Financial Report - Risk- and Opportunities Report

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opportunities and RISK REPORT

Opportunities report

The MAX Group segments serve various megatrends that benefit worldwide from the dynamic technological development in the wake of automation and the digital transformation as well as from changes in the policymaking sphere and society in general. This strategic positioning of the Group opens up opportunities that can have a positive impact on business performance.

MAX Automation understands opportunities to be the possibility of a positive target deviation from the annual budget and medium-term planning stemming from unplanned events or developments. Opportunities arise for the Group companies in particular from the development of new products on a regular basis or from ongoing development of existing products. The MAX Group companies are responsible for ensuring that their products and solutions satisfy the latest technological standards and are strategically well-positioned in their niche markets. Innovations support the Group companies in maintaining and expanding their position in their markets. As small and medium-sized enterprises, the MAX Group companies develop their innovations largely within the framework of specific customer projects, focusing on the market situation and the needs of their customers.

Opportunity management

The management of opportunities encompasses all measures of systematic and transparent handling of entrepreneurial potential. To this end, the Managing Directors of MAX Automation SE enter into a strategic dialogue with the management of the Group companies. The basis for this is a structured process that is standardized throughout the Group, in whose framework discussions are conducted in joint review meetings about operational potential, the implementation of strategies including the presentation of opportunities from relevant market and technology trends and the analysis of competitors. Through the integration into the monthly and annual planning and reporting processes, opportunity management is an essential component of MAX Automation’s strategic and value-oriented governance.

Operating opportunities in the segments

In the opinion of the Managing Directors, all core business areas of the MAX Group have a high level of development expertise in their respective markets so that market trends such as sustainability, e-mobility, health and automation can be used to create opportunities for the Group companies. For MAX Automation companies, opportunities primarily arise if economic trends in the manufacturing sector are significantly more positive. After a massive economic slump due to the coronavirus crisis, the Managing Directors are now expecting the German economy to recover. However, it is assumed that the pre-crisis level will not be reached before 2022. Nevertheless, this scenario is also associated with opportunities for the Group companies. It is now apparent that this economic environment is making circumstances favorable for medical technology.

Process Technologies

In the Process Technologies segment, MAX Automation operates in various markets in which the MAX Group expects significant opportunities in combination with overarching drivers of growth:

In industrial production, the degree of automation and the requirements for efficient processes are increasing all the time. In the automotive industry, this relates to the rising demand for powerful driver assistance systems, some of which are as advanced as autonomous driving, as well as the growing need for microelectronics through the increasing use of sensors in vehicles, for example. At the same time, policy guidelines and increased environmental awareness among the general population are resulting in targets being set for sustainable reductions in the CO₂ emissions of conventional combustion engines and the development of powerful electric drives.

With bdtronic and its subsidiary, the Process Technologies segment is operating as a specialist for proprietary mechanical engineering processes, including dispensing technology, hot riveting, plasma treatment and impregnation technology. For example, bdtronic offers solutions for bonding and sealing adaptive cruise control systems in vehicles. With its impregnation technology, bdtronic has a high level of process expertise and experience in the impregnation of electric and hybrid motors for high production volumes.

Environmental Technologies

MAX Automation believes that the Environmental Technologies segment has the following primary growth opportunities:

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, binding requirements, for example in the European Union (EU), to reduce carbon dioxide emissions have already been in place for years. Environmental protection targets and standards in the USA are expected to rise again in the long term after a new administration is elected in November 2020 and the new president declares his country's re-entry into the Paris climate protection act.

With the Vecoplan Group, which is firmly established in the market, MAX Automation has many years of expertise in the development, production and service of individual components and complete systems for efficient recycling and conditioning of primary and secondary raw materials. This gives the MAX Group opportunities to benefit from ever greater requirements for protecting the climate and the environment. The MAX Group expects demand for efficient remanufacturing solutions to rise overall. In this environment, it is pursuing the goal of subjecting existing solutions in valuable recycling to further development and thus adapting to increasingly complex challenges in certain regional markets.

