RISK REPORT
Risk management system and internal control system
Scope of application
A Group-wide risk management system (RMS) that complies with the German Law on Control and Transparency in Business (KonTraG) has existed since 2000. This enables potential risks to be identified in good time both in MAX Automation SE as the parent company and in the operating units and suitable countermeasures to be initiated. The risk management system was fundamentally revised in 2009 and has since been continuously adapted to new requirements. In 2018, measures were introduced to restructure risk management and internal control and reporting systems, which were continued in 2019. More extensive procedures have already been initiated for 2020.
Goals and principles
The goal of the MAX Group's risk management system (RMS) is the controlled handling of risks. The RMS is based on a systematic process of risk identification, assessment and management that covers the entire Group. The foundation of risk management is safeguarding the medium and long-term corporate goals, in particular maintaining and expanding the market position within the sectors addressed. The primary goal is to identify and appropriately manage the risk drivers through complete and appropriate risk management.
The following risk policy principles are derived from this:
Risk management is integrated into all major operative business and decision-making processes. Risks are primarily managed by the organizational units that operate locally.
The risk management process serves as a set of tools for the systematic recording, analysis, management and monitoring of risks threatening the company's existence.
Active and open communication about risks is a key success factor for the RMS. All MAX Group employees are encouraged to actively participate in risk management within their areas of responsibility.
The risk assessment is generally conservative, i.e. the maximum expected loss is determined (worst case).
Central monitoring is carried out by the management company MAX Automation SE.
Methods and processes
Risk management contains various step-by-step, computer-supported matrices, the aim of which is to deal with risk on the basis of risk identification via risk assessment. In this process, risks are identified, the significance of the risks for the company is determined and a mathematical risk factor is calculated in order to then formulate precisely defined risk management measures in terms of content and timing. A list of examples of risks and a guide for handling the electronic file complete the system.
The reporting interval is based on the quarter. A key element of this standard risk cycle is the risk inventory from the operating units. In it, individual risks are identified, evaluated and condensed, i.e. assigned to one of seven specific risk areas.
The assessment of individual risks is the task of the risk management of the Group companies and MAX Automation. The risk management manual serves as a guide. The evaluation process consists of three steps: First, the damage potential is calculated if possible, i.e. the maximum effect a risk can have on EBIT within the next 24 months. The probability of occurrence of the individual risk is then determined. In the third step, the effectiveness of possible countermeasures is examined and evaluated to determine whether this reduces the risk. Finally, the net risk potential, i.e. the net EBIT risk, remains after taking into account the probability of occurrence and the effectiveness of measures.
The net risks of the seven risk areas are calculated as the sum of all assigned individual risks. Each risk field is assigned to one of the following categories depending on the probability of occurrence:
Low probability of occurrence < 10 %
Medium probability of occurrence 10 – 50 %
High probability of occurrence > 50 %
The net risks of the risk areas add up to the overall risk potential of the Group. Portfolio and correlation effects are not taken into account.
Following the risk inventory, the operating units prepare their respective risk reports. On this basis, MAX Automation's risk management prepares the Group risk report, which provides information on material individual risks and the overall risk and is subsequently discussed by the Managing Directors and the Supervisory Board.
Managing Directors and the Supervisory Board are informed directly about acute risks. The risk managers are responsible for identifying, assessing, controlling and monitoring risks and for reporting. As a rule, these are the heads of the controlling departments of MAX Automation and the Group companies.
Key features of the risk management system for the financial reporting process
A key component of the internal control system (ICS) is the reporting system, which is constantly being further developed by MAX Automation as part of value-oriented reporting.
To ensure uniform treatment and valuation of accounting-related topics, the MAX Automation accounting manual is available to all companies. The accounting manual is updated regularly. It comprises all regulations, measures and procedures that ensure the reliability of financial reporting with reasonable assurance and that the financial statements of the Group and Group companies are prepared in accordance with IFRS.
