ANNUAL REPORT 2019
Notes to the Consolidated Financial Statements
as at December 31, 2019
Feintool International Holding AG, Industriering 8, 3250 Lyss, is a public limited company under Swiss law with headquarters in Lyss, Switzerland (“Company”). The consolidated financial statements for the period from January 1 to December 31, 2019, include the Company and its subsidiaries (“Feintool”). Feintool is the world’s leading technology group specializing in the development of fineblanking systems and a worldwide provider of high-quality and cost-effective fineblanked, formed steel components and punched electro sheet metal products. The Group maintains close partnerships with its customers across the entire fineblanking, forming and punching of electric engine components process – from component design, tool design and system construction through to large-scale series parts production. In addition to fineblanking, the Feintool Group also deploys other key processes such as precision forming and punching of electric engine components technology, and is the world’s only supplier of all-round solutions for the cost-effective manufacture of complex precision components.
With locations in Europe, US, China and Japan, the Feintool Group is represented in the world’s major automotive markets. Headquartered in Lyss, Switzerland, the Group has a headcount of 2 641. At its various locations, Feintool provides training for 91 young people mainly as polymechanics, constructing engineers and commercial employees.
The consolidated financial statements for the financial year are based on the financial statements of the Group companies as at December 31, 2019, which were prepared in accordance with consistent accounting policies.
The consolidated financial statements are prepared in accordance with Swiss law and the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The accounting principles of the SIX Swiss Exchange Listing Regulations have also been observed. In the management’s opinion, the consolidated financial statements give a true and fair view of the Group’s financial position, results of operations and cash flows.
The consolidated financial statements are prepared on a going-concern basis under the historical cost convention, with the exception of derivative financial instruments (measured at fair value) and net liability or assets from defined benefit plans (measured at present value of defined benefit obligations less fair value of plan assets).
The consolidated financial statements are prepared in Swiss francs (CHF), with amounts rounded to the nearest thousand (1 000). They are available in German and English. The German version is authoritative.
Further information on financial covenants is provided in Note 20.
The consolidated financial statements contain assumptions and estimated amounts which affect the amounts reported. Should these estimates and assumptions prove incorrect or incomplete, this may substantially affect the amounts reported and therefore Feintool’s financial position, results of operations and cash flows.
Property, plant and equipment
Items of property, plant and equipment are carried at cost less accumulated depreciation. Feintool regularly reviews whether the depreciation period chosen at the time matches the actual useful life, or capacity utilization rate, of the item of property, plant and equipment. If significant differences between the depreciation period and useful life are identified, the depreciation period is adjusted accordingly. If the expected cash flows on the item of property, plant and equipment no longer cover future depreciation, impairment losses are recognized.
In general, the right-of-use asset is initially recorded at the present value of the lease liability at the commencement of the lease term. This appraisal takes into account whether the ability to exercise renewal options is reasonably certain, or whether a termination option is not considered reasonably certain. In the case of indefinite leases, the value of the right-of-use asset and the amortization period are based on estimates of the economic life of such leases.
All assumptions are continuously reviewed.
The fair value of intangible assets is estimated at the date of acquisition. The residual value (difference between the purchase price and fair value of net assets acquired) represents goodwill. Most intangible assets acquired have a finite life and are therefore amortized. Goodwill is not amortized, but is instead tested annually for impairment. The allocation to intangible assets and goodwill on the acquisition date therefore has an effect on amortization in subsequent periods.
When testing goodwill for impairment, various estimates are made which require medium and long-term (terminal value) estimates. This relates to both internally projected data (cash flow, growth rates, etc.) and external parameters (discount rate). Should these estimates prove incorrect, significant changes in value might result. Further information is given in Note 18.2.
Current tax receivables and deferred tax assets
Feintool is liable to taxation in various jurisdictions. Provisions for income taxes incurred worldwide are based on estimates. For many transactions and calculations in its ordinary business, the tax charge is uncertain. If actual tax charges differ from the estimated charges, the corresponding adjustment is recognized in the financial year in which the definitive assessment is made. Management considers the corresponding estimates to be realistic and the corresponding provisions to be appropriate. Deferred tax assets are formed from temporary differences, and from tax loss carryforwards, but only if realization is deemed probable. The recoverable amount of capitalized tax assets recognized for loss carryforwards is therefore based on future forecasts for the relevant taxable entity over a period of several years. Should these future forecasts prove incorrect, significant changes in value might result. In a referendum held on May 19, 2019, Swiss voters adopted the Federal Act on Tax Reform and Old Age and Survivors’ Social Insurance Funding (STAF), thereby confirming the reform of corporate taxation in Switzerland. Feintool does not expect these changes to have a significant impact on its net assets, financial position, or results of operations. The effects of adoption in the Canton of Bern (which will not take place until 2022 at the earliest) cannot yet be estimated.
Further information is given in Notes 10 and 11.
Research & development
On its balance sheet, Feintool carries purchased as well as its own research and development work if the following conditions are met cumulatively:
All the above points are based on assumptions. Should these assumptions prove incorrect or incomplete, this may substantially affect valuation of the corresponding intangible asset. Further information is given in Note 18.1.
Provisions are recognized if (a) a present obligation to a third party has arisen as a result of a past event, (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and (c) the amount of the obligation can be reliably estimated. Provisions are recognized for a number of possible events and are explained in detail in Note 23. By definition, however, they involve a higher degree of estimation than other items in the balance sheet, since the estimated obligations may result in a higher or lower outflow of funds depending on the outcome of the situation.
Employee benefit plans
Feintool operates defined benefit plans for its employees in three countries. Their accounting status is in part based on long-term actuarial assumptions, which may differ from reality. Reassessments arising from changes in assumptions regarding life expectancy, developments in the capital market and changes in discount rates can amount to considerable sums. These are recognized directly in equity (other comprehensive income). Calculation of the respective underlying percentages involves estimated amounts that may substantially affect the financial position and results of operations. Further information is given in Note 24.
The Board of Directors and management believe the basis of planning and the assumptions to be realistic.
Feintool holds confirmed credit lines with various banks. These are considered to be financially noncurrent in nature, even if the individual installments have maturities of less than 360 days. The classification of interest-bearing liabilities as current or noncurrent is based on assumptions and estimates. These estimates are reviewed periodically, at least once a year. Details regarding the change in estimates can be found in note 20.
SIGNIFICANT CHANGES IN ACCOUNTING POLICIES
With the exception of newly issued or revised Standards and Interpretations that became effective in the financial year, Feintool essentially applies the same accounting policies as those applied in the previous year. On January 1, 2019, Feintool adopted the following new Standards and Interpretations:
IFRS 16 – Leases
Within the scope of the transition to IFRS 16, on January 1, 2019, the rights to use leased assets and the lease liabilitieswere recognized with a value of CHF 11.6 million. The transition to IFRS 16 was carried out according to the modified retrospective approach, whereby the company refrained from reassessing whether a contract contains a lease component for practical reasons. The comparative figures for prior-year periods have not been restated. As part of the first-time adoption of IFRS 16, Feintool is making use of the exemption and restating the value of right-of-use assets to reflect possible provisions for onerous leases, which are recognized on the Balance Sheet immediately before the date of first-time adoption. In addition, Feintool has decided not to apply the new provisions to leases that expire within twelve months of the date of initial adoption.
