 KHD Humboldt Wedag International AGKölnHalbjahresfinanzbericht zum 30. Juni 2016Half-year Financial Report 2016ISIN: DE0006578008 GERMAN SECURITIES IDENTIFICATION NUMBER (WKN): 657800 Stock Exchange Symbol: KWG www.khd.com Summary of the First Half Year 2016
Key Figures at a Glancescroll
scroll
*
restated according to IAS 8, please refer
to section 4 of the Group notes and the appendix to the notes to the
Group Financial Statements of December 31, 2015 Please note that differences can result from the use of rounded amounts and percentages. MANAGEMENT REPORT TO THE INTERIM GROUP FINANCIAL STATEMENTS AS OF JUNE 30, 2016Fundamental Group PrinciplesKHD Humboldt Wedag International AG (hereinafter also referred to as "KHD" or the "Group") made no fundamental changes to its business model, strategy or management system (see Group management report of December 31, 2015, pp. 15-22) during the first half-year 2016. In addition to further expansion of business activities in the segment Plant Services (formerly: Parts & Services), the focus is on strengthening the Capex segment by increasing competitiveness, intensifying research and development activities and supporting a culture of excellence and performance. Management, monitoring and reporting within the Group continue to be based on the following financial indicators:
Management and SupervisionManagement BoardEffective January 1, 2016, Mr. Tao Xing was appointed as a new member of the Management Board. With his many years of experience in the cement industry, Mr. Tao Xing's main tasks will include improving and expanding KHD business activities in China, the Asia-Pacific region and the Americas. From June through the end of December 2015, Mr. Tao Xing was a member of the KHD Supervisory Board. In this reporting period, Mr. Johan Cnossen resigned from his position as CEO and member of the Management Board effective March 11, 2016. In agreement with the Supervisory Board, the Management Board team reorganized the responsibilities for a transition period following the resignation of the previous CEO. As a result, Mr. Jürgen Luckas, Chief Financial Officer (CFO), is taking over the role of Management Board spokesperson. Supervisory BoardAt the KHD annual general meeting on May 18, 2016, Messrs. Gerhard Beinhauer and Da Hua were elected as new members of the Supervisory Board to serve alongside the reelected members Mr. Xiaofeng Liu, Ms. Eliza Suk Ching Yuen, Mr. Kangning Zou and Ms. Yiqiong Zhang. Mr. Beinhauer was elected as Chairman of the Supervisory Board and Mr. Liu was re-elected as Deputy Chairman at the constitutional meeting of the Supervisory Board on May 18, 2016. Economic ReportMarket EnvironmentThe International Monetary Fund (IMF) adjusted the outlook for global growth for 2016 to 3.2% (previous year: 3.1%). In the developing countries, prospects for growth remain uneven and, for all intents and purposes, weaker than in the last two decades. The growth forecast for these countries is 4.1% (previous year: 4.0%). The predicted growth in industrialized countries is 2.0% (previous year: 1.9%). According to an analysis by HSBC Holdings plc, global cement consumption decreased in 2015. An increase in demand expected for 2016 in the markets outside of China will, however, change low capacity utilization only slightly, so that it will have no significant effect on the cement price. KHD's markets demonstrate differing tendencies with respect to expected cement consumption:
Overall Assessment of the Economic SituationEconomic development as measured by order intake and revenue, and particularly with respect to profitability and liquidity, was unsatisfactory in the first half-year 2016. Significant budget targets were not met. Revenue of € 66.6 million was significantly lower than the previous year's value and approximately 20% below the budgeted value. The reasons for the drop in revenue were, in particular, delays in project execution, reductions in order value and unsatisfactory order intake. In the current reporting period, KHD's adjusted gross profit is just € 1.7 million. Although the adjusted gross profit was significantly above last year's level, the value budgeted for the first half-year 2016 (approximately € 7 million) was not reached. EBIT of € -18.8 million (adjusted EBIT: € -15.0 million) for the reporting period is also considerably below the budgeted figure. Adjusted EBIT differs from the forecast value by more than € 5 million. For EBIT (including idle capacity costs due to under-utilization of existing capacities into consideration), the difference is actually about € 9 million. These variances were caused by delays as well as major challenges while executing individual projects, which resulted in unexpected cost overruns. Due to the low order backlog and order intake that did not materialize, KHD's financial result is also affected by under-utilization of existing capacities (idle capacity costs of approx. € 3.8 million). Overall, the negative operating result and delays in payments for projects with challenges in execution and payments due to an arbitration award resulted in a cash flow from operating activities of € -52.3 million although the outlook