Group Management Report

as of December 31, 2018



Group Profile

Business Performance

Opportunities and Risk Report Including Risk Reporting on the Use of Financial Instruments





Please note: Figures shown may differ from the mathematically exact values (monetary units, percentages, etc.) due to rounding.

1. Group Profile


Billions of people rely on technology developed by Giesecke+Devrient (G+D) in their personal, professional, and digital lives. Around the world, demand is rising for easy-to-use physical and digital solutions that make interactions more secure. G+D has aligned its portfolio accordingly. All parts of the company are committed to providing protection and support for people, companies, and organizations in four core areas:



G+D is a global leader in physical and digital payment solutions. The company’s technologies and services make cash, electronic, and mobile payment processes more secure, thus creating confidence in the reliability of payment transactions.



In a 24/7 digital world, connectivity for mobile applications presents huge challenges. G+D delivers key technologies for connectivity – including in the Internet of Things – and ensures that connections are fast, always available, and above all secure.



In modern societies, the identities of citizens, users, and things require special protection. G+D safeguards and manages these throughout their entire lifecycle, with key examples including ID documents and driver’s licenses. The same applies to machines and to digital identities online.


Digital security

The increasing complexity of the digital world calls for innovative IT and data security solutions, which G+D provides to its customers both in the state sector and in industry. G+D’s digital security solutions are tailored to meet the highest requirements.


These four fields of activity, which together make up the Giesecke+Devrient portfolio, are delivered by the individual business sectors. G+D operates as a holding company comprising the four legally independent subgroups G+D Currency Technology, G+D Mobile Security, Veridos, and secunet. G+D employs 11,389 people across 32 countries.


G+D Currency Technology provides products and solutions for secure payment to central and commercial banks, banknote printers, security paper manufacturers, security transport companies, and casinos around the world. The portfolio includes banknote paper, banknotes, security features, banknote processing machines and complete cash center solutions. G+D is an international leader in the currency industry.


Banks, mobile network operators, car manufacturers, and other companies rely on industry solutions supplied by G+D Mobile Security. These solutions safeguard data, identities, and a wide range of digital transactions. The portfolio includes solutions for eSIM management, secure HCE, and cloud payment. Data and project management are also part of the offering, as are SIM, bank, ID, and healthcare cards and tokens.


Veridos is a joint venture between G+D and Bundesdruckerei, offering customers secure and pioneering identification and identity solutions. The product range covers traditional printed documents as well as electronic variants, such as e-passports and electronic ID cards. Highly secure travel documents, ID systems, and healthcare cards can be used for conventional identification purposes as well as for authentication and protection in digital business processes.


secunet Security Networks AG is a leading German provider of high-quality cyber security solutions and an IT security partner to the Federal Republic of Germany. It offers an extensive portfolio of products and consulting services around the protection of data and infrastructures and for the transmission, storage, and processing of information. This includes encryption technology up to the highest security level. secunet ensures public authorities, organizations, and companies enjoy maximum protection against cyber attacks, espionage, and sabotage.


The Corporate Center is responsible for the overall direction of the G+D Group and actively supports strategic development of the subgroups. It handles all issues of strategic importance, such as the legally independent innovation accelerator G+D advance52 and newly established investment company G+D Ventures. G+D Ventures is tasked with turning internal innovations into independent companies. It achieves this by giving startups access to G+D’s network of specialists and their expertise, and also assists with funding. G+D Grundstücksgesellschaft holds and operates the building at the Munich site and leases it to the Group companies.


Management Structure


Information on key aspects of our research and development activity can be found in section 2.1.2.



2. Business Performance


Globally, economic growth slowed slightly in 2018 compared with the previous year. Across all regions, increasing protectionism in the form of customs barriers and punitive tariffs hit international trade and curbed the growth of national economies. Performance in individual regions varied widely. In the advanced economies, particularly the US, economic activity was robust, delivering solid growth. The eurozone economy likewise grew. Among the emerging and developing countries, exporters of oil and gas benefited from higher oil prices. Tougher financial conditions and higher interest rates in the US had a negative impact on global economic growth. The national economies of Brazil, Turkey, and Iran failed to achieve growth in 2018 due to country-specific risks. Despite protectionist US trade policy, Asia (particularly China and India) was the economic region that saw the strongest momentum and highest growth rates.

Solutions developed by G+D in the core areas of payment, connectivity, identity, and digital security continued to enjoy strong customer demand in 2018. G+D again achieved solid sales growth of 5.1%, setting another record high in the company’s history.



2.1. Group Business Performance


The key financial performance indicators used to manage the Group remained unchanged in fiscal 2018. The Group is managed on the basis of net sales, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), capital expenditure, average working capital intensity1, free cash flow, and return on capital employed (ROCE)2.


Excellent order intake in 2018 enabled G+D to increase its order books to EUR 1.7 billion (+50%), thereby demonstrating its organic growth potential. The focus was on steady expansion of the solutions and services business as well as commercialization of new business models around digitalization.


In addition to organic growth, G+D again took strategic action in 2018 to leverage current market and technology trends. The establishment of G+D Ventures GmbH opens up new investment opportunities and activities for G+D in the ventures market. In its first year, the company acquired a 6.1% stake in Verimi GmbH. This identity and data platform is backed by a number of well-known German and international companies, including Allianz, Deutsche Telekom, and Samsung. The existing partnership and cooperation agreement with IDnow GmbH was bolstered by the acquisition of a 12% stake. IDnow provides global solutions for secure digital identification based on AI-supported biometrics and security technology. G+D also spun out a new startup for the first time in its history – Build38 GmbH, in which a number of G+D employees have invested. G+D holds 70% of the shares in this startup. The company has developed the Trusted Application Kit (TAK), which provides customers with a secure environment for mobile applications. Regardless of operating system, the solution offers comprehensive protection for mobile devices and ensures that data processing is secure and compliant with data protection law. The technology is already being deployed in the transport, banking, security, and government sectors.


