Risk Management

  • Crisis-related market risks reduced
  • Financial flexibility with high reserves
  • Rising prices for raw materials

As a group with global operations, the KSB Group is exposed to both global and regional risks. To achieve our business objectives, it is necessary to be aware of the various risks and to limit them. We do this with the help of a Group-wide risk management system that is part of our management system.

Under the terms of the Risk Management Manual, all Group companies are responsible for identifying and assessing risks and reporting these to Group headquarters. They must also initiate countermeasures to avert or limit any damage. Only through the systematic management of risks can opportunities for profit-oriented growth be leveraged responsibly.

The management of opportunities and risks involves first and foremost Controlling, Finance and Accounting as well as Internal Audits. Relevant guidelines on organisation and implementation have been issued.

Accounting is responsible for preparing the annual and consolidated financial statements, according to subprocesses clearly defined in advance.

As part of the planning and reporting process, Controlling and Finance and Accounting systematically identify document the opportunities and risks associated with each operating area. In addition, they carry out results analyses on an ongoing basis and report each month to the Board of Management. Twice a year, the individual business operations report on the current situation as well as foreseeable developments. If necessary, measures are then initiated to take advantage of new opportunities and manage recognised risks.

The Internal Audits department is integrated in the controlling processes. It is kept informed and plans its audits in such a way that priority is placed on examining units with a risk potential. The auditors also ensure that all operating units observe guidelines and actively and regularly take part in risk management.

Information on recognised risks and the countermeasures introduced in response forms an integral part of reporting to the Board of Management and the Audit Committee of the Supervisory Board. In this process, we identify and communicate risks in line with the following categories:

MARKET / COMPETITION

The global financial and economic crisis affected most of the sectors in which KSB operates. There was a risk that the resulting falloff in demand might take a firm hold, leading to lasting underutilisation of our production facilities. This risk was significantly reduced in 2010 with the change in the economic climate and increased willingness to invest on the part of many customers. By the second half of the year, short-time working, which had been used selectively as a tool, was no longer necessary.

In 2010, our plants producing goods for building services and industrial applications moved back closer to their pre-crisis production levels. In the business with pumps for the energy industry, there will be a lag before the economic turnaround has an effect on order placements, meaning that pressure on the sales prices of our products will continue. In our production of valves for liquefied gas transport systems, which also saw low capacity utilisation in 2010, we expect an improvement for the current and the following year.

The trend for some economies to close off their markets to foreign providers may continue. We are responding to this development by intensifying our creation of local added value.

Overall, we expect the market risks resulting from the financial and economic crisis to continue to decrease during the current and the following year.

The political upheaval in North Africa may result in a temporary reduction in order placements. However, this will not have a material effect on our overall business, as sales in the affected countries represent only a small proportion of that business.

PRODUCTS / PROJECTS

Technology and prices that reflect market requirements are vital prerequisites for a successful future. For this reason, we are constantly reviewing our product portfolio. Pumps, valves and systems that no longer meet our technical requirements are quickly replaced with new or improved versions that generally offer a higher level of customer benefits. To be able to offer these products at competitive market prices, cost considerations are a crucial part of our design and engineering work. At the same time, in our development process we ensure that the materials we select do not have negative impacts on the environment.

In 2010, we responded to our customers’ requirement to make increasing use of energy-efficient motors by acquiring a majority interest in the Italian company ITACO s.r.l. This company offers an innovative drive technology that enables substantial efficiency gains in combination with KSB variable speed systems. Moreover, the motors come without rare earths*, a usual requirement for high-efficiency drives. Such materials are expected to be subject to supply bottlenecks and higher costs.

There are no significant risks that could result from any technical problems in our products.

FINANCES / LIQUIDITY

In some cases, the financial and economic crisis had an effect on customers’ ability to make payments. To minimise the resulting default risks, we monitor our incoming payments on an ongoing basis. This allows us to respond quickly and adapt our receivables management appropriately. There were no major payment defaults in 2010, which confirms the effectiveness of our measures. We will continue our strict receivables management system and continue to require advance and partial payments, especially in the large-scale projects business. We reduce risks from having payment flows in different currencies by means of foreign exchange hedges. To this end, we mainly use forward currency contracts for transactions that have already been recognised and for future cash flows from orders still to be processed.

We did not have to draw on the loan against a borrower’s note placed in the previous year to finance our operating business in 2010. We were also able to finance our strategic projects using our own funds and also make early repayments of loans. In the current year and the following year as well we expect to make at most partial use of our full financial resources, and therefore have access to a considerable cushion of liquidity.

PROCUREMENT

The framework conditions on the supply markets became somewhat more difficult during the year under review. Increasing production in markets such as China and India meant that at times we had to pay higher purchase prices for the finished and raw materials we needed than in 2009.

If the global economic recovery continues during the current year, then prices for these goods can be expected to increase further. Procurement bottlenecks may also be encountered. To respond to this risk, we have secured additional sources of supply, primarily in Asia. However, the economic recovery will also increase our ability to pass on higher material costs to customers via price adjustments.

TECHNOLOGY / RESEARCH AND DEVELOPMENT

During the past financial year, we intensified our activities in research and development. In particular, the Group organisation introduced at the start of 2010 fosters product-related innovation.

When developing our products, we aim to recognise technical and market-related risks in good time. Sales employees are involved in key development phases to ensure that the latest findings from the market flow directly into the process. Where necessary, we respond to these findings with design changes. In order to shorten the time from the development of new products to their rollout on the market, we made appropriate changes to our processes in 2010.

We continue to develop products to meet customer specifications that are only used in very limited applications. Contracts concluded with customers ensure that compensation is paid for customised designs regardless of their use. This avoids any financial risk for KSB.

ENVIRONMENT

Like other companies, KSB is subject to numerous environmental protection laws and regulations in the EU and individual countries. With the aim of reducing environmental pollution risks, officers at all KSB sites monitor operations to ensure that employees strictly observe these regulations and comply with – in some cases even stricter – internal environmental standards. Appropriate provisions are recognised to provide financial cover for any remediation needed in the event of legacy contamination at individual sites.

OTHER RISKS

Serious business disadvantages can result from the manipulation or loss of data. We minimise these risks by using powerful, state-of-the-art hardware with the latest software versions. We have standardised IT infrastructures, data backup systems, mirrored databases, the latest virus protection applications and secure access procedures. In addition, we also have replacement capacity to prevent any bottlenecks caused by system failures.

In countries where KSB companies still work with IT systems whose software maintenance contracts are coming to an end or which are at higher risk of failure, we have pressed ahead with the deployment of SAP ERP. This is part of our policy to harmonise our business processes globally and to make them more secure.

As a result of demographic changes, competition for qualified specialists and managers is intensifying. To prepare for this, we are carrying out the Demographic Fitness* project, which involves analysing age structures and creating needs-oriented action plans. Furthermore, we are simplifying and standardising our processes for advertising new positions internationally.

OVERALL ASSESSMENT

Despite a recovering global economy, the markets have still not completely overcome the financial and economic crisis. Therefore, in 2011 and 2012 management will continue to have the key responsibility of identifying the associated risks and countering them in good time.

Overall, we did not identify any risks in financial year 2010 that could significantly or permanently impair the Group’s net assets, financial position or results of operations.