KONE’s business activities are exposed to financial risks such as foreign exchange risks, interest rate risks, liquidity risks and credit risks. These financial risks are managed as part of the total KONE risk portfolio. KONE Treasury is responsible for the centralized management of financial risks in accordance with the KONE Treasury Policy approved by the Board of Directors. KONE business units manage their financial risks locally in accordance with the KONE Treasury Policy.
KONE operates internationally and is thus exposed to risks arising from foreign exchange rate fluctuations related to currency flows from revenues and expenses (transaction risk) and from the translation of statement of income and statement of financial position items of foreign subsidiaries into euros (translation risk).
A substantial part of KONE operations are denominated in local functional currencies and do not therefore give rise to transaction risk. The sales and installations of new equipment and modernizations typically take place in the local currency of the customer. Component and material expenses may occur in other currencies than the sales currency, which exposes KONE to transaction risks. The KONE policy is to hedge the foreign exchange exposure of the order book and other highly probable future sales and purchases with foreign exchange forward contracts. The business units are responsible for evaluating and hedging the transaction risks in their operations according to the foreign exchange policy. The most significant transaction risk exposures arising from business operations are in the Chinese renminbi, US dollar, Saudi Arabian riyal, Malaysian ringgit and British pound. The majority of the currency forward contracts expire within one year.
Hedge accounting is applied in business units, where there are significant revenues or expenses in foreign currency. When hedge accounting is applied the gains and losses from the hedges are recognized in the statement of income at the same time as the exchange rate gains and losses for the hedged items are recognized.
KONE’s internal loans and deposits are primarily initiated in the local currencies of the subsidiaries in which case the possible foreign exchange risks are hedged using foreign exchange swap contracts.
Changes in consolidation exchange rates affect KONE’s statement of income, cash flow statement and statement of financial position, which are presented in euros. As approximately 75% of KONE’s revenues occur in functional currencies other than euro, the translation risk is significant for KONE. A change of 10% in the annual average foreign exchange rates would have caused a 7.7% (7.7%) change in 2016 in the consolidated sales in euros. Such a change would have had a higher impact on KONE’s operating income and therefore also some impact on KONE’s relative operating income. The translation of the subsidiaries’ balance sheets into euros caused translation differences of EUR -23.2 (177.4) million in 2016. The translation risk is not hedged as a rule with financial instruments as KONE’s business consists of continuous operations in various currency areas. The most significant translation risk exposures are in the Chinese renminbi, Hong Kong dollar and US dollar.
KONE’s cash and short-term investments were EUR 2,083.6 (1,902.3) million at the statement of financial position date. KONE’s interest-bearing debt was EUR 405.4 (406.1) million at the statement of financial position date and consisted of EUR 218.1 (44.5) million of financial debt, EUR 10.5 (192.4) million of option liabilities from acquisitions, and EUR 176.7 (169.2) million of employee benefits. As KONE’s financial investments are mainly invested in tenors of less than one year, changes in the interest rates do not have any significant impact on their market values. Changes in the interest rates may however impact future interest income.
When calculating the interest rate sensitivity analysis the interest-bearing net financial debt is assumed to remain on the level of the closing balance of 2016 during the following financial period. The sensitivity analysis presents the impact of a 1 percentage point change in the interest rate level on the net interest income for the financial period by taking into account the net financial debt tied to interest periods of less than one year, -2,060.0 (-1,886.7) million euros. For 2017 a 1 percentage point change in the interest rate level would mean a change of EUR 20.6 (18.9) million in net interest income. The interest rate sensitivity is calculated before taxes.
A change in interest rates does not have a material impact on the net interest on employee benefits, on financial debt or option liabilities from acquisitions.
