Explanatory notes to the consolidated financial statements 2016 of the HOCHDORF Group

Principles of consolidation

General information

The HOCHDORF Group prepares its accounts in compliance with all existing guidelines of Swiss GAAP FER (Swiss accounting and reporting recommendations) and the provisions of Swiss law. The consolidated annual accounts reflect the actual status of the Group's asset, financial and revenue position. The consolidated annual accounts are based on the principle of historical costs and are based on the annual accounts for the affiliated companies as of 31 December 2016, prepared according to standard principles.

Consolidation principles

Consolidated companies/consolidation method

The consolidated annual accounts for the HOCHDORF Group comprise the annual accounts for the HOCHDORF Holding Ltd parent company as well as all subsidiaries in which there is a capital and vote-relevant majority. Investments with 20 % to 50 % of the voting rights are accounted for using the equity method.

The consolidated individual financial statements for the companies are adapted to the standard Group structure and evaluation regulations and entered in accordance with the full consolidation method. 100 % of the assets and liabilities as well as expenses and revenues are included in the consolidated annual accounts and all intercompany transactions are eliminated. Significant interim profits within the Group are considered in this elimination.

The share of the minority shareholders in the company's own share capital and of the results is shown separately in the Group balance sheet and income statement.

Capital consolidation

For capital consolidation, assets and liabilities on holdings are evaluated at the time of the takeover according to standard Group principles (purchase method). Any remaining surplus/shortfall (goodwill/badwill) of this revaluation is offset against equity. The consolidated cash flow accounting is generated on the basis of the consolidated balance sheet and income statement.

Translation of foreign currencies

The annual accounts of consolidated companies in foreign currencies are converted as follows: current assets, fixed assets and external capital at end-of-year exchange rates (period end exchange rate); equity at historical exchange rates. The income statement and the cash flow statement are converted at average annual rates. The conversion differences incurred are recognised in equity without affecting net income. The foreign currency items included in the individual financial statements of the consolidated companies are converted as follows: foreign currency transactions at the exchange rate of the transaction day (current exchange rate); at the end of the year, foreign currency balances are converted at the end-of-year exchange rate (period-end exchange rate) and affect net income. The resulting exchange rate differences are shown in the income statement.

 Income statement average exchange ratesBalance sheet at end-of-year exchange rates
2016201531.12.201631.12.2015
1 EUR1.09001.07011.07201.0874
1 USD0.98880.96641.01641.0010
1 TND0.4598n.a.0.4418n.a.
1 UYU0.03290.03560.03460.0346
1 ZAR0.06760.07550.07430.06460

Cash flow statement

Cash and cash equivalents form the basis for the presentation of the cash flow statement. Cash flow from operating activities is calculated using the indirect method.

Overview of Group companies and associated companies


Consolidated companies

Location

Function

Currency
 Capital in thousand
31.12.2016
Capital share
31.12.2016
Capital share
31.12.2015
HOCHDORF Holding Ltd  Hochdorf CH Holding CHF 14,348 100 % 100 %
HOCHDORF Swiss Nutrition Ltd Hochdorf CH Production CHF 30,000 100 % 100 %
HOCHDORF Nutricare Ltd Hochdorf CH Trade CHF 1,200 100 % 100 %
HOCHDORF Baltic Milk UAB  Medeikiai LT Production and trade EUR 5,792 100 % 100 %
HOCHDORF Swiss Whey Ltd Hochdorf CH Shell company CHF 100 100 % 100 %
Switzerland. Milch-Gesellschaft Ltd Hochdorf CH Shell company CHF 100 100 % 100 %
HOCHDORF Deutschland GmbH 1 Siegburg DE Trade EUR --- ---    100 %
Marbacher Ölmühle GmbH  Marbach DE Production and trade EUR 2,000 100 % 100 %
Uckermärker Milch GmbH  Prenzlau DE Production EUR 10,000 60 % 60 %
HOCHDORF Americas Ltd 2 Montevideo UY Trade UYU 3,283 60 % 60 %
HOCHDORF South Africa Ltd  Cape Town ZA Production ZAR 500 90 % 90 %
Pharmalys Africa S.à.r.l. 3 Tunis TU Marketing TND 120 51 % n.a.
Pharmalys Laboratories SA 4 Hochdorf CH Trade CHF 100 51 % n.a.
Pharmalys Tunisie S.à.r.l. 5 Sousse TU Production TND 3,300 49 % n.a.

 

  1. Liquidated.
  2. Capital increase as at 12.8.2016 to UYU 3,283,200.
  3. Formation on 30.11.2016.
  4. Purchase of 51 % as of 19.12.2016.
  5. Purchase of 49 % as of 19.12.2016 with contractual guarantee to purchase additional 2 % in 2017.

Associated companies

Location

Function

Currency
 Capital in thousand
31.12.2016
Capital share
31.12.2016
Capital share
31.12.2015
Ostmilch Handels GmbH Bad Homburg DE Trade EUR 1,000 26 % 26 %
Ostmilch Handels GmbH & Co. Frischdienst Oberlausitz KG Schlegel DE Logistics EUR 51 26 % 26 %
Ostmilch Frischdienst Magdeburg GmbH  Meitzendorf DE Trade EUR 25 26 % 26 %

Valuation methods

General information

The accounting is carried out based on the assumption of the continuation of the operational activities. Assets are measured at cost, taking into account the necessary value adjustments. Liabilities are recognised at nominal value. All identifiable loss risks and depreciations are offset by value adjustments or deferrals. Expense and income items are accrued periodically.

