Annual Report 2016
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IX. OTHER DISCLOSURES

Contingent liabilities (contingencies and commitments)

Contingent Liabilities and Collateral

(€ thousands) 2016 2015
Liabilities from guarantees 4,481 2,739
Liabilities from warranties 224 1,239
Liabilities from the granting of other security for third-party liabilities and other contingent liabilities 11,231 9,444
15,936 13,422

Other contingent liabilities are expected to include up to € 7,380 thousand (previous year: € 928 thousand) for tax items (plus any interest). At present, there are no indications that any claims will be asserted under these obligations.

The Group has contingent liabilities as a result of its investment in associates and joint ventures of € 9,344 thousand (previous year: € 5,989 thousand). The reported amount is the Group’s share of contingent liabilities from joint ventures. Contingent liabilities relating to other investments total € 1,006 thousand (previous year: € 1,728 thousand). The extent to which these will result in a cash outflow depends on the future business performance of the ­respective company.

OPERATING LEASES
Minimum lease payments
(€ thousands) 2016 2015
Due within 1 year 16,627 17,832
Due between 1 and 5 years 29,269 32,398
Due after more than 5 years 7,001 7,799
52,897 58,029

In the year under review, € 17,832 thousand (previous year: € 16,283 thousand) was spent.

Operating leases relate primarily to vehicles and real estate.

FINANCE LEASES
Minimum lease payments Present values
(€ thousands) 2016 2015 2016 2015
Due within 1 year 561 446 501 436
Due between 1 and 5 years 587 818 584 803
Due after more than 5 years 112 164 109 151
1,260 1,428 1,194 1,390

Finance leases relate mostly to real estate, as well as to other equipment, operating and office equipment. The term of the contract covers most of the useful life of the asset concerned.

The annual obligations from IT services agreements amount to € 56,243 thousand (previous year: € 62,276 thousand) over a term of one to five years.

As in the previous year, there are no purchase price obligations from acquisitions of companies and no payment obligations from capitalisation measures at Group companies.

The aggregate purchase obligation for investments (principally items of property, plant and equipment) amounts to € 17,854 thousand (previous year: € 20,029 thousand). Almost all of the corresponding payments are due in 2017.

Research and development costs

Research and development costs in the year under review amounted to € 51,262 thousand (previous year: € 57,987 thousand). Some of these costs are contract costs under IAS 11.

Related party disclosures

Related parties as defined in IAS 24 are natural persons and companies that can be influenced by KBS AG or that can exert an influence on KSB AG.

Balances and transactions between KSB AG and its subsidiaries in the form of related parties have been eliminated during the consolidation process and are not explained in further detail. Details regarding transactions between the KSB Group and other related parties are provided below.

Pursuant to section 21(1) of the WpHG [Wertpapierhandelsgesetz – German Securities Trade Act], KSB Stiftung [KSB Foundation], Stuttgart, as the ultimate parent company, notified us on 21 May 2008 that its voting interest in KSB AG, Frankenthal / Pfalz exceeded the 75.00 % threshold on 5 May 2008 and amounted to 80.24 % (711,453 voting shares) on this date. 0.54 % of the voting rights (4,782 voting shares) were held directly by KSB Stiftung, Stuttgart, and 79.70 % (706,671 voting shares) were attributable to KSB Stiftung, Stuttgart, pursuant to section 22(1), sentence 1, No. 1 of the WpHG. The voting rights attributed to KSB Stiftung, Stuttgart, were held by Klein Pumpen GmbH, Frankenthal.

Related parties also include the non-consolidated subsidiary companies and joint ventures of Klein Pumpen GmbH, Frankenthal, and Kühborth-Stiftung GmbH [Kühborth Foundation], Stuttgart, which holds 1 % of the shares in Klein Pumpen GmbH. In addition, related parties include entities controlled by or under joint control of the Managing Directors of Klein Pumpen GmbH.