Based on the operating lease obligations held on December 31, 2018, the value of lease liabilities was restated on the Statement of Financial Position as of January 1, 2019, as follows:
Lease liabilities were discounted using the incremental borrowing rate as of January 1, 2019. The weighted average borrowing rate stood at 2.4 %.
Other new and revised standards
Feintool is either unaffected by these changes, or the changes have no material effect on its financial position, results of operations or cash flows.
NEW ACCOUNTING REQUIREMENTS
Various new IFRS regulations were published on the balance sheet date, but have not yet entered into force. Feintool decided against early adoption of the following standards, revised standards and interpretations. Feintool plans to adopt the changes from the financial years beginning on or after the date indicated:
Feintool is assessing the impacts of the revised Standards and Interpretations. Based on its initial findings, Feintool does not foresee any significant impacts on its financial position, results of operations or cash flows.
BASIS OF CONSOLIDATION
The consolidated financial statements in principle encompass the annual financial statements of Feintool International Holding AG, Lyss (Switzerland), in addition to the financial statements of all Group companies in which Feintool International Holding AG directly or indirectly owns more than 50 % of the voting rights or that it controls in any other way. A list of all investments is provided on page 90.
The group of consolidated companies did not change in 2019.
METHOD OF CONSOLIDATION
All companies that Feintool controls are included in the consolidated financial statements according to the full consolidation method. Assets and liabilities as well as income and expenses are therefore included in full in the consolidated financial statements. Minority interests in equity and income are disclosed separately in the consolidated balance sheet and the statement of comprehensive income. Intercompany liabilities, credits, expenses and income are offset. Unrealized temporary gains on inventories or assets are eliminated on consolidation.
ACQUISITIONS AND GOODWILL
Newly acquired companies are consolidated using the acquisition method. The balance sheet and income statement are consolidated at the date on which control is obtained. The difference between the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiring party, on the one hand, and the purchase price, on the other, is recognized as goodwill. Acquisition costs are charged immediately to the statement of comprehensive income. After initial measurement, goodwill is reported at cost less any impairments. Goodwill is tested for impairment annually by calculating the recoverable amount (higher of fair value minus disposal costs and value in use) of the relevant cash generating units or group of cash generating units. Where the recoverable amount is less than the carrying amount, an impairment is recognized in the statement of comprehensive income.
Decisions are often made on the level of the business units. Sales are centralized within the business units; orders are distributed across them on the basis of the specific skills of individual plants (machinery, employee experience). This optimizes cash flows for the business units, although the cash flows of the individual production locations change randomly. Feintool is deciding about impairments on the level of the business units.
When a Group company is sold or control over a Group company is lost, the difference between the selling price and the net assets sold, including goodwill and cumulative foreign exchange gains, is recognized in the statement of comprehensive income under either “Other operating income” or “Other operating expenses”. The company is deconsolidated on the date on which control over it is lost.
The functional currency of the consolidated entities is the currency of their local economic environment. Transactions in foreign currencies are translated at the respective daily rate. Monetary assets and liabilities in foreign currency are converted into the functional currency at the rate of exchange prevailing on the balance sheet date. In principle, the exchange translation differences are reported in net financial income/finance costs. Non-monetary assets and liabilities at historical cost are translated at the exchange rate applicable at the time of the transaction.
On consolidation, the balance sheet amounts of foreign subsidiaries are translated at closing rates, equity at historical rates and the amounts in the statements of comprehensive income and cash flows at average rates for the year. Exchange differences arising from translation differences in balance sheets and income statements are directly recognized in other comprehensive income and reported under shareholders’ equity. When a Group company is sold or liquidated, or when control over the company is lost, the cumulative translation differences are reclassified to net income as part of the gain or loss on disposal.
Foreign currency gains on certain equity-type loans that form part of the net investment in a company are recognized in the statement of comprehensive income (other comprehensive income), provided settlement of these loans is neither planned nor likely to occur in the near future.
The Feintool Group used the following exchange rates in financial years:
FINANCIAL ASSETS AND LIABILITIES
Classification and Valuation of financial assets
In the first instance Feintool Group classifies a financial asset as “Amortized costs”, as “Fair value through other comprehensive income – debt investments”, as “Fair value through other comprehensive income – equity investments” or as “Fair value through profit and loss” (“FVTPL”). Classification is based on the basis of the company’s business model for the control of financial assets and the characteristics of the contractual payment flows of the financial asset.
A financial asset is to be evaluated at amortized cost if the following two conditions are met:
A financial asset is to be valued as “Fair value through other comprehensive income” if the following two conditions are met:
On initial recognition of an equity instrument that is not held for trading, the Feintool Group may irrevocably elect to present subsequent changes in the investment’s fair value in OCI. This election is made on investment-by-investment basis.
In the initial calculation, the Feintool Group values a financial asset (with the exception of a trade receivable with no significant financing component) at fair value. For financial assets that are not valued at fair value through profit or loss, the valuation takes place with the addition or deduction of transaction costs that can be attributed directly to the acquisition or the disbursement of the financial asset. Trade receivables with no significant financing components are initially recognized at the transaction price.
The following valuation guidelines apply for the subsequent valuation of financial assets:
The subsequent valuation of these assets is based on the procurement costs carried over. The interest earned is to be calculated according to the effective interest method. The procurement costs carried over are to be reduced by any depreciations. Interest earned, foreign currency gains and value adjustments are recorded through profit and loss.
The subsequent valuation of these assets is recorded through profit and loss.
Feintool does not currently apply hedge accounting. For this reason, the changes to IFRS 9 regarding hedge accounting do not have any impact on the Feintool Group.
Impairment of financial assets
Expected credit losses are recorded. This model applies for financial assets at amortized cost as well as for contract assets. At the Feintool Group, the financial assets at amortized costs consist of trade and other receivables, cash and cash equivalents, and other current and non-current financial assets.
Under IFRS 9, the expected credit losses are valued based on one of the following two principles:
For trade and other receivables and similar receivables, the Feintool Group records the credit losses expected over the duration.
A credit loss is expected in the following two cases:
The calculation of the expected credit losses takes into account experience values and future expected losses based on market development, client position, and other components.
According to IFRS 9, the expected credit losses must likewise be evaluated with the following financial assets:
Feintool does not expect any material credit losses for these items.
The avoidance of clumping risks and a concentration of the financial investments on first-rate counterparties should help to avoid bigger loan losses. The Feintool Group carries out its banking business exclusively with nationally and internationally renowned banks that boast a BBB rating or better. It specifies the type of transactions that the subsidiaries are permitted to carry out with the banks.
Financial liabilities mainly include debt and trade payables, which are measured at amortized cost. Financial liabilities designated at fair value through profit or loss (derivatives) are stated at fair value. Non-current financial liabilities are measured using the effective interest method. In addition to the actual interest payments, interest expenses therefore also include the amounts of annual interest cost and pro rata transaction costs.
