In its worldwide business dealings, GILDEMEISTER is confronted with various opportunities and risks. Our opportunities and risk management assists us in identifying and assessing these timely. The Executive Board and the Supervisory Board are informed regularly about the risk situation of the group and of the individual business units.
Opportunities are identified and analysed within the opportunities and risk management system. The marketing information system (MIS) identifies significant individual opportunities; it is used to gather customer data worldwide and to evaluate market and competitor data.
General economic opportunities: GILDEMEISTER is consistently working the growth markets, particularly that of China and of other BRICK nations. We see good opportunities for growth in these markets and want to gain a significant amount of market share in these countries. At the same time, we are consolidating our position as a market leader in the machine tools business in the established markets.
Industry-specific opportunities lie in the growing market of solar technology and energy storage in which we participate with “Energy Solutions”. With our ECO series we are taking advantage of market opportunities in the world markets. Following the worldwide economic slump in 2009, GILDEMEISTER is now growing interest in products in the machine tools business.
Corporate strategy opportunities present themselves to GILDEMEISTER through a sustained leadership in innovations and technology, as well as through market-leading product quality. This leads to opportunities to further strengthen our position in numerous markets. As a full-liner we are constantly expanding our services and extending our Advanced Technologies in the field of ultrasonic and laser technology. Furthermore, we also see opportunities in the automation of machine tools. We are continuing to build upon the long-term successful cooperation with Mori Seiki. In the first half year the financing was re-arranged with the participation of Mori Seiki. Through this, we were able to repay our financial liabilities and strengthen our equity base. Through MG Finance GmbH, together with Mori Seiki and the Japanese trading company Mitsui & Co. Ltd. we are able to offer our customers tailor-made financing solutions.
Performance-related opportunities arise in that we involve our suppliers actively in the value added process and thereby strengthen their supply loyalty. Our worldwide direct sales and service network ensures our customers receive excellent customer service.
Risks are systematically identified, assessed, aggregated, monitored and notified through the GILDEMEISTER risk management system. In doing so, the risks in the individual company divisions are identified every quarter and the risk potential that is determined as a result is analysed and evaluated using quantitative methods. Any risks that jeopardize the company as a going concern will be reported ad hoc outside the regular reporting schedule.
Overall economic risks arise for GILDEMEISTER in particular from cyclical development.
Up to now a clear recovery in order intake in the machine tools business could be noted, nevertheless economic development can be negatively affected by the debt crisis in numerous European countries as well as in the USA and likewise by political changes in North Africa and in the Middle East. Further prospects for growth depend essentially on when and how the worldwide debt crisis will be resolved. Should it not be possible to contain the crisis in the short-term, this could have a considerable effect on the economic cycle. In addition, developments in North Africa and the Middle East could result in an increase in oil and gas prices.
Industry-specific risks are counteracted through our technological lead and a focus on our customers and markets. Major orders in the “Energy Solutions” division are subject to licensing procedures, which can be costly and time-intensive abroad. Through these bureaucratic hurdles, time delays can occur in constructing solar plants and consequently to delays in revenue recognition and possibly to contractual penalties. State incentives for solar installations, especially by way of feed-in tariffs, are subject in part to change at short notice in individual countries. Additionally, GILDEMEISTER bears the standard risks associated with the project business in the construction of solar plants. Overall we consider the probability of occurrence of losses from industry-specific risks as slight.
Corporate strategy risks lie mainly in false estimations of future market development and in possible misjudgements in technological developments. We counteract these risks through intensive monitoring of the market and competition, regular strategy discussions with customers and suppliers, a comprehensive trade fair presence in all important markets and through mis, our early warning system. We consider the probability of occurrence of losses from corporate strategic risks to be slight.
Procurement and purchasing risks are such that we are primarily exposed to due to the possibility of price increases for materials in machine tool building as well as price volatility in solar modules. Further risks exist in possible supplier shortfalls and quality problems. We counteract these through the standardisation of parts and components and through international sourcing. We have calculated potential losses from purchasing and procurements risks at about € 12 million with a low probability of occurrence.
Production risks are permanently monitored by GILDEMEISTER by way of key performance indicators in assembly and production progress, in through-put time and in through-put continuity. In principle, we avoid incalculable projects so we consider these risks to be manageable and controllable. We have calculated possible losses from production risks to be € 17 million with a low probability of occurrence.
Personnel risks arise primarily from a fluctuation in employees in key positions. GILDEMEISTER limits these risks through an intense programme to increase its employees‘ qualifications as well as performance-related remuneration with a profit-related incentive scheme, deputising arrangements that cushion the loss of key personnel and early successor planning. On the basis of the above-mentioned measures, we consider the probability of occurrence of an estimated loss in an amount of about € 5 million as slight.
IT risks exist due to the increasing networking of our systems, parts of which are highly complex. IT risks may arise from network failure or from data being falsified or destroyed through user and program errors or through external influences. We counteract these risks through regular investment in our hardware and software, by the use of virus scanning programs, firewall systems, and by controlling access and authorisations. Possible damages arising out of this area currently amount to € 1 million and are controllable. We consider the probability of occurrence to be slight.
Risks from operations-related activities arise in that our products are subject to constant price competition in international markets. We counteract this risk through cost reductions, improved production and procurement processes and optimised product start-ups. We consider the probability of occurrence of losses from the above-referred risks to be slight.
Financial risks: Currency-related risks arise out of our international activities, which we hedge through our currency strategy. The essential components of GILDEMEISTER’s financing are a syndicated loan, which comprises a cash tranche and an aval tranche agreed for five years, and an invoice factoring scheme. At the present time an interest rate hedge exists with a term until 2013, respectively 2015. All financing agreements include an agreement to comply with standard covenants. GILDEMEISTER’s liquidity is sufficiently measured. A risk exists with respect to payment dates in the project business. The agreed financing framework can absorb any time delays that are identifiable today. In principle, GILDEMEISTER bears risks of default on receivables, which may lead to a loan loss provisions or in individual cases even to a default on the receivables. Possible losses from all financial risks amount in total to about € 19 million. The probability of occurrence of any loss is low.
Other risks: Legal risks arise out of operating activities – in particular from possible warranty claims due to customer complaints when purchasing machine tools and services, which cannot always be completely prevented by our efficient quality management. To maintain the existing risks at a manageable and calculable level, GILDEMEISTER limits the time period of our warranties and liabilities. Insofar as deferred tax assets have not been impaired on loss carry forwards or interest carry forwards, GILDEMEISTER assumes the usability of this possible reduction in tax on taxable income. We assume that the tax and social insurance declarations we submit are complete and correct. Nevertheless, due to a differing assessment of the facts, additional charges may arise within the scope of an audit. Should there be additional charges, or should it not be possible to use loss and interest carry forwards, this could adversely affect GILDEMEISTER’s net assets, financial position and results of operations. Overall, we have calculated any possible losses arising out of tax risks at € 7 million with a low probability of occurrence.
Overall risk: All risks are aggregated to a total risk with the Monte Carlo simulation, which from today’s perspective does not endanger the future of the group as a going concern. The risks have declined compared to the last report on the first half-year 2011.