Cash and cash equivalents as well as securities without shareholding character

Cash and cash equivalents include cash and deposits in postal and bank accounts. They are recognised at their nominal value. Securities are measured at the market value on the balance sheet date. The remaining securities are balanced at acquisition value or at a lower market value.

Accounts receivable

Receivables are measured at nominal value less value adjustments. Identifiable individual risks are taken into account with appropriate value adjustments.

Inventories

Raw materials, operational materials and auxiliary materials are measured at the lower of cost or market. Semi-finished and finished products are measured at production cost, including the direct material and production unit costs as well as material costs and production overheads. Appropriate value adjustments are undertaken for goods with a low rate of inventory turnover.

The value adjustment rates applied for raw materials, auxiliary materials and operational materials are:

Inventory turnover rate Value adjustment
under 0.5 times 25.0 % of the purchase or manufacturing costs
0.5 – 1 times 12.5 % of the purchase or manufacturing costs
over 1 – 1.5 times  5.0 % of the purchase or manufacturing costs
over 1.5 – 3 times   2.5 % of the purchase or manufacturing costs
over 3 times  0 % of the purchase or manufacturing costs

There are no calculated value adjustments if additional acquisitions of the same raw material are made in the reporting period.

Semi-finished and finished products:

Inventory turnover rate Value adjustment
under 0.5 times 100 % of the purchase or manufacturing costs
0.5 – 1 times  50 % of the purchase or manufacturing costs
over 1 – 1.5 times  20 % of the purchase or manufacturing costs
over 1.5 – 3 times   10 % of the purchase or manufacturing costs
over 3 times  0 % of the purchase or manufacturing costs

The value adjustments calculated in this way are adjusted accordingly for normal saleability or longer shelf life. Apart from this, inventories whose realisable disposal value is lower than the acquisition or production cost (SPC) should be adjusted in value according to the «lower of cost or market» principle. The current market price on the sales market is assumed when defining the realisable disposal value. The typical sales deductions, sales expenses and any administrative expenses still to be incurred have to be deducted and the reimbursements of customs calculated.

The consumption is measured in accordance with the first-expiry-date-first-out principle, meaning products with the shortest first-expiry date are sold first.

Interim profits on internal Group inventories are eliminated, if significant.

Discounts (in the sense of markdowns) granted by suppliers are entered as acquisition price reductions.

Accruals and deferrals

Accruals and deferrals are recognised at their nominal value.

Impairment of assets

A check is made on each balance sheet date to see if assets are impaired in value. The check is based on events or indicators that show that an overvaluation of the book value seems possible. A loss from value impairment is posted with an effect on net income if the book value of an asset exceeds the recoverable amount. A recoverable amount is the higher of the net market value and the utility value.

Tangible assets

Tangible assets are measured at the acquisition cost less the economically necessary depreciation. Permanent impairments are taken into account. Depreciation is calculated on a straight line basis from the purchase value. All acquisitions over a value of CHF 5,000 are deemed investments. Projects in process are capitalised as current investment projects and are not depreciated. Interests on assets under construction are not capitalised. Tangible assets are written down over the following periods of use:

Asset groupService life
Property, plant15 – 65 years
Devices, equipment 5 – 25 years
Machines, appliances 5 – 25 years
IT systems, communication 5 – 10 years
Vehicles 5 – 10 years
Intangible assets 5 – 10 years

Leasing

Assets from financial leasing are capitalised and the relevant leasing liabilities are posted as a liability. With amortisations, the interest is charged directly to financial expenditure. Expenses for operating leasing are charged directly to the income statement.

Financial assets

Financial assets include long-term held securities, deferred tax assets as well as assets from pension funds and employer contribution reserves and long-term receivables from third parties. Securities are measured at purchase value less the economically necessary value adjustments.

Intangible assets

Intangible assets include software, patents and licences. These are recognised at the lower of acquisition cost or utility value. They are depreciated beyond their economic service life on a straight line basis.

Short-term/long-term external capital

Liabilities are measured at the nominal amount. Short-term external capital includes liabilities with due dates of less than 12 months and short-term accrual items. Long-term liabilities include financing with a runtime of more than a year.

Provisions

The calculation of the provisions requires assumptions on the probability, amount and time of an outflow of cash. If an outflow of cash is likely and a reliable estimate is possible, a provision is reported.

Income taxes

The revenue taxes payable on taxable profits for the individual companies are accrued. Likewise, the incurred capital taxes are accrued.

Valuation of deferred taxes occurs in line with the tax rates that are actually expected in meeting future tax liability or in the realisation of future receivables (liability method). There are no negative valuation differences that could lead to tax assets. Clearable tax credits from carried forward losses are capitalised if it is likely that they might be realised in the future by sufficient taxable profits. Capital taxes are posted under operating expenses.

