3. Capital and financial risk management

Capital management has the following objectives:

• securing sufficient liquidity to meet the Group’s needs to fulfil its financial obligations;
• securing sufficient funding capacity for future investments and acquisitions;
• ensuring creditworthiness;
• achieving an appropriate risk-adjusted return for investors.

Continuous monitoring and reporting to the management of the key financial figures and key performance indicators ensures that appropriate action is taken as soon as required.

Borrowings and other financial liabilities

Credit facility

As of 30 June 2019, the short-term bank loans and overdrafts amount to CHF 84.9 million (2017/18: CHF 148.9 million).

The majority of the current borrowings relates to a syndicated credit facility of CHF 500 million established in March 2016 for a five-year period, which includes options for a prolongation of two additional years and for an increase of up to CHF 200 million. The single financial covenant is the net debt ratio (calculated as the ratio of net debt to EBITDA). As of 30 June 2019 and throughout the 2018/19 financial year, dormakaba complied with this financial covenant.

The interest expenses on short-term bank loans and overdrafts are recorded within other interest expenses. Interest expenses are disclosed in detail in the note on the financial result (1.4).

Net debt

Disclosed below are the corresponding key figures as at 30 June 2019 and 30 June 2018, respectively, including the maturities.

The interest expenses for withdrawals from the syndicated credit facility and other credit facilities are recorded within other interest expenses. Interest expenses are disclosed in detail in the note on the financial result (1.4).

Bonds

Two bonds were placed in September 2017 in the Swiss capital market by dormakaba Finance AG, a Group company of dormakaba Holding AG, as a dual tranche transaction worth a total of CHF 680 million (ISIN CH0384629884 due in 2021 and ISIN CH0384629892 due in 2025).

The interest expenses for the two bonds amount to CHF 4.4 million in 2018/19 (2017/18: CHF 3.2 million). This is disclosed in the note on the financial result (1.4).

Share capital

As of 30 June 2019, the share capital comprised 4,200,026 registered shares with a par value of CHF 0.10 each. The shares are listed on the SIX Swiss Exchange (DOKA/ISIN CH0011795959).

Conditional capital as of 30 June 2019 amounted to CHF 42,438.

In accordance with the resolution of the Annual General Meeting (AGM) of 17 October 2017, the BoD is authorized to increase the share capital, no later than 17 October 2019, by a maximum amount of CHF 42,000 through the issue of a maximum of 420,000 fully paid-in registered shares at a nominal value of CHF 0.10 each. The increase may be made in partial amounts. No shares were issued out of authorized capital in the 2018/19 financial year.

Treasury shares

Treasury shares are recorded as a negative balance within equity and disclosed in the consolidated statement of changes in equity. These registered shares are predominantly intended as share-based compensation. Further information about the long-term incentive stock award plans are disclosed in the note on personnel expense (1.3) and within the Compensation Report.

In the 2018/19 financial year, a total of 11,102 shares (2017/18: 11,670 shares) were allocated. 9,217 shares (7,659 restricted and 1,558 performance shares) were vested as part of the long-term incentive stock award plans (2017/18: 7,627 shares made up of 5,997 restricted and 1,630 performance shares). In addition, 1,282 restricted shares (2017/18: 1,225 restricted shares) were allocated to the BoD members and 603 shares (2017/18: 2,818 shares) were allocated as consideration for acquisitions from previous years. Further information on the long-term incentive stock award plans is included in the Compensation Report.

Earnings per share

The earnings per share is calculated based on the profit attributable to the owners of the parent only. Net profit attributable to minority interests is not taken into account. The minorities represent mainly the shareholders who hold 47.5% of the shares of dormakaba Holding GmbH + Co. KGaA, a direct subsidiary of the Group parent, dormakaba Holding AG, which holds the remaining 52.5%. The legal subsidiaries are disclosed in the note on the legal structure of the dormakaba Group (5.3).

Dividends

dormakaba Group envisages a dividend policy whereby the minimum payout ratio should be 50% of the consolidated net profit after minority interests.

The dividend distribution is proposed to the AGM and shall be paid from the reserves from capital contributions of the parent entity, dormakaba Holding AG. As a result, the dividend will be paid out on 28 October 2019 free of Swiss withholding tax.

The total goodwill of CHF 8.0 million, resulting from acquisitions, recorded in the 2018/19 financial year (2017/18: CHF 145.0 million) is offset in equity as disclosed in the consolidated statement of changes in equity. See also the note on business combinations and divestments (4.3). The following tables show the impact on equity and net profit based on the assumption that the goodwill was capitalized and amortized over a period of five years.