Financial liabilities are de-recognized when repaid.
In the 2019 financial year, the Feintool Group entered into a revolving receivables purchase agreement with Weinberg Capital DAC (the program’s special purpose entity) governing the sale of trade receivables. The negotiated structure provides for the sale of the Feintool Group’s trade receivables as part of an ABS transaction, which was successfully initiated in December 2019. The receivables are being sold by the Feintool Group to the program’s special purpose entity.
Under this ABS program with a maximum value of up to kCHF 16 281, the Feintool Group’s European subsidiaries sold receivables valued at kCHF 15 593 as of December 31, 2019, of which kCHF 1 700 was retained as purchase price retentions. These funds are held as hedging reserves but are not paid out and are recognized as other financial assets. The basis for the transaction is the assignment of trade receivables from individual Feintool companies to the program’s special purpose entity as part of an undisclosed assignment. The program’s special purpose entity does not have to be consolidated under IFRS 10, as Feintool has neither the decision-making power nor any significant vested interest and there is no link between decision-making power and the variability of returns from the program’s special purpose entity.
The Feintool Group continues to perform receivables management (servicing) for the receivables sold.
Feintool is meeting the requirements regarding the derecognition of financial liabilities in accordance with IFRS 184.108.40.206, as the receivables are transferred in accordance with IFRS 220.127.116.11 b). An assessment pursuant to IFRS 18.104.22.168 has shown that Feintool has neither substantially transferred nor retained all of the risks and rewards. This means that in accordance with IFRS 22.214.171.124, Feintool must recognize its continuing involvement.
The maximum amount of the continuing involvement of kCHF 295, i.e. the amount for which Feintool is still liable for the default risk, will continue to be reported under trade receivables with a corresponding other financial liability. Any interest to be expected until receipt of payment is not recognized for reasons of materiality.
Cash and cash equivalents
Cash and cash equivalents comprise cash holdings, balances on postal and bank accounts as well as fixed-term deposits with a maturity not exceeding 90 days.
Trade receivables/other receivables
This item contains accounts receivable from ordinary business activities. Bad debt provisions on trade receivables are calculated and recognized based on the expected credit losses. Other receivables are stated at their nominal amount less expected credit losses. Notes on the calculation of the expected credit loss can be found under “Financial assets and liabilities”.
Raw materials and purchased goods are stated at weighted average cost. Finished and semi-finished goods are stated at cost of conversion including manufacturing overheads, but at no more than their net realizable values. Inventories with low turnover and obsolete items are written down. Work in progress is stated at the cost of conversion.
This item includes all contract assets less prepayments received and necessary allowances for identifiable risks. Recording of net sales of contract assets takes place over the specific period if several conditions are met. These conditions are explained in detail on page 42.
If these conditions are not met, the income is recognized when the control is transferred. If it is expected that the costs from a construction contract will exceed the contractually agreed income, the expected overall loss from the order is charged immediately and in full to the statement of comprehensive income.
The stage of completion of construction contracts is obtained from the ratio between the contract costs incurred and the total cost of the contract (cost-to-cost method), or based pro rata on the time spent (effort-expended method), provided the project can be assumed to proceed on a straight-line basis.
Property, plant and equipment
Items of property, plant and equipment are carried at cost less accumulated depreciation. Cost includes any costs attributable to bringing the asset to the condition necessary for it to operate in the intended manner. Borrowing costs are a component of cost if they are directly attributable to the asset. Subsequent maintenance costs are recognized in the carrying amount if the operational life is extended as a result or production capacity can be increased. Non-value-enhancing maintenance work and repairs are recognized in the income statement. Components of property, plant and equipment with different useful lives are recognized individually and depreciated separately. Depreciation is recognized on a straight-line basis over the estimated useful life. As a rule, land is not written down. Impairments (see separate section) are recognized when the carrying amount no longer appears to be recoverable. Such impairments are presented separately.
As a rule, the following depreciation periods are applied:
Capitalized costs that are closely linked to leased premises are depreciated over a maximum of the contractually agreed lease term.
Government contributions (funding received) for assets (mostly property, plant and equipment) are deducted from the cost of acquisition or manufacture of the asset in question. As the funding usually comes with certain conditions attached that, if not complied with, would result in the funding having to be repaid, the funding received is also declared as a contingent liability.
Upon entering into a contract, the Feintool Group will assess whether the contract should be classified as a lease or contains a lease component. In making this assessment, which requires a certain degree of discretion, the Group will assess whether a specific asset is affected, whether the Group obtains substantially all the economic benefits from the use of the asset, and whether the Group has the right to control the use of the leased asset.
The Feintool Group will recognize a right-of-use asset and a lease liability at the beginning of the lease term, except in the following two cases:
In both cases, lease payments are recognized as an expense on the Consolidated Statement of Comprehensive Income on a straight-line basis over the term of the lease.
The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease. If this rate cannot be readily determined, the Feintool Group will use an incremental borrowing rate specific to the country, term, and currency of the contract. Lease payments include, for example, fixed and variable payments that depend on an index or rate known at the commencement of the lease. The lease liability is subsequently measured at cost less accumulated depreciation and accumulated impairment on the basis of the effective interest method and remeasured (with a corresponding adjustment to the right-of-use asset) if future lease payments change as a result of renegotiation, changes in an index or interest rate, or a revaluation of options.
The right-of-use asset is initially measured at the amount of the lease liability, any initial direct costs, as well as restoration obligations, less any lease incentives granted. The right-of-use asset is amortized on a straight-line basis from the date of commencement to the end of the lease term unless ownership of the underlying asset is transferred to the company at the end of the lease term or the cost of the lease reflects the fact that the company will exercise a purchase option. In this case, the right-of-use asset is amortized over its useful economic life, which is determined in accordance with the rules for property, plant, and equipment. Similar to assets held by the Group, the recoverability of the right-of-use asset is also reviewed if there are indications of impairment.
The right-of-use asset is recognized under property, plant, and equipment and the lease liability under current and noncurrent financial liabilities.
The following contract terms or depreciation periods generally apply:
Further information is given in Notes 6, 17 and 20.
Intangible assets primarily include goodwill, in acquisitions purchased customer relations, patents, software, land-use-rights and certain development costs. The latter are only capitalized if the technical feasibility of completing an asset that is ready for market can be demonstrated, the costs can be measured reliably and the costs appear to be feasible based on the marketplace. Intangible assets are capitalized at cost and amortized over their estimated useful life on a straight-line basis. Any impairments are recognized when the carrying amount no longer appears to be recoverable. Such impairments are presented separately.
Intangible assets (with the exception of goodwill) have a finite life and are amortized as follows:
The recoverable amount of assets (property, plant and equipment, intangible assets) is reviewed when events or changes in circumstances indicate that the assets may be overvalued. In addition, the recoverable amount of goodwill is reviewed at least annually. If the carrying amount exceeds the recoverable amount (higher of fair value less disposal costs and value in use), it is immediately written down to the net realizable value. When calculating value in use, future cash flows are discounted using a pre-tax discount rate. This discount rate reflects current market assessments and risks specific to the assets in question.
