Annual Report 2021

4 Financial risk management

4.1 Financial risk factors

The group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk, equity price risk), credit risk and liquidity risk. The group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the group’s financial performance. The group uses derivative financial instruments to hedge certain risk exposures. The financial derivatives are measured with the aid of standardized mathematical models. The counterparty risk related to those derivatives is considered to be immaterial for the group.

Risk management is carried out by Group Treasury under a policy approved by the Board of Directors. Group Treasury identifies, evaluates and hedges financial risks in close cooperation with the group’s operating entities. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments and investment of excess liquidity.

Market risk

Foreign exchange risk

The group operates internationally and is exposed to foreign exchange risk arising from various currency exposures. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations.

Group Treasury has set up a policy to manage its foreign exchange risk. The group hedges its foreign exchange risk exposure of recognized assets and liabilities and future commercial transactions by derivative contracts.

The group has certain investments in foreign operations whose net assets are exposed to foreign currency translation risk which, as per group policy, is not hedged. These differences are recognized in other comprehensive income and accumulated in equity. Translation risk is not considered in the analysis below.

The following table details the group’s sensitivity to the major currencies with all the other variables held constant.

Interest rate risk

The group’s interest-bearing instruments with variable interest are cash, bank overdrafts, bank loans and a multiple currency revolving credit facility (undrawn as at 31 December 2021 and 2020). Currently, there is no material exposure to interest rate risk. Also refer to Note 19 Financial liabilities.

Equity price risk

The group holds a short-term investment in listed shares. The asset is subject to fluctuation in share price. Changes in fair value are recognized in profit and loss as they arise.  A sensitivity analysis was performed. A 10% fluctuation in share price leads to fluctuations in pre-tax earnings of TCHF +/– 20,876 (prior year: TCHF +/– 14,194).

Credit risk

Group Treasury and the group Credit & Collection Department are responsible for managing and analyzing the credit risk for all new clients before standard payment and delivery terms and conditions are offered. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and contract assets. Risk control assesses the credit quality of the customers, taking into account its financial position, past experience and other factors. No collateral is required. Individual risk limits are set based on internal or external ratings in accordance with guidelines set by the Board. The utilization of credit limits is regularly monitored.

There is no concentration of credit risk with respect to trade receivables, as the group has a large number of customers that are internationally diversified. 47% of trade receivables are covered through credit insurance (prior year: 47%).

The remaining part is not insured for one of the following reasons:

• From end customers with top rating (based on internal and credit insurance assessment): 22% (prior year: 20%)
• Too small to be insured: 3% (prior year: 3%)
• No insurance available: 28% (prior year: 30%)

Refer to Note 12 Trade receivables for information about the credit risk exposure on the group’s trade receivables and contract assets using a provision matrix.

Liquidity risk

Cash flow forecasting is performed in the operating entities of the group and aggregated by Group Treasury. Group Treasury monitors rolling forecasts of the group’s liquidity requirements to ensure it has sufficient cash to meet operational needs while maintaining sufficient headroom on its undrawn borrowing facilities (for details see further below) at all times.

The table below analyzes the group’s non-derivative financial liabilities and derivative financial liabilities according to relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows, ie undiscounted interest and principal payments:

The group maintains a CHF 470 million multiple currency revolving credit facility. The agreement was signed in 2019. In 2020, SoftwareONE exercised an option to increase the initial facility (CHF 400 million) by CHF 70 million. Additionally, the tenor of the facility was extended from 30 September 2022 to 30 September 2023. In 2021, SoftwareONE executed the remaining extension option and extended the credit facility from 30 September 2023 to 30 September 2024. Thus, the facility contains no more remaining extension options. Interest would be payable at a base rate plus a margin ranging from 50 to 60 basis points initially, depending on the currency, and thereafter adjusted for changes in the leverage ratio of the group. As at 31 December 2021 and 2020, the credit facility was not used. Each drawdown within the facility would have a tenor ranging from one week up to the maturity of the credit facility. The facility is subject to loan covenants (leverage ratio: net debt/earnings before net financial items, taxes, depreciation and amortization). A potential breach of covenant triggers measures which are standard in such circumstances. Under the agreement, the covenants are monitored on a regular basis by the treasury department and half yearly reported to management and lending banks to ensure compliance with the agreement. Transaction costs of TCHF 1,330 were capitalized in 2019 and amortized pro rata over the commitment period.

As at 31 December 2021, the group had total committed and uncommitted credit lines (including factoring) of TCHF 963,559 (prior year: TCHF 998,062) available, of which 21% (prior year: 21%) was drawn. From the drawn amount, TCHF 35,231 are covered by financial covenants, which are fulfilled as at 31 December 2021 (prior year: TCHF 47,737).