Veridos acquired a 75% stake in E-Seek Holding Inc., an American company specializing in advanced hardware for ID document verification. This acquisition complements Veridos’ software expertise and strengthens its presence on the North American market.



1 Ratio of 12-month average of working capital in reporting year to annual sales; working capital = customer receivables + inventories


2 Ratio of EBIT to average capital employed (year-end value in each case); capital employed = intangible assets + property, plant and equipment + financial investments accounted for under the equity method + inventories + accounts receivable trade − accounts payable trade




2.1.1. Results of Operations


Despite challenging conditions that included volatile exchange rates, G+D increased its sales by 5.1% to EUR 2,246 million, thereby once again exceeding its own targets. Adjusted for negative currency effects, growth would have been even higher, at EUR 151.6 million or 7% above the prior year.


A key driver of growth for G+D was its innovative solutions and services business, which grew at a rate of around 13% across all business sectors in a successful continuation of the Group’s long-term strategy. Sales performance in the individual subgroups was broadly consistent, with all business sectors contributing to growth.

Sales by Subgroup
Sales (EUR million) 20182017Change (absolute)Change
Currency Technology1,058.91,016.542.34.2%
Mobile Security867.6812.355.46.8%
Total 2,246.02,136.4109.65.1%

Currency Technology was able to build on the previous year’s high level of sales. Increased demand for banknotes led to high utilization of printing capacity and significantly higher sales than in the previous year. In solutions and services, some initial revenue from longer-term major projects was realized in 2018, which meant that the business grew significantly compared with the previous year. Growth was also driven by higher sales of banknote processing machines.


The market environment for Mobile Security continued to be defined by strong competition and price pressure on cards and modules in 2018. Exchange rate effects resulting from the appreciation of the euro also had a negative impact. Despite these challenges, Mobile Security was able to achieve solid sales growth. In the product business, there was a further volume increase of 8%, which compensated for the falling average sale price of SIM cards and payment cards. Sales growth in services and solutions was particularly gratifying, most notably with regard to eSIM management, mobile payment, and payment card issuance services.


Veridos won several comprehensive major projects in 2018, thereby creating the conditions to achieve the strongest growth. Finalizing these extensive contracts, some of which also have a financing component, takes time, meaning that the start of the project and corresponding revenue recognition was delayed in some instances. Veridos also achieved sales growth compared with 2017.


The high-quality, reliable cyber security solutions produced by secunet continued to meet customer needs in 2018. Burgeoning product business, especially with the SINA® portfolio, and a sustained high level of consultancy business ensured that the unit again achieved record sales and record results. Following successful certification of its health connector, secunet expanded its security offering to include a telematics infrastructure, as used by medical practices, for example. The connector is ready for immediate market launch and will pave the way for further sales growth.


First-time application of IFRS 15 resulted in additional sales of EUR 44.2 million being posted in 2018.


To improve comparability of expenditure and earnings, the consolidated income statement has been adjusted to take account of special effects. The table has been standardized as follows: The 2017 figures have been adjusted to exclude closure costs for Giesecke+Devrient Mobile Security Slovakia (GDSK). Profit from the sale of real estate has also been eliminated. The 2018 figures have been adjusted to take account of the cost of restructuring measures at CI Tech Components AG. After Diebold Nixdorf’s change in strategy and associated exit from joint venture CI Tech Components AG, G+D decided to realign the subsidiary. When the research and development activities relating to the existing product family have been completed, the company will focus on sales. The Dornach site will close at the beginning of 2019. This decision involved costs of EUR 17.0 million. The bulk of the cost was attributable to impairments on capitalized R&D expenditure and property, plant and equipment. These adjustments have an impact on various expenditure items in the income statement, including EBIT.

Consolidated Income Statement (IFRS)
EUR million20182017change (absolute)change
Net Sales2,246.02,136.4109.65.1%
Gross profit 1612.9618.8–5.9–1.0%
Gross margin 1 (% of sales)27.3%29.0%–1.7 pp–5.9%
Selling, R&D, and general administrative expenses 1(492.8)(495.6)2.80.6%
Other operating income and expenses 112.814.7–1.9–12.7%
Operating profit 1133.0137.9–4.9–3.6%
Financial income / (expenses)(13.5)(8.1)-5.4–66.3%
EBIT (adjusted)119.5129.8–10.3–7.9%
EBIT margin (adjusted) (% of sales)5.3%6.1%–0.8 pp–13.1%
Interest income2.02.2–0.2–8.6%
Interest expense(19.0)(19.6)0.62.9%
Earnings before income taxes (EBT)85.5112.8–27.4–24.2%
Income taxes(35.3)(45.8)10.523.0%
Net income50.267.0–16.8–25.1%
Reconciliation to EBITDA
EBIT (adjusted)119.5129.8–10.3–7.9%
plus depreciation and amortization (adjusted)2102.6104.62.01.9%
EBITDA (adjusted)222.1234.4–12.2–5.2%

Gross profit remained just below the level of the previous year (-1.0%). The rise in sales volumes and increase in project work and services were not sufficient to fully offset negative impacts in highly competitive markets. Structural costs, i.e. for selling, research and development, and general administrative expenses, were below the prior-year level despite higher sales. Research and development costs of EUR 113.3 million (-9.9%) were a key factor here. Mobile Security sharpened the focus of its development activities in 2018 and reduced costs accordingly. secunet also had to capitalize some development costs in connection with the development of the health connector. At EUR 224.1 million (+1.9%), selling expenses remained around the previous year’s level, rising at a lower rate than sales. General administrative expenses were EUR 155.4 million (+2.6%). This increase was lower than sales growth despite higher consultancy costs relating to strategic alignment of G+D’s portfolio.