Overall responsibility for the RMS / ICS lies with the Managing Directors. They have established a clearly defined management and reporting organization for the RMS / ICS that covers all organizational and legal units. Monitoring is carried out on a random basis by the accounting and controlling departments of MAX Automation.
The most important tools and control and safety routines for the accounting process are:
The MAX Group is characterized by a clear organizational, corporate and control and monitoring structure.
Coordinated Group-wide planning, reporting, managerial accounting and early warning systems and processes as well as catalogs of transactions requiring approval or reporting are in place for the comprehensive analysis and management of earnings-relevant risk factors and risks threatening the existence of the company.
The functions in all areas of the accounting process (such as financial accounting and managerial accounting) are clearly assigned.
An adequate internal guideline system (consisting of a Group-wide risk management guideline and an accounting manual among other things) has been established and will be adapted as necessary.
The IT systems used in accounting are protected against unauthorized access. Standard software is predominantly used for the financial systems employed.
The standard consolidation software LucaNet is used, which is also used for the preparation of Group-wide medium-term planning.
Only selected employees receive access authorization to the consolidation system. Only a small group of employees from Group accounting and managerial accounting has access to all data. For other users, access is limited to data relevant to their activities.
The procedure is as follows:
At monthly intervals, the subsidiaries report to the parent company on the performance from the past month and the current financial year. This procedure is supplemented at least quarterly by an updated forecast.
All reports are subjected to a critical target/actual analysis. An additional report from Management comments on deviations from the plan, provides information on measures taken to meet the plan, developments in the current reporting month and other topics such as market and competitive conditions, investments, financing and legal matters. Verbal explanations supplement the report.
The Managing Directors also hold regular discussions with the Managing Directors of the Group companies in order to review the business performance in comparison with the plans and, if necessary, to initiate measures to meet the plans.
Operative corporate planning is an essential component of the RMS. At the end of each fiscal year, the Managing Directors of the Group companies present the current course of business and explain the further corporate strategy. The discussions are based on the corporate strategy and the five-year plans for business development, investments and liquidity development based on this strategy. Corporate planning helps to identify and assess potential opportunities and risks long before major business decisions are made.
Material accounting processes are subject to regular analytical reviews. The existing Group-wide RMS is continuously adapted to current developments and its functionality is reviewed on an ongoing basis. The system was examined by the auditor PricewaterhouseCoopers GmbH, Düsseldorf, Germany, during the audit of the consolidated financial statements.
The Supervisory Board regularly deals with key issues from the RMS.
The accounting-related ICS was optimized and further developed in 2018 as part of the "Next Level Corporate Reporting" project. This process was continued in 2019.
The RMS / ICS also includes regular training of all employees. Among other things, workshops are held on the application of accounting standards (e.g. IFRS 15 and IFRS 16), accounting rules and software tools. In the case of corporate acquisitions, accounting processes are adapted quickly and new employees are familiarized with all relevant processes, content and systems.
Finally, it should be noted that neither the RMS nor the ICS can provide absolute certainty, since even if the necessary care is taken, the establishment of appropriate systems can be fundamentally flawed.
Overall risk situation
The Group's total risk potential amounted to around mEUR 6.6 at the end of 2019 (prior year: mEUR 7.4). This includes the net risk potential of 36 (prior year: 30) quantifiable individual risks. In addition, there were 170 (prior year: 207) unquantifiable individual risks. In view of the business volume and the overall economic situation, the overall risk potential is considered to be appropriate and easily manageable. At present, no risks have been identified that could endanger the existence of the Group either separately or in interaction with other risks.
Nearly half of the total risk potential is attributable to the risk field of "financial risks", which, however, are assessed with a probability of occurrence of less than 10%.