The tasks of the BoD include identifying risks, determining suitable measures, and implementing these measures or having them implemented. The BoD of dormakaba Holding AG conducted a regular Group-wide risk assessment in the year under review and determined the risks to be managed at particular management levels. The BoD is closely involved in assessing strategic risks and, through dialogue with the EC, ensures that operating risks are given due attention and reported accordingly. This approach gives the BoD a comprehensive overview of the key risks and measures. Thanks to this overview, the Group can prioritize and allocate the necessary resources.

Liquidity risk

Liquidity risk arises due to the possibility that dormakaba Group might experience difficulty in settling its debts or otherwise meeting its obligations related to financial liabilities.

Liquidity risk is managed centrally by Group Treasury. The Group’s objective is to maintain a balance between the continuity of funding and flexibility by using varied financing instruments across a range of maturities. The Group aims to maintain a spread of maturities to avoid excessive refinancing in any one period. The Group endeavors to maintain funding flexibility by keeping available committed credit lines with a variety of counterparties.

Credit risk

Credit risk is the risk of loss if a counterparty fails to fulfil its obligations to dormakaba. Hence, dormakaba is exposed to credit risk arising from financing activities, including deposits with banks and financial institutions, foreign exchange transactions, and other financial instruments, such as trade receivables, other current assets, and non-current financial assets.

Cash and cash equivalents are mainly held in the form of current accounts and current fixed-term deposits. Counterparty risks with financial institutions are monitored continuously and are minimized by the Group limiting its relationships to high-ranking banks only.

Trade receivables are monitored on an ongoing basis locally and via Group management reporting procedures. The danger of cluster risks on trade receivables is limited due to the large number and wide geographical spread of customers. The extent of the credit risk is determined mainly by the individual characteristics of each customer. The assessment of this risk involves a review of the customer’s creditworthiness based on its financial situation and experience. The maturity analysis of trade receivables is disclosed in the note on trade receivables (2.1).

Interest rate risk

Interest rate risk is the risk that the Group’s financial situation is impacted by changes in interest rates.

The dormakaba Group’s interest rate risk arises from its short-term and long-term borrowings. The interest rate risk is hedged only in a few cases. Management strives for a well-balanced mix of long- and short-term interest rate exposure, taking into consideration the planned funding requirements. Funding and related interest are managed centrally by Group Treasury.

Foreign currency exposure

Translation risk

dormakaba Group does not actively manage the translation risk.

In the 2018/19 financial year, the Group’s equity was negatively impacted in the amount of CHF 26.4 million (2017/18: CHF 15.8 million positive impact) by foreign currency translation.

The key exchange rates based on net sales in foreign currencies are disclosed in the table below:

In the 2018/19 financial year, dormakaba Group’s sales growth was negatively impacted by foreign currency translations in the amount of CHF 29.6 million (2017/18: CHF 47.9 million positive impact) and EBITDA likewise by CHF 2.4 million (2017/18: CHF 9.7 million positive impact).

Transaction risk

Management monitors foreign exchange risks on a regular basis. When Management deems it appropriate to do so, dormakaba uses derivative financial instruments to manage its transaction risk exposure to fluctuations in exchange rates.

Foreign exchange risks relating to intercompany loans are covered to a large extent by forward exchange contracts with third parties. The external counterparties involved are high-ranking financial institutions. dormakaba enters into financial transactions only to hedge against a related off-balance-sheet risk or a highly probable future business transaction. No uncovered short transactions are entered into.

Intercompany invoicing is structured in a way that foreign exchange risks are concentrated in dormakaba's manufacturing companies. The use of a group netting system with intercompany payment terms of up to 60 days reduces the intercompany exposure and foreign exchange risk. The third party and intercompany cross-currency exposures are reduced through natural hedges or they are hedged using financial instruments.

dormakaba Group actively manages the transaction risk arising from net investment in foreign currencies.

The following currency forward contracts for hedging purposes existed as at the balance sheet date:

In the 2018/19 financial year, the net foreign exchange loss amounts to CHF 2.4 million (2017/18: CHF 6.4 million). While the hedges mitigate the foreign currency effect arising from intercompany loans, the interest expenses for forward contracts amounts to CHF 26.3 million (2017/18: CHF 29.4 million). The foreign exchange gains and losses as well as the interest expenses and income are disclosed in the note on the financial result (1.4).