Other operating income and expenses were slightly down compared with the previous year. This item includes rental income, licensing revenues, and expenses and income from legal disputes. In the previous year, G+D received a substantial amount from a one-time antitrust compensation payment.


In 2018, financial income was impacted by the greater volatility of exchange rates, which particularly affected markets in North America, Brazil, India, and China. Costs totaling EUR ‑7.5 million (previous year: EUR -18.5 million) resulted from foreign currency transactions and currency hedging. In addition, falling stock market prices, especially in the last quarter of the year, had a negative impact of EUR -6.2 million on results. This contrasted with gains of EUR 5.5 million in the prior year. Investments in consolidated companies carried at equity contributed EUR 1.2 million (previous year: EUR 3.5 million) to results.


EBIT (adjusted) came in on target at EUR 119.5 million. All operational business sectors made a positive contribution to Group EBIT. The difference compared with the previous year is due in equal part to lower financial income and a smaller operating profit.


Issuing a promissory note loan in July 2018 allowed G+D to secure funding to finance additional major projects and also to enable strategic expansion of its portfolio. Despite the extra debt capital, interest expenses for financial and other liabilities were lower than the previous year at EUR 7.2 million (2017: EUR 8.0 million). G+D has been steadily replacing contractual repayment of higher interest rate loans with new debt that has significantly better interest conditions. At EUR 12.1 million, interest on pension obligations remained largely unchanged (previous year: EUR 11.9 million).


Income tax expenditure amounted to EUR 35.3 million in the reporting year and was thus lower than in the previous year. The tax rate increased slightly from 40.6% to 41.3%.


In the year under review, G+D again achieved significantly positive net income, which was 25.1% below the prior-year level.


The effect of first-time application of IFRS 15 boosted net income by EUR 10.2 million.


At EUR 222.1 million, EBITDA (adjusted) exceeded the planned target. A large proportion of the costs for realignment of CI Tech Components AG related to unscheduled impairments on capitalized R&D expenditure and property, plant and equipment. Accordingly, EBITDA adjustment only involved EUR 1.4 million of these costs.



2.1.2. Research and Development


All of G+D’s innovations are designed to make the lives of billions of people more secure. G+D strives to achieve this aim in both the digital and the physical world in the core areas of payment, connectivity, identity, and digital security. Through think tanks, hackathons, G+D advance52, and GD Ventures, G+D has created a wide range of opportunities to maximize internal and external innovation potential in these areas.


At EUR 154.8 million, total spending on research and development was only slightly below the previous year’s figure. This spending covers customer-specific development costs (EUR 25.0 million), capitalized research and development costs (EUR 16.5 million), and pure R&D expenditure (EUR 113.3 million). Higher capitalization is directly related to development of the health connector at secunet.

Research and Development
20182017Change (absolute)change
Number of R&D employees(FTE)1,1461,155–9–0.7%
Percentage of total employees(%)10.1%10.0%–0.1 pp1.1%
Spending on R&D(EUR million)154.8159.0–4.2–2.6%
thereof pure R&D expenditure(EUR million)113.3125.7–12.4–9.9%
R&D ratio(% of sales)5.0%5.9%–0.9 pp–14.3%
thereof cost of goods sold(EUR million)
thereof capitalizable costs(EUR million)16.510.95.651.8%
Capitalization ratio(%)14.6%8.7%5.9 pp68.4%
Amortization of capitalized development costs(EUR million)
Number of active patents7,8997,5583414.5%
New patent applications1721472517.0%

As a market leader for end-to-end cash management, Currency Technology aims to further expand its market presence. Ongoing innovation allows it to offer customers attractive solutions that improve their value chains. The portfolio extends beyond the provision of substrates, banknotes, security features, and banknote processing machines and is continually being adapted through research and development to meet emerging market needs. G+D provides comprehensive software and automation solutions as part of its digital agenda. These solutions add value for our customers by boosting cash center productivity while continuing to meet the highest security requirements. A further area of innovation is the use of big data technologies. Solutions developed by G+D gather data at every stage of the cash cycle, thus enabling precise forecasting by central banks and other cash cycle providers. Other core aims of our research and development activities are the integration of existing products already in use in the market (Industry 4.0) and the development of new, modular products in response to changes in the banknote verification and sorting market. We are also continuously improving our banknote security features with regard to threads, foils, and pigments. In particular, the use of micro- and nanotechnology enables highly innovative visual security features. The design awards received over the previous years are clear proof of G+D’s ability to deliver projects that combine advanced functionality, cutting-edge industrial design, and attractive product costs.


The global R&D activities undertaken in the Mobile Security sector are focused on three main areas. Firstly, the sector provides products and solutions for the Financial Solutions, Connectivity & Devices, and Digital Enterprise Security divisions. Secondly, in the field of eSIM management, G+D has developed a high performance, scalable platform for efficient management of identities and is continuously refining this solution in line with customer and market requirements. Major mobile network operators, leading technology companies, and car manufacturers all rely on these solutions. Thirdly, the emphasis in the mobile payment business is on developing dual-interface cards, which combine the latest chip hardware with an optimized operating system.


Veridos is driving forward the development of ID documents and complex system solutions for analog and digital verification of documents and identities through to secure authentication and electronic signatures. In the future, people will be able to use these solutions to equip their cell phones with a secure ID function or to provide a legally binding electronic signature. In the software and operating systems field, we enhanced the connectivity of the Java platform through integration of the applet suite with the relevant certifications. In addition to platforms, Veridos also advanced its development of highly secure ID documents, such as mobile driver’s licenses. With its solutions for highly secure digital identities, the IMAGO ID platform, and the VeriGO® border control platform, Veridos now offers a wide range of solutions that extend all the way from applying for an ID document through to having it checked at border control points.


