Net Assets, Financial Position and Results of Operations

  • Decline in consolidated earnings
  • Stable distribution of dividends at KSB AG
  • Another significant improvement in net financial position

The development in order intake, sales revenue and earnings basically confirmed the forecasts we made in last year’s Annual Report.


The structure of our income statement changed on a value basis in the financial year under review. In this context, the effects of the above-mentioned first-time consolidations described in more detail in the Notes need to be taken into account.

Earnings before taxes

The KSB Group generated earnings before taxes of € 135.8 million, compared with € 172.8 million in 2009, achieving a return on sales of 7.0 % (previous year: 9.1 %).

Increase in output of operations

Total sales revenue increased by 2.5 % due to improved business development. Work in progress and inventories of finished goods increased by € 12.3 million year on year. As a reduction of inventories was reported in 2009, total output of operations grew more sharply than sales revenue, amounting to € 1,953.8 million, or 3.8 % above the prior-year figure of € 1,881.8 million.

Change in cost structure

Cost of materials increased by 7.4 % due to factors such as increasing purchase prices on the supply markets. The increase was therefore greater than the change in total output of operations (+ 3.8 %). The figure of € 790.9 million is equivalent to 40.5 % of total output of operations (previous year: 39.1 %).

Staff costs rose by 5.1 % to € 649.8 million in absolute terms. In relation to total output of operations, this meant a moderate increase of 0.4 percentage points to 33.3 %. The reasons for this were collectively agreed salary increases and the increase in the number of employees, mainly attributable to the first-time consolidation of five operating companies. However, we also increased headcount at KSB AG – as part of strategic projects – and at our companies in the growth markets of Brazil and India. The KSB Group employed on average 290 more people during the year under review. Compared with the previous financial year, average output per employee improved from € 131 thousand to € 134 thousand.

Measured against total output of operations, other operating expenses changed only slightly (17.4 % compared with 17.2 %). In absolute terms, they increased by € 15.8 million to € 339.5 million. Higher selling expenses were one of the factors contributing to this development.

As forecast, major investments made in previous years are now having an impact on depreciation and amortisation expense. This explains the year-on-year change from € 43.4 million to € 48.1 million.

Financial income / expense declined by € 5.8 million overall. Higher interest income was offset by increased interest expense (the interest on the loan against a borrower’s note taken out at the end of 2009 had to be borne for the first time for 12 months in the year under review) and an increase in impairment losses on financial assets.

Earnings after taxes

The income tax rate rose by 4.6 percentage points, up from 29.2 % in 2009 to 33.8 %. As a result, the fall in earnings after income taxes to € 90.0 million (previous year: € 122.4 million) was more substantial (– 26.5 %) than the change in earnings before income taxes (– 21.4 %).

Earnings attributable to non-controlling interest fell from € 14.7 million to € 12.5 million, but rose slightly relative to earnings after income taxes (13.9 % compared with 12.0 % in the previous year).

At € 77.4 million, earnings attributable to shareholders of KSG AG were thus 28.0 % lower than in the previous year (€ 107.6 million).

Earnings per share

Earnings per ordinary share were € 44.09, compared with € 61.32 in the previous year, and € 44.35 per preference share, compared with € 61.58 in 2009.

Decline in earnings also at parent company KSB AG

KSB AG generated pre-tax earnings (in accordance with HGB) of € 39.8 million, down 14 % from the previous year (€ 46.3 million). While sales revenue (+1.3 %) was just slightly above the prior-year level, total output of operations could no longer achieve the level of 2009, dropping 0.5 % due to smaller increases in inventories compared with the previous year, among other things.

High dividend

Despite the decline in earnings, we aim to keep the dividend at a high level. We will therefore be proposing to the Annual General Meeting on 18 May 2011 the distribution of a dividend of € 12.00 per ordinary share and € 12.26 per preference share (including a preference dividend right of € 0.26), as in the previous year.

Segment results

In line with our management and reporting structures, our segment reporting format is by business unit.

In the Business Unit Pumps we achieved an increase in order intake of 5.3 %. Sales revenue rose by 2.5 %. We generated EBIT of € 121.6 million (compared with € 129.8 million in 2009).