Evolving Technologies

Further opportunities are arising in the Evolving Technologies segment, particularly in the area of medical technology:

Due to demographic trends and the ongoing high demand for medical and healthcare technology, MAX Automation sees good growth opportunities in the medical technology sector over both the medium and long term. This industry is being shaped by global trends including general progress in the field of medicine, growing health consciousness in society, customization of treatment options through “digital e-health solutions,” and patients’ desires for greater freedom in their treatment, such as in the form of self-medication. At the same time, the medical technology market is associated with high barriers to entry in the form of qualitative, technological and regulatory requirements for manufacturers, which facilitates lasting customer relationships based on trust.

With MA micro automation in particular, MAX Automation possesses the specialized skill sets and necessary technological expertise to meet the many requirements in medical technology. This is substantiated by a rising number of customers even in the coronavirus crisis year. This is a good starting point for consolidating the next stage of the company’s development in the in-vitro diagnostics market and broadening its business in addition to its strong position in extraction and testing equipment for contact lenses. In its international business, the company is seeing increased demand for production that is close to the market and a local presence for service and sales. It therefore has sites in Europe, North America and Asia, as well as a worldwide network of sales and service partners, ensuring comprehensive customer support and opening up additional opportunities for order acquisition.

Other opportunities

In addition to the respective growth drivers in its key business areas, the MAX Group sees opportunities in the exploitation of synergies between the Group companies, including a possible consolidation of activities in the areas of purchasing (purchasing volumes and benchmarking for the benefit of purchasing advantages) and financing (especially via cash pooling in the Group). A transfer of expertise and technology as well as best-practice exchange within the MAX Group can lead to the development of new applications in the Group companies and enable further growth opportunities.

Risk report

Risk areas

The business development of MAX Automation SE as the holding company depends essentially on the development of its group companies operating worldwide and is therefore subject to essentially the same risks as those of the MAX Group as a whole via the earnings contributions of the group companies.

Market risks and economic risks:

The World Economic Forum (WEF) regards epidemics such as the outbreak of the COVID-19 pandemic both as an independent business risk and as influencing existing risks. In principle, the business development of the MAX Group is strongly linked to the development of the overall economic environment. The resurgence of the pandemic at the end of 2020 has temporarily slowed the recovery of the overall economy. In this sense, the development of the global economy depends to a large extend on the further course of the pandemic. If further comprehensive containment measures are necessary as a result of the infection and they therefore have a greater impact on the economic recovery than assumed in our forecast report, this development could have a negative impact on the sales and earnings position as well as the strategic plans of the MAX Group in the 2021 fiscal year. In particular, negative impacts on production due to travel restrictions as well as time delays in order placements and project acceptances cannot be ruled out.

All MAX Automation Group companies are also exposed to further market risks, such as geographical and industry-specific economic trends, political or financial changes and existing and new competitors. Commodity prices and exchange rates also influence the course of business and may adversely affect the future success of the MAX Group. With its three core business areas, MAX Automation is highly specialized and has a strong position in attractive market niches, which reduces both market risks and the general economic risk. As of 31 December 2020, the MAX Group had an order backlog of mEUR 209.4 (previous year: mEUR 199.5), 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 from 2018 onwards, when the earnings forecast for the entire MAX Group was negatively affected due to expenses from ongoing projects of the group companies of the IWM Automation Group.

Since then, MAX Automation has counteracted the risk of misjudgments through a Group-wide project-related risk management approach. The goal is an even more conscious approach to handling 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 MAX Group’s lending banks have a direct influence 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. MAX Automation complied with the agreed covenants in 2020 respectively the review was partially suspended. The counterparty default risk is limited by the fact that banking transactions are concluded exclusively with reputable banks.

There are risks from the ongoing closure processes of the companies in the non-core business. Risks may arise primarily from the fact that the remaining projects of the companies may not be completed as planned and that the expenses for these projects may exceed the provisions made.

Other risks

Loss of efficiency due to non-uniform ERP systems:

MAX 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).

