Explanatory notes to the consolidated financial
statement 2017 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 financial statement reflects the actual status of the Group’s asset, financial and revenue position. The consolidated annual financial statement is based on the principle of historical purchase costs and is based on the annual financial statements for the group companies as of 31 December 2017, prepared according to standard principles.

Consolidation principles

Consolidated companies/consolidation method

The consolidated annual financial statement for the HOCHDORF Group comprises 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. Shareholdings 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 financial statement 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 liabilities 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
2017201631.12.201731.12.2016
EUR 11.11191.09001.17021.0720
USD 10.98320.98880.97451.0164
TND 10.40820.45980.39020.4418
UYU 10.03430.03290.03390.0346
ZAR 10.07380.06760.07870.0743

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
31.12.2017
Capital share
31.12.2017
Capital share
31.12.2016
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 1 Hochdorf CH Trade CHF --- --- 100%
HOCHDORF Baltic Milk UAB  Medeikiai LT Production and trade EUR 5,792 100% 100%
HOCHDORF Swiss Whey Ltd 2 Hochdorf CH Shell company CHF --- --- 100%
Switzerland. Milch-Gesellschaft Ltd Hochdorf CH Shell company CHF 100 100% 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 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. Tunis TU Marketing TND 120 51% 51%
Pharmalys Laboratories SA, Hochdorf Hochdorf CH Trade CHF 100 51% 51%
Pharmalys Tunisie S.à.r.l. 3 Sousse TU Production TND 3,300 51% 49%
Snapz Foods Ltd 4 Hochdorf CH Trade CHF 100 65% n/a
Zifru Trockenprodukte GmbH 5 Zittau DE Production EUR 200 100% n/a
  1. Merged with HOCHDORF Swiss Nutrition Ltd as at 01.01.17.
  2. Merged with HOCHDORF Swiss Nutrition Ltd as at 01.01.17.
  3. Purchase of 2% as of 14.03.2017 based on contractual assurance
  4. Formation on 19.10.2017.
  5. Purchase of 100% as of 31.10.2017

Associated companies

Location

Function

Currency
 Capital in thousand
31.12.2017
Capital share
31.12.2017
Capital share
31.12.2016
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. Indications for possible impairment are given if payment is delayed, the customer is experiencing financial difficulties or recapitalisation or bankruptcy is likely. The value adjustments for doubtful accounts receivable are established based upon the difference between the nominal value of accounts receivable and the estimated net collectible amount. The amount of the respective estimated loss is recognized in the income statement within the item «Specific valuation adjustment on accounts receivable”. As soon as a receivable becomes uncollectible, it is written off and charged against the item “Accounts receivable losses” under derecognition/adjustment of the item “Specific valuation adjustment on accounts receivables».

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 (PMC)
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 purchase or manufacturing cost (PMC) 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.

Prepayments and accrued income as well as accrued liabilities and deferred income

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 may be 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, licences and brand values. These are recognised at the lower of acquisition cost or utility value. They are depreciated over their economic service life on a straight line basis.

Equity/own shares

Own shares are recognised as a deduction from equity at cost. Profits and losses from transactions with own shares are recognised in capital reserves without affecting net income.

Equity/hybrid bond

The hybrid bond is a perpetual subordinated bond. The hybrid bond has its first call date after five-and-a-half years. This is the first possible call date in the case of the bond for HOCHDORF. If this is not exercised, the amount of interest payable increases (step-up). The hybrid bond is classified for the most part as equity. The issuing costs were deducted from the issue price. The obligations for the interest payable are discounted for the first five-and-a-half years (first call date) from the issue date. The conditions for the syndicated loan provide a basis of comparison for the interest rate. The discounted interest obligations are shown under short-term and long-term financial liabilities in accordance with their maturities. The interest payable is offset against the corresponding financial liabilities. Only the accrued interest of the relevant business year is recognised in interest expenses.

Equity/mandatory convertible bond

The mandatory convertible bond is a bond that does not give the bondholder any voting rights. The bond is converted into shares of HOCHDORF Holding Ltd at the latest at the end of its term as a mandatory requirement. The mandatory convertible bond is classified for the most part as equity. The issuing costs are recognised in equity via the capital reserves. The obligations for the interest payable are discounted from the issue date. The conditions for the syndicated loan provide a basis of comparison for the interest rate. The discounted interest obligations are shown under short-term and long-term financial liabilities in accordance with their maturities. The interest payable is offset against the corresponding financial liabilities. Only the accrued interest of the relevant business year is recognised in interest expenses.