Financial assets include loans granted to third parties and rental deposits. Depending on their nature (see “Financial assets and liabilities”), financial assets are stated at fair value or measured at amortized cost using the effective interest method. Gains and losses on these financial assets are recognized in financial result.
Current liabilities are those with a remaining term to maturity of less than one year. The current portion of non-current liabilities is also included.
Accrued expenses and deferred income
Expenditures incurred in the period at the end of the reporting year, for which no receipts are yet available, are recognized under accrued expenses and deferred income. On the other hand, revenues received in advance in the period at the end of the reporting year for which no work has yet been performed are also recognized here. In the Feintool Fineblanking Tech-nology segment in particular, it is often the case that clients are billed for fineblanking presses without all supplier invoices having been received as yet or all contractually agreed work on the press having been performed.
Provisions are recognized if (a) a present obligation to a third party has arisen as a result of a past event, (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and (c) the amount of the obligation can be reliably estimated. No provisions are recognized for future operating losses. Provisions are recognized for restructuring efforts when the Group company has a constructive obligation to implement restructuring as a result of communicating the plan to the individuals affected by it, and provided the costs can be reliably determined on the basis of a detailed plan. Reversals of provisions no longer required are recognized when the item for which the provision was originally recognized no longer exists or it is no longer probable that this item will occur.
Deferred taxes are accounted for using the balance sheet liability method. Under this method, the tax implications of temporary differences between carrying amounts in the consolidated financial statements and the tax base are recognized as a non-current liability or asset. They are generally calculated on the basis of actual or expected local rates of tax. Deferred tax liabilities are calculated for all taxable temporary differences. Deferred tax assets, including those for tax loss carryforwards and expected tax credits, are only recognized if it is probable that profits will be available for realizing the loss carryforwards and tax credits.
Changes in deferred taxes are recognized in the income statement except for deferred taxes on amounts recognized directly in other comprehensive income, which are also recognized in other comprehensive income.
Shares are issued to Group management as part of the remuneration at a contractually predefined amount. Individual members of the Board of Directors receive a contractually predefined number of shares.
Employee benefit plans
The Group operates various employee benefit plans, which differ depending on the circumstances of the individual com-pany. The benefit plans are financed through contributions made by the employer and/or the employee to state pension systems, separate legal entities (trusts, insurance companies) or through the accumulation of corresponding provisions in the balance sheet of the company itself.
In the case of defined contribution plans, the accrued expenses correspond to the agreed contributions by the Group companies. In the case of defined benefit plans, the costs are calculated by independent experts in the form of an actuarial report using the projected unit credit method. The calculations are updated periodically. Benefit plans operated by external providers are funded plans, while the agreed commitments of the Group companies themselves are unfunded plans. The liability carried consists of the defined benefit obligation as defined by the actuary, less any assets recognized at fair value.
The expense recorded in the statement of comprehensive income is an actuarial calculation of the cost less contributions from employees. This comprises:
The current past service cost is recognized in personnel expense. The impact of changes in pension plan benefits is also reported in personnel expenses. The interest on the net defined benefit liability is recognized in financial expense. The expense or income from reassessments is recognized as other comprehensive income in the statement of comprehensive income.
Other long-term obligations to employees, such as anniversaries or sabbatical leave programs are recognized using the same methodology, with the exception that any actuarial changes are recognized in personnel expense.
Equity represents the residual value (assets less liabilities). Capital reserves result from premium payments made by shareholders, transactions involving treasury shares, employee options and the fair value of conversion rights at the time of issue. Retained earnings comprise the income earned and retained by the Group as well as the reassessment of the net defined benefit liability (asset). Acquisitions of treasury stock are deducted from equity at cost. Other payments from equity instruments (derivatives classified as equity) are also taken directly as equity.
Net sales – Revenue from contracts with customers
Under IFRS 15, income is recorded from the point when the client takes control of the product or service. The following provides an overview of the fundamental valuation guidelines.
Sale of series parts
These net sales arise in the System Parts segment. The client gets control upon the delivery of the series parts – depending on the arrangement of the income terms. The net sales are recorded at this specific point in time. In the case of client complaints as a result of quality deficiencies, the client issues an invoice to Feintool. These complaints are dealt with swiftly and – where justified – are recorded in material expenditure.
Sale of presses and tools
These net sales arise in the Fineblanking Technology segment. The client gets control over the period of production of the presses, including peripheral devices and tools, as the process here is job production with corresponding specifications. Any dissolution of a contract results in invoicing of the manufacturing costs plus the calculated profit. Recording of net sales therefore takes place over the specific period if the following conditions are also met:
The expenditure for expected warranty costs is incorporated in the calculation, and a corresponding accrued liability is shown via the material expenditure across the whole period. In warranty cases, the press is repaired and the accrued costs charged to the accrued liability. Under IAS 18, when the above-mentioned criteria were met, net sales and expenditure for presses and tools were accounted for by means of POC methods. In terms of content, there is no change here under the new standard.
The System Parts segment also sells tools in connection with parts production. Since these tools remain in the corresponding production facility for the parts production, invoicing takes place after the “Production Part Approval Process” (PPAP).
Service contracts (in the press business)
The service and inspection contract is similar to a framework agreement with a description of the service scope and the daily rates to be applied. Customers are charged once the service has been rendered. The recording of net sales takes place at the defined time.
Other operating income/expenses
Other operating income includes gains on the disposal of property, plant and equipment, investments and various smaller items of income, such as revenue from staff restaurants, IT costs charged to third parties and letting income.
Other operating expenses include operating costs with the exception of material cost and personnel expenses as well as depreciation.
Gains/losses on the disposal of property, plant and equipment are recognized when ownership and the incidental risks and rewards are transferred.
Cost of materials
The cost of materials includes the following costs associated with production:
Income from recycling scrap metal is deducted from the cost of materials.
Research & development
Order-related development costs are capitalized as work in progress. Research & development costs are charged in full to the statement of comprehensive income in the year in which they are incurred, provided they are not capitalized. Development costs for new products are capitalized only if there is a likely prospect of realization in technical and market terms, the cost can be measured reliably and it is probable that the expected future economic benefit attributable to the asset will accrue to Feintool.
Interest is recognized using the effective interest method. Interest not yet received or paid is reported at the end of the reporting period in deferred income or expense. Interest is reported on the statement of comprehensive income under financial result.
1 Segment information
The following footnotes are applicable to the 2019 and 2018 financial years.
1) Total Net Sales include “Sales from products transferred over time” about CHF 33.7 million (prior year CHF 56.7 million). The net sales have been recognized in the Fineblanking Technology Segment. The remaining net sales in this segment mainly consist of tool sales and services.
2) The gross margin is calculated as net sales less material costs, the change in finished and semi-finished goods and work in progress, and direct personnel costs.
3) Net working capital comprises trade receivables, inventories, net assets of construction contracts and prepaid expenses and accrued income less trade payables, advance payments received from customers and accrued expenses and deferred income. The remaining receivables and liabilities is included in the calculation for “Finances/Other”.
4) Net sales is allocated to countries based on the customer’s domicile.
The following explanations on the segment information apply to the financial years 2019 and 2018.
