Risks and risk management
Foreign exchange risk
Currency risk arises when future business transactions, or reported assets or liabilities,
are expressed in a currency which is not the Group’s functional currency.
The Group’s transaction exposure arises primarily in the Swedish companies
where a large proportion of revenue is generated by the global sales organisation
and is not in SEK. Other companies mainly conduct operations in their
national markets where revenue and costs are in the same currency.
Aside from currency risks on sales by the Swedish companies, risks also arise
from the import of raw materials and components. Altogether, the Swedish
companies have a surplus inflow of foreign currency. The direct commercial foreign
exchange flow, after net calculations of flows in the same currencies, shows
a surplus of MSEK 474 (294). In addition to this, there is also an indirect impact in
conjunction with the purchase of raw materials and components. This results,
over time, in a lower net exposure for the Group.
The Group’s policy is to hedge all significant net cash flows. Incoming flows of
foreign currency should be used for payment in the same currency. In addition, a
certain portion of the anticipated net inflow from sales and purchases is hedged
by means of forward contracts after individual assessment at 50 per cent for the
coming six-month period. On statistical assessment of the foreign-exchange
position, a change in the Swedish krona against other currencies of 1 per cent,
with all other variables being constant, would impact the Group’s earnings by
about MSEK 5 (3). The financial instruments are managed by the Parent Company’s
Currency risk also arises in conjunction with the translation of foreign net assets
and earnings, so-called translation exposure. This currency risk is not hedged and
refers, primarily, to the translation of foreign subsidiaries’ income statements and
balance sheets. Earnings from foreign subsidiaries are translated into Swedish
krona based on the average exchange rate for the year. The exposure of the
Group’s net assets outside of Sweden has increased as operations there have
changed from previously pertaining to sales companies, to now also including production
units. At the closing date, net assets in foreign companies corresponded to
MSEK 1,583 (1,444) including goodwill. The Group applies hedge accounting
where the purchase consideration for acquired companies has to some extent
been financed through borrowing in the acquired company’s local currency. Net
assets abroad that are subject to hedge accounting amount to MSEK 796 (810) and
accumulated borrowing MSEK 215 (215). Translation differences that affected
comprehensive income amounted to a negative MSEK –9.8 (–19.5) before deferred
tax of MSEK 2.2 (4.3).
A weakening of the Swedish krona by 1 per cent with all other variables remaining
constant would result in an increase in equity of MSEK 16 (14) largely due to
gains/losses on the translation of EUR and GBP. A change in the Swedish krona of
1 per cent against other currencies would result in a direct impact on net sales in
the subsidiaries of approximately MSEK 30 (30) whilst the impact on results in the
foreign subsidiaries would be MSEK 3 (3).
Interest rate risk
Fagerhult holds no significant interest-bearing assets, which is the reason the
Group’s income and cash flow from operating activities are, in all material
aspects, independent of changes in market interest rates.
The Group’s interest-rate risk arises in conjunction with long-term borrowing. In
addition to pension liabilities of MSEK 68.3 (66.4), interest-bearing liabilities
totalled MSEK 1,885.3 (1,342.2) and cash and cash equivalents were MSEK 731.6
I(471.9). Borrowing on the basis of floating interest rates exposes the Group to
interest-rate risk as regards cash flow. Borrowing on the basis of fixed interest
rates implies an interest-rate risk for the Group in terms of fair value. During
2016 and 2015, the Group’s borrowings largely comprised loans with threemonth
fixed interest rates.
The Group analyses its exposure to interest-rate risk on a dynamic basis. Various
scenarios are simulated, whereby refinancing, re-negotiation of existing
trading positions, alternative financing and hedging are taken into consideration.
Based on these scenarios, the Group calculates the earnings impact from a
given change in interest rates. In each simulation, the same change in the interest
rate is applied for all currencies. The scenarios are simulated only for those
liabilities comprising the largest interest-bearing positions. Simulations performed
show that the earnings impact of a 1 per cent change would be a maximum
of MSEK 12, with the current capital structure. The simulation is conducted
quarterly to verify that the maximum possible loss is within the limits
established by the executive management.