Short-term/long-term liabilities

Liabilities are measured at the nominal amount. Short-term liabilities 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 of foreign companies 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 accounts receivable 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.

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 takeover of Zifru Trockenprodukte GmbH as at 31 October 2017 and the formation of Snapz Foods AG with the acquisition of intangible rights will only lead to a negligible increase in the individual balance sheet items. The values are therefore directly comparable with the previous year overall.

1. Cash and cash equivalents

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

TCHF20172016
Cash198
Post account9,1299,370
Bank account54,28258,111
Short-term investments430219
Total63,86067,708

2. Accounts receivable

TCHF20172016
Accounts receivables from third parties81,86258,869
Minus provision for doubtful accounts-378-1
Short-term receivables from related parties44,1008,421
Accounts receivables from associated companies1,5562,393
Other receivables10,6815,625
Other receivables from related parties041
Total137,82175,348

Diversification means there is no concentration of credit risk with regard to accounts 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

TCHF20172016
Raw materials, packaging materials, operating materials12,37510,204
Finished and semi-finished products, trade goods44,34341,137
Heating oil434491
Value adjustments for inventories-1,707-2,050
Total55,44549,782

4. Accrued income

TCHF20172016
As at 31 December 21,55515,175

The accrued income is 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
projects 2
Total
Net accounting value as at 01.01.2016 72,411 27,135 54,934 5,961 1,158 8,115 169,714
 
Purchase value
As at 01.01.2016 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 01.01.2016 76,946 29,563 86,511 11,968 1,268 0 206,256
Change in scope of consolidation 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
 
Purchase value
As at 01.01.2017 151,474 59,574 144,679 20,060 2,606 38,084 416,477
Change in scope of consolidation 5 3,543 148 3,766 7 1 0 7,465
Additions 0 10 0 0 44 83,914 83,968
Disposals  -205 -166 -444 -97 -145 0 -1,057
Reclassification 3 14,695 12,719 8,261 3,117 126 -38,918 0
Currency translation differences 4,045 1,100 2,646 112 100 205 8,208
As at 31.12.2017 173,552 73,385 158,908 23,199 2,732 83,285 515,061
 
Accumulated depreciation
As at 01.01.2017 79,035 31,801 87,914 13,146 1,604 0 213,500
Change in scope of consolidation 5 31 57 1,126 7 1 0 1,222
Disposals  -178 -132 -422 -87 -83 0 -902
Depreciation  2,376 2,575 4,614 1,680 271 0 11,516
Currency translation differences 1,820 742 2,068 36 65 0 4,731
As at 31.12.2017 83,084 35,043 95,300 14,782 1,858 0 230,067
 
Net accounting value as at 31.12.2017 90,468 38,342 63,608 8,417 874 83,285 284,994
  1. The Group holds undeveloped 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.
  5. In the context of the purchase of Zifru Trockenprodukte GmbH.

Of which assets subject to financial leasing

 TCHFTotalOpen instalments
Net accounting value as at 01.01.20178,9787,012
  
Purchase value
As at 01.01.20179,8907,012
Additions00
Disposals of instalments0-1,943
Currency translation differences6625
As at 31.12.20179,9565,094
 
Accumulated depreciation
As at 01.01.20179120
Depreciation5650
Currency translation differences250
As at 31.12.20171,5020
 
Net accounting value as at 31.12.20178,4545,094

6. Associated companies

Associated companies Location Function Currency   Capital in
thousand
31.12.2017
Shareholding 31.12.2017
TCHF
Capital share 31.12.2016
TCHF
Ostmilch Handels GmbHBad Homburg DETradeEUR1,0002,5602,670
Ostmilch Handels GmbH & Co. Frischdienst Oberlausitz KGSchlegel DELogisticsEUR510141
Ostmilch Frischdienst Magdeburg GmbHMeitzendorf DETradeEUR257987
2,6392,898