The Business Unit Valves reported just over 9 % more orders and a 4.6 % increase in sales revenue. EBIT, at € 10.1 million, was below the figure for the previous financial year of € 11.2 million.

The Business Unit Service posted strong growth, with order intake up 16.4 % and sales revenue up 18.0 %. However, EBIT generated only increased from € 26.9 million to € 30.5 million due to special charges in Belgium.

The effects presented in the reconciliation line related to the recognition of construction contracts under IAS 11 have declined sharply. This applies to both sales revenue (€ – 42.4 million) and EBIT (€ – 31.1 million).


Principles and objectives of financial management

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. The aim of our financial management is to ensure liquidity at all times and to finance our activities at optimum conditions. In financing 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.

Hedging financial risks

Our primary tool for minimising the foreign exchange risks inherent in our export business are currency forwards. This applies both to transactions already recognised and to future cash flows from orders on hand that are still being processed. We transact most of our foreign currency business in US dollars. There is only a relatively low volume of foreign currency liabilities.

We reduce the risks resulting from changes in prices on the procurement side for orders with extended delivery dates by agreeing cost escalation clauses or, in the case of fixed-price contracts, by including the expected rate of cost increases in our sales price.

We limit the risk of default by taking out credit insurance, arranging advance and partial payments, and agreeing bank guarantees. To ensure long-term liquidity, we agree on payment terms and conditions with our customers in the project business that reflect the cost trend curves of order completion as far as possible.

We take account of the risks from short-term fluctuations in cash flows by agreeing sufficient lines of credit with our banks. In order to be able to provide the necessary securities, appropriate guarantee volumes are also made available. Adequate proportions are confirmed for a period of more than one year. Our cash credit and guarantee credit lines amount to around € 888 million.

Unless explicitly stated otherwise, the following comments on the financial situation relate to the published prior-year figures.


The KSB Group’s equity amounts to € 825.6 million. This includes KSB AG’s subscribed capital of € 44.8 million. Capital reserve amounts to € 66.7 million. Revenue reserves total € 602.5 million, including earnings after taxes attributable to shareholders of KSB AG of € 77.4 million. € 111.6 million are attributable to non-controlling interest. Despite the significant € 215.9 million (13.1 %) rise in total equity and liabilities, the equity ratio once again improved (44.4 %; previous year: 43.8 %). Taking into account the reclassification of advances received from customers and parts of advances received from customers (PoC) as well as the first-time consolidations, the increase in total equity and liabilities would have been € 151.1 million or 8.8 % year on year. The equity ratio would then have increased by 2.3 percentage points.

Non-controlling interest relates mainly to KSB Pumps Ltd. /India (€ 39.7 million), PAB GmbH / Germany (€ 18.1 million), KSB Shanghai Pump Co. Ltd. / China (€ 11.0 million), GIW Industries, Inc. / USA (€ 9.7 million), KSB America Corporation / USA (€ 9.4 million) and SISTO Armaturen S.A. / Luxembourg (€ 5.2 million).


The largest item under liabilities are provisions for employee benefits, including, also as the largest item, pension provisions. These were increased by 4.1 % to € 245.4 million as at the reporting date. A large number of the pension plans currently in use in the KSB Group are defined benefit models. We have been reducing the associated risks, such as demographic changes, inflation and salary increases, since 2009, for example by introducing defined contribution plans for new employees.

Our obligations for current pensioners and vested benefits of employees who have left the company account for just over half of the amount recognised in the balance sheet. The rest relates to defined benefit obligations for our current employees, who have an average remaining working life of about 15 years.

The remaining provisions for employee benefits, which, in contrast to pension provisions, are predominantly short-term, fell from € 143.8 million to € 134.9 million as a result of a decline in partial retirement and profit bonus obligations.

Other provisions include long-term components of € 15.6 million for warranty obligations. The excess relates to provisions for mainly short-term uncertain liabilities.

Non-current liabilities fell significantly from € 160.1 million to € 109.6 million. The reason for this is in particular the early redemption of loans that we had taken out in the previous year in order to secure the liquidity of the Group in the event of a prolonged crisis.