projected only low cash outflows in the first half-year. In spite of the unfavorable market and margin situation, KHD is convinced that the Group will achieve a successful economic turnaround in the medium term. Business DevelopmentIn the first half-year 2016, order intake was € 19.3 million. This is considerably lower than the level reached in the previous year (€ 65.7 million). Particularly in comparison with the budget, the order intake is especially disappointing. The difference is more than € 100 million as compared to budget; this was primarily caused by customers' contract award decisions and delays in investment decisions. The low order intake results from a low level of new business (€ 29.4 million) together with order cancellations and reductions (€ -6.5 million) and effects from currency rates (€ -3.3 million) in the order backlog. Orders of just € 11.5 million were placed in the Capex segment in the first half-year (previous year: € 45.1 million). Budget targets were also not achieved in the Plant Services segment. In comparison with the Capex segment, spare parts and service business is relatively stable. With € 17.6 million (previous year: € 20.6 million), it contributed 60.9% to order intake. Due to the low order intake volume and the progress in execution of existing projects, the order backlog as of June 30, 2016 decreased - compared with the figure of December 31, 2015 - by € 47.2 million to € 136.6 million. The current order backlog is not sufficient for complete utilization of existing capacities. Despite the significant improvement in order intake expected as the financial year progresses, careful evaluations are now underway to determine the extent to which capacity adjustments are necessary for individual companies of the KHD Group. Group Earning SituationKHD's revenue amounting to € 66.6 million is considerably lower than the figure for the previous year (€ 89.4 million). Significant contributions to revenue came primarily from projects in India, North America and Russia. Reasons for the decrease of 25.5% are the relatively low order backlog at the beginning of the year, delays in project execution, reductions in order value and order intake that did not materialize in the first half-year 2016. The gross profit for the first half-year was € -2.1 million (previous year: € -10.5 million). Cost of sales include € 3.8 million of idle capacity costs due to under-utilization of existing capacities (previous year: € 2.0 million). Because these costs are not directly associated with the revenues recognized, they were corrected when determining the adjusted gross profit. The adjusted gross profit for the first half-year 2016 was € 1.7 million (previous year: € -8.5 million). In comparison with the previous year, the adjusted gross profit is slightly positive, but it is still at an unsatisfactory level and continues to be characterized by projects won in a highly competitive environment with strong margin pressure. In addition, some individual large projects showed an increase in costs to complete, resulting in a considerable increase in the estimated total costs. In contrast to the first six months of the financial year 2015, sales expenses increased by 29.7%, from € 4.8 million to € 6.2 million. Due to the ongoing difficulties in the market environment, KHD consciously invested in the expansion of sales activities, which focus on strategically important projects in KHD's core markets. These core markets traditionally include the Iranian market as well. After the years of embargo, the sales office in Iran was strengthened substantially to ensure competent and efficient customer service in the region. In comparison with the previous year, general and administrative expenses of € 8.1 million (previous year: € 9.4 million) have decreased by 14.2%. This reduction is in no small part due to the success of active cost management. Other expenses decreased considerably to € 4.5 million (previous year: € 7.0 million). Besides € 1.8 million in expenses for research and development (previous year: € 2.6 million), other expenses also include exchange rate effects of € 1.3 million (previous year: € 0.7 million). In the previous year, other expenses also included expenses related to fair value adjustments of foreign exchange forward contracts for hedging exposure on foreign currency receivables in the amount of € 2.5 million. From an economic perspective, other income resulting from the effects of currency exchange rates on the foreign currency receivables (€ 1.3 million, previous year: € 2.5 million) and the income from fair value adjustments of foreign exchange forward contracts (€ 0.5 million) should be offset against the expenses from exchange rate effects and fair value adjustments of foreign exchange forward contracts. Earnings before interest and taxes (EBIT) increased from € -28.5 million in the previous year to a current amount of € -18.8 million; the adjusted EBIT (after eliminating idle capacity costs) improved from € -26.5 million to € -15.0 million. The low sales volume combined with the unsatisfactory gross profit margin - particularly due to the distinct effects explained above - have resulted in a considerably