7. Financial assets

TCHF20172016
Securities3030
Deferred tax assets2,0851,273
Assets from employer contribution reserves8,0777,899
Total10,1929,202

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

Taxable losses carried forward after expiration

TCHF20172016
2023 and later7,9994,490
Total7,9994,490

Pension plans

TCHF
Employer contribution reserve
Nominal value
31.12.2017
Renounced use
31.12.2017
Balance sheet
31.12.2017
Provision per
2017
balance sheet
31.12.2016
Result of the committee of works and staff councils
in personnel expenses
2017 2016
HGR pension fund 8,077 0 8,077 178 7,899 0 0

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 2017 (previous year 2.25%).

TCHF
Economic benefit/economic liability
and pension expenditure
Credit/debit balance  Economic share of the organisation Change compared to prior year Amounts accrued for the period Pension expenditure in personnel expenses
31.12.2017 31.12.2017 31.12.2016 2017 2016
HGR pension fund 16,856 0 0 305 2,142 2,142 1,837

8. Intangible assets 1)

TCHF Software Brands Other intangible assets Total
Net accounting value as at 01.01.2016 1,951  0 1,951
 
Purchase value
As at 01.01.2016 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 01.01.2016 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
 
Purchase value
As at 01.01.2017 2,879 700 3,579
Additions 704 3,520 4,224
Disposals -87 -87
Currency translation differences 59 59
As at 31.12.2017 3,555 3,520 700 7,775
 
Accumulated depreciation
As at 01.01.2017 1,179 16 1,195
Disposals 0 0
Depreciation 514 117 140 771
Currency translation differences 45 45
As at 31.12.2017 1,738 117 156 2,011
 
Net accounting value as at 31.12.2017 1,817 3,403 544 5,764
  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

TCHF20172016
To third parties72,50657,729
To related parties2,170446
To associated companies155380
Total74,83158,555

10. Short-term financial liabilities

TCHF20172016
Other financial liabilities 19,57191
To related parties 296,82954,300
Leasing liabilities1,9811,945
Bank loans 3987,097
Total108,47963,433
  1. Including discounted interest amounts from the convertible bond and the hybrid bond for 2018; see additional explanations in figure 15.
  2. Including purchase price debt of CHF 96.4 million in connection with the acquisition of the Pharmalys companies.
  3. Uckermärker Milch GmbH has its own credit line for EUR 10 million. Until the end of 2016, the outstanding amount was listed under short-term financial liabilities. The credit agreement is identical to the credit agreement for the syndicated loan of the holding company and is of a long-term nature. The amounts outstanding are therefore listed under long-term financial liabilities from 2017.

11. Other short-term liabilities

TCHF20172016
Other short-term liabilities6,2294,565
Employee overtime311193
Employee holiday credits658536
Salary accounts (salary payments, profit-sharing, AHV, SUVA, health insurance, etc..)4,0354,288
Government bodies (taxes, source taxes, VAT)5,8043,202
Total17,03712,784

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 carried over to the new year.

12. Accrued liabilities and deferred income

TCHF20172016
As at 31 December 15,4964,652

The accrued liabilities and deferred income essentially includes accruals in the context of reimbursements and commissions to customers («Schoggi Law») and other supplier services (power, water, transport).

13. Long-term financial liabilities

TCHF20172016
Mortgages, loans 1452429
Leasing liabilities3,1175,098
Bank loans 211,817115,205
To related parties0105,500
Other financial liabilities 324,3360
Total39,722226,232
  1. Loan commitment to a former shareholder of Marbacher Ölmühle GmbH.
  2. Uckermärker Milch GmbH has its own credit line for EUR 10 million. Until the end of 2016 the outstanding amount was listed under short-term financial liabilities. The credit agreement is identical to the credit agreement for the syndicated loan of the holding company and is of a long-term nature. The amounts outstanding are therefore listed under long-term financial liabilities from 2017.
  3. Including discounted interest amounts from the convertible bond and the hybrid bond for 2019 and subsequent years; see additional explanations in point 15.