The Fineblanking Technology segment comprises the development, manufacture and sale of presses, tools, peripheral systems and all related services.
The System Parts segment develops, produces and sells high-precision system components and assemblies using fineblanking and forming technology as well as electronic sheet stamping. The segment also sells production-specific tools to third-party customers. The production and internal sale of tools is also included in this segment.
For operational reasons, the tool making business in Switzerland has been shifted from Fineblanking Technology to the System Parts segment as of June 1, 2018. This affects 68 employees and assets amounting to CHF 3.3 million.
“Finances/Other” essentially comprises the figures for Feintool International Holding AG, the German sub-holding company Feintool Holding GmbH and the real estate company included in the sub-holding company HL Holding AG.
The operating profit/loss comprises all operating income and expenses directly attributable to the individual segments. This includes all cross-segment expenses, which are charged directly. Feintool’s financing is undertaken at the Group level. Financial expenses and income, financial liabilities as well as taxes, are therefore reported only at the Group level and do not appear in the segment reports. Feintool generates 18.4 % (previous year 17.2 %) of consolidated sales with one customer. Income is generated in all segments. With the other customers, the share is less than 12.3 % (previous year 12.8 %) in each case.
There is no reconciliation of data in management reports and data contained in the financial reports, as internal and external reporting are subject to the same valuation principles.
2 ACQUISITION OF INVESTMENTS
On July 31, 2018, Feintool Holding GmbH, Bayreuth, Germany, acquired 100 % of the shares of the German company Stanzwerk Jessen GmbH with its subsidiaries Jela GmbH, SLTJ GmbH and Stanz- und Lasertechnik Jessen GmbH. SLTJ GmbH merged after that with Stanz- und Lasertechnik GmbH. The name of Stanz- und Lasertechnik Jessen GmbH was then changed to Feintool System Parts Jessen GmbH.
1) In intangible assets is mainly the value of customer contracts and relationships contained.
1) Goodwill at historical rates on the acquisition date. For the Feintool Group, goodwill represents the value that it would have had to pay in order to independently set up a profitable “greenfield” operation for the production of pressed parts from electrical sheets (qualified employees, market access, etc.). The acquisition of this company is related to the expected increase in e-mobility.
The costs incurred by the Feintool Group for the acquisition of Stanzwerk Jessen GmbH and it’s subsidiaries Jela GmbH, SLTJ GmbH and Stanz- und Lasertechnik Jessen GmbH amounted to around CHF 0.8 million. In particular, this includes the fees of external lawyers and advisers. The costs were recognized in other operating expenses in the previous year.
3 Net sales
1) Total gross sales include “sales generated over a period” of CHF 33.7 million (previous year CHF 56.7 million). These sales were generated in the Fineblanking Technology segment. For a further breakdown of sales, see Section 1.1 Segment information.
4 capitalized Self-generated assets
5 Personnel expenses
1) Direct personnel expenses are personnel expenses that can be directly assigned to the production process.
The Group employed 2 641 staff at the end of the year under review (previous year 2 697) and 91 trainees (previous year 82).
6 Other operating expenses
1) This item will be presented separately from 2019 onwards. It is not possible to determine the corresponding figures for the previous year because the figures for the previous year are cumulative. The corresponding item was recognized under maintenance and repairs in the previous year.
2) Rental and lease expenses were not recognized in more detail until the 2018 financial year. Due to the introduction of IFRS 16, this classification will be applied from the current financial year onwards.
7 Other operating income
1) “Other income” includes income from staff restaurants, as well as sub-letting.
8 Financial expenses
1) Besides bank charges, other financial expenses include annual amortization of establishing cost for the promissory note/syndicated loan, market making costs and valuation expenses from hedging.
9 Financial income
1) Other financial income comprises valuation income from hedging.
10 Income taxes
1) The weighted tax rate is calculated from the income tax rates likely to apply to the income of the individual Group companies in the respective tax jurisdiction, which naturally varies according to the actual earnings figures.
2) Unrecognized tax loss carryforwards from the current year refer to companies in Czeck Republic and China.
11 Deferred taxes
Feintool does not disclose deferred taxes related to earnings not distributed as dividends, which will presumably be reinvested permanently in subsidiaries. The tax effect is estimated as not material.
The temporary differences arising on the acquisition/sale of entities in the previous year relate to the acquisition of Stanzwerk Jessen GmbH and its subsidiaries.
11.3 Unrecognized tax assets
Deferred tax assets, including those for tax loss carryforwards and expected tax credits, are only recognized if it is probable that profits will be available against which the loss carryforwards and tax credits can be utilized.
Income taxes and information regarding the tax charge are shown in Note 10.
12 Consolidated earnings per share
No dilution effects were recognized in the financial year.
Earnings per share are calculated on the basis of the consolidated net income for the financial year divided by the average number of shares in circulation. No dilution effects were recognized in the financial year.
1) As of December 31, 2019, trade receivables with a value of kCHF 24 854 were sold under factoring and ABS programs (previous year factoring: kCHF 11 389).
15 contract assets
The gross margin recorded under contract assets as at the closing date amounted to 35.0 % (previous year 38.0 %).
16 Prepaid expenses and accrued income
1) Prepaid expenses for customer orders includes expenses for constructions that are assigned to a specific order. These prepaid expenses are released on a straight-line basis over the course of the order.
2) In 2019 Oberthausen purchased the rented property therefore rental agreement has been terminated.
17 Property, plant and equipment
1) Reclassifications include positions of immaterial assets amounting to kCHF -323 (previous year kCHF -157). There was no reclassification from immaterial assets to fixed assets (previous year kCHF 2 319).
2) The change in the scope of consolidation in previous year applies to Stanzwerk Jessen GmbH with its subsidiaries.
As part of the transition to IFRS 16, the values of finance leases (as of January 1, 2018, acquisition cost of kCHF 67 010 and accumulated amortization of kCHF 27 971) were also transferred from the previous year to the separate statement of changes in noncurrent assets (section 17.3).
Other property, plant and equipment includes installations, vehicles and assets under construction. Assets under construction amounted to kCHF 39 300 in the year under review (previous year kCHF 48 874). Gains on asset disposals are recognized as other operating income (Note 7). A gain of kCHF 203 (previous year kCHF 1 013) was generated in the reporting year. Losses on asset disposals are stated as other operating expenses (Note 6). In the year under review, this loss totaled kCHF 362 (previous year kCHF 541). As at December 31, 2019, the Feintool Group had entered into purchase commitments for the purchase of property, plant and equipment totaling approx. CHF 42.4 million (previous year CHF 13.6 million).
1) As part of the transition to IFRS 16, on January 1, 2019, leases were recognized as right-of-use assets with a value of CHF 11.6 million. Detailed information can be found on page 34.
In the 2019 financial year, interest expenses from lease liabilities were incurred in the amount of CHF 652 000 (previous year: CHF 650 000).
18 Intangible assets
1) Research and development expenses amounting to kCHF 4 469 (previous year kCHF 4 381) were charged to the consolidated statement of comprehensive income.