negative EBIT margin of -28.3% (previous year: -31.9%) in the first half-year 2016. Net finance income decreased by € 0.9 million from € 4.3 million to € 3.4 million. Finance income includes interest received in the amount of € 3.0 million from two loans extended to AVIC International (HK) Group Ltd. (AVIC HK) for a total of € 100.0 million in the financial year 2014 and amounted to € 4.1 million, whereas finance expenses accounted for € 0.7 million. For the most part, the decrease of € 0.5 million in finance income was due to a lower level of cash and cash equivalents. The primary reason for the increase in finance expenses of € 0.4 million was the interest on a € 25.0 million bank loan. The Group net result for the period was € -17.3 million (previous year: € -25.8 million), which translates into diluted and basic earnings per share of € -0.35 (previous year: € -0.52). Segment Earnings Situation1Revenue in the Capex segment in the six-month period reached only € 47.3 million (previous year: € 71.8 million). The relatively stable business in the Plant Services segment achieved revenues of € 19.3 million (previous year: € 17.6 million), € 1.7 million more than the comparable value from the previous year. However, this did not compensate for the considerable decrease revenues in the Capex segment. While gross profit of € -8.2 million (previous year: € -14.5 million) in the Capex segment was unsatisfactory due to the execution of projects with low margins, and in particular due to high unexpected cost overruns in some projects, the Plant Services segment generated gross profit of € 6.1 million (previous year: € 4.0 million). The idle capacity costs apply to the Capex segment only, so the adjusted gross profit amounts to € -4.4 million (previous year: € -12.5 million). As a result the adjusted gross profit margin in the Capex segment was -9.3% (previous year: -17.4%). In contrast, the Plant Services segment achieved a positive gross profit margin of 31.6% (previous year: 22.7%). EBIT in the Capex segment of € -21.4 million (previous year: € -30.5 million) reflects the difficult economic environment of recent years, high unexpected margin deterioration and idle capacity costs, which resulted from under-utilization of existing capacities. EBIT in the Plant Services segment of € 2.6 million (previous year: € 2.0 million) offset the significantly negative result of the Capex segment only to a certain degree. Financial Position and Net AssetsLiquidityKHD's total cash and cash equivalents decreased considerably in the first half-year. As of June 30, 2016, this figure amounted to € 61.7 million (end of 2015: € 112.7 million). The main reason for this development is the notable decrease in cash flow from operating activities, which amounted to € -52.3 million during the reporting period (previous year: -€ 30.4 million). The reasons for the outflow of funds in operational business were, in addition to unfavorable business development, primarily negative cash flows from projects with challenges in execution and payments due to an arbitration award. For further details regarding operative cash flow, see the following table: scroll
The cash flow from investment activities of € 2.5 million (previous year: € 2.4 million) primarily includes interest payments from the loans extended to AVIC HK. Taking the effects of currency exchange rates in the amount of € -1.1 million into consideration, cash and cash equivalents as of June 30, 2016 now total € 61.6 million (December 31, 2015: € 112.6 million). Total AssetsIn comparison with the end of 2015 (€ 392.3 million), the balance sheet total decreased by € 38.3 million to € 354.0 million. This was primarily the result of the decrease in cash and cash equivalents of € 51.0 million, a decrease in the gross amount due from customers for contract work of € 5.1 million as well as a decrease in payments made in advance in the amount of € 5.2 million. In contrast, trade receivables and other receivables increased significantly by € 22.7 million due to the timing of billing the customers. Other current and non-current assets differed only slightly. FinancingOn the liabilities side, non-current liabilities remained unchanged for the most part in comparison with December 31, 2015, but current liabilities decreased with respect to the end of 2015 (€ 133.0 million) by € 19.1 million to € 113.9 million. Trade and other payables decreased by € 12.1 million to € 59.3 million and provisions shown under current liabilities decreased by € 11.7 million to € 11.1 million. The reasons for these reductions are primarily the reduced business volume and a payment related to an arbitration award. In contrast, commitments under construction contracts increased by € 5.3 million to € 42.6 million. The main reason for this increase are high progress billings, which exceeded the aggregate amount of project costs incurred and recognized profits. The net working capital - the difference between current assets (less cash) and current liabilities - increased considerably from the figure reported on December 31, 2015 (€ 25.1 million) to € 60.2 million. The main reason for this is the increase in trade receivables due to the