Annual Report 2022

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 minimise 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 standardised mathematical models. The counterparty risk related to those derivatives is 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, recognised 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 recognised 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 recognised 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 of 31 December 2022 and 2021). Currently, there is no material exposure to interest rate risk. Also refer to Note 19 Financial liabilities.

Equity price risk

The group is exposed to price risks related to listed shares. Changes in fair value are recognised in profit and loss as they arise. In 2022, SoftwareOne sold shares for cash proceeds of TCHF 72,940. In December 2022, the group entered into a total return swap agreement in which it sold the shares but remains exposed to the price risk related to these shares, refer to further explanations in section Liquidity Risk below.

A sensitivity analysis was performed. A 10% fluctuation in share price leads to fluctuations in pre-tax earnings of TCHF +/– 5,841 (prior year: TCHF +/– 20,876).

Credit risk

Group Treasury and the Group Credit & Collection Department are responsible for managing and analysing 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, considering 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 utilisation of credit limits is regularly monitored.

There is no concentration of credit risk with respect to trade receivables, as the group has many customers that are internationally diversified. 39% 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): 42% (prior year: 22%)
• Too small to be insured: 1% (prior year: 3%)
• No insurance available: 18% (prior year: 28%)

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 always maintaining sufficient headroom on its undrawn borrowing facilities (for further details see below).

The table below analyses the group’s non-derivative financial liabilities according to relevant maturity groupings based on the remaining period as of the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows, i.e., undiscounted interest and principal payments:

In July 2022 the group signed an amendment and restatement agreement for the multiple currency revolving credit facility to increase the facility from CHF 470 million to CHF 660 million and extend the tenor to 31 December 2025. The initial agreement was signed in 2019. The facility contains two extension options which can be exercised with the consent of the lending banks in the fourth quarter of 2023 and 2024. This allows the term of the credit facility to be extended by another year to a maximum of 31 December 2027. Interest would be payable at a base rate plus a margin ranging from 62.5 to 77.5 basis points initially, depending on the currency, and thereafter adjusted for changes in the leverage ratio of the group. As of 31 December 2022 and 2021, 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 amortisation). 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.

In December 2022, the group entered into a total return swap agreement related to listed equity securities. Under the total return swap, SoftwareOne sold the underlying shares for cash consideration of TCHF 42,559, classified as investing cash inflow, but remains exposed to changes in the market value of these shares. As a result, the group did not derecognise the financial asset. SoftwareOne recorded a financial liability for the receipts from swap contracts of TCHF 42,559. In the event of a negative market price development of the underlying asset, there is a risk of a cash outflow when agreed thresholds are exceeded up to the amount of the consideration received. On maturity date of the total return swap, the liability from the swap contract and the related financial asset will both be derecognised and the related cashflows will be settled. At the end of the reporting period, the total return swap had a positive market value.

The maturity structure of the derivative financial instruments based on cash flows is as follows:

The contractual agreement determines whether the contracting parties must fulfil their obligations from derivative financial instruments net or gross.

As of 31 December 2022, the group had total committed and uncommitted credit lines (including factoring) of TCHF 1,097,742 (prior year: TCHF 963,559) available, of which 24% (prior year: 21%) was drawn. From the drawn amount, TCHF 35,121 were covered by financial covenants and fulfilled as of 31 December 2021.

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. In 2022, this goal was not achieved due to the one-time effects related to the loss on disposal of SoftwareOne Russia and a fair value loss related to the valuation of equity instruments.

The equity ratio for the period ended 31 December 2022 and the prior year were as follows:

The equity ratio for 2022 decreased compared to the previous year, which is mainly due to the loss for the period in 2022.

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 recognised a fair value loss of TCHF 71,328 in finance expenses in 2022 (prior year: gain of TCHF 67,812).

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 based on 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 analysed 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 reporting 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 2022 and 2021.

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, the acquisition of Intelligence Partner and Predica.

CompuCom (fair value as of 31 December 2022: TCHF 3,438; prior year: TCHF 5,212)
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 clients over a period of 10 years. During 2022, the group recognised an unrealised fair value loss of TCHF 167 (prior year: loss of TCHF 613). 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%, i.e., TCHF +/– 344 (prior year: TCHF +/– 521).

Intelligence Partner (fair value as of 31 December 2022: TCHF 2,065; prior year: TCHF 3,264)
The contingent consideration liability of Intelligence Partner depends on the EBITDAs of the years 2022 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 2,100 (prior year: TCHF 3,150).

Predica (fair value as of 31 December 2022: TCHF 8,750)
The contingent consideration liability of Predica depends on certain KPIs of the years 2022 to 2024 and the retention of three key employees. The contingent consideration is capped at a maximum of TCHF 8,750. A partial amount of TCHF 5,125 is exclusively related to the retention of the three key employees. The contingent consideration for performance year 2022, which amounts to a maximum of TCHF 1,875, is based on revenue, revenue growth and new customers. The calculation for the performance years 2023 and 2024 is primarily based on chargeability of delivery resources and new customers and amounts to a maximum of TCHF 1,750. In the event of termination by one of the three key employees, the contingent consideration is reduced proportionately.

4.4 Transfer of financial assets

The group enters transactions in which it transfers trade receivables under factoring agreements and, as a result, may either be eligible to derecognise the transferred receivables in their entirety or must continue to recognise 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 of 31 December 2022 is TCHF 197,477 (prior year: TCHF 170,260). The amount is fully derecognised from the balance sheet. Moreover, liabilities to factoring partners for forwarding incoming payments from clients of TCHF 14,150 (prior year: TCHF 3,991) are recognised under financial liabilities.