Corporate risks |
Probability of occurrence |
Possible financial impact |
Risk situation for 2019 compared to the previous year |
|---|---|---|---|
Strategic risks |
low |
minor |
equal |
Market risks and economic risks |
possible |
minor |
equal |
Risks from business activities, project risks |
possible |
significant |
equal |
Financial risks, tax risks |
possible |
significant |
equal |
Legal risks |
low |
minor |
equal |
Risks from equity investments |
low |
significant |
equal |
Other risks (e.g. IT, personnel, environment) |
possible |
minor |
equal |
Specification of the potential financial impact on the consolidated result or consolidated EBIT minor (< kEUR 400), moderate (from kEUR 400 to mEUR 1.3), significant (> mEUR 1.3)
Risk reporting
Risk areas and significant individual risks
Market risks and economic risks: All MAX Group companies are exposed to market and economic risks, i.e. geographical and industry-specific economic trends, political (e.g. BREXIT, protectionism, trade wars) and financial changes (e.g. banking crisis), commodity prices and exchange rates influence the course of business and may adversely affect the future success of the Group companies. In principle, the business development of the operating units is strongly linked to the development of the overall economic environment. MAX Automation is divided into three core business areas. A high degree of specialization and a strong position within attractive market niches reduce both the industry risk and the general economic risk. The risk is also reduced by diversification into other sectors such as medical technology. The initiated sales process of the companies from the non-core business (the former Mobility Automation segment) will greatly reduce the dependency on the automotive economy in the future. In principle, however, market and economic risks cannot be ruled out.
As of 31 December 2019, the MAX Group had an order backlog of mEUR 199.5 (previous year: mEUR 260.3), which provides a time buffer to counteract market and cyclical risks.
Risks from business activities, project risks: Due to the scale of individual projects, MAX Automation sees a possible risk in project planning and project execution. Technical misjudgments and/or delays can occur, especially in larger projects. The fact that this can have a significant impact on the operating result was particularly evident in 2018, when the earnings forecast for the entire MAX Group had to be adjusted through an ad hoc announcement on 28 June 2018, due to expenses from ongoing projects of the subsidiaries of the IWM Group.
MAX Automation counteracts the risk of misjudgments through a Group-wide project-related risk management approach. The goal is to consciously deal with risks at all management levels of the Group.
Financial risks: By means of a new syndicated loan agreement, Group financing was switched from bilateral bank accounts of the individual Group companies to uniform Group financing in 2015 and adjusted again in 2018 in favor of MAX Automation. The covenants agreed with the Group's lending banks have a direct impact on the interest margin and give the banks a special right of termination in the event of non-compliance. These are based on balance sheet and earnings figures from the consolidated financial statements prepared in accordance with IFRS. There is regular communication with the lending banks and guarantee insurers. In 2019, MAX Automation adhered to all the covenants agreed with the lending banks or the review was suspended beginning in the third quarter. The counterparty default risk is limited by the fact that banking transactions are concluded exclusively with reputable banks.
The contract for the sale of the former Group company NSM Packtec GmbH ("Finnah Packtec) provides for what is known as loss sharing on the basis of the EBITDA 2018 of Finnah Packtec (earnout clause), whereby the risks that this will result in payment claims against MAX are estimated to be very low.
There are risks from the ongoing sales and closure processes of companies in the non-core business (formerly Mobility Automation). Risks may arise if sales and closure processes are not completed as planned, the sales prices are below the book value of the companies or expenses for critical projects still in progress in the companies exceed the provisions made.
Other risks
Loss of efficiency due to non-uniform ERP systems: The Group companies all have different ERP systems. This leads to efficiency losses, especially with regard to uniform processes and possible synergy effects (e.g. purchasing). The medium-term introduction of a uniform ERP system at the level of the business segments is currently being examined.
Portfolio measures: The planned divestments involve the risk of not being able to sell the business activities as planned. This could have a negative impact on the business, assets and liabilities, earnings situation and reputation.
As part of the audit for the 2019 fiscal year, the auditor examined the risk management system of the SE and the Group. The auditor has come to the conclusion that the system is suitable to meet the legal requirements for risk management.
