Key performance indicators
GEA Group’s overriding goals are to secure a sustainable increase in enterprise value and to achieve strategic growth. In order to create the requisite financial scope for this and to focus the group even more closely on cash flow generation, a new key performance indicator – the “cash flow driver margin” – has been introduced and also incorporated into the new bonus system. This is a simplified cash flow indicator (EBITDA minus capital expenditures for property, plant and equipment, and intangible assets, and change in working capital) and is calculated as a ratio to revenue.
The return on capital employed (ROCE) provides a further key performance indicator for measuring the value added that is generated by the group’s operating activities. It therefore figures in both the group’s regular reporting activities and the calculation of variable, performance-related elements of management remuneration. In order to enhance the implementation of ROCE, as the primary performance indicator, at an operational level, the ROCE drivers EBIT and EBIT margin, working capital, and the ratio of working capital to revenue are also monitored continuously. When calculating capital employed, effects arising from the acquisition of the former GEA AG by the former Metallgesellschaft AG in 1999 are not taken into account. Furthermore, as of 2011, the key performance indicators are also presented after adjustment for purchase price allocation effects. As a component of capital employed, capital expenditure is managed using a multilevel approval process.
The ratio of the expected ROCE to the weighted average cost of capital (WACC) is a key criterion for investment and portfolio decisions. The performance of these key indicators is presented in section 10 (“Segment reporting”) of the notes to the consolidated financial statements. The group calculates WACC on the basis of the following factors: the cost of equity, based on the return yielded by an alternative, risk-free investment plus a market risk premium; actual borrowing costs; and the rate used to discount pension obligations.
A careful analysis of order intake and revenue, broken down by region and customer industry, is conducted on a monthly basis in order to identify emerging market trends as early as possible. To respond rapidly to foreseeable developments, the segments again returned regularly the key performance indicators – order intake, revenue, and EBIT forecasts – in 2012.
Management of capital employed
Resources are allocated within the group primarily on the basis of the strategic and medium-term planning. This provides the framework for preparing key decisions on core technologies, sales markets, and other strategically important variables.
Acquisitions and expansion investments are assessed not only on the basis of key performance indicators showing potential returns, but also in terms of their importance for achieving the group’s strategic goals. The key economic criterion for evaluating rationalization and expansion investments is the expected return compared with the cost of capital. The payback period is also calculated as an additional benchmark for assessing the risk arising from changing economic conditions. Working capital management begins before an order is accepted with the payment terms that are offered or negotiated.
Project- and activity-based management
In addition to general management with the aid of the key performance indicators described above, the group has established individual assessment and approval procedures for customer and investment projects, utilizing specific thresholds for the different hierarchy levels. Customer projects are evaluated primarily on the basis of their expected margins (gross margin on a fully absorbed cost basis) and of their commercial and contractual risk profile, with a particular emphasis on cash flow. Project management is also backed up by extensive project controlling not only at operating unit level but also – depending on the size of the project involved – segment or group level in the form of a separate reporting system for major contracts. At group level, the analysis focuses on deviations between the calculated and the expected or realized contract margin. In many cases, the findings gained from this analysis yield suggestions for improving internal processes, which can be used in subsequent projects.