REPORT OF THE SUPERVISORY BOARD

Throughout the last financial year, the Supervisory Board continued to perform its tasks with great care in accordance with the law, the Articles of Association and the Rules of Procedure. We regularly advised the Board of Management on corporate management issues and monitored its work. The Supervisory Board was consulted directly and at an early stage with regard to decisions of fundamental importance. The Board of Management informed us about the position of the company, in particular its business, financial and staffing situation, planned investments, as well as corporate planning and strategic and organisational development issues via written and oral reports prepared regularly and on an ad hoc basis in a comprehensive and timely manner. We continued to meet on a regular basis to discuss selected issues, both with and in the absence of the Board of Management.

We discussed the Company’s significant business transactions in detail on the basis of the Board of Management’s reports. Any departures in business developments from the plans and targets were reviewed and commented on in detail by the Board of Management. After thorough examination and discussion, we adopted our resolutions on the reports and proposals by the Board of Management. Beyond the intensive work in the plenary sessions and in the committees, the Chairman of the Supervisory Board in particular and other Supervisory Board members were in frequent contact with the Board of Management outside the meetings to discuss the current business development and significant transactions as well as questions of strategy, planning, risk assessment, risk management and compliance.

In the reporting period, no conflicts of interest arose involving members of the Board of Management or the Supervisory Board that would have been subject to compulsory disclosure in the Report of the Supervisory Board.

MAIN FOCUS OF WORK IN THE SUPERVISORY BOARD PLENARY SESSIONS
AND IN THE COMMITTEES

Core topics of our discussions with the Board of Management were strategy implementation and the continued development of the corporate organisation. The analysis of business development in selected Business Units and Regions represented an additional focus, as did comprehensive investment programmes at various different sites. We also closely examined the economic situation in and the prospects associated with specific market areas.

Four regular Supervisory Board meetings were held in 2013, and one constituent meeting. The performance of KSB Aktiengesellschaft and the Group was the subject of regular discussions in the plenary sessions, primarily with regard to order intake, sales revenue, earnings, assets and employment levels as well as the current economic situation, strategy, and investment, divestment and acquisition projects. We carefully studied the German and international service activities, including the concept in place for expanding these in China. Given the large number of acquisitions in recent years, we paid continued attention to their structured integration and management to ensure the desired level of profitability.

The Board of Management regularly explained to us in detail the ways in which KSB can achieve the planned growth for the coming years, including the underlying methodological and strategic considerations. All investments were subjected to critical analysis before being approved and subsequently overseen by us. In this context, the Supervisory Board released initial funds for the purpose of modernising the foundry at the Pegnitz site in Germany. On several occasions, we reviewed the status of modernisation and expansion work at our locations in North and South America. A major investment decision was made for the benefit of our US subsidiary GIW Industries, Inc.; its headquarters in Grovetown, Georgia, will be gradually expanded and modernised over the coming years. In order to obtain a major Chinese order for the supply of pumps, we had to comprehensively expand our local manufacturing facilities. We received several reports from the Board of Management on the status of the order, which is now being processed and will take several years to complete. In a number of countries, the start or expansion of business activities led to property acquisitions. In each case we discussed the long-term impact of such measures.

Given the changes in the energy sector, not least the turnaround in energy policy in Germany, we continued to look at the issue of how these radical market movements are impacting or will impact in future our business operations. We subjected the deliberations of the Board of Management on this subject to critical scrutiny, focusing in particular on the qualitative assessment of corresponding measures, and on the current state of progress.

Repeatedly on the agenda was the continued development of our organisational structure. We devoted particular attention in this respect to the structuring of our international sales activities. Another focus was on the adjustments to our Group management structure. The concept adopted at the end of 2012 was fleshed out in greater detail and presented to top management in the middle of the year. The changes entered into force at the beginning of 2014. As well as a strengthening of regional responsibilities, we expect the changes to result in the Board of Management being able to focus to a greater extent on fundamental, strategic issues. Another focus of our work was the status – as explained regularly by the Board of Management – of the measures in place to develop our value-based corporate culture.

In September the Supervisory Board convened for a meeting near the Beinwil site in Switzerland, where it was able to assess how business was developing there and visit the production facilities. In addition, we informed ourselves about selected products and functions of the Group. Against the background of the changes to the composition of the Supervisory Board in the year under review, and the appointment of a new Chairman of the Supervisory Board, we discussed further ways of optimising the Supervisory Board’s work, through for example a more efficient internal organisational structure. At the December meeting, we discussed and approved a major investment in the expansion of valve production at the La Roche Chalais site in France. We also looked at business performance during the year and planning for 2014.