Changed assessment of risks after the end of the reporting period
Effects of SARS-Cov-2 (Coronavirus)
The World Economic Forum (WEF) regards epidemics such as the outbreak of the Coronavirus infection (COVID-19) both as an independent business risk and as an impact on existing opportunities and risks. The outbreak of COVID-19 was first detected at the end of 2019 in a densely populated production and transport center in central China. The global pandemic spread worldwide via the Chinese New Year and international travel after the end of the reporting period.
According to the WEF, it is within the realms of possibility overall that the growth of the Chinese economy will slow down by 0.5 percentage points in 2020 as a result of the production losses caused by COVID-19. The global economy would thus lose at least 0.1 percentage points. According to the WEF, industrialized nations and emerging markets with a high dependency on China would be particularly affected. Resilience to the effects of COVID-19 is further complicated in individual countries by structural weaknesses in economic and health systems.1
Especially for companies for which China is an important production site and/or central sales market, risks result from COVID-19.2 The impact of production delays on the earnings performance of companies cannot yet be estimated after partial interruptions of the supply chains. For companies, the risk exposure decreases depending on the existing demand and the existing order backlog. Meanwhile, manufacturing sectors such as the automotive industry in particular are gradually resuming operations.3 For the German Institute for Economic Research (DIW), the export-dependent German industry would be particularly affected by a continued global spread of the virus. According to the DIW, the "Corona effect" on mechanical engineering and the automotive industry is still unclear and cannot be quantified. MAX Automation currently expects only a minor influence on its future earnings. However, delays in order placement, comissionings or due to bottlenecks in logistics cannot be ruled out.4
- https://www.weforum.org/agenda/2020/02/why-is-coronavirus-a-global-business-risk/
- https://www.finance-magazin.de/wirtschaft/fx-weltwirtschaft/gibt-corona-der-china-konjunktur-den-rest-2052831/
- https://www.finance-magazin.de/wirtschaft/fx-weltwirtschaft/gibt-corona-der-china-konjunktur-den-rest-2052831/
- https://www.diw.de/de/diw_01.c.740859.de/diw_konjunkturbarometer_februar__industrierezession_setzt_sich_unabhaengig_vom_corona-virus_fort.html
Explanatory report on the disclosures in accordance with Section 315 (4) HGB and Section 289 (4) HGB
Subject of the report
According to the explanatory memorandum on the German Accounting Law Modernization Act (Bilanzrechtsmodernisierungsgesetz - BilMoG), which entered into force on 29 May 2009, the internal control system embraces the principles, procedures and measures required to ensure effective, due and proper account- ing practices and to ensure compliance with the relevant legal provisions. This also includes the internal auditing system insofar as it relates to the accounting procedures.
With regard to the accounting process, the risk management system, as part of the internal control system and like the latter, relates to accounting oversight and monitoring processes, especially for balance sheet items hedging the risks to which the enterprise is exposed.
Key features of the internal control system and of the risk management system with regard to the accounting process
The key features of the existing internal control system at MAX Automation SE and of the risk management system with regard to the (Group) accounting process are detailed at length in the risk report section.
Explanation of the key features of the internal control system and of the risk management system with regard to the accounting process
The internal control and risk management system with regard to the accounting process, the main features of which are outlined above, ensures that business matters are correctly recorded, presented and recog- nised in the balance sheet and so transferred to the external accounts.
The clear organisational, corporate and control and monitoring structure as well as the qualified equipment of the accounting department in terms of personnel and materials form the basis for efficient work in the areas involved in accounting. Clear legal and internal guidelines and directives ensure a uniform and proper accounting process. Clearly defined review mechanisms within the divisions involved in the accounting process itself and early risk identification by risk management ensure coherent accounting.
The internal control and risk management system of MAX Automation SE ensures that the accounting at MAX Automation SE as well as at all companies included in the consolidated financial statements is uniform and in accordance with legal and statutory requirements as well as internal guidelines. In particular, the uniform group risk management system, which fully complies with legal requirements, has the task of recognizing risks in time, evaluating them and communicating them appropriately. In this way, accurate, relevant and reliable information is made available to the respective addressees in a timely manner.
