this risk using interest rate derivatives on a case-by-case basis. Fixed rate financial instruments are not exposed to this risk.

As part of our interest rate sensitivity analysis, we simulate a 100 basis point increase (decrease) in market interest rates and analyse the effects on the floating rate financial instruments. In 2010, the net interest balance would have been € 3.2 million (previous year: € 2.7 million) higher (lower). Changes in the fair value of interest rate derivatives used to hedge floating rate liabilities increase (decrease) equity by € 0.1 million (previous year: € 0.2 million).

Cash Flow Statement

The cash flow statement is prepared using the indirect method. Cash flows are classified by operating, investing and financing activities. Effects of changes in the consolidated Group and in exchange rates are eliminated in the relevant items. The effect of exchange rate changes and changes in the consolidated Group on cash and cash equivalents is presented separately.

Cash flows from operating activities include a “cash flow” subtotal that merely comprises the net profit for the year; depreciation, amortisation and impairment losses as well as reversals of impairment losses; changes in non-current provisions; and non-cash effects, for example, of the disposal of fixed assets. This subtotal is combined with the changes in the other operating components of assets (including current financial instruments) and liabilities to determine cash flows from operating activities.

Cash flows from investing activities exclusively reflect cash-effective acquisitions and disposals of investments in intangible assets; property, plant and equipment; and non-current financial assets.

In addition to cash flows resulting from equity items (capitalisation measures and dividend payments), cash flows from financing activities comprise cash flows arising from changes in financial receivables and liabilities. Employee deferred compensation is also presented here as it is externally funded.

If cash and cash equivalents include restricted cash (e.g. cash used to hedge credit balances prescribed by law for partial retirement agreements), this is reported separately.

Cash flows from operating activities include cash flows from interest received amounting to € 7,159 thousand (previous year: € 4,150 thousand) and cash flows from (income) taxes totalling € – 37.894 thousand (previous year: € – 43,529 thousand). Cash flows from investing activities include cash flows from dividends received amounting to € 4,201 thousand (previous year: 5,148 thousand). Cash flows from financing activities include cash flows from interest paid amounting to € – 7,660 thousand (previous year: € 4,621 thousand).

€ 5.2 million of the cash flows from operating activities is attributable to the first-time consolidation of companies; the prior-year figure would have been € 1.0 million. € – 0.6 million of the cash flows from investing activities is attributable to the first-time consolidation of companies; the prior-year figure would have been € – 0.0 million. The effect of first-time consolidations on cash flows from financing activities is € 0.0 million; the prior-year effect would have been € – 0.8 million.

Segment Reporting

Segment reporting corresponds to our new internal organisational and management structure, as well as the reporting lines to the Board of Management and the Supervisory Board. In our matrix organisation management decisions are primarily taken on the basis of the key performance indicators – order intake, sales revenue and earnings before income taxes – determined for the Pumps, Valves and Service Business Units. Reporting the relevant assets (including the resulting depreciation and amortisation, impairment losses / write-downs), number of employees and inter-segment sales revenue for these Business Units is not part of our internal reporting. The managers in charge of the Business Units, which are geared to product groups, have profit and loss responsibility. They identify business opportunities across markets and industries and assess our options based on current and future market requirements. They also proactively encourage the development of new products and improvements to the available range of products. In this context, they work closely with our Sales organisation and Operations.

The Pumps product group covers single- and multistage pumps, submersible pumps and associated control and drive systems. Applications include process engineering, building services, water and waste water transport, energy conversion and solids transport.

The Valves product group covers butterfly, globe, gate, control, diaphragm and ball valves, as well as associated actuators and control systems. Applications primarily include process engineering, building services, energy conversion and solids transport.

The Service product group covers the installation, commissioning, start-up, inspection, servicing, maintenance and repair of pumps, related systems and valves; as well as modular service concepts and system analyses for complete systems

The amounts disclosed for the individual segments have been established in compliance with the accounting policies of the underlying interim consolidated financial statements.

Transfer prices for intercompany sales are determined on an arm’s length basis.

There were no discontinued operations in the year under review, as in the comparable period of the previous year.

The order intake of the Business Units by segment presents order intake generated with third parties and unconsolidated Group companies.

The external sales revenue of the Business Units by segment presents sales revenue generated with third parties and unconsolidated Group companies. The effects from measuring construction contracts in accordance with IAS 11 are presented separately as reconciliation effects.

The segment results show earnings before interest and taxes (EBIT), including non-controlling interests. The effects from measuring construction contracts in accordance with IAS 11 are presented separately as reconciliation effects.

The segment reporting format in the prior-period consolidated financial statements was by region, in line with the internal organisational and management structure in place at the time.