2) Other intangible assets primarily comprise patents and licenses, customer relations purchased within acquisitions as well as land-use-rights.
3) The previous year change in the scope of consolidation applies to Stanzwerk Jessen GmbH with its subsidiaries.
The following impairment test was performed for all business units in the financial year: The recoverable amounts for the cash-generating units are calculated on the basis of the value in use. The impairment test for goodwill was calculated using the DCF method (discounted cash flow method). The cash flows were discounted using the WACC (discount rate after tax). The future cash flows are based on a budget approved by the management for a period of three years and an extended projection over two years plus the residual value.
The goodwill of the cash-generating unit System Parts Stamping Europe is allocated to Feintool System Parts Jessen GmbH and its subsidiaries acquired in the financial year 2018. The acquisition of this company is related to the expected increase in e-mobility.
This development is expected to continue for at least the next ten years. For this reason, the period of future cash flows has been set at a total of eight years.
The cash-generating units System Parts Fineblanking Europe, Forming Europe and Stamping Europe are included in the System Parts Europe group. As of the date of the impairment test, the recoverable amount of the cash-generating unit System Parts China exceeded the net carrying amount by kCHF 12 936 (previous year kCHF 10 273). An increase in the weighted average cost of capital to 9.75 % (previous year 10.1 %) leads to a situation where the value in use equates the net carrying amount. If the discount rate were to increase by 1 % (after taxes), the value in use for all other cash-generating units would still be above the value of the net assets plus goodwill.
19 Financial assets
The weighted average interest rate in the reporting period was 0.4 % (previous year 0.9 %). Loans to third parties consist of marketable securities and loans to staff. Receivables from the financing of customer tools refers to tools the customer has ordered but not yet or only partially paid for. Amortization is based on either the parts produced or an agreed payment plan. Ownership is normally transferred upon acceptance of the tool.
20 Financial liabilities
The weighted average interest rate in the reporting period was 1.7 % (previous year 1.7 %).
The weighted average interest rate in the year under review was 1.4 % (previous year 1.3 %).
On July 15, 2016, a promissory note was issued in the amount of EUR 65 million. The issuer, with a guarantee from Feintool International Holding AG, is Feintool Holding GmbH based in Germany. The loan is divided into three tranches with different maturities:
– EUR 25 million, term until fiscal year 2021, fixed interest rate of 0.90 %
– EUR 25 million, term until fiscal year 2023, fixed interest rate of 1.10 %
– EUR 15 million, term until fiscal year 2026, fixed interest rate of 1.66 %
Standard covenants are defined in the loan agreement. The only material covenant to be complied with is:
– Equity ratio > 25 %
As of December 31, 2019, all the covenants had been met.
On June 13, 2017, Feintool signed a CHF 90 million syndicated loan agreement in cash loans with six banks with an option of increase about CHF 60 million. On May 17, 2018, this contract was extended and will now run until June 13, 2023. The syndicated loan defines a number of covenants, the principal one being:
– Equity ratio > 30 %
– Net senior debt/EBITDA < 3.0x
As of December, 31st 2019, CHF 44.5 million of the syndicated loan had been used (previous period CHF 34.1 million) and all the covenants had been met. In accordance with the principle of substance over form, beginning in 2019, the syndicated loan will be recognized as a noncurrent financial liability, although the individual installments each have a term of less than 360 days. As a result of the difficult market environment at present, hardly any repayments are planned for the next year. The extension of the individual installments has been confirmed until the end of the contract, provided that the covenants are met.
Credit agreements concluded on a bilateral basis with various banks also contain standard covenants. As of December 31, 2019, all the covenants had been met.
If the Group or companies were unable to meet one or several covenants of the syndicated loan, promissory note or bilateral debts, the banks would have the right to terminate the loans at short notice.
As at December 31, 2019, Feintool has CHF 45.5 million (previous year CHF 55.9 million) in unused, confirmed creditlines at the bank.
1) This item includes the borrowing of interest-bearing debt of kCHF 13 644 (previous year kCHF 74 800), the repayment of interest-bearing lease liabilities of kCHF 14 674 (previous year kCHF 23 627) and the repayment of interest-bearing debt of kCHF 2 444 (previous year kCHF 53 941).
2) As part of the first-time adoption of IFRS 16, new leases were recognized with a value of kCHF 11 634.
21 Trade and other payables
1) Liabilities from factoring and ABS include all customer payments not yet forwarded and the corresponding liability in respect to the continuig involvement from ABS. Further information on the ABS program can be found on page 38.
22 Accrued expenses and deferred income
Provisions for actual warranty events cover the estimated cost arising from warranty services provided by the Group companies, which the company must cover for contractual reasons or due to its conduct. The outflow of funds occurs as and when the warranties are taken up, over a maximum of three years.
“Other provisions” include provisions for restructuring, scrap rebates, customer complaints, price reductions that were not passed on and various small items. The expected duration of the outflow of funds is 1 to 2 years.
24 Employee benefit plans
The assets of the employee benefit plans do not include treasury shares (previous year kCHF 0). The Group uses assets (tangible assets) belonging to the retirement fund with a value of kCHF 6 579 (previous year kCHF 6 619). The “Net defined benefit liability (asset)” item contains various benefit plans in Switzerland, Germany and Japan. The net liability from the Swiss plan amounts to kCHF 51 367 (previous year kCHF 47 329), the German plan to kCHF 10 281 (previous year kCHF 8 739) and the Japanese plan to kCHF 866 (previous year kCHF 856). On account of the materiality of the figures, only the Swiss and German plans are shown in Note 24.3 onwards.
The majority of Feintool employees in Switzerland are insured against the risks of death, old age and disability through the semi-autonomous Feintool Group pension fund. The benefits provided by the Feintool Group’s pension fund exceed the minimum level prescribed by the Federal Occupational Old Age, Survivors’ and Disability Pension Act (BVG). The ordinary employer contributions comprise risk contributions of 2.2 % and age-related contributions of 5.5 %-14.0 % of the insured salary for credits to individual retirement assets. The typical retirement age is 65 for men and 64 for women. Employees have a right to early retirement from age 58, in which case the conversion rate is reduced in accordance with the longer expected pension payment period and the absence of contribution payments prior to retirement. Furthermore, employees can withdraw their retirement pension in full or in part as a lump sum. The amount of pension paid out is arrived at from the conversion rate, which is applied to the insured individual’s accumulated retirement savings at the time of retirement. In the case of retirement at age 65/64, the conversion rate is 5.6 % (previous year 5.8 %). Afterwards, it will fall by 0.2 % each year until it reaches 5.2 % in financial year 2021. This amendment to the regulations of the Swiss pension fund has been agreed on in financial year 2016. The accumulated retirement assets are arrived at from the employee and employer contributions paid into the individual savings account of each insured member, together with the interest credited to the retirement assets, vested benefits brought in and any voluntary payments made by the insured person. The interest rate paid on the retirement assets is set by the Board of Trustees each year.