Derivative financial instruments

Derivative financial instruments are used to hedge risks in currencies, interest rates and commodities. The booking of derivative financial instruments depends on the hedged underlying transaction. Derivatives to hedge the changes in the value of an already reported underlying transaction are reported in accordance with the same valuation principles that are used for the hedged underlying transaction. Instruments for hedging future cash flows are not reported on the balance sheet, but rather disclosed in the Notes to the financial statements until the recognition of the future cash flow. When the future transaction or sale of the derivative occurs, the current value of the derivative financial instrument is reported and simultaneously recognised with the recognition of the hedged cash flow on the income statement. The derivative financial instruments open on the balance sheet date are disclosed in the Notes to the consolidated financial statements under «Other comments – Open derivative financial instruments».

Employee pension plan

HOCHDORF Holding Ltd's pension liabilities and those of its subsidiaries in Switzerland are set out in the completely autonomous HOCHDORF Group pension fund. The pension scheme includes a defined contribution in accordance with Swiss GAAP FER 16. The costs resulting from the employee pension are charged to the income statement for the appropriate period. The actual economic effects of pension plans on the company are calculated on the balance sheet date. An economic benefit is carried as an asset if it is used for the company's future pension expenses. A financial obligation is shown as a liability if the requirements for the creation of a provision are met.

Employees and former employees receive different employee pension payments or old-age pensions corresponding to the legal requirements applicable in the countries where they are paid out.

Sales and revenue recognition

Net sales include the receipt of economic benefits from the sale of goods and services within the scope of ordinary business activity during the reporting period. Reductions in revenue such as discounts, rebates and other price reductions as well as duties paid to third parties such as commissions, fees and any value-added taxes must be deducted from reported net sales. All inter-group turnover is eliminated in the consolidation process.

Turnover is booked when a Group company has transferred the definitive benefits and risks that are associated with ownership of the sold products and the power of disposal to the customer, and the ability to collect the receivables resulting from such is adequately secured. Turnover from the provision of services is reported in the accounting period in which the service was provided. The consideration of reductions in revenue for customers takes place in the same period as the turnover that caused these reductions in revenue in accordance with the terms and conditions of the order. The HOCHDORF Group does not have any brokerage transactions or business events with multiple, separate components.

Umsatzerlöse werden verbucht, wenn ein Konzernunternehmen den massgeblichen Nutzen und die Risiken, die mit dem Eigentum der verkauften Produkte verbunden sind, sowie die Verfügungsmacht auf den Kunden übertragen hat und die Einbringbarkeit der dadurch entstandenen Forderungen angemessen gesichert ist. Umsätze aus der Erbringung von Dienstleistungen werden im Abrechnungszeitraum erfasst, in dem die Dienstleistung erbracht wurde. Die Abgrenzung von Erlösminderungen an Kunden erfolgt für den gleichen Zeitraum wie die Umsätze, die diese Erlösminderungen gemäss den Auftragsbedingungen begründeten. Vermittlungsgeschäfte und Geschäftsvorfälle mit mehreren abgrenzbaren Bestandteilen fallen in der HOCHDORF-Gruppe nicht an.

Research and development

Research and development costs are charged in full to the income statement. These costs are included in the items «Personnel expenses» and «Remaining operating costs».

Contingent liabilities

Contingent liabilities are valued on the balance sheet date. A provision is formed if a cash outflow is likely without a useful cash inflow.

Transactions with related parties

Business relationships with related parties are conducted at arm's length. Related parties (natural or legal) are defined as any party directly or indirectly able to exercise significant influence over financial or operating decisions of the organisations. Organisations that are controlled directly or indirectly by related parties are also considered to be related.

Notes to the consolidated financial statement

The increase in the individual balance sheet items was mainly due to the change in the scope of consolidation as a result of the acquisition of Pharmalys Laboratories SA and Pharmalys Tunisie S.à.r.l, which were consolidated in the balance sheet for the first time as at 31 December 2016. This acquisition had no impact on the income statement.

1. Cash and cash equivalents

The valuation of cash and cash equivalents is at nominal value and comprises the following:

TCHF20162015
Cash87
Post account9,3708,477
Bank account58,11134,362
Short-term investments219177
Total67,70843,023

2. Accounts receivable

TCHF 2016 2015
Trade receivables from third parties 58,869 49,213
./. Provision for doubtful accounts –1 –194
Short-term receivables from related parties 8,421 2,600
Trade receivables from associated companies 2,393 0
Other receivables 5,625 4,121
Other receivables from related parties 41 0
Total 75,348 55,740

Diversification means there is no concentration of credit risk with regard to receivables from deliveries and services. The other receivables mainly result from credit from welfare institutions and from government bodies (VAT, Directorate General of Customs).

3. Inventories

TCHF 2016 2015
Raw materials, packaging materials, operating materials 10,204 10,326
Finished and semi-finished products, trade goods 41,137 39,511
Heating oil 491 513
Value adjustments for inventories –2,050 –1,370
Total 49,782 48,980

4. Accrued income

TCHF20162015
As at 31 December 15,17510,310

The prepayments and accrued income are comprised of revenues not yet received as well as costs paid in advance. The increase compared to the prior year primarily results from the still outstanding «Schoggi Law» payments, which were also higher year on year due to larger price differences in the market.

