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Annual Report 2016

Opportunities and risks profile

As a technology company, technotrans operates in a dynamic market environment in which new opportunities and risks are continually emerging. technotrans conducts opportunity and risk management to assist the company management in achieving the corporate targets. technotrans’ long-term success depends on identifying and seizing opportunities at an early stage. Meanwhile the company is exposed to risks that could hinder the attainment of its short and medium-term targets. technotrans takes risks to mean internal and external events, resulting from uncertainty about future developments, which could adversely affect the attainment of corporate targets. technotrans understands opportunities to mean possible successes over and above the defined targets, which thus promote the development of the business. Risks and opportunities are inseparably linked. The structures and processes of the risk management system as explained in the Risks Report are therefore automatically also an aspect of opportunities management. To establish the overall risk, technotrans bundles individual risks that belong together substantively. Based on the recommendations of DRS 20, technotrans categorises its risks according to five risk groups:

General and Industry-Specific Risks

The success of the technotrans Group depends to quite some degree on the macroeconomic developments of its sales markets, specifically the printing industry, the plastics processing industry, the machine tool and laser industry, along with the sales markets of its customers. In assessing macroeconomic development, among other tools technotrans uses forecasts by widely recognised institutions and economic research institutes. The growing diversification of the technotrans Group reduces its dependence on the business cycles of a single industry, while creating the chance to share in the opportunities offered by various growth markets.

A fundamental cyclical and industry-specific risk naturally remains because the actual economic development of the global economy and the German economy, but particularly of the export-oriented capital goods industry, could differ considerably from the forecasts made. Political decisions, international conflicts and exchange rate volatility may erode sales of our products and undermine our forecasts. Thanks to its flexible production structures, technotrans is able to adjust capacities swiftly and thus respond to changes in demand.

As a systems supplier, technotrans realises a comparatively high proportion of its revenue from the leading printing press manufacturers worldwide. As a result of the industry’s process of consolidation in the past few years, technotrans is subject to growing interdependence with machinery manufacturers (OEMs). Economic difficulties for one of these customers or its exit from the market would potentially have a considerable impact on the financial position and financial performance of the company in the short term. However, the Board of Management does not expect any lasting effects because consolidation would probably not exercise any influence on overall sales of printing presses.

Industry-specific opportunities and risks could also arise for the technotrans Group from technological and competitive changes. technotrans addresses these risks through ongoing initiatives to safeguard and extend its leading technological and innovative position as well as by focusing on customers and markets.

In summary, the Board of Management assesses all net risks and therefore the overall risk in this risk category of general and industry-specific risks as low at the time of compiling this report.

Corporate Strategy Risks

There are a number of risks involved in taking over companies that could impact our financial performance, financial position and net worth. If the expected economic or industry-specific developments or the targets for newly acquired businesses or expectations of newly developed products should prove to be inaccurate, the revenue and therefore also the earnings target could be missed. Attainment of the margin targets depends to a very great degree on the planned revenue performance and on keeping costs strictly under control. Unplanned expenses, e.g. for restructuring measures unexpectedly needed or unforeseeable additional quality problems, could also cause major shortfalls.

Compared with the previous year, acquisition risks within the category of corporate strategy risks for the technotrans Group have changed. There is a medium risk that we will not meet our earnings targets in particular from a misjudgement of the future market and business performance of the acquired companies. How quickly the acquisitions can be integrated into the group in order to realise the expected group-wide synergies will also be crucially important. Building on experience of the most recent successful acquisitions, the Board of Management addresses this risk by deploying additional personnel and conducting regular checks on the measures implemented. With the acquisition of GWK Wärme Kältetechnik mbH in 2016, technotrans took an important strategic step towards further reducing its dependence on the printing industry, as its main market segment to date, and significantly stepping up its activities in the growing market of the plastics processing industry.

The strategic direction of the group in the past few years has centred on investment in growth markets, the expansion of existing markets and the acquisition of further companies. The purpose of this investment is to increase the presence in existing markets and to access new market areas that offer attractive growth potential. In order to gain access to further sales markets, technotrans is focusing on its core skills and specifically addressing niche markets where it can succeed as a systems partner to major industrial clients. The relevant markets are moreover continuously monitored and opportunities for strategic acquisitions that complement organic growth are identified. By making targeted acquisitions, technotrans endeavours to strengthen its position as technology leader, unlock market potential, improve the services it provides for customers and expand the product portfolio.

To maintain competitiveness, meet market requirements and attract new customer groups, technotrans is also investing in the development and optimisation of its technologies, products and processes. Its activities focus on all sales markets. New products are created in constant consultation with the customer from the product and applications development stage onward (product/market strategy).

In new markets involving new customers, there is fundamentally always the possibility that efforts to launch new products will not succeed. On the other hand the individual risk is lower because of the growing number of customers. Nevertheless, it is impossible to exclude miscalculations with regard to the strategic direction of the group and its market potential, along with a lack of customer acceptance of newly developed products; these could have negative effects on the competitive position and the sales of the group. We tackle this risk by conducting a careful analysis of the underlying conditions before developing new products, and by carrying out a meticulous selection process of prototypes; we rate this risk as low.

In drawing up our plans for the 2017 financial year we have based our estimates on realistic planning assumptions and can if necessary take swift corrective action to exclude these risks as far as possible, or minimise their impact.

