The credit facility is subject to certain covenants with regard to additional borrowing, purchases and disposals of assets, and the provision of collateral. There are also financial covenants to be observed during the lifetime of the credit facility, such as stipulated ratios for consolidated net debt⁴ to consolidated operating EBITDA⁵ (less than 2.75) and consolidated operating EBITDA⁵ to consolidated net interest payable (greater than 4.0).

If the financial covenants are not met and their breach is not remedied or the lenders do not waive the covenants, there may be grounds for termination under the conditions of the credit facility. Among other things, the lenders would then be entitled to call due all amounts owed with immediate effect. There are also certain other contractually agreed circumstances whose occurrence can lead to termination with all outstanding amounts becoming due for repayment with immediate effect. A further right of termination exists in certain instances where a third party acquires a controlling or majority shareholding.

⁴ Group net debt adjusted for downpayment guarantees exceeding EUR 35 million.
⁵ Group operating EBITDA adjusted for non-cash charges under the MSP Program.

Most Group business is transacted in euros, US dollars and pounds Sterling. The Group is mainly exposed to currency risk where payables and receivables exist or are likely to arise in a currency other than the local currency of the company recording them. As part of active risk management, foreign currency payables and receivables are normally hedged as they arise using financial instruments (foreign exchange contracts) (see also the Notes to the Consolidated Financial Statements under Note 32, “Additional Disclosures on Financial Instruments”). Risk due to changes in market interest rates is liable to affect variable-rate loan exposures in particular and may have an adverse impact on cash flows (cash flow risk). For the lifetime of the variable-rate master loan agreement, interest rate swaps and collars were used to hedge this risk on a pro rata basis in line with forecast changes in loan exposure over time. Those interest rate hedges expired on 30 September 2010 as planned and were not extended for the remaining term of the master loan agreement, as interest rates are low compared with the rates that can currently be hedged. The cash flow impact of interest rate changes is subject to regular analysis, however, and interest rate hedging will be resumed if interest rates change accordingly.

Liquidity risk can result in the Demag Cranes Group being unable to make available the funds needed to meet financial obligations entered into in its operating business or in connection with financial instruments. Safeguarding the liquidity of the Demag Cranes Group while allowing sufficient reserves for special eventualities is therefore an integral part of ongoing liquidity management. Resource equalisation within the Group through cash pooling and intercompany loans ensures that cash surpluses at individual Group member companies are efficiently used to meet funding needs in others. Sufficient lines of credit ensured that neither funding nor liquidity shortfalls arose in financial year 2009/2010. Under the master loan agreement entered into by Demag Cranes AG, the Group had EUR 130.0 million undrawn on a revolving credit facility at the balance sheet date (2008/2009: EUR 140.0 million).

The facility can be drawn against for terms of between one and six months and has a total term of up to nine months. Under the same master loan agreement, the Group also had access to EUR 33.8 million in undrawn combined credit and guarantee facilities at the balance sheet date (2008/2009: EUR 16.4 million).

Credit risk arises when customers or other contractual partners delay or default in meeting their obligations under a business transaction and financial losses are suffered as a result. The Demag Cranes Group counters specific credit risk by only doing business with parties of good credit standing, primarily based on the ratings of national and international trade credit rating agencies, and by rigorously observing risk limits laid down by trade credit insurers. Credit risk is also avoided by agreeing advance payments and the use of documentary letters of credit.

Reporting on compliance risk covers risks such as legal risks, risks arising from breaches of compliance regulations and risks arising from fraudulent activity. The Demag Cranes Group has established a compliance system that counters these risks through the Code of Conduct as well as various compliance corporate policies, audits and employee training initiatives. A regular Group-wide compliance report describes the status of the compliance management system so that risks can be promptly identified and appropriate measures taken. Compliance risk is also addressed within the higher-level risk management system. The Management Board and the Compliance Officer review the compliance system of Demag Canes AG regularly and adapt it to meet changing requirements.

Because it operates worldwide, the Demag Cranes Group is exposed to fluctuations in prices and volumes on its sales markets. It counters this general risk by diversifying its product portfolio as well as the sectors and regional markets to which it sells. By continuously monitoring the markets, it ensures that its sales strategy is updated to take account of changing customer requirements or competitor behaviour, for example.

There are certain dependencies relating to suppliers of the Demag Cranes Group. These arise in part because there are only limited possibilities for changing suppliers of certain components and assemblies at short notice and in part because there is a technical/commercial dependency on suppliers of certain components, especially mould-specific components. The Group has defined clear procurement strategies for such cases to safeguard supplies in the long term. Bought-in parts account for a large proportion of production costs. As the steel industry, for example, is subject to strong cyclical movements, prices can be volatile. Through a wide range of specific measures, the Group constantly endeavours to secure prevailing market prices.