The following table shows services provided and used, as well as pending receivables and liabilities owed from and to related parties:

Sales of
goods and services
Purchases of
goods and services
Receivables Liabilities
(€ thousands) 2016 2015 2016 2015 31 Dec. 2016 31 Dec. 2015 31 Dec. 2016 31 Dec. 2015
KSB Stiftung and Kühborth-Stiftung GmbH 1
Parent company
Klein Pumpen GmbH
143 13 35 24 133
Subsidiaries of
Klein Pumpen GmbH
75 765 520 124 214
Associates / joint ventures of Klein Pumpen GmbH 483 410 2,172 2,226 127 25 213
Other related parties 12 1 16 16 1

Further information on joint ventures and associates (related party disclosures) can be found in Section IV. Balance Sheet Disclosures – Notes No. 4“Investments accounted for under the equity method”, 6 “Trade receivables and PoC as well as other financial and non-financial assets” and 10 “Liabilities”, and in Section IX. Other Disclosures – Contingent Liabilities.

The transactions in relation to the parent company Klein Pumpen GmbH are based on a rental and services agreement between KSB AG and Klein Pumpen GmbH.

Transactions with subsidiaries of Klein Pumpen GmbH comprise transactions with Palatina Versicherungsservice GmbH, which provides services in the area of insurance. In addition, following an increase in the interest held from 50 % to 100 %, Abacus alpha GmbH and its subsidiaries Abacus Experten GmbH, Abacus Resale GmbH and airinotec GmbH have been subsidiaries of Klein Pumpen GmbH since 18 November 2016. Until 17 November 2016 these companies had still been classified as associates and joint ventures of Klein Pumpen GmbH. AIM GmbH & Co. KG and AIM Power Service GmbH also have to be classed as associates and joint ventures of Klein Pumpen GmbH in the reporting year. The two companies carry out maintenance and servicing work, and provide other services.

A rental and services agreement is in place between Palatina Versicherungsservice GmbH and KSB AG. Abacus Experten GmbH has entered into several contracts for work with KSB AG; Abacus Resale GmbH trades in products. KSB AG has also concluded service agreements with Abacus alpha GmbH and Abacus Resale GmbH. We supply airinotec GmbH with our products.

All transactions are carried out at arm’s length with the following exceptions:

In the 2016 financial year KSB incurred costs of € 418 thousand for garden maintenance work at the property in Frankenthal. The real estate concerned is attributable to both KSB and Klein Pumpen GmbH on a pro rata basis. The garden maintenance work was carried out by a service provider, Abacus alpha GmbH, Frankenthal, which was directly and wholly owned by Klein Pumpen GmbH as at 31 December 2016, and by other service providers. Based on the pro rata area, an amount of € 84 thousand should have been charged to Klein Pumpen GmbH as its share of the garden maintenance services costs. In accordance with the contractually agreed provisions, only € 4 thousand of these costs were passed on, creating a disadvantage for KSB of € 80 thousand. The disadvantage relating to the 2016 financial year was offset between the parties in the financial year by means of a disadvantage compensation agreement. Payment is scheduled for 2017.

For the financial years before 2016 there is, according to the same principles, a potential claim for damages in accordance with section 317 AktG of around € 800 thousand in the ten-year statutory documentation and retention periods. This potential claim for damages is not recognised due to it being disputed and because the statutory capitalisation criteria are not fully met.

Expenses of € 52 thousand incurred by KSB for third-party services for the maintenance of outdoor facilities were not passed on at the instigation or in the interest of Klein Pumpen GmbH during the 2016 financial year, creating a disadvantage of € 52 thousand for KSB. The disadvantage relating to the 2016 financial year was offset between the parties in the financial year by means of a disadvantage compensation agreement. Payment is scheduled for 2017.

For the financial years before 2016 there is, according to the same principles, a potential claim for damages in accordance with section 317 AktG of around € 466 thousand in the ten-year statutory documentation and retention periods. This potential claim for damages is not recognised due to it being disputed and because the statutory capitalisation criteria are not fully met.