The research and development activities of secunet focus on improvements and innovations in processes, products, and solutions. In this regard, secunet is responding to its customers’ growing need for higher security in existing infrastructures and for solutions to threats in new technical environments. Innovative efforts at secunet are focused on three strategic areas: promoting a culture of innovation; cooperating and partnering with customers, universities, and industry associations; and concentrating expertise via product managers who support development projects from the innovation management stage through to the creation of market-ready products. During the development of the health connector, secunet capitalized significant R&D expenses for the first time.


G+D advance52 – our catalyst for digital technologies and business models – validated new business ideas and again developed advanced solutions for G+D’s business sectors in 2018. This included creating an app for Veridos called VeriGO® TrueID, which provides citizens with easy access to e-government services in their particular country. Two digital business models were implemented for Currency Technology that boost the efficiency of cash centers in commercial banks and central banks.


The change in the number of active patents and new patent applications was greater in 2018 than in the prior year. Overall, the changes are within the industry’s normal range of fluctuation.



2.1.3. Capital Expenditure


Investment3 totaled EUR 108.0 million in 2018. As planned, G+D invested more than in the previous year and reached an investment ratio as a percentage of fixed assets4 amounting to 19%. Both Currency Technology and Mobile Security refurbished or improved a number of buildings, mainly production facilities. For Mobile Security, the expansion and modernization of its site in Spain was a particular priority. In the year under review, the Veridos subsidiary in Greece completed its investment in facilities for the production and personalization of ID cards and polycarbonate data pages, which began in 2017. Comprehensive modernization of the Munich site continued in 2018. G+D also acquired minority stakes in Verimi and IDnow. Investment in property, plant and equipment (including advance payments) stood at EUR 78.8 million overall. Investment in intangible assets (EUR 29.2 million) primarily relates to capitalized R&D expenses and capitalized software solutions (e.g. ID service platform).



3 Investment in intangible assets and property, plant and equipment, plus associated advance payments

4 Fixed assets = plant and quipment plus intangible assets and property


Capital Expenditure and Depreciation / Amortization
EUR million20182017change (absolute)change
Group sales2,246.02,136.4109.65.1%
Capital expenditure108.094.913.113.8%
Investment ratio (% of fixed assets2)17.6%15.1%+2.5 pp16.7%

There are investment commitments of EUR 24.9 million with regard to 2019.



2.1.4. Assets and Liabilities


Current assets increased by EUR 371.4 millionmainly due to an increase in cash as a result of taking out a promissory note loan (EUR 200 million). A detailed analysis of the change in cash and cash equivalents is provided in section 2.1.5. Semi-finished and finished products are shown as contract assets in some instances due to first-time application of IFRS 15. Current receivables increased on balance by around EUR 68.4 million due to sales growth and higher advance payments to suppliers for orders relating to major projects.


As of December 31, 2018, non-current assets were below the previous year’s level. Investment in property, plant and equipment and intangible assets was slightly higher than depreciation/amortization. Following the realignment of CI Tech, impairments of EUR 15.6 million were recognized for tools.


Current financial liabilities were down compared with the previous year due to scheduled repayment of loans and the reduction of short-term bank credit.


Changes in provisions are primarily attributable to utilization of the restructuring provision created in the previous year for the closure of GDSK. Warranty provisions increased slightly due to the higher volume of business.


The issuing of a EUR 200 million promissory note loan led to an increase in non-current liabilities.


Application of IFRS 15 resulted in significant reclassifications within current liabilities. Customer prepayments (2018 balance: approx. EUR 160 million) are no longer shown as part of accounts payable trade, but accounted for as current contract liabilities. Adjusted for this reclassification, accounts payable trade rose by around EUR 80 million. In addition, customer prepayments from major projects (approx. EUR 70 million) increased, financing the higher level of purchase commitments.


Provisions for pensions were down by EUR 8.7 million, primarily due to the adjustment of actuarial interest.


The equity ratio fell to 19.7% (previous year: 20.6%) and reflects the balance sheet extension resulting from taking out the promissory note loan in July 2018. Application of IFRS 15 had a positive effect on equity of EUR 28.4 million.


Average working capital intensity improved to 20.1% in 2018, primarily because there was less build-up in the course of the year.


At 10.9%, ROCE based on (adjusted) EBIT was on target and remained 1.2 percentage points below the level of the previous year.

Balance Sheet Summary (IFRS)
EUR million20182017change (absolute)2018 % of total assets
Current assets1,654.41,283.0371.466.4%
thereof inventories367.8426.2–58.414.8%
thereof current receivables556.5488.168.422.3%
thereof contract assets134.60.0134.65.4%
thereof cash and cash equivalents429.3210.7218.517.2%
Non-current assets838.0859.1–21.133.6%
thereof property, plant and equipment463.1471.2–8.118.6%
thereof intangible assets149.9155.7–5.86.0%
thereof other non-current assets224.9232.1–7.29.0%
Liabilities and equity2,492.42,142.1350.3
Current liabilities928.6803.4125.137.3%
thereof current financial liabilities63.275.5–12.32.5%
thereof current lease liabilities0.53.2–2.70.0%
thereof provisions88.297.0–8.83.5%
thereof trade payables373.5456.8–83.315.0%
thereof contract liabilities236.60.0236.69.5%
Non-current liabilities1,073.9896.8177.143.1%
thereof non-current financial liabilities444.0250.6193.417.8%
thereof non-current lease liabilities2.
thereof pensions and similar liabilities586.3594.0–7.723.5%

No significant effects are expected from off-balance-sheet liabilities. Please see note 31 of the consolidated financial statements in this regard.



2.1.5. Financial Position


In 2018, cash and cash equivalents nearly doubled, rising by EUR 218.5 million to EUR 429.3 million.


Cash flow from operating activities was EUR 188.6 million (prior year: EUR 77.7 million). Customer prepayments had a strongly positive impact as of the balance sheet date and will be used to finance orders from suppliers in fiscal 2019. The high proportion of customer prepayments meant that working capital remained at the prior-year level, despite sales growth. After cautious investment activity in the previous year, G+D made a conscious decision to purchase property, plant and equipment and intangible assets equal in value to the depreciation/amortization recorded. Free cash flow was strongly positive in 2018 at EUR 71.6 million, which represented a significant improvement compared with the previous year and the planned target.