The risk management and internal control system of the Group was restructured in 2018. This process, which is designed to optimise the reporting and controlling instruments, will be continued in 2020.
Opportunities Report
The business units of the MAX Group serve various megatrends that are benefiting worldwide from the dynamic technological development in the course of digitalization as well as from changes in the political and social arena. This strategic positioning of the Group opens up numerous opportunities that can have a positive impact on the course of business.
MAX Automation's long-term strategy is to focus on several promising and high-margin growth areas, to increase its presence and local value creation in attractive foreign markets and to develop innovative service offerings in networked production. This is to be accompanied by a reduction in the volatility of order intake, operational excellence in project execution, the expansion of the service business and the increased use of existing synergies within the Group.
Uniform standards for risk management and controlling within the Group are of major importance in this respect. To this end, binding reporting and controlling instruments apply to all Group companies.
Opportunity Management
MAX Automation understands opportunities as the possibility of a positive target deviation due to events or developments. Opportunity management encompasses all measures of systematic and transparent handling of entrepreneurial potential. For this purpose, the Managing Directors of MAX Automation SE enter into a strategic dialog with the management of the Group companies. The basis for this is a structured and Group-wide standardized process, in the course of which not only operational potential but also the implementation of strategies, including the presentation of opportunities and risks from relevant market and technology trends, are discussed in joint review meetings.
Subsequent to the strategic dialog, all companies identify opportunities in their operational planning and monthly reporting in order to better assess and evaluate the current earnings and liquidity situation.
All decision-makers are involved in opportunity management - from the Managing Directors of the MAX Group to the management of the Group companies and division and project managers. The process is supported by the holding function "Corporate Development".
Due to the integral connection with the strategy, planning and reporting processes, opportunity management is an essential part of the strategic and value-oriented corporate management of MAX Automation.
Market and competitive opportunities
MAX Automation is active in the Process Technologies business unit in various markets in which the Group expects significant opportunities combined with overarching growth drivers:
In industrial production, the degree of automation and the requirements for efficient processes - especially with regard to ever-increasing networking - are constantly increasing. This development is based on several trends. In the automotive industry, this concerns, among other things, the increasing demand for high-performance driver assistance systems through to autonomous driving, as well as growing demand for microelectronics. At the same time, due to political requirements and increased environmental awareness among the population, society has set itself the social goals of sustainably reducing CO2 emissions from conventional combustion engines and developing powerful electric drives.
MAX Automation operates as a specialist for proprietary mechanical engineering processes, including dosing technology, hot riveting, plasma treatment and impregnation technology. bdtronic, for example, offers solutions for bonding and sealing adaptive speed control in vehicles and with its impregnation technology offers unique process competence and experience in impregnating electric and hybrid engines for high production volumes.
MAX Automation estimates that the Environmental Technologies business unit offers the following significant growth opportunities:
Climate protection, the conservation of natural resources and the recycling of residual materials, thereby returning them to the reusable material cycle as well as for energy recovery are becoming increasingly important worldwide. The generally heightened environmental awareness among the public as well as economic and social changes, such as the strong growth of the metropolitan areas in Asia, for example, are leading to a steadily increasing demand for powerful and innovative solutions for the environmentally friendly disposal of waste and the efficient processing of residual materials.
With the Vecoplan Group established in the market, the MAX Group has many years of expertise in the development, production and maintenance of individual components and system solutions for the efficient recycling and processing of primary and secondary raw materials. This gives the Group the opportunity to benefit from the continuously increasing demands make on climate and environmental protection.
There are political guidelines on environmental protection and recycling of residual and valuable materials at regional, national and international level with increasing requirements. A milestone in this development was the third United Nations Environment Assembly (UNEA) in December 2017, at which more than 100 participating countries committed themselves to "a planet without pollution". At the same time, there have already been binding targets for years, for example in the European Union (EU) to reduce carbon dioxide emissions or in North America in the form of the so-called zero waste programs of local authorities.