The Managing Directors of Klein Pumpen GmbH are also deemed to be related parties.

Pending balances at the year end are unsecured, do not accrue interest and are settled by means of payments. No guarantees were given or received. The receivables presented here, as in the previous year, are not subject to write-downs and no provisions have been created for this purpose.

Disclosures and information on affiliates and investments accounted for using the equity method provided in other section of these Notes refer to relations covering the supply of products and services on an arm’s length basis, unless stated otherwise.

Pursuant to IAS 24, the remuneration of key management personnel of the Group must be disclosed. The following table contains the relevant figures for the KSB Group with regard to the remuneration paid to members of the Board of Management:

(€ thousands) 31 Dec. 2016 31 Dec. 2015
Short-term benefits (total remuneration) 1,250 1,289
Post-employment benefits 1,388 1,429
Other long-term benefits
Termination benefits
Share-based payments
Total 2,638 2,718

Based on the relevant legal provisions, the Annual General Meeting on 6 May 2015 resolved not to disclose the remuneration of the Board of Management separately for each member and classified by components. € 5,255 thousand (previous year: € 4,518 thousand) has been provided for pension obligations to current members of the Board of Management, and € 39,309 thousand (previous year: € 39,387 thousand) to former members of the Board of Management and their surviving dependants; total benefits paid to these persons amounted to € 2,244 thousand in the year under review (previous year: € 2,246 thousand).

The short-term benefits paid to members of the Supervisory Board amount to € 716 thousand for the 2016 financial year (previous year: € 833 thousand).

The members of the Supervisory Board and the Board of Management are listed before the presentation of the proposal on the appropriation of the net retained earnings of KSB AG.

Auditors

PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, based in Frankfurt am Main with an office in Mannheim, were appointed as auditors and group auditors for financial year 2016 at the Annual General Meeting of KSB AG on 11 May 2016. Overall, fees (including expenses) amounting to € 481 thousand were recognised as expenses. Of this, € 449 thousand relate to audit services, € 24 thousand to other certification services and € 8 thousand to other services.

KSB applied the IDW RS HFA 36 (new version) standard for the financial year ending on 31 December 2016, i.e. earlier than required. The audit fees include costs for the audit of the consolidated financial statements and of the statutory annual financial statements of KSB AG and the German subsidiaries included in the consolidated financial statements. The fees for other certification services primarily include attestation services outside of the audit of the annual financial statements. The fees for other services mainly include fees for project-specific consultancy services.

Use of exemption option

KSB Service GmbH, Frankenthal, and KSB Service GmbH, Schwedt, and Uder Elektromechanik GmbH, Friedrichsthal, have made partial use of the exemption provision under section 264(3) of the HGB.

Events after the reporting period

There were no reportable events after the reporting date.

Events after the Reporting Period

The Board of Management and the Supervisory Board agreed to a proposal made by the major shareholder Klein Pumpen GmbH on 12 January 2017 that KSB Aktiengesellschaft be converted into a partnership limited by shares [Kommanditgesellschaft auf Aktien]. A motion to this effect will be proposed to the Annual General Meeting on 10 May 2017. If the motion is adopted, the company will trade under the legal form of SE & Co. KGaA in future. The general partner would be a management company, which would be wholly owned by a new subsidiary of the non-profit KSB Stiftung [KSB Foundation] and the non-profit Kühborth-Stiftung GmbH [Kühborth Foundation]. The parent SE & Co. KGaA and thus the KSB Group would be managed via this management company by a single-tier Administrative Board with four executive and five non-executive directors.

No further significant events occurred after the balance sheet date that would have a material effect on the company’s results of operations, financial position and net assets.

German Corporate Governance Code

The Board of Management and Supervisory Board of KSB AG issued the current statement of compliance with the recommendations of the Government Commission on the German Corporate Governance Code in accordance with section 161 of the AktG [Aktiengesetz – ­German Public Companies Act]. The statement of compliance is published on our web site (www.ksb.com) and has thus been made permanently accessible.

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