Risks from equity investments:

The revaluation of our investments as part of impairment tests may result in risks due to impairment of goodwill.

Litigation

MAX Automation is party to litigation in connection with the sale of the former Group company NSM Packtec GmbH and in connection with the acquisition of Shanghai Cisens Automation Co., Ltd. MAX Automation asserts claims in both arbitration proceedings and is also exposed to counterclaims in each case. Payment claims against MAX Automation that would result from a negative outcome of the proceedings could have an impact on the Group’s future annual results. Possible reputational losses cannot be ruled out. In both proceedings, however, the prospects of success for MAX Automation are considered to be predominantly positive as things currently stand.

Risk management system/internal control system

Scope of application

In the MAX Group, there is a Group-wide risk management system that complies with the German Law on Control and Transparency in Business (KonTraG). 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 the 2018 fiscal year, measures were introduced to restructure risk management and internal control and reporting systems, which have been continuously expanded since then.

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, that is, the maximum expected loss is determined (worst case).

The lead management company MAX Automation SE carries out central monitoring.

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, that is, 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, that is, 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%

Possible probability of occurrence 10 – 50%

High probability of occurrence > 50%

The net risks of the risk areas add up to the total risk potential of the MAX 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.

The Managing Directors and the Supervisory Board are immediately informed 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 managerial accounting departments of MAX Automation and the Group companies.

Key features of the risk management system for accounting 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 Group companies. The accounting manual is regularly updated. 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. The internal control, accounting and managerial accounting functions of MAX Automation carry out monitoring on a random basis.

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, internal control 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 Group companies report to the parent company on the performance from the past month and the current fiscal 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 the 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 General Managers 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 and strategic corporate planning is an essential component of the RMS. At the end of each fiscal year, the General Managers of the Group companies present the current course of business and explain their respective further corporate strategies. This is the basis for the corresponding five-year plans for business development, investment and liquidity development. 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 and ICS.

The internal control system for accounting was first optimized and subjected to further development in 2018. Building on this, a cross-process internal control system guideline was also rolled out in 2020. In this context, major Group companies appointed local internal control system officers to ensure local implementation of the specified minimum controls.

The RMS/ICS also includes regular training of all employees. For example, workshops are held on the application of accounting standards (e.g., IFRS 15 and IFRS 16), accounting rules, the risk control matrices of the internal control system guideline, local control documentation and software tools. In the acquisition of new companies, 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.

As part of the audit for fiscal year 2020, the auditor examined the risk early warning 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 early risk identification.

Overall risk and opportunity situation

The MAX Group’s overall risk and opportunity situation is made up of the individual risks and opportunities described for all risk and opportunity categories. In addition to the risk categories presented, there are unexpected events that could have a negative impact on the business performance and thus also on the income from operations, the financial situation and the assets of the MAX Group. The established risk and opportunity management system is continuously monitored and subjected to further development so that opportunities and risks can be identified at an early stage and the current opportunity and risk situation can be met with success. The overall risk and opportunity situation of the MAX Group remains essentially unchanged. The MAX Group’s total risk potential amounted to around mEUR 6.4 at the end of 2020 (prior year: mEUR 6.6). This includes the net risk potential of 35 (prior year: 36) quantifiable individual risks. In addition, there were 166 (prior year: 170) unquantifiable individual risks. In view of the business volume and the overall economic situation, the total risk potential is considered to be appropriate and easily manageable. At present, no risks have been identified that could endanger the existence of the MAX Group either separately or in interaction with other risks.

Approximately half of the total risk potential is attributable to the risk area of “financial risks.”

Corporate Risks ‎	Probability ‎of occurrence	Possible ‎financial ‎impact	Risk situation for 2020 ‎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	higher
Legal risks	low	minor	equal
Risks from equity investments	possible	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)

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 accounting 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 recognized in the balance sheet and so transferred to the external accounts.

The clear organizational, 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 MAX Group was restructured in 2018 and further elaborated in 2019 and 2020. This ongoing process, which is designed to optimize reporting and controlling instruments as well as internal control structures will also be continued in 2021.

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