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

Position Book value
TCHF
Due date Interest rate
Syndicated loan 0 30.06.2021 from 0.70% to 2.60%
Bank loans 11,915 >2020 from 1.50% to 7.11%
Geiger loan 452 >2020 from 1.26% to 2.68%
Short-term leasing 1,981 2018 from 1.85% to 5.34%
Long-term leasing 3,117 2019/2020 from 1.85% to 5.34%
Other short-term financial liabilities 9,571 2018 from 0.00% to 7.97%
To related parties short-term 96,829 2018 No interest
Other long-term liabilities 24,336 2019/2023 No interest
Total 148,201

The financial liabilities are recorded and valued at the nominal value.

14. Provisions

TCHF
Development of provisions
Damages claimsVarious provisionsDeferred
tax provisions
Total
As at 31.12.2015105011,09511,200
Provisions made (with effect on net income)8003,0443,124
Provisions used0000
Provisions released-1040-134-238
Currency translation differences-10-71-72
As at 31.12.201680013,93414,014
Provisions made (with effect on net income)053,2233,228
Provisions used-5100-51
Provisions released-290-182-211
Currency translation differences00442442
As at 31.12.20170517,41717,422

15. Share capital – mandatory convertible bond – hybrid capital – contingent capital

The share capital of HOCHDORF Holding Ltd was unchanged at CHF 14,347,600 as at 31.12.2017. It is divided into 1,434,760 registered shares at a nominal value of CHF 10 each (2016: 1,434,760 registered shares).

In the business year 2017, HOCHDORF Holding Ltd issued a public mandatory convertible bond with a nominal volume of CHF 218.49 million, net CHF 217.06 million; duration from 30.03.2017 – 30.03.2020; 3.5% interest rate for the whole duration; conversion price CHF 304.67; securities number 35,275,641; ISIN CH0352756412; conversion period: 03.01.2018 up to and including 13.03.2020. The transaction costs for the mandatory convertible bond of CHF 1.43 million are represented in the capital reserves.

The mandatory convertible bond is composed of a public offering of mandatory convertible bonds in the sum of CHF 87,485,000 to existing shareholders in Switzerland and certain existing shareholders outside Switzerland and the USA (Tranche A) and a private placement of mandatory convertible bonds amounting to CHF 131,005,000, which were subscribed to in full by Mr Amir Mechria (Tranche B).

The mandatory convertible bond is classified for the most part as equity. It is split into an equity component and a liabilities component. The liabilities component includes all future bond interest payments. These were discounted on the issue date of 30.03.2017 at an interest rate of 1%. This interest rate corresponds to the current margin of the syndicated loan. Of the whole bond amount of CHF 218.49 million, CHF 133.285 million are effectively interest-bearing from 30.03.2017 until 30.03.2018. From 01.04.2018, interest will be charged on the full bond amount. The effective interest payments will be drawn from the corresponding financial liabilities and will not be charged to income. Only the accrued interest of the relevant business year is recognised in interest expenses.

The division of the mandatory convertible bond into an equity component and a liabilities component had, mistakenly, not yet been carried out in the half-yearly statement as at 30.06.2017. The previous year will be adjusted accordingly in the half-year report as at 30.06.2018.

HOCHDORF Holding Ltd has contingent capital of CHF 7,173,800 for the creation of 717,380 registered shares to service the mandatory convertible bond.

Likewise in 2017 (payment 21.12), HOCHDORF Holding Ltd issued a public mandatory convertible bond with a nominal volume of CHF 125 million, net CHF 124.17 million. It is a perpetual subordinated bond which pays interest with a coupon rate of 2.5%. The hybrid bond has its first call date after five-and-a-half years (21.06.2023). If this is not exercised, the amount of interest payable increases (step-up). Securities number 39,164,798; ISIN CH0391647986.

The hybrid bond is classified for the most part as equity due to its properties. It is split into an equity component and a liabilities component. The liabilities component includes all future bond interest payments until the first call date. These were discounted on the issue date of 21.12.2017 at an interest rate of 1%. This interest rate corresponds to the current margin of the syndicated loan. The effective interest payments will be drawn from the corresponding financial liabilities and will not be charged to income. Only the accrued interest of the relevant business year is recognised in interest expenses.