timing of billing the customers. Equity dropped by € 20.0 million from € 203.4 million to € 183.4 million. The main reason for this decrease aside from currency translation differences recognized in equity of € 1.2 million and actuarial losses related to defined benefit obligations in the amount of € -1.5 million, is the distinctly negative Group net result for the period in the amount of € -17.3 million. Despite the reduction in equity, the equity ratio remained unchanged at 51.8%. Non-Financial Performance IndicatorsNon-financial performance indicators include mainly employee development, customer satisfaction, the effects of our products on the environment, speed of project execution, product quality and individual, employee-related indicators. Targets achievement in relation to non-financial performance indicators is measured with the help of various instruments, such as annual employee appraisal, the CRM system for recording customer satisfaction or the systematic measuring of emissions values and energy consumption of individual products. Value-oriented management in the KHD Group means that, for example, customer satisfaction or the minimization of our products' impact on the environment is more important than short-term profit maximization. KHD spent € 1.8 million on research and development in the first half-year 2016 (previous year: € 2.6 million), keeping the activities in this area at a high level. Despite the current, unsatisfactory result situation, KHD invested in the enhancement and further development of technology for cement plants. For this reason, in addition to improving significant cement plant components, the primary focus of research and development (R&D) is improving the efficiency of cement plants. Other crucial R&D topics include developing environmentally friendly products, with a particular emphasis on energy efficiency and emissions reduction, as well as using alternative fuels in cement plants. The KHD Group had 742 employees (excluding trainees) at the end of June 2016 (end of 2015: 735). This increase in headcount applies to the Indian subsidiary where the number of employees increased by 28 (of whom 8 employees are in the workshop with temporary contracts). In the other Group companies, as a rule, positions vacated due to usual employee fluctuation will not be filled and planned hiring will be postponed. Due to the low order backlog, necessary adjustments of the capacities should be made in a manner compatible with social needs to the maximum extent possible. Despite the expected significant improvement in order intake as the financial year progresses, careful evaluations are now underway to determine the extent to which capacity adjustments are necessary for individual companies of the KHD Group. Report on Events after the Reporting PeriodThere were no substantial developments or events of particular significance after the balance sheet date June 30, 2016. Risk and Opportunities ReportKHD's approach to risk management ensures that changes in the risk position are promptly identified. To the extent required, provisions are set up for specific risks. The risks identified do not pose a threat to the KHD Group as a going concern, either individually or in combination. In comparison with the balance sheet date in 2015, there has been no significant change as of the date of this Half-Year Report in the assessment of risks and opportunities. For example, KHD does not expect any major changes to risks and opportunities for KHD business activities as a result of the referendum of June 23, 2016 in which the United Kingdom decided to leave the European Union. In addition, based on KHD's assessment, the current political developments in Turkey resulting from the coup attempt on July 15 and 16, 2016 will not directly affect business activities. However, the specific risk associated with the Turkish market, which is important to KHD, will be monitored very closely. For a detailed description of the risks and opportunities, please refer to the relevant section in the KHD Group management report as of December 31, 2015 (page 55 ff. of the Group Annual Report). OutlookThe expected development of cement production in 2016 in some markets is associated with a high degree of uncertainty. Confidence related to growth in cement consumption is fragile and growth in demand is volatile. Currency devaluations and lower raw materials prices have resulted in significant financial upheaval. Cement manufacturers see themselves as exposed to risk from excess capacity due to large investments in new cement plants in recent years. At the same time, consolidation remains an important subject in the industry, i.e. production capacities for some individual cement producers do not increase due to investments in new facilities or in the expansion of existing cement plants, but due to acquisitions. In the long run, however, investments in infrastructure by developing and emerging countries will remain the most significant driver of growth in the cement industry. The particularly high degree of uncertainty associated with the outlook was highlighted in the section titled 'Opportunities and Risks Relating to the Outlook for