In July 2018, G+D successfully placed a promissory note loan of EUR 200.0 million, meeting with strong demand from investors. The loan has a term of between five and ten years and features attractive conditions, thus providing the Group with funds for financing operational growth. G+D also made scheduled repayments on existing long-term bank loans (EUR 32.5 million) and reduced its short-term debt and borrowings by EUR 10.0 million. Please refer to note 13 of the consolidated financial statements for information on approved but unused credit lines and on the capital structure. A dividend payment of EUR 24.1 million was made to shareholders in the reporting year.


Change in Cash and Cash Equivalents



2.1.6. Employees


The total number of employees was down slightly as of the reporting date of December 31, 2018, despite rising sales. The number of people working in production roles fell as a result of adjustments to the production landscape in Mobile Security, in particular the closure of the production site in Slovakia. The secunet and Veridos business sectors made targeted increases to the number of production staff in line with higher sales volumes. Compared with the previous year, fewer people were employed in sales, particularly in Mobile Security. The number of administrative employees increased, especially in IT and finance roles.

Number of Employees
FTE at reporting date20182017Change (absolut)change
Research and development1,1461,155–8–0.7%

Relocation of production in Mobile Security and the restructuring at CI Tech only began to take full effect towards the end of the year, meaning that the average number of employees rose by 96 (+1.0%) and personnel expenses increased to EUR 686.5 million (+4.3%).



2.1.7. Declaration on Management and Governance


In accordance with the German law on equal participation of women and men in leadership positions in the private and public sectors (FüPoG), the Supervisory Board set itself the target in 2017 of ensuring that 30% of members of the Supervisory Board and 0% of members of the Management Board should be women. The aim with regard to the top tier of management below Board level is to achieve a proportion of 17%, and 30% for the second management tier. Giesecke+Devrient GmbH aims to meet these quotas by March 31, 2022. As of December 31, 2018, women made up 41.7% of the Supervisory Board, with Astrid Meier, Verena von Mitschke-Collande, Prof. Gabi Dreo Rodosek, Claudia Scheck, and Monika Wächter all serving as members. In the top tier of management, the proportion of women was 14.4%, while the proportion in the second tier was 20%.



2.2. Overall Assessment of Economic Situation


The 2018 fiscal year was highly successful for G+D. The order backlog reached EUR 1.7 billion – the highest-ever level in the company’s history. Currency Technology and Veridos, in particular, had very strong order books, demonstrating how attractive our solutions are to customers. All sectors achieved sales growth in 2018 compared with the previous year, despite negative effects from the appreciation of the euro against other currencies in core foreign markets. The portfolio’s strategic shift towards solution-oriented and digital business models continued to gain significant momentum. Actual sales growth exceeded planned targets.


EBIT and EBITDA performance fell below the strong results achieved in the previous year, but both earnings figures came in on target when excluding the adverse impact of realigning CI Tech.


With its major project in Egypt, Currency Technology confirmed its leading role as a system integrator for the entire cash cycle, offering its customers end-to-end solutions. The Banknote Solutions division further expanded its excellent market position. Production facilities were well utilized, with sales volumes increasing again compared with the previous year. The Currency Management Solutions division saw a significant improvement in sales and benefited from growth of both its solutions business and its product business.


Sales at Mobile Security grew as planned compared with the previous year. This is especially gratifying because this particular business sector operates in highly challenging and dynamic markets. Mobile Security responded to the appreciation of the euro and the commoditization impacting the core connectivity market for plug-in SIM cards, in particular, by achieving higher sales volumes in physical cards and expanding the growth areas of Internet of Things and automotive. The sector also confirmed its position as a world leader in the growing embedded SIM (eSIM) market. The core payment business thus grew significantly in 2018.


Veridos was likewise successful in winning several major projects, enabling it to make substantial progress in 2018 by leveraging the available growth opportunities. The very healthy order book provides a solid basis for the desired long-term sales growth. While sales growth was modest in 2018, this business sector offers some of the best future opportunities for growth in the entire G+D Group.


secunet continued its exceptional success story in 2018. Following the approval of its secure health connector, secunet expanded its security offering to include a telematics infrastructure, as used by medical practices, for example. The business sector upgraded its sales and earnings forecasts in December. Its cyber security solutions will continue to be developed and refined in the future, laying the foundation for further growth.

3. Opportunities and Risk Report
Including Risk Reporting on the Use of Financial Instruments


As a global enterprise, G+D has to find the right balance between opportunity and risk when carrying out its diverse business activities. Failure to identify and manage risk satisfactorily could jeopardize individual business sectors or even threaten the Group’s existence. Effective risk management forms part of responsible and sustainable corporate governance. At G+D, the objective of risk management is to recognize risk as early as possible, properly assess it, and then counter it by taking appropriate action. This is intended to minimize any potential impact on the Group’s net assets, financial position, and profitability, to safeguard the ongoing existence of G+D as an independent business, to strengthen its market position, and to achieve real increases in enterprise value.



3.1. Risk Management System


The risk management system incorporates all the process and organizational guidelines needed to identify, analyze, assess, and manage the Group’s overall risk situation. This system is embedded into strategy, planning, and controlling mechanisms across the entire Group. While operating and financial risks are dealt with on an ongoing basis whenever necessary in the course of day-to-day business management and assessed during the quarterly performance reviews, strategic risks are subject to an annual review as part of the strategy process and therefore to separate reporting. Compliance risks are likewise managed via our own compliance organization and are also subject to separate reporting, including notification of Corporate Controlling in the event of financial implications.