Current liabilities increased substantially. In addition to trade payables, there was also a substantial increase of € + 59.6 million in advance payments received that were reclassified as liabilities. As the increase is greater than the increase in total equity and liabilities, the share of current liabilities in total equity rose to 21.8 %.

Contingencies and commitments

The KSB Group’s off-balance sheet contingent liabilities totalled € 13.3 million as at the reporting date (previous year: € 17.4 million). These arise mainly from collateral and performance guarantees.

There are no other extraordinary obligations and commitments beyond the reporting date. Other obligations and commitments fall within the scope of what is needed to continue business operations, such as obligations from long-term rental, lease and services agreements (in particular information technology and telecommunications) and from purchase commitments.


The KSB Group’s net financial position, i.e. the difference between interest-bearing financial assets on the one hand and financial liabilities on the other, once again improved significantly from € 223.0 million in 2009 to € 293.0 million as a result of our systematic liquidity management.


Cash flows from operating activities amounted to € 162.1 million, a year-on-year decrease of € 50.2 million. Cash flows were impacted by the reduction in earnings and a larger amount of funds tied down in receivables. Resources were freed up primarily through an increase both in advances received from customers and in liabilities.

The volume of our investment activity was considerably reduced compared with the previous year, leading to total cash flows of € – 91.6 million (previous year: € – 99.4 million).

Cash flows from financing activities changed from € + 127.4 million to € – 88.3 million due to the redemption of bank loans. In the previous year this figure was affected by borrowings and a loan against borrower’s note.

The KSB Group’s cash and cash equivalents from all cash flows together changed only insignificantly, from € 409.8 million to € 407.6 million (including € 18.9 million of restricted cash used to secure credit balances for partial retirement obligations, compared with € 16.1 million in the previous year), although this includes changes in exchange rates.

We assume that, in future, we will continue to be able to meet our outgoing payments largely from operating cash flow. From today‘s perspective, we are therefore not planning any additional external financing measures.


Unless explicitly stated otherwise, the following comments on net assets relate to the published prior-year figures.

Our total assets rose by 13.1 % to € 1,861.3 million. This is mainly due to an increase in non-current assets as well as an increase in receivables and other assets. In addition, this includes the above-mentioned reclassifications and first-time consolidations (the latter resulted in an effect of € 8.6 million).

Around 28 % is attributable to fixed assets, as in the previous year. Intangible assets and property, plant and equipment with a historical cost of € 968.5 million have carrying amounts of € 449.4 million. Investments in property, plant and equipment in the year under review amounted to € 67.8 million, considerably below the prior-year figure of € 85.3 million, but still in excess of depreciation (€ 44.7 million). The highest additions relate to other equipment, operating and office equipment (€ 21.0 million), and to plants and machinery (€ 20.2 million). The focus of our investment activities was, as in the previous year, the Region Europe, predominantly Germany and France. Outside Europe, the highest additions were made at our plants in India, China, Indonesia, Brazil and the USA. We maintained our policies for measuring depreciation and amortisation in the year under review. We increased our investments in financial assets year on year; loans in particular increased by some € 8 million compared with the previous year. However, growth amounted to only € 4.2 million overall due to the decline in the carrying amounts of the investments in affiliates and other equity investments. Additions, predominantly resulting from the increase in our stake in an Italian motor manufacturer, were more than offset by effects from the first-time consolidation of six companies and by write-downs as a result of impairment tests. The write-downs basically relate to companies in Belgium, the Netherlands and Germany.

Taking into account the above-mentioned reclassification of advances received from customers and the first-time consolidations, inventories increased by 5.9 % to € 324.5 million, mainly as a result of the growing business volume. They tied up around 17 % of our resources. This is slightly down from the adjusted prior-year figure (18 %) because there was a greater change in total assets.

As a result of the increased sales revenue, in particular towards the end of the year, trade receivables were more than € 60 million above the prior-year value at the end of the reporting period. Along with an increase in orders on hand (more than € 1.1 billion at the end of 2010), the value of customer orders in progress, measured according to the percentage of completion method, not including PoC advance payments, increased by € 10.3 million. As a result, receivables and other current assets made up around 32 % of total assets (previous year 30 %), taking into account the change in the total assets.