A liabilities component is used on the grounds that the interest payments, which can, in principle, be delayed, have to be paid up to and including 30.03.2020, according to the issue prospectus. This is because the interest payments for the hybrid bond cannot be suspended as long as interest is paid for the mandatory convertible bond (compulsory events), which will be the case until the bond matures on 30.03.2020. In addition, it can be assumed on the basis of the dividend policy of HOCHDORF Holding Ltd that no interest payments will be delayed until the first call date as a result of dividend payments.

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). The income statement items included the values of the Pharmalys companies for the first time in 2017. Also included in 2017 are the values for the months November and December of the newly founded Snapz Foods Ltd and the acquired Zifru Trockenprodukte GmbH. Therefore, a direct comparison with the prior year is only of limited value.

16. Net revenue from deliveries and services

By product groups

TCHF 2017   2016  
Milk products/cream 234,459 39.04% 232,828 42.99%
Milk powder 165,057 27.48% 157,787 29.13%
Infant formula 166,094 27.66% 121,762 22.48%
Specialties/wheat germ 17,227 2.87% 13,933 2.57%
Bakery/confectionary goods 4,664 0.78% 5,027 0.93%
Other products/services 13,026 2.17% 10,269 1.90%
Total 600,527 100.00% 541,606 100.00%

By region

TCHF 2017   2016  
Switzerland/Liechtenstein 200,319 33.36% 191,210 35.31%
Europe 237,106 39.48% 234,061 43.22%
Asia 22,640 3.78% 25,247 4.66%
Middle East/Africa 132,190 22.01% 82,663 15.26%
USA/Canada 239 0.04% 321 0.06%
Americas (others) 4,111 0.68% 5,435 1.00%
Other 1)   3,922 0.65% 2,669 0.49%
Total 600,527 100.00% 541,606 100.00%
  1. The remaining turnover comprises deliveries to customers who export the goods and where the destination country is not separately recorded.

By Division

TCHF 2017   2016  
Dairy Ingredients 405,131 67.46% 393,099 72.58%
Baby Care 168,751 28.10% 123,029 22.72%
Cereals & Ingredients 26,645 4.44% 25,478 4.70%
Total 600,527 100.00% 541,606 100.00%

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 providers. The providers (milk producers) are limited to the individual milk producer organisations. On the processing side, the market is shaped 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.

17. Other operating income

TCHF20172016
Various other operating income419551
Total419551

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.

18. Personnel expenses

TCHF20172016
Wages-41,201-38,891
Social contributions-6,643-6,141
Incidental wage costs incl. temporary staff-3,156-2,764
Total-51,000-47,796

19. Other operating expenses

TCHF20172016
Facilities expenditure (incl. warehouse rents)-4,934-4,879
Maintenance, repairs-8,503-8,381
Vehicle and transport costs-10,035-7,625
Insurance, fees, duties-1,404-1,232
Energy and disposal expenditure-15,273-16,904
Administration and IT expenditure-4,728-4,029
Advertising costs incl. commissions to customers-14,409-6,804
Various other operating costs-5,646-5,767
Total-65,382-55,621

20. Financial result

TCHF20172016
Interests from cash and cash equivalents10
Revenues from holdings and financial assets incl. associated parties6131,660
Other financial revenue1925
Exchange rate gains3,9880
Total financial revenue4,6211,685
 
Interest costs-1,319-1,170
Deposit fees, fees-18-144
Exchange rate losses-0-419
Total financial costs-1,337-1,733
Total3,284-48

21. Non-operating income

TCHF20172016
Revenue from external properties-34-31
Total-34-31

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

TCHF20172016
Profit from the disposal of operational assets-48-4
Extraordinary result  38-5
Total-10-9

23. Taxes

TCHF20172016
Current income taxes  
Taxes on operating result -3,793-667
   
Deferred income taxes  
Net change in deferred tax assets and liabilities-1,217-2,304
Total-5,010-2,971

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 10.73% (previous year: 13.28%). The reduction compared to the previous year is due primarily to the late submission of carried forward losses at the foreign subsidiaries from prior years in a volume equivalent to CHF 2,285,414 and the formation of deferred tax assets on new losses from the business year in a volume equivalent to CHF 2,756,390. By applying the tax rates which are applicable for the companies, this results in a lower tax expenditure with a volume equivalent to CHF 1,102,678. Without these changes, the weighted, average tax rate for the business year would be 12.80%.
Capital taxes are reported separately in operating costs. 2016 and years before have been definitively assessed for the Swiss companies. The companies abroad have been provisionally assessed.