Corporate Controlling compiles a Group risk report on a quarterly basis, which provides information on the current status of risks. The risk report is provided to members of the Supervisory Board and Advisory Board as part of quarterly reporting. The Group accounting department incorporates all accounting practices and valuation methods into the Group’s standard accounting policy and updates this policy when new IFRS standards are published or existing ones amended. Employees in finance are regularly informed of the latest issues relating to financial reporting and of the relevant dates in the accounting and planning process. In order to evaluate all risks in connection with accounting (e.g. inventory valuation, credit default risks with regard to receivables, valuation of provisions), the Group accounting department has defined standard requirements for the Group. External experts are consulted to help assess special areas, such as pension obligations. Variance analysis is included in the monthly reports to the Management Board. Significant changes and the breakdown of individual items are analyzed at the Group, subgroup, and subsidiary level.



3.2. Compliance Management


The purpose of the compliance management system (CMS) is to maintain customer confidence in G+D. At the same time, it safeguards the Group’s ongoing existence. The CMS is continually updated to satisfy new legal requirements and also to reflect G+D’s current risk profile. To achieve this objective, the CMS is subject to continuous monitoring and adjustment with regard to suitability, implementation, and effectiveness. G+D Currency Technology was audited by an external auditor in 2017 in accordance with Assurance Standard 980 of the German Institute of Public Auditors (IDW). G+D Mobile Security was audited in line with the same standard in 2018 and the first quarter of 2019. As part of a compliance assessment, risks relating to corruption and antitrust law violations are regularly reviewed and assessed across all group entities.


The Group-wide compliance organization ensures that every employee and all Management Board, Supervisory Board, and Advisory Board members within the G+D Group are familiar with compliance requirements and act accordingly.


The Compliance Offices regularly report on activities in the core compliance areas of prevention, detection, and response. Management is informed of (potential) compliance violations and the countermeasures taken, thereby enabling it to counter any undesirable developments.


Compliance Management



Individual events are reported separately and directly to the Chairman of the relevant Management Board, who takes appropriate measures in conjunction with the other Board members. External consultants are used as necessary to examine and advise on compliance matters.


On behalf of the Management Board, the Group’s auditing department (Corporate Auditing) conducts regular checks to assess the implementation and effectiveness of Group management and monitoring processes. The main aspects looked at are risk management, the internal control system, legal regulations, and internal corporate guidelines. The Group’s auditing department was certified by Ernst and Young in accordance with the requirements of the Deutsches Institut für Interne Revision e.V. / The Institute of Internal Auditors in 2018. In fiscal 2018, Corporate Auditing carried out a total of 19 audits. Findings are reported to the Management Board and managers of the audited entity. Corporate Auditing checks that measures arising from these investigations are implemented appropriately.



3.3. Strategic Risks


The maintenance of our competitiveness requires the development of new products, services and solutions. This also entails establishing complete ecosystems and implementing the associated business models, which may affect the liability exposure. Developing the right technology at the right time and having the necessary organizational structures in place is crucial. We seek to shape market developments through carefully targeted investment in research and development. If activities are started too soon, this can give rise to idle costs, while starting too late can lead to loss of market share. Changes in strategy can result in substantial restructuring costs. We counter this risk by reviewing strategy in each subgroup and at the wider Group level on an annual basis.


Targeted acquisitions, which tie up capital, are sometimes necessary to support corporate strategy and expand our portfolio of products and services. Implementing the associated business plan and necessary measures to integrate the acquired organization into the Group entails considerable risk. Failure to meet objectives may cause the value of assets to fall and thus impact results.



3.4. Operating Risks and Opportunities


All identified operating risks are regularly assessed by the risk owners in the subsidiaries. This involves an analysis of the probability of occurrence, the potential damage, and the effectiveness of the measures employed to mitigate the risk.



3.4.1. Risk Analysis


G+D carries out comprehensive risk analysis, extending from contract initiation right through to the expiry of any warranty period. Where the relevant undertaking comes under the operational responsibility of a Group company and this company receives technical, logistical, or other specialist support or supplies from a different Group company, joint risk analysis must be performed for all Group companies involved.


G+D distinguishes the following main categories of operating risks: production risks, supplier risks, IP risks, security risks, political risks, financial risks, and tax risks. A number of individual risks may be associated with any project or venture, which are subject to different correlations.



3.4.2. Operating Risks and their Assessment


Operating risks are risks that may occur anywhere along the value chain and can jeopardize the achievement of near-term corporate objectives. The individual risks must be assessed separately and also aggregated for the project or venture in question to provide a useful indicator of overall risk. The risks identified (individual risks and overall risk) are evaluated using the gross and net methods. Gross risk is defined as the potential damage that might result if no measures or controls were in place to mitigate the risk. Net risk is the risk remaining when mitigating actions are taken into account. The probability of occurrence is multiplied by the net risk to obtain the risk value.


The probability of occurrence indicates the estimated likelihood of the identified risk occurring, which is classified as follows:



DescriptionProbability of occurrence
Expected to occur80% < x
Probable50% < x ≤ 80%
Not probable10% < x ≤ 50%
Possible, but largely theoreticalx ≤ 10%

Overall Risk Situation

As of December 31, 2018, 40 operating risks had been reported to the Management Board and Supervisory Board via the risk report.


After combining the individual risks as per the categories defined above, the following picture emerges:


Risk Categories



Financial risks represent a potentially serious risk to the Group. Annual impairment testing of goodwill may reveal the need for an adjustment, based on operational performance and anticipated future development derived from this. G+D is also exposed to general credit default risk with regard to receivables, which exists for customers in South America in particular as a result of possible defaults. Security and tax risks are characterized by a high potential net risk, but this is accompanied by an extremely low probability of occurrence of almost 0%. Production risks have a slightly higher probability of occurrence, combined with comparatively low net losses. All other risk categories are of lesser importance.