If interest rates on borrowing in Swedish krona as of 31 December 2016 had
been 10 points higher/lower, but all other variables had been constant, then
gains after tax for the financial year would have been MSEK 1.9 (1.0) higher/
lower, primarily as an effect of higher/lower interest expenses for borrowings
with floating interest rates.
Credit risks are managed at Group level. Credit risks arise if the counterparty
does not fulfil its commitments in conjunction with lending within the framework
of cash management policies and through credit exposure to clients and
banks, including receivables and agreed transactions. If the Group’s customers
have received a credit rating from an independent rating institution, these ratings
are used. Where no independent credit assessment exists, a risk assessment
is made of the customer’s credit status in which the entity’s financial position
is considered, as well as previous experience and other factors. Individual
risk limits are set based on internal or external credit ratings, in accordance with
the limits set by the Group management. The application of credit limits is frequently
reviewed. No significant losses occurred in either 2016 or 2015. The
majority of receivables from customers are guaranteed through credit insurance.
A total provision of MSEK 28.1 (23.5) was made for those trade receivables
not expected to be received.
Liquidity risk is managed by ensuring that the Group has sufficient cash and cash
equivalents and short-term investments in a liquid market, available financing
through agreed credit facilities and the possibility to close market positions. The
Group has a strong financial position. At present, no new borrowing requirements
exist, but should such requirements arise, there is currently no difficulty
in obtaining external credit, as long as such credit meets certain covenants, on
the borrower, such as debt-to equity and interest coverage ratio, which are at
Management also meticulously follows rolling forecasts for the Group’s
liquidity reserve on the basis of anticipated cash flows.
The table in Annual Report (page 79, note 32) presents an analysis of the Group’s financial liabilities to be
settled net, specified according to the time to maturity, as of the closing date.
The amounts stated in the table are the contractual, undiscounted cash flows.
Amounts falling due within 12 months correspond with the carrying amounts,
as the effect of discounting is negligible.
The Group’s objective with regard to the capital structure is to secure the Group’s
ability to continue operating, so that it can continue to generate returns for
shareholders and benefits for other stakeholders, and to maintain an optimal
capital structure to keep the cost of capital down. To maintain or adjust the capital
structure, the Group may change the dividend paid to shareholders, repay capital
to shareholders, issue new shares or sell assets to reduce debt. The Group
monitors capital on the basis of debt/equity ratio. This ratio is calculated as interest-
bearing liabilities in relation to equity. The debt/equity ratio at 31 December
2016 was 1.9 per cent (1.9).
Price risk in the Group’s operations primarily arise in conjunction with the purchase
of input material used in manufacturing. Dominant components, such as
electronic control systems and sheet metal, have the single greatest impact on
the cost of manufactured products, excluding processing costs. The Group’s
exposure to price risk on financial instruments is minimal.
Risk associated with plants and inventories
In addition to the above risks, all of which, in principle, impact the Fagerhult
Group’s cash flows, restricted capital in both non-current assets and inventories
is also exposed to risk. Rationalisations and a high level of utilisation of investments
made have meant the value of capitalised assets has been possible to
maintain at a comparatively low level. Consequently, the risk of a permanent impairment of non-current assets is considered unlikely. Risks associated with
inventories are primarily related to obsolescence resulting from overproduction
and out-of-date technology. Fagerhult’s business concept includes customer-order
driven production. This implies flexible production in which the need for
inventories is reduced and with that, the risk of obsolescence.
As computer-aided technology has assumed an increasingly greater scope
within the companies, security requirements have also increased. The functional
security of the databases and e-mail servers is checked via daily backups.
Battery backup and diesel generators provide protection against operational
disruption in the main manufacturing facility in Habo from where the majority
of the Group’s computer operations are controlled. To date, no costs have arisen
as a result of damage. The internet connection is fixed and completely isolated
from other networks via hardware firewalls. Access via public networks is
secured via security devices. User access to the system is regulated via Group
authorisations and entitlements based on actual assignments and roles within
The Fagerhult Group purchases and manages Group-wide insurance policies for
property and liability risks, creating co-ordination gains and cost advantages.