In order to perform its duties efficiently, the Supervisory Board worked with six committees in the past financial year. These prepare the Supervisory Board’s resolutions and the special topics to be discussed in the plenary sessions. In addition, they also make their own decisions – to the extent that this is legally permissible – within the scope of their areas of responsibility. This allocation has proved worthwhile in practice. The Chairs of the committees regularly and comprehensively report in the plenary sessions on the content and results of the work carried out in the committees.

The Nomination Committee looks at the shareholder representative nominations prior to the Supervisory Board elections at the Annual General Meeting.

The Planning and Finance Committee focuses on corporate and investment planning and the financial situation of the company. Given our strategic objectives, the Committee discussed in detail the tools available for reliable and forward-looking planning, including appropriate and informative performance indicators. The new methodology used to incorporate forecasts and requirements was presented by the Board of Management and also dealt with in depth.

The Corporate Development Committee deals with a changing range of key issues. It discussed in particular the areas of strategy controlling, production management and innovation, and looked at a number of major investments, including in France and North America. Discussions on a comprehensive and Group-wide overhaul of the controlling and internal management system also figured on the agenda, as did measures to accompany the establishment of new Group companies in the Philippines and Colombia. The discussions on securing and optimising the provision of castings to our manufacturing facilities continued. The heads of the relevant specialist departments often took part in the committee meetings, along with the responsible members of the Board of Management.

The Personnel Committee primarily addresses topics relating to the Board of Management’s remuneration, including the terms of the individual service contracts, as well as other Board of Management issues. Decisions on the Board of Management’s remuneration are made in plenary sessions, with the Committee meeting regularly to act in a preparatory capacity. In addition, the Committee discussed staff development issues with the aim of prioritising the recruitment of candidates for the Board of Management and other management positions from within the company’s own ranks. In 2013, the Committee members again participated in events with potential candidates for various different management levels in an effort to foster a direct exchange of ideas. The committee discussed in detail the need to reassign responsibilities as a consequence of the retirement from the Board of Management of Prof. Dr. Dieter-H. Hellmann on age grounds with effect from the 2013 year end. Also the subject of careful deliberation was the first-time appointment of Dipl.-Kfm. Werner Stegmüller to the Board of Management of KSB Aktiengesellschaft, with effect from 1 January 2014 for four years.

The meetings of the Audit Committee were always attended by the Member of the Board responsible for Finance and, on several occasions, by the auditors. The committee primarily discussed the 2012 annual and consolidated financial statements, the audit reports submitted by the auditors and the internal auditors, and the effectiveness and further development of the risk management system and compliance organisation. In particular, the Committee prepared the independent examination by the Supervisory Board of the financial statements, the management reports and the proposal on the appropriation of the net retained earnings. In this context, it also defined key audit areas for the external auditing of the 2013 financial statements. In addition, the half-year financial report was discussed with the Board of Management. The committee submitted a proposal to the plenary session for the selection of auditors by the Annual General Meeting on 15 May 2013 and subsequently commissioned them to carry out the audit of the annual and consolidated financial statements for the 2013 financial year. The declaration of independence by the auditors was obtained in accordance with section 7.2.1 of the German Corporate Governance Code and the auditors’ continued independence was monitored. The committee also discussed the monitoring of the financial reporting process and the effectiveness of the internal control and auditing system.

There was no requirement during the year under review to convene the Mediation Committee pursuant to section 27(3) MitbestG [Mitbestimmungsgesetz – German Co-Determination Act].

CORPORATE GOVERNANCE AND STATEMENT OF COMPLIANCE

The Supervisory Board continuously monitored developments in corporate governance standards throughout the year. The Board of Management and the Supervisory Board report on corporate governance at KSB in accordance with section 3.10 of the German Corporate Governance Code as part of the Corporate Governance Statement pursuant to section 289a HGB [Handelsgesetzbuch – German Commercial Code]. On 5 December 2013 they issued a joint updated statement of compliance in accordance with section 161 of the AktG [Aktiengesetz – German Public Companies Act] and made it permanently available to shareholders on the company’s web site. With just a few exceptions, KSB Aktiengesellschaft complies with the recommendations set out in the Code in the version dated 13 May 2013.