the 2016 Financial Year' in the KHD Group management report of December 31, 2015 (page 74 et seq. of the Group Annual Report). In the course of updating the forecast, KHD had to make adjustments, some of major significance, with regard to the forecast values for the 2016 financial year that had been disclosed in the outlook on the Group's economic development described in the 2015 Group Annual Report. Despite the very unsatisfactory first half-year, KHD expects a considerable increase in new orders in the second half-year 2016. In total, KHD still expects higher order intake than in the previous year (€ 154 million). In the Capex segment, order intake above last year's value (€ 113.2 million) is expected, and in the Plant Services segment, order intake close to the value in the financial year 2015 (€ 40.9 million) is the goal. Revenue and EBIT will likely be within the scope of the forecast updated on May 3, 2016. Due to delays in contract awarding associated with opportunities included in the planned order intake, contrary to the original planning, significant projects can be recorded as order intake no earlier than in the second half-year 2016. Together with challenges in the execution of several large projects, this significantly affects the forecast figures with respect to revenue and EBIT. In accordance with the updated planning, KHD expects revenue in the financial year 2016 that will be more than 10% lower than the previous year's value. EBIT is expected to be significantly lower than the figure for the financial year 2015. Due to the lower order intake and worse payment conditions as well as negative cash flows from projects with challenges in execution, KHD expects that the operating cash flow in the financial year 2016 will be considerably negative. However, in comparison with the value of June 30, 2016 (€ -52.3 million), no further decline is expected. Despite the considerably negative impacts from earnings and decreased liquidity, our forecast shows that KHD's financial and net asset position will remain stable. In comparison with the first half-year, we expect significant improvements - particularly in order intake - in the second half-year of the 2016 financial year. As the liquidity situation and the high equity ratio remain comfortable this provides us with the flexibility to successfully cope with difficult market phases as well as the current, unsatisfactory earnings situation. In spite of the unfavorable market and margin situation, KHD is convinced that the Group will achieve a successful economic turnaround in the medium term. We will continue to develop our service and product portfolio and use opportunities for internal and external growth. Opportunities and Risks Relating to the Forecast for the Second Half-Year 2016While the risk management system in principle is oriented toward the medium and long term, special consideration in the forecast process is given to the opportunities and risks that can have an effect within the forecast period. Due to the special characteristics of long-term plant engineering, risks and opportunities can also lead to significant deviations from forecast figures in short-term outlook. Significant risks and opportunities regarding the forecast values exist for order intake, particularly in the Capex segment. The awarding of individual large contracts to the KHD Group can significantly affect the order intake in the second half of the 2016 financial year. Despite close collaboration with customers during the tendering process, customer investment decisions and the awarding of individual projects to the KHD Group can only be forecast with substantial uncertainty, which can lead to either a significantly higher or significantly lower order intake. The revenue and earnings forecast is mainly based on the order backlog in the Capex segment and on the planning of the relatively stable business in the Plant Services segment. The risks and opportunities relating to the planned revenue and earnings figures are nevertheless significant in the second half-year of the financial year 2016 as well, since delays or accelerations in project execution, postponement of awarding projects included in planned order intake and unexpected cost overruns can affect these figures.
Cologne, Germany, August 12, 2016 The Management Board s) Jürgen Luckas s) Yizhen Zhu s) Daniel Uttelbach s) Tao Xing INTERIM GROUP FINANCIAL STATEMENTS1 GROUP INCOME STATEMENT for the Period from January 1 to June 30, 2016of KHD Humboldt Wedag International AGscroll
scroll
*
restated according to IAS 8, please refer
to section 4 of the Group notes and the appendix to the notes to the
Group Financial Statements of December 31, 2015 2 GROUP STATEMENT OF COMPREHENSIVE INCOME for the Period from January 1 to June 30, 2016for KHD Humboldt Wedag International AGscroll
As in the previous year, no income taxes on the currency translation differences were applicable. Deferred tax assets in the amount of € 701 thousand (previous year: deferred tax liabilities of T€ 118 million) relating to the actuarial gains and losses have been considered. 3 GROUP BALANCE SHEET as of June 30, 2016of KHD Humboldt Wedag International AGASSETS scroll