5. Tangible assets

TCHF Property, plant 1 Equipment, warehouse equipment, fixed equipment Machines, production appliances, furnishings Office equipment,
IT systems, communication, fittings
Vehicles Current investment projects2 Total
Net accounting value as at 1.1.2015 61,840 25,088 44,325 5,865 1,405 13,884 152,407
 
Purchase value
As at 1.1.2015 138,642 53,119 129,088 16,662 2,467 13,884 353,862
Additions 0 0 259 0 31 31,091 31,381
Disposals 0 –38 –292 –27 –130 0 –487
Reclassification 3 15,596 4,652 15,117 1,334 180 –36,879 0
Currency translation difference –4,881 –1,035 –2,727 –40 –122 20 –8,786
As at 31.12.2015 149,357 56,698 141,445 17,929 2,426 8,115 375,970
 
Accumulated depreciation
As at 1.1.2015 76,802 28,031 84,763 10,797 1,062 0 201,455
Disposals 0 –19 –286 –9 –56 0 –370
Depreciation 2,093 2,271 4,108 1,192 308 0 9,972
Currency translation difference –1,949 –720 –2,074 –12 –46 0 –4,801
As at 31.12.2015 76,946 29,563 86,511 11,968 1,268 0 206,256
 
Net accounting value as at 31.12.2015 72,411 27,135 54,934 5,961 1,158 8,115 169,714
 
Net accounting value as at 1.1.2016 72,411 27,135 54,934 5,961 1,158 8,115 169,714
 
Purchase value
As at 1.1.2016 149,357 56,698 141,445 17,929 2,426 8,115 375,970
Change in scope of consolidation 4 1,631 0 1,324 16 95 0 3,066
Additions 0 0 56 0 9 42,152 42,217
Disposals  –256 –160 –2,729 –210 –24 0 –3,379
Reclassification 3 1,462 3,206 5,044 2,345 121 –12,178 0
Currency translation difference –720 –170 –461 –20 –21 –5 –1,397
As at 31.12.2016 151,474 59,574 144,679 20,060 2,606 38,084 416,477
 
Accumulated depreciation
As at 1.1.2016 76,946 29,563 86,511 11,968 1,268 0 206,256
Reclassification 4 253 0 104 12 79 0 448
Disposals  –130 –82 –2,434 –179 –17 0 –2,842
Depreciation  2,262 2,433 4,053 1,350 288 0 10,386
Currency translation difference –296 –113 –320 –5 –14 0 –748
As at 31.12.2016 79,035 31,801 87,914 13,146 1,604 0 213,500
 
Net accounting value as at 31.12.2016 72,439 27,773 56,765 6,914 1,002 38,084 202,977
  1. The Group holds undevelopped parcels of land in Lithuania. The value is equivalent to TCHF 157.
  2. The current investment projects are plants under construction.
  3. New acquisitions are posted with project numbers under «current investment projects» as inward movements. After the start of operations, there is a transfer posting from the «current investment projects» account to the appropriate fixed asset account. A decision is taken about which purchase costs are capitalised or posted via the income statement.
  4. In connection with the purchase of Pharmalys Tunisie S.à.r.l.

Of which assets subject to financial leasing

 TCHF Total Open instalments
Net accounting value as at 1.1.2016 9,548 8,918
   
Purchase value
As at 1.1.2016 9,900 8,918
Additions 0 0
Disposals of instalments 0 –1,901
Currency translation difference –10 –5
As at 31.12.2016 9,890 7,012
 
Accumulated depreciation
As at 1.1.2016 352 0
Depreciation 564 0
Currency translation difference –4 0
As at 31.12.2016 912 0
 
Net accounting value as at 31.12.2016 8,978 7,012

6. Associated companies

Associated companies Location Function Currency   Capital in
thousand
31.12.2016
Shareholdings   31.12.2016
TCHF
Capital share   31.12.2015
TCHF
Ostmilch Handels GmbHBad Homburg DETradeEUR1,0002,6702,291
Ostmilch Handels GmbH & Co. Frischdienst Oberlausitz KGSchlegel DELogisticsEUR5114138
Ostmilch Frischdienst Magdeburg GmbHMeitzendorf DETradeEUR258748
2,8982,377

7. Financial assets

TCHF20162015
Securities3030
Deferred tax assets1,273544
Assets from employer contribution reserves7,8997,726
Total9,2028,300

The deferred tax assets result from existing carried forward losses in the tax balance sheet. The increase comes primarily from the negative results of Uckermärker Milch GmbH and HOCHDORF Baltic Milk UAB.

Taxable losses carried forward after expiration

TCHF20162015
2023 and later4,4901,420
Total4,4901,420

Pension plans

TCHF
Employer contribution reserve
Nominal value
31.12.2016
Renounced use
31.12.2016
Balance sheet
31.12.2016
Provision per
2016
Balance sheet
31.12.2015
Result of the
committee of works and staff councils in personnel expenses
20162015
HGR pension fund7,89907,8991737,72600

The posting of interest from employer contribution reserves by the pension facility appears as a credit in the financial revenues. Interest of 2.25 % was calculated on the employer contribution reserves in 2016 (previous year 2.25 %).