KONE’s cash and cash equivalents was EUR 589.2 (552.7) million and s financial investments EUR 1,494.4 (1,349.6) million on December 31, 2016. Most of the cash and financial investments are managed centrally by KONE Treasury, but some are located on decentralized bank accounts and local investments in a number of KONE countries. Changes in local regulations can nevertheless have an impact on the location of the cash and financial investments in the future. To ensure sufficient liquidity KONE has in 2016 signed a committed syndicated credit facility of EUR 800 million maturing in 2021. This facility has replaced the previous bilateral facilities (EUR 540 million). In 2016 KONE utilized an European Investment Bank (EIB) credit facility of EUR 160 million according to previously agreed conditions. The credit facility is a 5-year fixed interest rate loan which will be used for R&D purposes. The fair value of the loan is estimated based on discounted cash flows using a current borrowing rate (level 2 fair value hierarchy). KONE has also an uncommitted commercial paper program of EUR 500 million.
Maturity analysis of financial liabilities and Interest payments Dec 31, 2016 Dec 31, 2015 MEUR <1 year 1-5 years >5 years Total <1 year 1-5 years >5 years Total Interest-bearing debt Long-term laons - -1.0 -160.0 -161.0 - -0.8 - -0.8 Finance lease laibilities -13.9 -33.1 -1.7 -48.7 -10.9 -24.5 - -35.3 Short-term loans - - - - -0.1 - -0.1 Used bank overdraft limits -1.1 - - -1.1 -1.0 - -1.0 Interest payments -0.0 -0.1 -0.0 -0.2 -0.0 - -0.0 Option liabilities from acquisitions -10.5 - - -10.5 -192.4 - - -192.4 Employee benefits - - -176.7 -176.7 - - 169.2 -169.2 Non-interest bearing debt Accounts payables -743.3 - - -743.3 -728.9 - - -728.9 Derivatives Capital inflow 2,530.9 98.3 - 2,629.2 2,697.4 158.1 - 2,885.4 Capital outflow -2,508.8 -98.5 - -2,607.3 -2,669.7 -153.1 - -2,822.8 Net interest - - - - 0.3 0.3 - 0.3 Net outflow -746.8 -34.5 -338.4 -1,119.7 -905.2 -20.4 -169.2 -1,094.8
KONE has substantial amounts of cash and financial investments. In order to diversify the financial credit risk, KONE invests its funds into highly liquid interest rate funds and into deposits with several banks. Global counterparty limits are approved by the Board of Directors. All open exposures such as cash on bank accounts, investments, deposits and other financial transactions, for example derivatives contracts, are included when measuring the financial credit risk exposure. When selecting counterparty banks and other investment targets, only counterparties with high creditworthiness are approved. The size of each limit reflects the creditworthiness of the counterparty. Counterparty creditworthiness is evaluated constantly and the required actions are considered case by case if significant changes in the creditworthiness of a counterparty occur.
Customer credit risks relate to advance payments receivable from customers or to accounts receivable related to equipment handed over or to services rendered. This risk is managed by defining the rules for tendering, payment terms, authorizations and credit control as well as project management controls. Advance payments, documentary credits and guarantees are used in payment terms to minimize customer credit risks. KONE proactively manages its accounts receivable in order to minimize the risk of customer defaults. KONE’s customer base consists of a large number of customers in several market areas. The management considers that there are no significant concentrations of credit risk with any individual customer or geographical region.
The credit quality of advance payments receivable and accounts receivable is evaluated according to KONE’s credit policy. According to this policy, the rules for credit quality evaluation are set separately for the new equipment business and the service business. The credit quality is evaluated both on the basis of the aging of the receivables as well as on the basis of individual case-by-case customer analysis in order to identify customers with a potential higher credit risk due to individual customer specific reasons. The bad debt provision for the accounts receivable is recognized on the basis of this credit quality evaluation. The amount of bad debt provision recognized to cover doubtful accounts was EUR 164.1 (146.5) million at the end of the financial period.
Aging structure of the account receivable
after recognition of impairment, MEUR
Dec 31, 2016 Dec 31,2015 Not past due and less than one month receivables 1) 1,220.9 1,099.3 Past due 1-3 months 1) 208.7 207.6 Past due 3-6 months 1) 124.2 129.7 Past duy > 6 months 19.9 43.6 Accounts receivable in the consolidated statement
of financial position
1) There is no material impairment loss recognized related to these receivable.