Overall, the Group expects demand for efficient reprocessing solutions to increase. In doing so, it pursues the goal of further developing existing solutions in materials recycling and thus adapting them to increasingly complex challenges in individual regional markets.
In the Evolving Technologies business unit, opportunities arise in particular in the areas of medical technology and optoelectronics:
The medical technology industry is characterized by global trends such as general medical progress, growing health awareness in society, the individualization of therapy involving so-called digital e-health solutions, or the desire of patients for more freedom in therapy, for example in the form of self-medication. At the same time, the medical technology market has high barriers to entry in the form of qualitative, technological and regulatory requirements for manufacturers, which enables trusting and long-term customer relationships.
With MA micro automation in particular, MAX Automation has specialized competencies and the necessary technological prerequisites to meet the numerous requirements in medical technology. This is proven by the increasing number of customers, which is a good starting point to participate in the growth of the market.
AIM Micro's technologies and processes for the production of optoelectronic modules serve the largest and fastest-growing application areas in the photonics industry, including wafer saws for the production of silicon semiconductors or industrial image processing for quality assurance in production engineering.
The MAX Group commands extensive, in-depth knowledge and technologies to successfully accompany and shape developments in Industry 4.0 and automation. It should be noted that the Group has an expanding installed base as sales of plant and machinery continue to grow, thereby increasing the potential in the service business. The Group companies take this into account through their expertise in the maintenance and remote maintenance business.
In their international business, the MAX companies are experiencing increased demand for production close to the market and local presence for service and sales. Consequently, the Group has locations in Europe, North America and Asia as well as a worldwide network of sales and service partners. In this way, the Group ensures comprehensive customer support and opens up additional opportunities in order acquisition.
Opportunities from synergies
In addition to the respective growth drivers in the three core business units, the MAX Group perceives opportunities in the exploitation of synergies between the Group companies. These include the bundling of activities in the areas of purchasing (purchasing volumes and benchmarking in favor of purchasing advantages) and financing or, for example, a transfer of know-how and technology as well as best practices in joint projects and the development of new applications.
One of MAX Automation's goals is to increase the value added in the group by specifically advancing the supply and service relationships between the Group companies. To a limited extent, there are also opportunities to exploit sales synergies through project-based cooperation within the Group.
Financial opportunities
Opportunities will arise from the project business of the former Group company NSM Packtec GmbH, which was sold on 9 March 2018. For an order for the company currently operating under the name Finnah Packtec Gmbh ("Finnah Packtec"), contract fulfillment and advance payment bonds were granted on the part of the MAX Group which were claimed by a customer of Finnah Packtec amounting to mEUR 3.973 in late December 2018. By filing charges on 12 August 2019, MAX Automation has asserted the claim for indemnity for amounts paid of these mEUR 3.973 plus interest towards Finnah Packtec before the Münster District Court. The prospects of full success in this legal dispute and of being awarded the reimbursement of expenses are assessed as very high. In January 2020, Finnah Packtec filed an application to initiate insolvency proceedings on its assets. At the time of reporting, it is not yet possible to estimate whether such proceedings will be initiated and, if so, what the repayment rate of insolvency claims will be. Therefore, an arbitration action is being prepared in parallel against the owner of Finnah Packtec in order to increase the chances of repayment of the advance payment bond.
With the files charged on 22 August 2019, MAX Automation also asserted claims for payment and information against Finnah Packtec at the Dusseldorf District Court. The lawsuit is based on an agreement dated 8 March 2018, between the MAX Group and Finnah Packtec regarding the assignment of customer claims, which was made to MAX Automation for the repayment of shareholder loans. At the end of 2019, receivables of mEUR 4.8 were still outstanding, which were written off as of 31 December 2019. All incoming payments are therefore to be seen as an opportunity. The prospects of success in this trial are considered to be highly likely.
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