EQUITY AND LIABILITIES scroll
4 GROUP STATEMENT OF CASH FLOW for the Period from January 1 to June 30, 2016for KHD Humboldt Wedag International AGscroll
scroll
scroll
5 GROUP STATEMENT OF CHANGES IN EQUITY for the Period from January 1 to June 30, 2016of KHD Humboldt Wedag International AGscroll
scroll
6 NOTES TO THE GROUP FINANCIAL STATEMENTS as of June 30, 2016of KHD Humboldt Wedag International AG1. Group structure and affiliated companiesKHD Humboldt Wedag International AG ("KHD" or "Group") is one of the world's leading providers of equipment and services for cement producers. In its capacity as the managing holding company of the Group, KHD holds a 100% interest in KHD Humboldt Wedag GmbH, Cologne/Germany on June 30, 2016, unchanged since December 31, 2015. The core business areas of KHD's 13 Group companies are industrial plant engineering and providing related services. The strategic and operational focus of the Group entities is on planning and constructing plants for the cement industry and providing a comprehensive range of services. 2. Reporting principlesThe interim financial statements of KHD are prepared using uniform accounting principles. The interim financial statements of KHD and of the subsidiaries that are included in the consolidated financial statements were prepared in accordance with International Financial Reporting Standards (IFRS) and the related interpretations of the International Accounting Standards Board (IASB), as applicable pursuant to Regulation No. 1606/2002 of the European Parliament and Council concerning the application of International Accounting Standards in the EU for interim financial reporting. In accordance with IAS 34, this interim report does not contain all of the information and notes to the financial statements that the IFRS requires for consolidated financial statements at the end of a financial year. These consolidated financial statements and the Group management report for the first half-year 2016 were neither audited pursuant to Section 317 of the German Commercial Code (HGB), nor were they subjected to an auditor's review. The accounting and measurement methods applied in these interim financial statements are consistent with those applied as of December 31, 2015, unless changes are described. The methods are described in detail in KHD's Group Annual Report on the IFRS consolidated financial statements as of December 31, 2015 on pages 85ff. These interim consolidated financial statements give a true and fair view of the net assets, financial position and result of operations during the reporting period. The preparation of interim financial statements requires that estimates are used and assumptions are made that have an impact on the assets, liabilities, provisions, deferred tax assets and liabilities, as well as income and expenses. Over time, the estimates and assumptions can change and significantly affect the net assets, financial position and result of operations of KHD. Although the estimates and assumptions are made carefully and conscientiously, it cannot be excluded that the actual amounts might deviate from the estimates used in the interim financial statements. The assumptions and estimates apply for the most part to the group-wide determination of economic useful life, the assumption used as basis for the impairment test of the goodwill, the measurement of provisions, the usability of tax loss carryforwards as well as the estimation of project costs and the percentage of completion in case of construction contracts. KHD operates in the area of plant engineering and construction and determines the result of construction contracts according to the percentage of completion (POC) method based on the stage of completion. The POC method leads to profit recognition based on the stage of completion corresponding to the ratio of costs incurred to the estimated overall project costs. Expected losses from construction contract are immediately recorded as an expense. With this method, the estimate of the stage of completion is particularly important; moreover, it can include estimates with regard to the scope of deliveries and services required to meet the contractual obligations. These significant estimates also include the overall project costs, the overall project revenues, the project risks and other relevant figures. According to the POC method, changes in estimates can lead to an increase or decrease in revenue. These interim consolidated financial statements have been prepared in euro. All amounts, including figures used for comparison, are stated in thousands of euros (€ thousand). All amounts have been rounded in accordance with standard commercial practice. 3. Applying new or revised International Financial Reporting StandardsIn the reporting period, the Group applied all International Accounting Standards Board (IASB) standards and International Financial Reporting Interpretations Committee (IFRIC) interpretations required to be applied, providing that the standards and interpretations have already been endorsed by the European Union (EU). The following standards and/or changes to standards were published by the IASB during the reporting period.