The legal form of the Feintool Group’s pension fund is that of a foundation. The Board of Trustees, which comprises an equal number of employee and employer representatives, is responsible for managing the foundation. The duties of the pension fund Board of Trustees are laid down in the BVG and in the rules of the pension fund. A temporary shortfall is permitted under the BVG. The Board of Trustees is required to take measures to rectify any underfunding within a reasonable period. Under the BVG, additional employer and employee contributions may be incurred if the pension fund exhibits a significant shortfall (shortfall < 90 % = considerable shortfall; in this instance, contributions to rectify the situation are essential). In these cases, the contributions to rectify the situation are split between the employer and the employee; the law does not require the employer to assume more than 50 % of the additional contributions. The BVG funding ratio of the Feintool Group pension fund was around 93.6 % as at December 31, 2019 (previous year 90.6 %). The Board of Trustees is the central coordination and monitoring body for the management of the assets. The pension assets are administered by a mandated, independent financial services provider. The Board of Trustees determines the investment strategy and tactical bandwidths in accordance with the statutory provisions. In accordance with its guidelines, the financial services provider is able to decide on the asset allocation subject to the statutory requirements concerning asset classes and bandwidths. In the financial year 2016, the company that established the pension fund committed to the addition of another CHF 1.2 million annually for the restructuring of the pension fund for the Feintool Group – along with the standard contributions – until a 100 % degree of coverage is achieved.
The German plans comprise:
This essentially includes the right to a lifetime pension payable upon retirement, disability and/or death. The level of monthly pension entitlement on reaching the retirement age of 65, and on reaching age 63 at the earliest, amounts to 50 % of the annual pensionable income broken down into a monthly amount; the annual pensionable income is deemed to be the fixed annual income at the time the pension becomes due for payment.
The Japanese plan includes all employees who have worked at the company for three or more years. Employees are entitled to a pension from age 60.
The expected contributions made to the employee benefit plans for the following financial year amount to CHF 5.5 million in the case of employer contributions and CHF 3.1 million in the case of employee contributions.
The plan assets are invested by an AAA-rated bank in line with the predefined strategy. The following limits apply to investment:
Currencies other than the CHF are hedged. With the exception of directly held real estate, all investments are traded on a public exchange.
The German plan includes a reinsurance policy to cover pension liabilities. Assets from the insurance policy are included in plan assets.
As at December 31, 2019, the weighted-average duration of pension benefit obligations was 15.3 years for the Swiss plan (previous year 14.4 years) and 19.2 - 19.8 years for the German plans (previous year 18.3 - 19.4 years). Feintool uses the BVG 2015 G mortality table in Switzerland and Heubeck in Germany for the hypothetical life expectancy.
On September 20, 2018, the Feintool Group concluded a capital increase. The transaction resulted in the creation of 451 871 new Feintool shares with a par value of CHF 10 each at the transaction price of CHF 112.50 each.
This conditional capital of 55 750 registered shares with a par value of CHF 10 each was created following the resolution of the Extraordinary General Meeting of July 2, 1998 for the payment of rights conferred under the employee stock option plan.
The “authorized capital” amounting to a maximum of CHF 6 000 000 created on April 19, 2016, by issuing a maximum of 600 000 new shares with a par value of CHF 10 each expired on April 19, 2018. By resolution of the General Meeting of April 24, 2018, the Board of Directors was authorized, if required, to create authorized capital amounting to a maximum of CHF 6 000 000 by issuing a maximum of 600 000 new shares with a par value of CHF 10 each. The new shares must be paid up in full. The Board of Directors is authorized to restrict or exclude the subscription right in certain cases. The shares may be issued in one or more steps. The authorization is limited to two years. The authorized share capital will expire on April 24, 2020. As of September 20, 2018, 451 871 new shares with a par value of CHF 10 each were issued as part of a capital increase. The shares were fully drawn from the “authorized share capital”.
In the 2019 financial year, 5 000 shares were purchased at an average price of CHF 55.17 (previous year 19 909 shares at an average price of CHF 103.55) and 12 447 shares sold at an average price of CHF 66.09 (previous year 9 174 shares at an average price of CHF 108.05) for the share-based management remuneration. Treasury shares are reserved primarily for management remuneration.
26 Capital participation plans
As a component of the bonus, 12 447 shares (previous year 8 763) were allocated to the Board of Directors, the Group Management and other managers in the financial year at a transaction value of kCHF 748 (previous year kCHF 723). Of this amount, 5 000 shares have been distributed in January 2020, 5 619 shares in December 2019 and 1 828 shares in August 2019. All shares were transferred from treasury shares and were transferred directly to the ownership of the recipient.
27 Off-balance sheet transactions, contingent liabilities
Contingent obligations comprise funding that has been received and is subject to certain conditions. In the event of a breach of these conditions, there is a risk that these funds or a portion of them will have to be repaid.
Feintool owns properties at some locations that are either contaminated or suspected of being contaminated. Under the supervision of the local authorities, Feintool is remediating these plots of land to remove the corresponding pollution and contaminants. Based on our current assessment, these activities are not expected to have a significant impact on the Feintool Group’s net assets, financial position, or results of operations.
At one location in Switzerland, a neighbor filled a suit due to excessive noise emissions from a production site. Together with the responsible authorities, Feintool is currently examining structural and organizational modifications with the aim of reducing the effects of the emissions. Feintool does not expect these modifications to have a material impact on the Group’s financial position, results of operations or cash flows.
At the end of the reporting period, Feintool was not involved in any other court proceedings. However, disputes relating to product liability, promotional activities, labor law and unfair dismissals, anti-trust law, securities trading, sales and marketing practices, health and safety, environmental and tax-related claims, state investigations and copyright law are always a possibility. Such proceedings could result in substantial claims being brought against Feintool that may not be covered by insurance policies. Feintool believes, however, that any such proceedings would not have a significant effect on the Group’s financial position, operating results or cash flows.
28 Assets pledged as security for own liabilities
29 Economic risks
Continuously growing protectionism with rising tariffs, the change in raw material and energy prices as well as the persistently high external trade imbalances entail risks for the future development of the global economy. These factors could lead to a decline in global economic growth. The inherent uncertainties cause stronger exchange rate fluctuations, and a continuation of the weakness of the euro in particular. The scenarios described could give rise to severe adverse effects for Feintool.
Management of financial risks
Financial risk management is based on the directives approved by the Board of Directors and Group Management. The principles of risk management and the processes applied are reviewed on a regular basis in order to address changes in the market environment and in Feintool’s activities.
Besides standards for general financial risk management, these directives include standards for specific aspects of liquidity, interest rate, exchange rate and default risk management, the use of derivative financial instruments, capital procurement and the policy on investing surplus liquidity. Capital procurement within the Group is mostly undertaken on a centralized basis.
Liquidity risk denotes the risk that the Feintool Group may at some point in the future be unable to meet its regular payment obligations on time and in full. Feintool must ensure that the Group is able to meet its payment obligations at all times. This will be the case if sufficient funds can be generated by the cash flow from operating activities or if the necessary financial resources can be raised on the financial markets or from banking institutions. Feintool Group’s management considers an operating liquidity reserve equivalent to one month’s costs of the Group (approx. CHF 25 million) to be adequate. This liquidity reserve can also be secured through unused credit lines. Management receives regular reports on the Group’s present and anticipated liquidity status, giving it an overview of the liquidity situation.