24. Earnings per share

Earnings per share, basic

20172016
Weighted average shares outstanding1,404,6391,411,425
Net profit after minority interests25,894,28519,931,059
Earnings per share in CHF, basic18.4314.12

To determine the net profit per share, the net profit 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 and additions due to the creation of new registered shares from the conversion of the convertible bond.

Earnings per share, diluted

2017 2016
Weighted average shares outstanding, basic 1,404,639 1,411,425
Dilution effect of convertible bond 1   717,136 0
Weighted average shares outstanding, diluted 2,121,775 1,411,425
     
Net profit after minority interests 25,894,285 19,931,059
Interest paid on convertible bond 2   26,045 0
12% tax effect (interest on convertible bond*0.12/1.12) -2,791 0
Net profit after minority interest, diluted 25,917,539 19,931,059
Earnings per share in CHF, diluted 12.22 14.12
  1. The dilution is calculated from the conversion loan of CHF 218.49 million and the conversion price CHF 304.67, from which a maximum of 717,136 new shares are generated. The conversion period runs from 03.01.2018 to 13.03.2020. Therefore, as of 31.12.2017 the whole of the mandatory convertible bond was outstanding.
  2. In this case only the accrued interest on the liabilities component for the current business year is taken into account in interest costs. The actual interest payments are offset against the liabilities component of the discounted interest payments, as described in figure 15.

25. Own shares

HOCHDORF Group pension fund

 2017
Number
2016
Number
Registered shares of HOCHDORF Holding Ltd 18,00018,000
Total18,00018,000

Transactions with own shares

 20172016
Balance as of 01.01 in units24,37224,000
At the average price per share of CHF211.14158.94
Purchases in units13,00421,353
At the average price per share of CHF279.91216.60
Sales/allocations in units-1,243-20,981
At the average price per share of CHF 303.22188.14
   
Balance as of 31.12 in units36,13324,372
At the average price per share of CHF237.20211.14

Share-based remuneration

As described in the remuneration report, 20% of the Board of Directors’ remuneration, excluding expenses, is paid out in the form of HOCHDORF Holding Ltd shares. In the case of Group Management, 20% of the variable remuneration is also paid out in the form of HOCHDORF Holding Ltd shares. They are allocated at the volume-weighted average price of all transactions on the SIX on the allocation day.

Allocation Allocation date Allocated securities Volume-weighted
average exchange rate
(CHF)
Recognised expenses (CHF)
Variable remuneration paid to Group Management 10.03.2017 873 314.37 274,448.04
Fee for Board of Directors 13.12.2017 370 276.89 102,449.30

Further notes

Unsettled derivative financial instruments

Exchange rate instrumentsValue changes2017
Asset values
2017
Liability
values
 PurposeValue change2016
Asset values
2016
Liability
values
 Purpose
Interest rate swaps000Hedging000Hedging
Forward exchange contracts-2290229Hedging12000Hedging
Total assets and liability values-229022912000

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. As of the balance sheet date, forward exchange contracts existed totalling EUR 36 million at an average exchange rate of EUR 1 = CHF 1.163791.

Leasing debts

TCHF20172016
Unrecognised leasing debts747
Total747

The unrecognised leasing debts are for the full operational leasing of a car, which includes variable costs, such as maintenance, servicing and fuel.

Liabilities from pension fund

TCHF20172016
HOCHDORF Group pension fund360308
Total360308

The liabilities from the pension fund relate to the premiums invoice for the month of December, which had not yet been paid as at the balance sheet date.

Acquisitions

On 31 October 2017, in connection with the strategic development of the Cereals & Ingredients division, HOCHDORF Holding Ltd acquired 100% of the shares in Zifru Trockenprodukte GmbH, with its registered office
in Zittau (Germany), and thus acquired control. The company specialises in the production of dried fruit and
vegetable products.