Multiplying the net risk values by the relevant probabilities of occurrence gives a cumulative risk value of EUR 30.5 million for the current reporting year. The individual risks were simply added up for the purposes of this calculation. Simultaneous occurrence of all individual risks can be virtually ruled out due to the different correlations.


Risk Value and Provisions



Compared with the previous year, there was a notable reduction in production risks due to a quality initiative and in IP risks, based on an updated assessment.


If the probability of an individual risk occurring is greater than 50%, the provisions or impairments correspond to 100% of the net risk value. The cumulative risk value is EUR 30.5 million, with corresponding provisions of EUR 14.0 million. For finance risks in particular, no provisions at the same level were necessary in view of the probability assessment.


These risks have been taken into consideration in these financial statements and in the forecast, in accordance with the Group’s accounting policy. If the risks for which no provisions have been made due to the low probability of occurrence do occur, this would have a negative impact on our net assets, financial position, and results of operations. If the risks covered by provisions occur, there would be a cash outflow.


After careful analysis, the Group-wide risks are not deemed existential in nature, either individually or overall. Thanks to G+D’s strong market positioning, capacity for technological innovation, globally standardized processes, and committed employees, the Management Board is confident that the Group is again well equipped to meet the challenges posed by these risks in 2019 and to leverage the opportunities that arise.



Financial Risks

G+D is subject to typical liquidity risk, counterparty credit risk, and market risks stemming from changes to exchange rates, interest rates, and share prices. The current uncertain political situation in South America could affect the fulfillment of contracts by each side.


Risk associated with an impairment of goodwill at the Group level is subsumed into financial risks.


Financial risks are primarily managed as part of the Group’s ongoing business and financing activities. Additionally, financial risks affecting the G+D Group and its operating subsidiaries are identified centrally on the basis of written guidelines and their management is also handled by G+D GmbH. Financial risk forms part of the monthly risk reports submitted to the Management Board and is also included in regular reporting to the Supervisory and Advisory Boards.


If necessary, derivative financial instruments are deployed in relation to foreign currency and interest rates to hedge underlying transactions. In accordance with risk management standards applying to international banks, all trading activity is subject to financial monitoring that is independent of the Group’s treasury department.


In accordance with IAS 19, G+D is required to recognize actuarial gains and losses arising from pension obligations fully and immediately in equity. This leads to high volatility of equity in response to changes in capital market interest rates.


For further details on financial risk, please see note 22 of the consolidated financial statements.



IP Risks

It is crucial to protect, license, and acquire intellectual property (IP) rights as part of R&D activities. G+D could be accused by third parties of breaching their intellectual property rights. This could result in compensation payments for damages and a ban on using certain technologies. The Group’s patent department works with external law firms to register and monitor patents.



Security Risks

G+D is not completely immune to cyber security risks, whether in the form of economic or industrial espionage, or of cyber attacks by specific countries or competitors. These risks could lead to unintentional sharing of confidential information or intellectual property, product damage, supply difficulties, loss of production, or compromised (personal) data. G+D may also be faced with threats from individuals who gain unauthorized access to buildings or systems and misuse, steal, or damage information or assets. G+D has taken a range of technical and organizational precautions to minimize this risk. These include IT security measures, identity management, multi-level access control and entry systems, camera surveillance, deployment of a Group security service, and raising employee awareness through regular training sessions on compliance and security issues. G+D has implemented a security and control system that makes it possible to identify and respond promptly to risk.



Supplier Risks

At G+D, supply chain management is organized individually in each of the business sectors, but in accordance with uniform guidelines contained in the procurement manual. Any disruptions, such as delivery delays on the supplier side or an increase in prices for raw materials (particularly semiconductors and cotton), may have adverse effects on the availability, quality, and cost of G+D products and therefore impact sales and earnings.


When selecting external partners, care must be taken to ensure that they abide by internal rules and applicable laws and regulations, as well as supplying G+D’s customers with high-quality products. When contractual relationships end, legal disputes may arise, in which claims could be brought against G+D.



Production Risks

G+D offers its customers high-quality products and services. Its employees are crucial to the success of the company. Due to demographic trends, there is a risk that it may not be possible to fill vacant positions with appropriately skilled employees. Through initiatives such as global hackathons and think tanks, G+D highlights its attractiveness as an employer, in particular to young professionals. These activities are accompanied by an integrated program to nurture talent, which is designed to foster staff loyalty. In addition to employees, proper utilization of production capacity is essential to success. Additional capacity must be maintained to safeguard continuous production. G+D aims to ensure optimum machine utilization and back-up capacity by means of production planning and management. Ineffective staff management or the stoppage of machinery would have serious consequences for net assets, the financial position, and results of operations.


Machines that are outdated or no longer meet the latest technical standards could lead to a loss of production capacity, resulting in partial or complete failure to produce the planned quantities. Problems of this kind can result in project delays or late delivery of products to end customers. If G+D is late in delivering products, it could face contractual penalties for failing to comply with delivery deadlines, for example. Prompt investment in replacement machinery is intended to prevent these issues. Capital expenditure is managed by the business sectors at G+D and closely monitored by the project controlling team.


Statutory requirements can also impact production, for instance if emissions limits are regulated more tightly. Environmental issues are becoming increasingly important for businesses. G+D seeks to counter risks in this area by means of an environmental management system and embracing corporate responsibility (CR). Details of the measures taken can be found on pages 26–29 of the annual report.


Unrecognized defects and quality problems or the delayed introduction of new products could result in higher costs for G+D and have an adverse impact both on demand for the company’s products and on its reputation. To counter this, ongoing and efficient development of the quality management system is essential, with a corresponding focus on customer needs. In relation to product development, timely implementation of preventive measures is especially important in order to achieve the warranted product quality and avoid substantial additional costs during the subsequent commercialization phase. Our underlying approach is that “quality is everybody’s business.” Making this attitude a reality requires processes, organizational interfaces, tasks, and responsibilities to be clearly defined and communicated. Each employee therefore needs to be fully aware of the contribution they can make within their role.