Financial Risks

Financial risks stem first and foremost from liquidity bottlenecks, credit financing and exchange rate fluctuations as well as price changes.

The individual subsidiaries fundamentally finance themselves from their operating profit. Depending on the liquidity situation, technotrans AG also helps with the financing and provides funding if required. To remain in a position to act at all times, the group parent has adequate liquidity reserves. A diversified financing structure, spread across several principal banks, prevents dependence on individual lenders. Nor would a change in the interest rate have any major impact on the financial performance, because ongoing financing involves a mix of fixed-rate and variable-rate financing and in selected instances interest rate risks are hedged. At the reporting date of December 31, 2016 the unsecured share of financing within the bank liabilities amounted to € 4.5 million. A significant deterioration in the financial performance, financial position and net worth from the plan figures for the 2017 financial year could render it necessary to draw on these reserves. Based on our plans for 2017, the Board of Management rates this risk as low.

In view of the company’s structure and relevant markets, exchange rates have only a minor impact on the operating performance of the technotrans Group because the overwhelming portion of its business is settled in euros. Foreign currency risks of the subsidiaries in financial reporting terms are transferred within the group to the group parent and thus pooled centrally. On the other hand exchange rate movements may be a help or a hindrance to the competitiveness of our customers.

We consider the risk of a major debt default to be low overall, among other things based on the experience of recent years. Credit insurance and receivables management at customer level represent an effective means of pre-empting bad debt risks as far as possible. Credit checks and possibly demands for collateral ensure that business with new customers proceeds in an orderly manner. All in all, the Board of Management rates the financial risks as low.

Economic Performance Risks

As well as corporate strategy risks, technotrans is exposed to economic performance risks, in particular in the form of procurement risks and production risks. The purchased materials are fundamentally exposed to the risk of price fluctuations. technotrans limits the price and volume risk through systematic supplier management as well as by creating a group procurement structure in order to create economies of scale in the group’s procurement of the principal categories of materials. The purchasing volume of the group increased by over 35 percent as a result of the acquisition of GWK. On the materials and procurement side we expect to see a rising trend in raw material prices for some components in 2017.
There is furthermore the risk that customer expectations with regard to punctuality of delivery or quality will not be met. A large number of processes and mechanisms, from supplier management and customer project handling to quality management, are intended to anticipate and eliminate such risks.

The impact on the group of production and sales risks is of minor importance in view of growing diversification within the group. GWK’s higher vertical integration furthermore increases flexibility within the group by providing a safeguard against external supply bottlenecks if necessary.

A secure and effective IT infrastructure is the basis of the modern working environment. The growing integration of a large number of IT systems and the need for permanent availability place high demands on the information technology used. We do not currently foresee serious dangers from failures of our IT systems. technotrans addresses possible risks from the failure of computer systems and networks, unauthorised accessing of data and data misuse through a central shared service centre function (in technical and organisational terms) as well as through regular investment measures in hardware and software. The Board of Management continues to estimate the IT risks as low. To limit future IT risks, technotrans uses preventive measures for system security (use of virus scanners, firewall systems and access controls) as well as an ongoing SAP ERP implementation strategy.

The success of the group also depends substantially on the commitment, expertise and integrity of the employees. The group companies by and large handle their personnel management autonomously. There exist possible risks mainly in the areas of personnel recruitment and personnel development. Changes to structures or processes harbour the risk of losing employees and their expertise if they are unable to identify with the measures taken and are therefore prompted to move (fluctuation). We tackle this risk through focused training and advancement measures, by spreading individual expertise among teams and by offering commensurate pay. Employees appreciate the positive corporate culture, with the result that all measures combined make technotrans an attractive employer. Overall, the Board of Management rates the economic performance risks as low.

Legal Risks

technotrans AG and its group companies are exposed to a wide range of legal risks. The business operations of the individual companies harbour risks especially from guarantee and product liability claims from customer complaints. To cover the risks adequately, provisions amounting to € 1.4 million (previous year: € 0.9 million) were accounted for.

In response to significant individual risks of group companies from litigation and therefore associated litigation risks, a provision is formed if the obligation is probable and a reasonable estimate of the amount in question is possible. The litigation in progress at the balance sheet date concerns product liability cases in connection with sales of machinery and relates to past events. Though the final outcome of the litigation may have a future influence on earnings and cash flow, we believe it will not have any lasting impact on the net worth of the group.

If claims are made by third parties, technotrans carefully examines their basis, if need be involving external lawyers. We estimate the risks identified in this area as low, because the group is currently not involved in legal proceedings with any substantial influence on its overall economic position. At December 31, 2016 technotrans accounted for provisions for litigation risks amounting to € 1.0 million.

Future changes to the law and to regulations, entailing changes to standards, could have a negative effect on the development of the technotrans Group. While effective contract and quality management plus a compliance system can minimise this risk, they cannot exclude it altogether. technotrans has adequate insurance cover in place to guard against the risk, and in individual instances also accounts for provisions. Overall, the Board of Management rates the legal risks as low.

Other Risks

As a result of its corporate strategy of driving growth through the gradual expansion of its investment portfolio, the group has accounted for goodwill amounting to € 23.1 million (previous year: € 5.8 million). Pursuant to IAS 36 this must be tested for impairment at least once a year. If impairment is established, the goodwill in question is to be written down. In the year under review, as in the previous year, no write-downs were recognised.