The key audit matters from our audit
Key audit matters are those matters that, in our professional judgment, were of most signifi cance in our audit of the fi nancial statements.
Key audit matters are selected from the matters communicated with the Executive Board and the Supervisory Board but are not intended to represent all matters that were discussed with them.
Our audit procedures relating to these matters were designed in the context of our audit of the fi nancial statements as a whole. Our opinion on the fi nancial statements is not modifi ed with respect to any of the key audit matters described below, and we do not express an opinion on these individual matters.
Sensitivities with respect to the valuation of goodwill
Under EU-IFRS, the Company is required to annually test the amount of goodwill for impairment. This annual impairment test was signifi cant to our audit because the assessment process is complex and judgmental and is based on assumptions that are affected by expected future market conditions, particularly those in Germany and the USA.
As a result, our audit procedures included among others discussing the budget and Mid-term Plan with the Executive Board and reconciling the input used to determine the value in use with the budget and Mid-term Plan 2014 – 2016. Furthermore we involved a valuation expert to assist us in evaluating the assumptions and methodologies used by the Company, in particular those relating to the assumed EBIT growth for the Cash Generating Units: Kendrion Linnig Group, Kendrion (Aerzen) GmbH, Kendrion Kuhnke Automation, Kendrion Kuhnke Automotive, Kendrion (Mishawaka) LLC and Kendrion (Shelby) Inc.
We also focused on the adequacy of the Company’s disclosures about those assumptions to which the outcome of the impairment test is most sensitive, that is, the assumptions that have the most signifi cant effect on the determination of the recoverable amount of the cash-generating units.
The Company’s disclosures about goodwill are included in Note 2.
Acquisition of Kuhnke AG has a signifi cant effect on the fi nancial statements
As described in Note 20, on 14 May 2013, the Company completed the acquisition of Kuhnke AG. We focused on this transaction because it is material to the fi nancial statements as a whole. The determination of the assumptions that underlie the initial acquisition accounting and the useful lives associated with the acquired intangible assets involve signifi cant management judgment. Our audit procedures included among others the evaluation of assumptions and methodologies used by the Company in determining the purchase price allocation. We performed certain audit procedures on the opening balance of Kuhnke and involved valuation experts in performing our procedures. We furthermore focused on the adequacy of the disclosure in Note 20.
Sensitivities with respect to the valuation of deferred tax assets
The Company has unused tax losses which can be carried forward. The Company’s disclosures about the unused tax losses and related deferred tax assets are included in Note 4. The Company recognized deferred tax assets for the carryforward of unused tax losses to the extent that it is probable that future taxable profi t will be available against which unused tax losses can be utilized. Assessing the future taxable profi t is complex and requires signifi cant management judgment, in particular on the assumptions about the expected future market and economic conditions, mainly in Germany and the Netherlands.
Our audit procedures included evaluating the Executive Board’s assumptions and estimates in relation to the likelihood of generating suffi cient future taxable profi ts based on budgets, business cases, past experiences and discussions with the Executive Board. We further focused on the adequacy of the disclosure in Note 4.
Sensitivities in the determination of Earn Out liability
The Company has agreed an earn out scheme in relation to the Kuhnke acquisition as included in Note 13 and Note 20. The earn out liability is material to the fi nancial statements as a whole and depends on meeting certain fi nancial criteria. Assessing the amount of future earn out payments is complex and judgmental as it is based on expectations on future target margins which are affected also by future market or economical conditions. Our audit procedures included among others the evaluation of the assumptions and methodology used by the Company in determining the earn out liability. We performed audit procedures on the determination of the earn out liability as a part of the accounting for the acquisition as well as the subsequent valuation of the earn out liability. We verifi ed that the earn out liability is based on the underlying agreement and is based on the expected future margin as per the initial recognition as well as per the balance sheet date. Furthermore we evaluated the reasonableness of the expected margin on which the earn out liability is based.
Going concern
The Company’s fi nancial statements have been prepared using the going concern basis of accounting. The use of this basis of accounting is appropriate unless the Executive Board either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. As part of our audit of the fi nancial statements, we concur with the Executive Board’s use of the going concern basis of accounting in the preparation of the Company’s fi nancial statements.
The Executive Board has not identifi ed a material uncertainty that may cast signifi cant doubt on the Company’s ability to continue as a going concern, and accordingly none is disclosed in the fi nancial statements. Based on our audit of the fi nancial statements, we also have not identifi ed such a material uncertainty. However, neither the Executive Board nor the auditor can guarantee the Company’s ability to continue as a going concern.
Responsibilities of the Executive Board and the Supervisory Board for the fi nancial statements
The Executive Board is responsible for the preparation and fair presentation of these fi nancial statements in accordance with EU-IFRS and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the report of the Executive Board in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore, The Executive Board is responsible for such internal control as management determines is necessary to enable the preparation of the fi nancial statements that are free from material misstatement, whether due to fraud or error. The Supervisory Board is responsible for overseeing the Company’s fi nancial reporting process.
Our responsibility for the audit of the fi nancial statements
The objectives of our audit are to obtain reasonable assurance about whether the fi nancial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Dutch Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to infl uence the economic decisions of users taken on the basis of these fi nancial statements.