4.2 Capital risk management

The group’s objectives when managing capital are to safeguard the group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

Surplus cash held by the operating entities over and above working capital requirements are transferred to Group Treasury whenever the legal environment permits. Group Treasury invests surplus cash in interest-bearing current accounts or short-term time deposits to provide sufficient headroom as determined by the abovementioned forecasts.

In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares.

Capital is measured based on the group’s consolidated financial statements and monitored closely on an ongoing basis. Management's target for the period under review was to strengthen the capital base to sustain and support further development of the business. This goal was achieved through the positive operating results of the group and the increase in equity.

The equity ratio for the period ended 31 December 2021 and the prior year were as follows:

The equity ratio for 2021 increased slightly compared to the previous year, which is mainly due to the net income for the period.

4.3 Categories of financial instruments and fair value estimation

Categories of financial instruments

The following table discloses the carrying amounts and fair values, as required, of the group’s financial instruments by class and category:

Financial assets consist of an investment in listed equity instruments for which the group recognized a fair value gain of TCHF 67,812 in finance income in 2021 (prior year: gain of TCHF 84,197).

Fair value estimation

The carrying amounts of cash and cash equivalents, trade and other receivables and trade and other payables with a remaining term of up to 12 months, as well as other current financial assets and liabilities, represent a reasonable approximation of their fair values, due to the short-term maturities of these instruments.

The fair value of financial assets (equity instruments) is based on observable price quotations at the reporting date. The fair value of derivatives is determined on the basis of input factors observed directly or indirectly on the market. The fair value of foreign exchange forward contracts is based on forward exchange rates.

Financial instruments carried at fair value are analyzed by valuation method. The fair value hierarchy has been defined as follows:

Level 1: The fair value of financial instruments traded in active markets is based on quoted market prices for identical assets or liabilities at the balance sheet date.

Level 2: The fair value measurements are those derived from valuation techniques using inputs for the asset or liability that are observable market data, either directly or indirectly. Such valuation techniques include the discounted cash flow method and option pricing models. For example, the fair value of interest rate and currency swaps is determined by discounting estimated future cash flows, and the fair value of forward foreign exchange contracts is determined using the forward exchange market at the end of the reporting period.

Level 3: The fair value measurements are those derived from valuation techniques using significant inputs for the asset or liability that are not based on observable market data.

The following table discloses valuation classes for financial instruments measured at fair value:

There have been no transfers between the different hierarchy levels in 2021 and 2020.

The change in carrying values associated with 'Level 3' contingent consideration liabilities are set forth below:

The most significant contingent consideration liabilities relate to the acquisition of the customer base of CompuCom and the acquisition of Intelligence Partner.

CompuCom (fair value as at 31 December 2021: TCHF 5,212; prior year: TCHF 6,266)
The purchase price for the customer base of CompuCom acquired in 2015 is fully based on variable payments that depend on the future revenues generated from those customers over a period of 10 years. During 2021, the group recognized an unrealized fair value loss of TCHF 613 (prior year: gain of TCHF 5,904). The most significant unobservable input used to determine the fair value of the CompuCom contingent consideration is the cash flow forecast, which is mainly based on future gross profit. The development of the future gross profit and the contingent consideration is linear. Thus, a change of +/– 10% in gross profit development leads to a change of cash outflow by +/– 10%, ie TCHF 521 (prior year: TCHF +/– 627).

Intelligence Partner (fair value as at 31 December 2021: TCHF 3,264; prior year: TCHF 3,417)
The contingent consideration liability of Intelligence Partner depends on the EBITDAs of the years 2021 to 2023 and an additional 'catch-up' year if necessary. The development of the future EBITDAs and the contingent consideration is not linear and is capped at a maximum of TEUR 3,150. As in the prior year, SoftwareONE estimates that the maximum amount will be paid.

4.4 Transfer of financial assets

The group enters into transactions in which it transfers trade receivables under factoring agreements and, as a result, may either be eligible to derecognize the transferred receivables in their entirety or must continue to recognize the transferred receivables to the extent of any continuing involvement, depending on certain criteria. These criteria are presented in Note 2 Summary of significant accounting policies.

The amount of the receivables sold as at 31 December 2021 is TCHF 170,260 (prior year: TCHF 151,619). This amount is fully derecognized from the balance sheet. Moreover, liabilities to factoring partners for forwarding incoming payments from customers of TCHF 3,991 (previous year: TCHF 5,210) are recognized under financial liabilities.