The replacement of existing products in a region may mean that spare parts inventories can no longer be used. G+D counters this risk by periodically revising its phase-out and sales planning. In addition, inventories are regularly subjected to impairment testing during the preparation of financial statements.



Political Risks

The Middle East is currently affected by political uncertainty. Contracts with customers from this region could be impacted by extreme developments that make it impossible for the parties to fulfill the contract due to force majeure or shortages.


G+D counters this risk by continually monitoring economic and political developments in key markets, aided by the strong regional focus of G+D’s sales organization. Production and capital expenditure are managed centrally, enabling a rapid response in the event of any economic slowdown.



Tax Risks

G+D’s business activities are subject to the usual risks associated with international operations. These include the incompatibility of different tax regimes, possible tax obstacles that make business more difficult, and import/export regulations. Intercompany netting may be challenged by the tax authorities, which can entail lengthy negotiations and the need to produce extensive documentation.


G+D seeks to counter these risks by continually adapting its internal processes to changing requirements. The company also takes advice from auditors, lawyers, and tax consultants in the countries concerned.


The introduction of a holding structure and the associated carve-out and establishment of legally independent local companies has increased the potential risks. Where possible, the risk position was mitigated by obtaining binding information from the relevant local tax authorities.



3.4.3. Operating Opportunities


Dynamic market conditions mean new business opportunities are opening up all the time. Maintaining an extensive vertical and horizontal portfolio of products and solutions allows the Group to diversify risk and take advantage of these market opportunities.


In G+D’s dynamic market environment, it may occasionally be the case that customers are no longer able to meet their payment obligations. If a customer has filed for bankruptcy, impairment adjustments need to be made to these receivables in the accounts. The 2018 financial statements include impaired customer receivables totaling EUR 9.0 million. If, contrary to expectations, it becomes possible for the customer to settle the outstanding receivables, the derecognition would be reversed. This would positively impact net assets, the financial position, and results of operations by the corresponding amount.


G+D sees hard-to-quantify opportunities in the following areas:


G+D is a technology leader in the fields of payment, connectivity, identity, and digital security, all of which have huge market potential. If these trends gain in importance over the short term in industry, the public sector, or the private sphere and the corresponding change processes take place more quickly, opportunities for solutions provided by G+D could emerge, leading to additional sales and earnings growth.


In a dynamic market environment, G+D strikes a balance between effectively meeting the current needs of customers and investing in promising new products and solutions. If the vertical and horizontal expansion of value-adding activities proves more rapid and extensive than currently anticipated and awareness of security issues in the digital world results in an even greater need for security technology than expected, G+D could see a faster rise in demand for new and improved products. This could have a positive impact on net assets, the financial position, and results of operations, allowing an upward revision of existing forecasts.


Finally, legal requirements could also lead to an increase in sales and earnings. Internal forecasts could be revised upward if the use of a technology that G+D is involved in developing or that is contained in its products were to be made mandatory, for instance.


Overall, opportunities and risks are well balanced.



3.4.4. Major Projects


G+D is currently responsible for a number of major projects with high sales potential and lengthy implementation periods stretching over several years. These projects have an elevated risk structure, which is taken into account in the business cases with corresponding premiums.


Tight project management and a dedicated project controlling team have been put in place to support and oversee these major projects. The risks posed by major projects can be successfully addressed through continuous risk management.



4. Forecast


In 2018, G+D gained significant major projects in Egypt, Bangladesh, and Uganda, with implementation periods spanning multiple years. As a result, order backlog increased to a record EUR 1.7 billion.


Sales growth in 2018 was positively impacted on a one-time basis by initial application of IFRS 15. G+D therefore plans to generate sales at the previous year’s level in 2019, provided there are no significant exchange rate fluctuations or politically motivated restrictions on market access.


Currency Technology is expected to further increase its high level of sales. There continues to be growth potential in its project business, in plant engineering, and in the market for banknote processing machines. The need for digitalization solutions in the cash cycle will gain further momentum and provide an additional boost to sales growth. Due to sustained competitive pressure and the modified product mix, the business sector expects EBIT to fall slightly.


Mobile Security will focus more strongly on attractive markets and is prepared to accept lower sales of physical SIM cards. By contrast, this sector expects sales in its solutions and service business to rise in 2019. Overall, sales will decline, however. Earnings are expected to increase slightly compared with the previous year due to increased profitability as well as the elimination of production relocation costs.


Veridos has created a solid foundation for further sales growth thanks to its healthy order backlog. The business sector expects to see a significant increase in 2019. Earnings will also improve slightly as sales grow.


After a record year in 2018, moderate sales growth is expected at secunet in 2019. Earnings are predicted to remain at the previous year’s level. In addition to providing IT security solutions for customers in the public sector and safeguarding critical infrastructures, secunet can now also guarantee the secure exchange of data in the healthcare sector by way of its BSI-certified health connector.


Higher EBIT and EBITDA are expected for G+D overall than in 2018.


In 2019, working capital intensity is expected to be at the 2018 level.


After cautious investment activity in recent years, investment already increased in 2018. This trend is set to continue in 2019. Furthermore, investment is expected to significantly exceed depreciation/amortization.


The high level of prepayments received at the reporting date of December 31, 2018, is directly related to G+D’s major projects and had a very positive impact on free cash flow. A proportion of these funds will be passed on to suppliers in 2019. Free cash flow is expected to remain positive in 2019 but will be below the previous year’s level due to the special effect described.


In 2019 G+D aims to expand its employee headcount in growth markets resulting in an expected increase of the overall workforce.


ROCE is expected to be similar to that achieved in 2018.


Actual results may, of course, vary from expected performance. The impact of applying IFRS 16 will affect financial metrics in 2019. These effects have not yet been included in our planning.