Cash and cash equivalents account for around 22 % of assets (previous year: appro. 25 %). This change can be attributed solely to the increase in total assets because, despite the early redemption of loans, we were able to keep the absolute value of cash and cash equivalents virtually constant.

Inflation and Exchange Rate Effects

There are no companies within the Group whose financial statements were required to be adjusted for the effects of inflation.

The translation of financial statements of consolidated companies that are not prepared in euros gave rise to a difference of € + 39.1 million. This was taken directly to equity.


Despite the negative effects on the financial performance, which we had anticipated, the economic situation of the KSB Group remained stable at a high level at the end of financial year 2010. We therefore have a good basis for achieving continued business success in the coming years.


The remuneration of the Board of Management consists of fixed and variable components. The amount of the fixed remuneration is governed primarily by the function and responsibility assigned to the member of the Board of Management. The fixed remuneration component consists of a fixed sum plus benefits as well as pension commitments (retirement, occupational disability and widow’s and orphan’s pension). The fixed basic salary is paid monthly; the benefits include the private use of a company car, coverage of insurance premiums and any payments for a post-contractual restraint on competition. The variable remuneration component is linked to the return on sales for the financial year in question. The Board members also receive variable remuneration components which serve as a long-term incentive. These depend on a consideration of the growth in earnings over a period of three years based on the economic added value method.

The total amount of the variable components is limited, to take account of extraordinary, unforeseeable developments. No stock options or other share-based payment arrangements are granted to members of the Board of Management.

The additional possibility of a premium, to be paid out at the discretion of the Supervisory Board, of no more than three monthly salary payments per financial year in recognition of the special performance of individual members of the Board of Management was also recently created. Such decisions will be made on an irregular, i.e. not necessarily annual, basis.


The Board of Management has submitted the dependent company report to the Supervisory Board. This concludes with the following declaration: “In accordance with section 312(3) of the AktG [Aktiengesetz – German Public Companies Act], we declare that our company – on the basis of the circumstances known to us at the time when the transactions were made or the measures were either taken or not taken – received adequate compensation and was not disadvantaged by the fact that the measures were either taken or not taken.”

INTERNAL CONTROL SYSTEM (disclosures pursuant to section 315(2), No. 5 of the HGB)

Our internal control system (ICS) serves to ensure that regular financial reports and consolidated financial statements are properly prepared. Key elements of the ICS are – in addition to the risk management system that is described in detail elsewhere in this management report – guidelines and regulations which include, among other things, standard accounting and valuation policies. They must be applied to the full extent by all Group companies. There is a clear separation of functions and the four-eye principle is applied. Reviews of our Internal Audits departments ensure that this happens. Our accounting practices also include regular analytical plausibility checks using time series analyses and actual/budget variance analyses. These reviews enable us to identify significant changes early on, which we then examine for accounting and valuation discrepancies. The results are discussed at management level.

Our ICS is subject to a continuous development and improvement process, and we are in regular contact with our auditors. We analyse current financial reporting issues together, such as, for example, announced changes to the accounting regulations. If it becomes necessary to adapt existing guidelines or codes or issue new ones, this is done promptly and communicated to the entire Group.

Corporate Governance Declaration

We will make our updated Corporate Governance Declaration pursuant to Section 289a of the HGB accessible to the public from 31 March 2011 at > Investor Relations > Corporate Governance Declaration. In addition to the Corporate Governance Report (including the Statement of Compliance in accordance with section 161 of the German Public Companies Act), the Corporate Governance Declaration includes relevant information on corporate governance practices applied at KSB AG that go beyond statutory requirements. Also described are the working methods of the Board of Management and Supervisory Board, and the composition and working methods of the committees of the supervisory Board.


The tragic events in Japan have cast a new light on the discussion of the use of nuclear power as a source of energy. It is still too early to assess the extent to which this will have an impact on orders for energy industry components such as pumps and valves. In principle, KSB offers products suitable for all forms of energy conversion. Should the share of global electricity supplies accounted for by nuclear power fall in the future, this would necessarily drive up demand for conventional power plants or renewable energy facilities. From today’s perspective, such a trend towards substitution would not put KSB at a disadvantage.