TCHF
Economic benefit/economic liability
and pension expenditure
 Credit/debit balance Economic share of the
organisation
Change compared to prior yearAmounts accrued for the periodPension expenditure in personnel expenses
31.12.201631.12.201631.12.201520162015
HGR pension fund16,6500001,8371,8371,771

8. Intangible assets 1)

TCHF Software Other intangible assets Total
Net accounting value as at 1.1.2015 1,549 1,549
 
Purchase value
As at 1.1.2015 1,927 1,927
Additions 761 761
Disposals –45 –45
As at 31.12.2015 2,643 2,643
 
Accumulated depreciation
As at 1.1.2015 378 378
Depreciation 337 337
Currency translation difference –23 –23
As at 31.12.2015 692 692
Net accounting value as at 31.12.2015 1,951 1,951
 
Net accounting value as at 1.1.2016 1,951 1,951
 
Purchase value
As at 1.1.2016 2,643 0 2,643
Additions 246 700 946
Disposals –1 –1
Currency translation difference –9 –9
As at 31.12.2016 2,879 700 3,579
 
Accumulated depreciation
As at 1.1.2016 692 0 692
Disposals 0 0
Depreciation 494 16 510
Currency translation difference –7 –7
As at 31.12.2016 1,179 16 1,195
 
Net accounting value as at 31.12.2016 1,700 684 2,384
  1. Intangible assets only cover acquired assets. Own brand names and licenses are not evaluated and not balanced on the balance sheet date.

9. Trade payables

TCHF20162015
To third parties57,72951,466
To related parties4461,406
To associated companies3800
Total58,55552,872

10. Short-term financial liabilities

TCHF 2016 2015
Other financial liabilities  91 24
To related parties 1 54,300 0
Leasing liabilities 1,945 1,901
Bank loans 2 7,097 0
Total 63,433 1,925
  1. Including purchase price debt of CHF 45.8 million in connection with the acquisition of the Pharmalys companies. Additionally, this position includes an outstanding dividend payment to the former owner of the Pharmalys companies.
  2. Uckermärker has its own credit line for EUR 10 million, of which EUR 6.5 million had been used as of the closing date.

11. Other short-term liabilities

TCHF20162015
Other short-term liabilities4,5658,998
Employee overtime193219
Employee holiday credits536493
Salary accounts (salary payments, profit-sharing, AHV, SUVA, health insurance, etc.)4,2883,685
Government bodies (taxes, source taxes)3,202678
Total12,78414,073

The other short-term liabilities include the «Schoggi Law» fund in particular. This fund is augmented from charges raised per litre of milk delivered. The funds are used to compensate for any gaps in the «Schoggi Law» credit from the state. It is calculated annually. Money that is not used is reimbursed to the milk suppliers.

12. Accrued liabilities and deferred income

TCHF20162015
As at 31 December 4,6525,095

The deferred income essentially includes accruals in the context of reimbursements and commissions («Schoggi Law») as well as invoices not yet received for goods receipts and other supplier services (power, water, transport).

13. Non-current financial liabilities

TCHF 2016 2015
Mortgages, loans 1 429 425
Leasing liabilities 5,098 7,017
Bank loans 115,205 55,000
To related parties 2 105,500 0
Total 226,232 62,442
  1. Loan commitment to a former shareholder of Marbacher Ölmühle GmbH.
  2. Purchase price debt in connection with the purchase of the Pharmalys companies.

Terms and interest rates (long-term and short-term financial liabilities)

Position Book value
TCHF
Due date Interest rate
Syndicated loan 115,000 30.6.2021 from 0.60 % to 2.50 %
Bank loans 7,302 >2020 from 1.50 % to 7.11 %
Geiger loan 429 >2020 from 2.02 % to 3.83 %
Short-term leasing 1,945 2017 from 1.85 % to 9.64 %
Long-term leasing 5,098 2018/2020 from 1.85 % to 9.64 %
Other current liabilities 91 2017 from 6.39 % to 7.97 %
To related parties 159,800 2017/2018 No interest
Total 289,665

The financial liabilities are recorded at nominal value and valued.

14. Provisions

TCHF
Development of provisions
Short-term provisions Damages claims Deferred
tax provisions
Total
As at 31.12.2014 533 1,204 9,712 11,449
Provisions made (with effect on net income) 0 61 1,953 2,014
Provisions used –533 –839 0 –1,372
Provisions released 0 –190 –2 –192
Currency translation differences 0 –131 –568 –699
As at 31.12.2015 0 105 11,095 11,200
Provisions made (with effect on net income) 0 80 3,044 3,124
Provisions used 0 0 0 0
Provisions released 0 –104 –134 –238
Currency translation differences 0 –1 –71 –72
As at 31.12.2016 0 80 13,934 14,014

Notes to the consolidated income statement

The following explanatory remarks are given to supplement the income statement, structured in accordance with the overall cost procedure (production income statement).

15. Sales of products

By product groups

TCHF 2016   2015  
Milk products/cream 233,060 42.30 % 225,290 40.91 %
Milk powder 166,307 30.19 % 190,062 34.52 %
Infant formula 122,126 22.17 % 110,217 20.01 %
Specialities/wheat germ 14,148 2.57 % 12,061 2.19 %
Bakery/confectionary goods 4,996 0.90 % 6,260 1.14 %
Remaining products/services 10,289 1.87 % 6,765 1.23 %
Total 550,926 100.00 % 550,655 100.00 %

By region

TCHF 2016   2015  
Switzerland/Liechtenstein 199,718 36.25 % 210,302 38.19 %
Europe 234,749 42.61 % 243,255 44.18 %
Asia 25,253 4.58 % 23,611 4.29 %
Middle East/Africa 82,670 15.01 % 62,438 11.34 %
USA/Canada 321 0.06 % 0 0.00 %
Americas (others) 5,507 1.00 % 1,560 0.28 %
Rest 1 2,708 0.49 % 9,489 1.72 %
Total 550,926 100.00 % 550,655 100.00 %
  1. The remaining turnover comprises deliveries to customers who export the goods and where the destination country is not separately recorded.

