ANNUAL REPORT 2010/11 - Schumag AG

SCHUMAG AG 31Since August 2010 we have implemented factoringand in December 2010 we carried out an extensivesale-and-lease-back transaction with regard to ourmachinery. In addition, we received a workingcapital credit in July 2011 and a current accountcredit line in April 2012, each amounting to EUR1.0 million. With these measures we maintainedour financial balance. However, our liquidity situationcontinues to be strained. In the event of adeterioration of the order situation and thus alsoof the financial situation there is a risk due to ouruncertain ownership issue, that the required additionalexternal financing may not be available indue time.Other risksProcurement risksProcurement market risks are basically divided intoschedule, quantity and price risks. Especially in thesteel processing industry there has been a situationfor several years that the emerging markets exertconsiderable influence on the above mentionedrisks due to their demand behaviour. A particularfeature of the company's risk profile results fromthe fact that a large number of raw materials (inparticular special alloys) can be exclusively procuredfrom only one or very few manufacturers.Difficulties with raw material supplies experiencedin the recent past were largely prevented in fiscalyear 2010/11. The raw material suppliers haveincreased their production capacities again. Intotal, moderate price increases have resulted.These are due to the increased demand fromemerging markets as well as the worldwide risein raw material prices.It is hardly possible to quantify the procurementrisks because these are in the end determined bythe fact whether or not a promised production canbe carried out according to the requirements interms of quantity, quality, price and delivery date.In the past fiscal year production orders werelargely processed according to schedule. Theincrease of the total operating performanceamounting to more than EUR 18 million wasmanaged on the procurement side without anysignificant problems. Due to our customer structureit is hardly possible to derive long-term requirementplans for our procurement.The risk structure as well as the different formsof risks have not considerably changed comparedto the previous year. Framework contracts withsuppliers are increasingly concluded which alsoaim at the procurement of the required materialson a just-in-time basis. This results in both chances(less capital being tied up) and risks (increaseddependency on suppliers).By means of long-term purchasing contracts andactive inventories management we continue tocounteract price increases and risks relating toscheduled delivery dates. Based on the specificationsof our customers we purchase our rawmaterials to a considerable extent from certainsuppliers. This does not lead to any dependencies onindividual suppliers which threaten the continuedexistence of the company.There is an increasing tendency that our customersenter into direct price negotiations with our rawmaterial suppliers. This results in a reduction ofrisks with regard to uncontrolled price increases.Apart from this, a trend can be identified thatour purchase orders concentrate on less and lesssuppliers. The resulting bundling effect leads toclearly increased ordering volumes in individualcases which are difficult to cover by a trade creditinsurance which again leads to shorter timesallowed for payment with our suppliers.In other conditions, price risks will gain in importance.It is up to the risk management in the procurementarea to manage this, e.g. by adequate hedging transactionsor by an improved communication betweenbuying and sales.