For further information regarding standards, interpretations and amendments that have been published, but are not yet applicable, please see section 1 of the Group notes to the Group Annual Report 2015. 4. ConsolidationSubsidiaries are investees over which KHD has power to control, is exposed to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. At KHD this is regularly the case when KHD holds, directly or indirectly, more than 50% of the voting rights, or controls the business activities in another manner. These companies are, as a general rule, consolidated. Subsidiaries are consolidated from the date when actual control is transferred to KHD and are deconsolidated from the date when control no longer exists. All intercompany transactions, balances, and unrealized profits or losses on intra-Group transactions are eliminated. The accounting and measurement principles applicable to subsidiaries pursuant to statutory law are adjusted in order to ensure consistency with the accounting and valuation principles of KHD. Non-controlling interests are presented and commented on separately. Besides KHD AG, the Group includes:scroll
scroll
D = Directly owned I = Indirectly owned 5. Segment reportingFor KHD, reporting is done in two separate segments. It is oriented towards internal Group management control and internal financial reporting and is based on the management approach. Due to changes in the classification of the two reportable segments KHD adapted the internal organization and, as a result, the internal Group reporting as of October 1, 2015. Reporting was done for the Capex (project business) and Parts & Services segments up to September 30, 2015. Starting on October 1, 2015, the services directly linked to project business are no longer reported in the Parts & Services segment, but instead in the Capex segment. Thus, in addition to the equipment supply, the Capex segment now also includes, in particular, services during supervision of erection and commissioning of projects. The Parts & Services segment was renamed as "Plant Services" as of October 1, 2015. The goal of these organizational changes is to improve the internal management control of KHD and strengthen the strategic expansion of the services business. To ensure comparability previous year's segment reporting was adjusted retrospectively to the segment structure that applied starting on October 1, 2015. The business activity of the two reportable now includes the following activities and services:
Management and controlling of the KHD Group is based in particular on key figures for the balance sheet and income statement. However, for the operating segments key figures are determined only for the income statement and for order intake, but not for the balance sheet. In its function as the chief operating decision maker, the Management Board assesses the profitability of the segments based on the operating result (earnings before interest and taxes - EBIT). The following table provides an overview of the business for the 2016 and 2015 financial half-years. The figures for the first financial half-year 2015 were adjusted retrospectively with regard to the new segment structure that applies since October 1, 2015. scroll
The recognition and measurement principles used for the reportable segments are in line with the IFRS principles described above that are used for the Group financial statements. Revenue and segment-related expenses are directly allocated to the respective segment. Expenses and income which cannot be allocated directly to the segments (e.g. general and administrative expenses) are allocated to the segments using appropriate allocation keys. In its segment reporting, KHD reports only revenue from external customers, i.e. revenue between the two segments is eliminated. As a result of the change in the segment structure as described above, the segments currently do not generate revenue with the respective other segment. The following project data was allocated to the different geographical areas according to the place of performance or delivery of the products and services. scroll
scroll
6. Construction contractsThe gross amount due from or due to customers for contract work is recognized at contract cost incurred plus proportionate profits depending on the stage of completion less progress billings and recognized contract losses. scroll
The balance of the construction contracts decreased from € 13,486 thousand by € 8,943 thousand to € 4,543 thousand due to the timing of the billing. Of the revenue of € 66,567 thousand recognized in the period under review (previous year, as of June 30, 2015: € 89,404 thousand), € 54,331 thousand (previous year, as of June 30, 2015: € 78,419 thousand) is attributable to construction contracts for which revenue was recognized on the basis of the stage of completion. The measurement of construction contracts is affected by estimations with respect to project revenue and project costs. Here, particularly costs to complete and, therefore, total estimated costs are subject to changes in estimates. Changes in estimates for projects are considered while calculating the amount of revenue and expenses recognized in profit or loss for the period in which the change in estimate was made as well as in the following periods. In this way, changes in estimates have a direct effect on the recognized result from construction contracts. There were negative effects from changes in estimates in the amount of about € 6 million in the first half-year of 2016. 7. Cash and cash equivalentsThe Group reports cash and cash equivalents in the amount of € 61,709 thousand (previous year, as of December 31, 2015: € 112,673 thousand). scroll
8. Other expensesscroll
9. Income taxThe expenses booked in the first half-year 2016 for income taxes amounts to € 1,898 thousand (previous year, as of June 30, 2015: € 1,579 thousand). The income tax expense is composed as follows: scroll