As a result of possible competitive disadvantages compared to non-listed and large listed competitors, customers and suppliers, presentation of the segment results was waived, pursuant to Swiss GAAP ARR 31/8. The Swiss milk market is small and tightly knit with few key companies and suppliers. The suppliers (milk producers) are organised within several milk producer organisations. On the processing side, the market is dominated by four large dairies, along with cheesemakers. On the customer side, the chocolate industry segment is predominant, likewise with just a few large processors. In the area of infant formula (based on milk), only one other firm produces infant formula for the Swiss and international market, apart from the HOCHDORF Group.

16. Other revenue

TCHF20162015
Various remaining revenue551553
Total551553

The various remaining revenue includes the renting of office and production space as well as private shares from employees for the use of vehicles as larger positions.

17. Reductions in proceeds

TCHF 2016 2015
Discounts, contingency reserves, accounts receivable losses 1   –280 –294
Reimbursements («Schoggi Law»), rebates  –8,611 –6,719
Various reductions in proceeds 2   –429 46
Total –9,320 –6,967
  1. There were no significant losses from accounts receivables in the current year.
  2. Various reductions in proceeds include individual damage claims from deliveries and services. The balance is shown net since cancellations of the provisions made in previous years also occur via the damages claims account.

18. Personnel expenses

TCHF 2016 2015
Wages –38,891 –37,561
Social contributions –6,141 –5,845
Incidental wage costs incl. temporary staff –2,764 –2,821
Total –47,796 –46,227

19. Other operating expenses

TCHF 2016 2015
Facilities expenditure (incl. warehouse rents) –4,879 –4,754
Maintenance, repairs –8,381 –7,895
Vehicle and transport –7,625 –7,226
Insurance, fees, duties –1,232 –1,308
Energy and disposal expenditure –16,904 –18,066
Administration and IT expenditure –4,029 –4,722
Advertising costs incl. commissions to customers –6,804 –4,687
Various other operating costs –5,767 –4,800
Total –55,621 –53,458

20. Financial result

TCHF 2016 2015
Interests from cash and cash equivalents 0 1
Revenues from holdings and financial assets incl. associated parties 1,660 723
Other financial revenue 25 19
Total financial revenue 1,685 743
 
Interest costs –1,170 –1,834
Deposit fees, fees –144 –29
Exchange rate losses –419 –3,776
Total financial costs –1,733 –5,639
Total –48 –4,896

21. Non-operating result

TCHF 2016 2015
Revenue from external properties –31 –40
Total –31 –40

The external properties refer to a building lease at Rothenburg fuel depot as well as an owner's association parking level at Hochdorf station.

22. Extraordinary result

TCHF 2016 2015
Profit from the disposal of operational fixed assets –4 –6
Exceptional expenditure –5 –66
Total –9 –72

23. Taxes

TCHF 2016 2015
Current income taxes    
Taxes on operating result  –667 –679
     
Deferred income taxes    
Net change in deferred tax assets and liabilities –2,304 –1,434
Total –2,971 –2,113

Valuation of deferred taxes occurs in line with the tax rates that are actually expected in meeting future tax liability or in the realisation of future receivables (liability method). The tax rate is 12 % for companies exclusively based in the canton of Lucerne; it is 15 % for HOCHDORF Swiss Nutrition Ltd, with its production in the Thurgau canton. 15 % was applied for the subsidiary in Lithuania and 25 % for the subsidiaries in Germany, Uruguay and South Africa.
The weighted average tax rate relates to the Group's earnings before taxes (EBT) and amounts to 13.28 % (previous year: 13.96 %).
Capital taxes are reported separately in operating costs. 2015 and years before have been definitively assessed for the Swiss companies. The companies abroad have been provisionally assessed.

24. Earnings per share

Company results per share, basic

20162015
Weighted average shares outstanding1,411,4251,152,439
Company result before minority interests19,931,05913,521,507
Company earnings per share in CHF, basic14.1211.73

To determine the company result per share, the company results due to the HOCHDORF Group shareholders is divided by the average number of outstanding shares. Own shares held are not included in the calculation of the average outstanding shares. The weighted average number of shares is a result of the total of all transactions in the reporting year.
No convertible bonds are outstanding in the year under review. Therefore, there was no dilution effect.

25. Own shares

HOCHDORF Group pension fund

 2016
Number
2015
Number
Registered shares of HOCHDORF Holding Ltd 18,00025,000
Total18,00025,000

Transactions with own shares

  2016 2015
Balance as of 1.1. in units 24,000 5,143
At the average price per share of CHF 158.94 136.73
Purchases in units 21,353 44,708
At the average price per share of CHF 216.60 148.04
Sales in units –20,981 –25,851
At the average price per share of CHF 188.14 140.54
     
Balance as of 31.12. in units 24,372 24,000
At the average price per share of CHF 211.14 158.94

Further notes

Unsettled derivative financial instruments

Exchange rate instruments Value changes 2016
Asset values
2016
Liability values
 Purpose Value change 2015
Asset values
2015
Liability values
 Purpose
Interest rate swaps 0 0 0 Hedging 31 0 0 Hedging
Forward exchange contracts 120 0 0 Hedging –120 0 –120 Hedging
Total assets and liability values 120 0 0 –89 0 –120

The market values of forward exchange contracts to hedge future cash flows are not reported on the balance sheet, similar to the underlying transaction. The corresponding profit from the derivative is reported on the income statement at the time the hedged transaction occurs. There were no forward exchange contracts as of balance sheet date.