AUDIT OF THE 2013 ANNUAL AND CONSOLIDATED FINANCIAL STATEMENTS

The accounting documentation, in addition to the proposal by the Board of Management on the appropriation of net retained earnings and the audit reports submitted by the auditors, was provided in good time to all members of the Supervisory Board. The documents were examined in detail by the Audit Committee on 18 March 2014 as well as by the Supervisory Board plenary session on 25 March 2014 and explained in depth in both cases by the Board of Management. The auditors attended the meetings of both bodies, reported on the findings of the audit and were available to provide additional information.

The Supervisory Board examined the annual financial statements and the management report of KSB Aktiengesellschaft for the year ended 31 December 2013, which were prepared in accordance with the provisions of the HGB [Handelsgesetzbuch – German Commercial Code], as well as the consolidated financial statements and the group management report for the year ended 31 December 2013, which were prepared in accordance with the International Financial Reporting Standards (IFRS), and the proposal by the Board of Management on the appropriation of net retained earnings.

The Frankfurt am Main offices of BDO AG Wirtschaftsprüfungsgesellschaft based in Hamburg audited the annual financial statements and the management report of KSB Aktiengesellschaft for the year ended 31 December 2013, as well as the consolidated financial statements and the group management report for the year ended 31 December 2013, and issued an unqualified audit opinion. The key audit areas defined for the auditors by the Audit Committee for the year under review were: Verification of the appropriateness and effectiveness of the Group-wide risk management system and of the proper nature of management reporting in accordance with the new German Accounting Standard No. 20 (DRS 20), particularly with regard to the report on expected developments, as well as the opportunities and risk report. The auditors reported their findings on these key audit areas both orally and in writing.

The Supervisory Board concurs with the auditors’ findings. Based on its own final examination results, the Supervisory Board plenary session did not raise any objections to the annual financial statements, consolidated financial statements, management report and group management report. In accordance with the recommendation of the Audit Committee the Supervisory Board approved the financial statements prepared by the Board of Management; the annual financial statements are thus adopted. After its own examination, the Supervisory Board deems the proposal by the Board of Management on the appropriation of net retained earnings of KSB Aktiengesellschaft to be appropriate and concurs with it.

DEPENDENT COMPANY REPORT

The auditors also audited the dependent company report for the 2013 financial year prepared by the Board of Management in accordance with section 312 AktG and issued the following unqualified audit opinion on this report:

“On completion of our audit and assessment in accordance with professional standards, we confirm that

  1. the actual amounts and disclosures in the report are correct;
  2. the consideration paid by the company for the transactions listed in the report was not inappropriately high.”

The reports by the Board of Management and the auditors were provided in good time to all members of the Supervisory Board and were also discussed by the Audit Committee and at plenary sessions. The auditors attended the meetings of both bodies, reported on the material findings of the audit and were available to provide additional information. The Supervisory Board concurs with the auditors’ findings. Both the recommendation by the Audit Committee and the final results of the Supervisory Board plenary session’s examination did not give rise to any objections to the dependent company report prepared by the Board of Management and to the statement by the Board of Management at the end of the dependent company report.

CHANGES ON THE BOARD OF MANAGEMENT AND SUPERVISORY BOARD

The changes on the Board of Management have already been described above. Dr. Hans-Joachim Jacob, the long-standing Chairman of the Supervisory Board, retired with effect from the close of last year’s Annual General Meeting on 15 May 2013, having reached the age limit for members. The Annual General Meeting elected Prof. Dr. Michael Hoffmann-Becking as a new member of the Supervisory Board. In addition, Dr. Jörg Matthias Großmann – following his appointment by court order in 2012 – and, once again, Mr. Klaus Kühborth, were elected to the Supervisory Board. The period of office of the employee representatives on the Supervisory Board came to an end, as scheduled, at the close of this Annual General Meeting. At the elections on 16 and 17 April 2013, Ms Sigrid Maurer, Dr. Stephan Bross, Mr. Alois Lautner and Mr. Volker Seidel were all re-elected to the Supervisory Board with Mr. René Klotz and Mr. Wolfgang Kormann being elected for the first time. At its constituent meeting on 15 May 2013, the Supervisory Board elected Mr. Klaus Kühborth as its Chairman and Mr. Alois Lautner as its Deputy Chairman. In this context, the Supervisory Board wishes to thank the departing members for the many years of cooperation in an atmosphere of mutual trust.

The Supervisory Board would like to acknowledge and thank the Board of Management, the employees and employee representatives of all Group companies for their good work in the year under review.

Frankenthal, 25 March 2014

The Supervisory Board