The taxes reported in the interim period are calculated using the estimated effective tax rate of the respective company. 10. LitigationAs already reported in the 2015 Group Financial Statements, pending arbitration claims were finally decided in January 2016 by an arbitration award. The effects of the arbitration award on the income statement were already recognized in full in the financial year 2015. In the reporting period, only the outstanding payment to the customer was made. All other litigations that are subject to disclosure are unchanged compared with the status that had been reported in the 2015 Group Financial Statements. 11. Transactions with related partiesAs defined by IAS 24, in addition to the subsidiaries of KHD, the related companies also include those companies that have a controlling or joint management interest in KHD or exercise considerable influence as well as those other related companies of AVIC Group that are affiliated with these. As business transactions between KHD and its consolidated subsidiaries were eliminated in the consolidation process, the following presents only the transactions with respect to direct and indirect parent companies of KHD and the other related companies or persons that were not eliminated. Relationships to parent entitiesThere has been a cooperation agreement with AVIC Beijing since 2010, reinforced since February 2011 by the capital interest in KHD amounting to 20% that is held by Max Glory Industries Limited (Max Glory), an AVIC Beijing group company. As a consequence of a public takeover offer, AVIC Beijing further increased its indirect share in KHD in the 2014 financial year. As of June 30, 2016, AVIC Beijing indirectly holds the majority of KHD shares with 89.02%. Among others, the strategic partnership between AVIC Beijing and KHD resulted in joint projects in Malaysia, Venezuela, and Turkey. Relationships to other related entitiesThe cooperation between the KHD Group and the AVIC Group was expressed in the conclusion of two loan contracts in the financial year 2014, each regarding € 50.0 million, with AVIC International (HK) Group Ltd. (AVIC HK) as the borrower. The interest on the loans amounts to 6% per annum. Both loans have a term of three years. For the loan granted in June 2014, KHD has the right to demand loan repayment at any time before the due date with a notification period of 30 days. The loans granted to AVIC HK are secured by a corporate guarantee from AVIC Group. The following transactions took place with related companies in the first half-year 2016: Incomescroll
Income with indirect parent companies relate to revenue from projects in America in which the cooperation partner AVIC Beijing is KHD's customer as well as costs charged back for a project in which AVIC Beijing is the supplier. Included in the income with other related entities is interest income from the loan with AVIC HK in the amount of € 3,033 thousand. Expensesscroll
In the financial year, the expenses from transactions with related entities total € 25 thousand (previous year: € 9,382 thousand). The expenses from transactions with indirect parent companies are related to contract costs of projects for which AVIC Beijing provides supplies and services to KHD. Current assetsscroll
As of June 30, 2016, there were current assets due from the companies of the AVIC Group in the amount of € 55,601 thousand (previous year: € 51,136 thousand). These assets result from advance payments, receivables from projects, and claims. An amount totaling € 18,000 thousand results from the cooperation agreement between AVIC Beijing and Humboldt Wedag GmbH. Non-current assetsAs of the reporting date, loans to other related entities in a total amount of € 100,000 thousand are included in the balance sheet under non-current assets. Liabilitiesscroll
As of June 30, 2016, liabilities due to AVIC Beijing in the amount of € 17,250 thousand (previous year: € 6,054 thousand) were reported in the balance sheet. The liabilities relate to the projects mentioned above. 12. Additional notes on financial instrumentsList of Financial Assets and Liabilities by Categoryscroll
scroll
The carrying amounts reported on June 30, 2016 in general correspond to the fair values. The fair values for the financial assets and liabilities held for trading and of the long term, guaranteed loan to AVIC HK measured at amortized cost were determined according to the following procedures:
Financial assets and financial liabilitiesscroll
There was no reclassification between levels 1 and 2 in the current reporting period. 13. Other disclosuresWithin the scope of its normal business activities, the Group has contingent liabilities due to advance guarantees, performance bonds, and guarantees for warranty obligations. The Group does not anticipate any material liabilities due to these commitments. There are bank guarantee credit facilities that allow the individual companies of the Group to provide bank guarantees for their customers all over the world. Within the scope of these bank guarantee credit facilities, the Group has provided bank guarantees in the amount of € 37.4 million (previous year, as of Dec. 31, 2015: € 33.0 million). With respect to events that occurred after the closing date for the financial statements, please refer to the corresponding section in the Management Report regarding the Interim Group Financial Statements as of June 30, 2016. 14. Responsibility statementTo the best of our knowledge we assure that, in accordance with the applicable reporting standards for interim financial reporting, the interim consolidated financial statements, in accordance with the accounting standards generally accepted in Germany, give a true and fair view of the net assets, financial position, and result of operations of the Group, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Group along with a description of the principal opportunities and risks associated with the expected development of the Group for the remainder of the financial year. In addition, we assure that the interim financial report complies with the regulations of IAS 34, as well as the further applicable International Accounting Standards and the applicable interpretations of the IFRS Interpretations Committee.
Cologne, Germany, August 12, 2016 The Management Board s) Jürgen Luckas s) Yizhen Zhu s) Daniel Uttelbach s) Tao Xing |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||