Leasing debts

TCHF20162015
Unrecognised leasing debts754
Total754

Liabilities from pension fund

TCHF20162015
HOCHDORF Group pension fund308305
Total308305

Acquisitions

On 19 December 2016, in connection with the strategic development of the Baby Care division, HOCHDORF Holding Ltd acquired 51 % of the shares in Pharmalys Laboratories SA with registered office in Hochdorf, for CHF 170.9 million and thus acquired control. The company does business in the sale of infant formula in the Middle East, North Africa and Asia.

The acquired net assets are as follows:

 TCHF Total
   
Cash and cash equivalents 4,891
Trade receivables 15,122
Short-term receivables from related parties 4,035
Other short-term receivables 7
Other short-term receivables from related parties 41
Inventories 616
Prepayments and accrued income 7,890
Trade payables –13,216
Other short-term liabilities –8,105
Short-term provisions –1,649
Accrued liabilities and deferred income –18
Identified net assets 9,614
 
Goodwill 166,008
Net assets incl. Goodwill 175,622
 
Less minority interests –4,711
Provisional purchase price 170,911

On 19 December 2016, in connection with the strategic development of the Baby Care division, HOCHDORF Holding Ltd acquired 49 % of the shares in Pharmalys Tunisie S.à.r.l. with registered office in Kondar, Tunisia, for CHF 1.2 million with the contractual obligation to acquire another 2 % of the shares in 2017 and thus acquire control. The company does business in the packaging and sale of infant formula in the Middle East and North Africa.

The acquired net assets are as follows:

 TCHF Total
   
Cash and cash equivalents 192
Trade receivables 1,170
Property, plant 1,325
Other fixed assets 1,191
Trade payables –901
Short-term financial liabilities –225
Other short-term liabilities –4
Other short-term liabilities from related parties –93
Accrued liabilities and deferred income –2
Long-term financial liabilities –225
Identified net assets 2,428
 
Badwill –19
Net assets incl. Badwill 2,409
 
Less minority interests –1,238
Provisional purchase price 1,171

The purchase price is calculated on the basis of the average EBIT in 2016 and 2017 for Pharmalys Laboratories SA and Pharmalys Tunisie S.à.r.l. multiplied by a factor of 14. In addition to this, there is a one-off upside compensation of CHF 28 – 36 million for the increase in the value of the shares of HOCHDORF Holding Ltd from the signing of the Memorandum of Understanding through 24 October 2016. The purchase price is thus variable and will be set definitively as of 31 March 2018. There may still be deviations from this as a result. The final purchase price shall be between CHF 160 and CHF 190 million on the basis of the forecasts at this time and will also include external advisory costs in connection with the transaction.

An amount of CHF 20 million of the total purchase price to be paid was transferred in cash by 31 December 2016. As of 30 March 2017, another advance payment of CHF 45.8 million is to be made in the form of Mandatory Convertible Securities (MCS) from Tranche B of the paid-in convertible bonds in March 2017. The remaining, definitive total purchase price is to be paid partially in MCS and in cash on 30 March 2018.

Pharmalys Laboratories SA – Exit

In accordance with the Shareholders' Agreement of 19 December 2016 between the minority shareholder and HOCHDORF, both parties are forbidden until 19 December 2020 – without the consent of the other party – from transferring their shares in Pharmalys Laboratories SA or from establishing any rights to these shares. After the end of this period, the shares are subject to a mutual right of first offer or pre-emptive right.

In the event that the minority shareholder wants to transfer their shares and HOCHDORF does not exercise its right of first offer or pre-emptive right, the parties shall endeavour to jointly seek an alternative solution for the exit of the minority shareholder within three years (e.g. by staggered sale to HOCHDORF, sale to a third party, IPO).

Goodwill offset against equity

Purchase costs

TCHF20162015
As at 1 January3,0883,088
Additions166,0080
As at 31 December169,0963,088

Accumulated depreciation

TCHF20162015
As at 1 January–999–382
Additions–618–617
As at 31 December–1,617–999
   
Theoretical price as at 31 December167,4792,089

The acquisitions in the reporting year resulted in goodwill of TCHF 166,008. This is shown based on a linear amortisation over 5 years (pro rata). Badwill generated is not taken into account in these explanatory remarks. The statement of changes in shareholders' equity shows goodwill as a net position.

The effects of a theoretical capitalisation on the income statement and balance sheet are shown in the following table.

TCHF20162015
Group result19,40613,024
Goodwill amortisations–618–617
Theoretical company results18,78812,407
   
TCHF20162015
Equity45,805192,788
Theoretical goodwill 167,4792,089
Theoretical equity213,284194,877

Transactions with related persons and companies

The business transactions with related persons and companies are based on standard commercial contracts and conditions. All transactions are contained in the consolidated annual accounts 2016 and 2015. These cover deliveries of goods and raw materials as well as services to and from related companies.