Feintool has a syndicated loan of CHF 90 million (previous year EUR 90 million), a promissory note in the amount of EUR 65 million (previous year EUR 65 million), bilateral credit loans and several leasing and rental contracts (more details in note 20).
These contracts contain standard covenants, particularly
Were the Group or individual companies unable to meet these covenants, the banks would have the right to terminate the loans at short notice. As at December 31, 2019, all covenants had been met. As at December 31, 2019, Feintool had CHF 45.5 million (previous year CHF 55.9 million) in unused, confirmed credit lines at the bank.
1) Excluding social security obligations, advance payments from third parties and outstanding VAT obligations.
2) Excluding accruals for salary, bonus and overtime as well as outstanding installations and other work to be fulfilled in relation to customer orders.
3) As at December 31, 2019, the contractual values of the forward exchange deals amounted to kCHF 12 344 (previous year kCHF 14 062).
Interest rate risk
Interest rate risk can have a negative impact on the Group’s earnings as a result of higher interest rates on borrowings or lower interest rates on assets. Furthermore, changes in interest rates can affect the fair value of underlying financial instruments. Depending on the expected trend in interest rates, Feintool obtains financing at either fixed or variable rates. There are currently financial liabilities from the promissory note loan due to fixed interest payments, from bank loans where half have fixed rates and half adjustable rates, and from lease liabilities with fixed rates, fixed terms and running amortization. Interest rate management is mostly undertaken on a centralized basis so as to limit the impact of interest rate changes on net financial income/finance costs.
A 0.5 % increase in the adjustable interest rate would adversely affect pretax profits by kCHF 384.
Exchange rate risk
Owing to its geographical diversification, Feintool is exposed to exchange rate risk particularly in relation to the euro (EUR), US dollar (USD), the Chinese currency yuan (CNY), the Japanese yen (JPY) and the Czech (CZK). Changes in exchange rates can affect the fair value of existing financial instruments and in particular the expected future cash flows. As far as possible, the Group uses natural hedges in order to offset the impact of exchange rate fluctuations. It seeks to ensure that costs are incurred in the same currency as the resulting income. The resulting surpluses (euro in particular) and requirements (Swiss franc in particular) at Group level are coordinated centrally in the various currencies. The net position of the most important foreign currencies is hedged over a period of usually six to twelve months, as required.
The Feintool Group’s exchange rate risk is calculated by way of the following sensitivity analysis. The table shows the impact on total earnings if foreign currencies were decreased by 5 % versus the Swiss franc and simultaneously all other variables were to remain the same.
Other market risks
The fair value of financial instruments may change as a result of exchange rates, interest rates or changes in credit ratings, and may therefore affect the Group’s financial position and earnings. Feintool seeks to minimize the net effect of market risks through a balanced financing and asset structure.
Derivative financial instruments
Derivative financial instruments are used to minimize existing interest rate or exchange rate risks. The positive and negative fair values in the Notes show current market values. The contract volumes also shown indicate the extent of the exposure to derivatives.
In terms of capital management, the Group’s objective is to ensure that the business has the financial means necessary to continue as a going concern, and to provide the resources required to achieve the Group’s objectives so that added value can be generated for shareholders and other stakeholders and a cost-effective, low-risk capital structure can be maintained. Among the criteria used by the Group to monitor its capital structure are the equity ratio and net financial liabilities. In addition, it monitors the main covenants (equity, senior net debt/EBITDA) under the syndicated loan agreement.
The equity ratio is calculated as the ratio of equity to total assets. Net financial liabilities consist of current and non-current interest-bearing liabilities less cash and cash equivalents.
The Group’s aims for an equity ratio of at least 40 % and for a net-debt/EBITDA ratio of less than 1. Comments on the aforementioned ratios are provided in the Financial Review (on page 24). In terms of dividends policy, Feintool aims to pay shareholders approximately 30 % of consolidated annual profit in the form of a dividend.
Feintool’s credit risk is the book value of the recognized financial assets with the exception of financial guarantees. In this case, the guaranteed amount corresponds to the credit risk.
Default risk is the risk that a counterparty will be unable to meet its liabilities to the Group companies. By avoiding cluster risk and concentrating financial investments among first-class counterparties, it should be possible to avoid extensive credit default risk. The automobile sector is the focal point of Feintool’s operations. By definition, this market segment involves a certain risk for Feintool’s operations. As far as normal customer credit balances are concerned, outstanding receivables are constantly monitored as part of the process of regular reporting by the Group companies to Head Office. As at December 31, 2019, the overall default risk amounts to kCHF 125 202 (previous year kCHF 129 882). Feintool generates more than 18.4 % (previous year 17.2 %) of consolidated sales for one customer. Income is generated in all segments. With the other customers, the share is less than 12.3 % (previous year 12.8 %) in each case.
The Feintool Group banks exclusively with renowned national and international institutions that have a minimum rating of BBB. It specifies the type of transactions that the subsidiary companies may conduct with the banks.
30 Financial instruments
The carrying amounts do not differ significantly from the fair values.
1) Excluding accruals for commitment fees, prepaid expenses for customer orders rental agreements, prepaid insurance premiums and tax.
2) Excluding accruals for salary, bonus and overtime as well as outstanding installations, tax and other work to be fulfilled in relation to customer orders.
30.3 Fair value hierarchy
Feintool has measured financial instruments at fair value and uses the following hierarchy to determine fair value.
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices)
Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Feintool holds only financial instruments in Level 2 amounting to kCHF 159 net (previous year kCHF 56).
Currency instruments primarily relate to the hedging of foreign-currency risks in euros. The life of the foreign exchange futures is a few months.
31 Related parties
31.1 Compensation paid to members of the Board of Directors and Group Management
Levels of compensation paid to the Board of Directors and Group Management are defined by the Nomination and Compensation Committee and approved by the full Board of Directors. Total compensation (excluding tax-allowable expenses), specifically fees, salaries, credits, bonuses and benefits in kind agreed during the financial year and paid directly or indirectly to the members of the Board of Directors and Group Management, amounted to kCHF 2 672 (previous year kCHF 2 605).
1) Incl. benefits in kind
2) For the Chairman of the Board of Directors, allocation of a predefined number of shares. The shares are locked in for five years. The valuation corresponds to the price at the time of allocation. For the 2019 financial year, the shares were transferred on January 3, 2020. Group Management is entitled to a predefined amount in Swiss francs. Remuneration is in the form of shares. The number of shares depends on the average price in October/November. The shares have a staggered lock-in period of 1-4 years. Disbursement took place in December.
32 Major shareholders
1) The notice dated July 15, 2013, comprised 400 285 shares or 8.97 % of the corresponding share capital. Following the capital increase on September 20, 2018, 400 285 shares correspond to a capital share of 8.14 %.
33 Events after the balance sheet date
There were no significant events after the balance sheet date.
34 Approval of the consolidated financial statements
The consolidated financial statements were authorized for issue by the Board of Directors on March 2, 2020 and will be submitted to the Annual General Meeting for approval on April 30, 2020.