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) ||2018||2017||Change (absolute)||Change|
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 million||2018||2017||change (absolute)||change|
|Gross profit 1||612.9||618.8||–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)||2.8||0.6%|
|Other operating income and expenses 1||12.8||14.7||–1.9||–12.7%|
|Operating profit 1||133.0||137.9||–4.9||–3.6%|
|Financial income / (expenses)||(13.5)||(8.1)||-5.4||–66.3%|
|EBIT margin (adjusted) (% of sales)||5.3%||6.1%||–0.8 pp||–13.1%|
|Earnings before income taxes (EBT)||85.5||112.8||–27.4||–24.2%|
|Reconciliation to EBITDA|
|plus depreciation and amortization (adjusted)2||102.6||104.6||2.0||1.9%|
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|
|Number of R&D employees||(FTE)||1,146||1,155||–9||–0.7%|
|Percentage of total employees||(%)||10.1%||10.0%||–0.1 pp||1.1%|
|Spending on R&D||(EUR million)||154.8||159.0||–4.2||–2.6%|
|thereof pure R&D expenditure||(EUR million)||113.3||125.7||–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)||25.0||22.4||2.6||11.6%|
|thereof capitalizable costs||(EUR million)||16.5||10.9||5.6||51.8%|
|Capitalization ratio||(%)||14.6%||8.7%||5.9 pp||68.4%|
|Amortization of capitalized development costs||(EUR million)||8.4||6.8||1.6||23.5%|
|Number of active patents||7,899||7,558||341||4.5%|
|New patent applications||172||147||25||17.0%|
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 million||2018||2017||change (absolute)||change|
|Investment ratio (% of fixed assets2)||17.6%||15.1%||+2.5 pp||16.7%|
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 million||2018||2017||change (absolute)||2018 % of total assets|
|thereof current receivables||556.5||488.1||68.4||22.3%|
|thereof contract assets||134.6||0.0||134.6||5.4%|
|thereof cash and cash equivalents||429.3||210.7||218.5||17.2%|
|thereof property, plant and equipment||463.1||471.2||–8.1||18.6%|
|thereof intangible assets||149.9||155.7||–5.8||6.0%|
|thereof other non-current assets||224.9||232.1||–7.2||9.0%|
|Liabilities and equity||2,492.4||2,142.1||350.3|
|thereof current financial liabilities||63.2||75.5||–12.3||2.5%|
|thereof current lease liabilities||0.5||3.2||–2.7||0.0%|
|thereof trade payables||373.5||456.8||–83.3||15.0%|
|thereof contract liabilities||236.6||0.0||236.6||9.5%|
|thereof non-current financial liabilities||444.0||250.6||193.4||17.8%|
|thereof non-current lease liabilities||2.4||0.1||2.3||0.1%|
|thereof pensions and similar liabilities||586.3||594.0||–7.7||23.5%|
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
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 date||2018||2017||Change (absolut)||change|
|Research and development||1,146||1,155||–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.