Transactions with associated companies

TCHF20162015
Net sales69,39581,988
Cost of goods–6,647–53,799
Service revenue023
Service costs–498–544
Other expenses–1820
Financial revenue95
Financial expenses–11–33

Transactions with related companies

TCHF20162015
Net sales5,60311,064
Cost of goods–627–576
Service revenue6632
Service costs1–1,837–1,771
Financial revenue1732
Financial expenses–3–12
  1. Service costs include the employer contributions for employees, which are settled in the related HOCHDORF Group pension fund.

Contingent liabilities

There are no contingent liabilities.

Risk report

Risk management and risk policy

Risk management provides important support in protecting and securing future potential. The general risk awareness of the management team and employees is increased by annual risk assessments. The HOCHDORF Group has an implemented risk management system for all Group companies.

Starting with the identification of risks, the main risks for the company are assessed and measured in regard to their likelihood of occurrence and impact. Appropriate measures are defined and their implementation checked periodically. Each member of the Group Management is responsible for the implementation of the measures in their area of responsibility. The Board of Directors is notified periodically of important changes in the risk assessment.

Risk assessment

In this year's risk assessment, management views the greatest risks to be in the areas of political framework conditions (country risk, food legislation, the «Schoggi Law»), dependency on the processing industry and sales partners as well as fluctuations in revenue.

The HOCHDORF Group is exposed to various financial risks due to its business activity. These include currency, interest and credit risks.

The HOCHDORF Group generates revenues and profits in foreign currencies in Switzerland and abroad. Changes in the exchange rate will have an impact on the consolidated results for this reason. In order to limit these risks, the concept of «natural hedging» is applied as the primary hedging strategy. The foreign currency risk from the inflow of money in a certain currency is neutralised by cash outflows in the same currency. For this reason, currency fluctuations only affect the margins of the Group to a limited extent, i.e. the Group is exposed to a relatively low transaction risk. Periodically, it is analysed whether there is a gap due to the «natural hedging». The analysis is discussed with the Group Management and it is decided whether any gaps need to be hedged with derivative instruments.

The translation risk due to the translation of profits/losses generated/incurred abroad can affect the Group results, despite the effective «natural hedging», if there are significant fluctuations in currency. Translation risks are not hedged by the Group.

Since the Group does not have significant interest-generating assets apart from bank deposits, the Group's income is mainly independent of changes in current interest rates. The Group's interest rate risk comes from foreign financing. The Group is subject to changes in current interest rates due to the loans. Furthermore, interest rates based on the framework loan agreement for the Group depend on the ratio of net debt to EBITDA and on the equity ratio of the Group and on LIBOR.

The risk management in the area of credit risks is handled by ongoing monitoring of the credit limits and by means of external credit insurance.

Internal control system

The internal control system (ICS) is expanded and improved continuously. It is intended for ongoing optimisation of the business activities and has the goal of ensuring the necessary processes and instruments for identifying and controlling risks. The system complies with the statutory requirements in Switzerland and is satisfactory for the needs of a company the size of HOCHDORF. The ICS for the HOCHDORF Group was developed on the basis of the COSO framework. Besides the controls related to complying with the strategic and operating objectives and compliance with the rules, the ICS was primarily designed for risks related to financial reporting in all Group companies. The compliance and effectiveness of the ICS is usually checked in the internal audit. In 2016, the focal point of the audit was on the processes in the purchase of milk and in the area of IT security. Furthermore, the external auditors undertake adequate audit procedures in order to assess whether there is an ICS. They confirm this in their audit report.

Internal Audit

In 2016, the Internal Audit was outsourced and handled by PricewaterhouseCoopers with support provided by experts in the Finance and Accounting Department. The Internal Audit supports the Board of Directors in the handling of its monitoring and controlling tasks, particularly at the subsidiaries. Internal Audit provides an independent and objective audit and advisory service that is focused on generating added value and improving business processes. It helps the company to achieve its goals by assessing the effectiveness of the risk management, the controls and the management and monitoring processes with a systematic and targeted approach and by improving them.

Internal Audit works with the Audit Committee to prepare a strategic audit plan at regular intervals, which is presented to the Board of Directors for approval in each case. On the basis of the multi-year plan, Internal Audit develops an operating audit plan that details the planned audits over the next year. This plan is presented to the Audit Committee for approval. Furthermore, the Board of Directors can give special orders to Internal Audit.

After completing each audit, Internal Audit prepares a written audit report. It contains the findings and recommendations made by Internal Audit as well as the statement by Management containing the planned measures and the time required for the completion of these measures. Group Management checks the implementation of the defined measures and continuously provides orientation for the Audit Committee.

Internal Auditors did not take part in any meetings of the Board of Directors or in any meetings of the Audit Committee in the reporting year. External Audit receives information about the audit plan and the audit activities of Internal Audit as well as the audit reports. Internal Audit may view the reports of External Audit.

Events after the balance sheet date

After the balance sheet date and until the adoption of the Group accounts by the Board of Directors, no significant events have occurred that could affect the informational value of the 2016 annual accounts or which must be disclosed here.

The consolidated annual accounts were approved in the form presented here by the Board of Directors at its meeting on 10 March 2017.