As part of an audit in accordance with Dutch Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the planning and performance of the audit. We also:
z Identify and assess the risks of material misstatement of the fi nancial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is suffi cient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
z Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
z Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Executive Board.
z Evaluate the overall presentation, structure and content of the fi nancial statements, including the disclosures, and whether the fi nancial statements represent the underlying transactions and events in a manner that achieves fair presentation.
z Obtain suffi cient appropriate audit evidence regarding the fi nancial information of the Company and business activities within the Company to express an opinion on the fi nancial statements. We are responsible for the direction, supervision and performance of the group audit.
We remain solely responsible for our audit opinion.
We are required to communicate with the Supervisory Board regarding, among other matters, the planned scope and timing of the audit and signifi cant audit fi ndings, including any signifi cant defi ciencies in internal control that we identify during our audit.
We are also required to provide the Supervisory Board with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
Report on the Executive Board Report and the Supervisory Board Report and other information
Pursuant to the legal requirement under Part 9 of Book 2 of the Dutch Civil Code regarding our responsibility to report on the Executive Board Report and the Supervisory Board Report and the other information:
z We have no defi ciencies to report as a result of our examination whether the Executive Board Report and the Supervisory Board Report, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the other information as required by Part 9 of Book 2 has been annexed.
z We report that the Executive Board Report and the Supervisory Board Report, to the extent we can assess, is consistent with the fi nancial statements.
Arnhem, 26 February 2014 KPMG Accountants N.V.
M.J. De Vries RA
>> Provisions in the Articles of Association governing the appropriation of profit
Under article 35.1 and 35.2 of the Articles of Association of the Company, the Executive Board shall, with the approval of the Supervisory Board, determine which part of the profi ts is added to the reserves. The profi t remaining after transfer to the reserves is available to the General Meeting of Shareholders. The Company can only make payments to the shareholders and other parties entitled to the distributable profi t insofar as the shareholders’ equity exceeds the paid-up and called-up part of the capital plus the statutory reserves and exceeds the amounts resulting from the distribution test, performed by the Executive Board at the date of each dividend payment.
>> Profit appropriation Appropriation of net profit EUR million
Net profi t 16.7
The Executive Board has decided, with the approval of the Supervisory Board, that the net profi t of EUR 16.7 million will be added to the other reserves.
>> Post-balance sheet events There are no post-balance sheet events.
1 2009 EBITA and EBITDA excluding effect restructuring provision and costs related to the disposal of the Vink Group. EBITA excluding amortisation related to acquisitions.
2 2013 excluding EC fi ne payable. Relates to inventories, receivables minus non interest bearing debts.
3 2011 including Kendrion (Shelby) Inc.
4 Total invested capital is property, plant and equipment, intangible assets, other investments and current assets less cash, current tax liabilities, trade payables and other payables (2013 including EC fi ne).
5 Before cash fl ow relating to acquisitions and disposals (2011 and 2013 excluding acquisition expenses).
6 Excluding EC fi ne payable.
7 Pro forma. Unaudited.
8 2011 EBITA and EBITDA are normalised
(excluding EC fi ne and a.o. acquisition expenses).
9 2013 EBITDA is including full year Kuhnke.
10 2013 revenue is including full year Kuhnke.
11 The results for 2011 have been negatively infl uenced by a non-recurring supplementary provision of EUR 39 million as a result of the judgement regarding the EC fi ne.
EUR million 2013 2012 2011 2010 2009
>> Kendrion N.V. consolidated
Statement of comprehensive income conform financial statements
Revenue 354.0 284.9 267.9 221.9 149.2
Organic growth (1.2)% (4.1)% 20.7% 42.9% (27.0)%
Operating result (EBIT) 20.9 24.4 (11.5) 22.8 (5.0)
Operating result before amortisation (EBITA)1 23.9 26.7 (10.0) 24.2 (3.9)
Depreciation and amortisation 16.0 12.7 10.8 10.1 8.8
Operating result before depreciation and amortisation (EBITDA) 36.9 37.1 (0.7) 32.9 3.8
Profi t for the period 16.7 18.0 (20.1) 16.6 4.0
Statement of financial position at 31 December conform financial statements
Total assets 334.8 230.1 229.3 177.1 152.8
Total equity 134.1 103.1 91.7 114.5 96.1
Net interest-bearing debt 49.0 21.3 25.9 5.2 13.9
Working capital2, 3 40.6 33.9 35.8 26.0 21.7
Invested capital4 242.5 180.1 176.7 129.3 113.1
Statement of cash flows conform financial statements
Net cash from operating activities 27.5 28.3 27.6 25.6 3.9
Net investments 18.5 18.7 13.5 8.9 5.9
Free cash fl ow5 10.6 9.7 14.6 17.4 (1.9)
Ratios – pro forma
Solvency 40.1% 44.8% 40.0% 64.7% 62.9%
Net interest-bearing debt6 / EBITDA1, 8, 9 (debt cover)7 1.2 0.6 0.6 0.2 1.1
Net interest-bearing debt / equity (gearing) 0.4 0.2 0.3 0.1 0.1
EBITA1, 8 / net fi nance costs (interest cover)7 4.6 5.5 12.1 8.1 1.6
Working capital2, 3 in % of revenue10 10.2% 11.9% 12.1% 11.7% 14.5%
Market capitalisation as at 31 December 309.2 186.5 189.6 164.1 105.8
Net interest-bearing debt as at 31 December 49.0 21.3 25.9 5.2 13.9
Theoretic value of the organisation (Enterprise value)7 358.1 207.8 215.5 169.3 119.7