The acquired net assets are as follows:

 TEUR Total
   
Cash and cash equivalents 31
Accounts receivables 42
Other short-term receivables 75
Inventories 615
Accrued income 3
Property and plant 3,023
Other fixed assets 2,351
Trade payables -14
Other short-term liabilities -113
Long-term liabilities -3,477
Provisions -1,273
Identified net assets 1,263

The purchase price corresponds to the net assets. There was no goodwill.

Purchase price calculation for Pharmalys

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 its registered office in Baar (now Hochdorf), and 49% of the shares in Pharmalys Tunisie S.à.r.l., with its registered office in Kondar, Tuneisia. As at 14 March 2017, HOCHDORF Holding Ltd additionally acquired 2% of the shares in Pharmalys Tunisie S.à.r.l., with the result that it now holds 51% of the shares.

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 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 30 March 2018. The EBIT of the two companies will be available when the annual report is created. The parties decided by mutual consent, contrary to the arrangements in the share purchase agreement, to create an additional side letter, listing items that have an impact on the calculation of the purchase price, but can only be definitively determined in 2018. The expected maximum purchase price will be taken into account based on the results of the two companies as at 31 December 2017. The purchase price is CHF 248.213 million on the basis of the audited financial statements and includes external advisory costs in connection with the transaction. A provisional purchase price of CHF 172.082 million was shown in the financial statements as at 31 December 2016. Taking into consideration the payment made in 2017 for the acquisition of 2% of the shares in Pharmalys Tunisie S.à.r.l. for CHF 0.049 million, CHF 76.082 million therefore still has to be included as the value of the holdings as at 31 December 2017. This amount represents in total goodwill and is offset against equity.

An amount of CHF 20 million of the total purchase price to be paid was transferred in cash by 31 December 2016. As at 14 March 2017 an amount of CHF 0.049 million was paid for the purchase of 2% of the shares in Pharmalys Tunisie S.à.r.l. On 30 March 2017, another advance payment of CHF 45.8 million was made in the form of Mandatory Convertible Securities (MCS) from Tranche B of the paid-in convertible bonds in March 2017. On the basis of the purchase agreement and the side letter, a further payment was made on 30 March 2018 in the form of MCS and in cash. The final payment is scheduled for the end of 2018.

Goodwill offset against equity

Purchase costs

TCHF20172016
As at 1 January169,0963,088
Additions76,082166,008
As at 31 December245,178169,096

Accumulated depreciation

TCHF20172016
As at 1 January-1,617-999
Additions-33,819-618
As at 31 December-35,436-1,617
   
Theoretical price as at 31 December209,742167,479

A goodwill of TCHF 76,082 resulted from the determined purchase price for Pharmalys. 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.

TCHF20172016
Net profit40,84619,406
Depreciation of goodwill-33,819-618
Theoretical net profit7,02718,788
   
TCHF20172016
Equity309,28245,805
Theoretical goodwill 209,742167,479
Theoretical equity519,024213,284

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 of 2017 and 2016. These cover deliveries of goods and raw materials as well as services to and from related companies.

Transactions with associated companies

TCHF20172016
Net sales79,07069,395
Cost of goods-10,755-6,647
Services revenue240
Service costs-383-498
Operating expenses-72-182
Financial revenue139
Financial expenditure-10-11

Transactions with related companies

TCHF20172016
Net sales57,1545,603
Cost of goods0-627
Services revenue11966
Service costs 1-2,136-1,837
Operating expenses-1,7720
Financial revenue2,83317
Financial expenditure-971-3
  1. Service costs include the employer contributions for employees, which are settled in the related HOCHDORF Group pension fund.

In the course of the acquisition of Zifru Trockenprodukte GmbH in Zittau HOCHDORF Holding Ltd negotiated with the previous shareholders. The previous shareholders included Kyberion AG, with a stake of 43%, and Prof Dr Holger Karl-Herbert Till, with a stake of 5%. Kyberion AG is controlled fully by the CEO of HOCHDORF Holding Ltd, Dr Thomas Eisenring. Prof Till is a Board member of HOCHDORF Holding Ltd. Neither Prof Till nor Dr Eisenring were present at any of the negotiations or meetings of the Board of Directors of HOCHDORF Holding Ltd relating to the purchase of Zifru Trockenprodukte GmbH.

Contingent liabilities

There are no contingent liabilities.

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 2017 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 23 March 2018.