Production processes can give rise to complex risks, the main ones being unanticipated technical difficulties, unforeseen developments at project locations, problems at partner companies or subcontractors and the resulting disruptions to logistics. These risks are minimised by issuing comprehensive corporate policies and procedural instructions on project and quality management, product and occupational safety as well as environmental protection. Risks are also mitigated through systematic employee training and development, continuous improvements to production processes and technologies, and regular plant and system maintenance. The Group has adequate insurance cover for losses resulting from technical failure, fire, explosions and similar events.

Within the Group, potential major project risks, such as liability and earnings risks, are continuously monitored and mitigated through strict project management and control. Cost overruns can occur although, especially on major automated projects, but can be managed by limiting liability and concentrating on core products.

In order to maintain its competitiveness, the Demag Cranes Group works continuously to develop new products and improve the existing product range. Despite using state-of-the-art project management, monitoring and control techniques, new product development entails considerable cost risk. This risk lies not only in the actual development phase, but also after market launch due to a possible need for technical improvements that can only be identified once products are in continuous operation in real-use conditions. Risks arising from product liability cannot be ruled out entirely. They may affect the Demag Cranes Group in the form of financial losses and damage to its reputation. Insurance has been taken out to cover product liability claims.

In order to ensure the security and efficiency of our business processes both now and in the future, our IT systems are constantly being checked and developed. In order to limit the risk of failure of application-critical systems, websites and infrastructure components, the Group complies with industry standards, such as backups, redundant network connections and separate computer centres. In financial year 2009/2010, the IT departments of the Group member companies were combined in a shared services centre for Group IT in a transfer of ownership, the aim being to provide a stronger basis for the systems’ reliable and cost-efficient operation. In particular, the SAP systems at regional subsidiaries of Demag Cranes & Components GmbH were uniformly updated to the current version 6.0.

The future of our business largely depends on the dedication and performance of our employees. The Group seeks to meet the ever fiercer competition for highly qualified specialist and senior staff, as well as the related risk of loss of expertise due to staff turnover, by offering attractive training and development opportunities and performance-based compensation systems. In addition, it places particular emphasis on knowledge management within the Group by consistently supporting and advancing top management. As part of an employer branding initiative, we are also developing a new strategy to enhance the Group’s attractiveness as an employer so that it can recruit tomorrow’s employees and managers today.

Most of the products and services provided by the Demag Cranes Group can be allocated to the global market for cargo handling equipment and material logistics. Demand for such goods depends to a considerable extent on the performance of the overall economy.

In the course of the financial year, the global economy continued to recover from the effects of the recession, with Asia and Brazil proving to be the most dynamic growth regions. In the euro zone, the economy as a whole is only very slowly recovering from the sharp downturn. The uncertainty resulting from the debt crisis in several euro zone countries continues to have a negative impact.

In implementing the restructuring and integration activities it had decided upon, the Demag Cranes Group not only cushioned the effects of the sharp drop in sales volumes and revenue resulting from the global financial and economic crisis; it also made itself more competitive in readiness for a future economic recovery.

The Industrial Cranes segment’s products are used in a diverse range of industries and serve a variety of customer groups. These include end customers who operate in cyclical sectors, i.e. in sectors particularly sensitive to changes in the economy as well as to global and regional trends. It remains difficult to make forecasts for the Industrial Cranes segment because it is heavily reliant on the economic cycle, although the order situation improved significantly in the course of the financial year.

The Port Technology segment is dependent on worldwide cargo volumes and growth in container handling. A healthy sign is that there are now positive trends in contract awards, with a renewed increase in replacement expenditure. In the case of expansion expenditure, we continue to see a reluctance to invest due to terminals still operating at relatively low capacity. The original implementation timetables of terminal automation projects are still being put back. Over the medium and long term, however, experts still expect further growth in global cargo traffic, and therefore continuing demand for the relevant handling equipment.

In the Services segment, increasing utilisation of crane equipment by customers is invigorating spare parts business. This is having a positive effect on the EBIT margin. However, there is a general uncertainty about whether the current level of capacity can be maintained or whether the improvement in the business situation in recent months was an effect of the backlog.

The Demag Cranes Group operates in markets characterised by intense competition and in some cases considerable price pressure resulting from the overcapacity caused by the financial and economic crisis. This price pressure is apparent in emerging economies and particularly so in mature markets. Here, technological benefits cannot always be given adequate consideration when making purchasing decisions owing to the sometimes very limited funds available for new investments. In order to develop and maintain a competitive edge in spite of this, the Demag Cranes Group invests in developing products for differentiated customer and market segments as well as in expanding its distribution and service network.

Any company operating globally in the mechanical engineering sector faces risks arising from the activities of competitors. Observation of our competitors suggests that global competition will continue to rise in the Demag Cranes Group’s product segments. We counter these risks by constantly monitoring the market and developing product, pricing and marketing strategies on the basis of our observations.