Report of the statutory auditor to
the Annual Shareholders’ Meeting of
Georg Fischer Ltd, Schaffhausen

Report on the audit of the consolidated financial statements

Opinion

We have audited the consolidated financial statements of Georg Fischer Ltd and its subsidiaries (the Group), which comprise the consolidated income statement for 2018, the consolidated balance sheet as at 31 December 2018 and the consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2018 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Swiss GAAP FER and comply with Swiss law.

Basis for opinion

We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the “Auditor’s responsibilities for the audit of the consolidated financial statements” section of our report.

We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Our audit approach

Materiality

The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.

On the basis of our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate, on the consolidated financial statements as a whole.

 

 

 

Overall materiality

 

CHF 17’250’000

How we determined it

 

5% of profit before tax

Rationale for the materiality benchmark applied

 

We chose profit before tax as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured, and it is a generally accepted benchmark.

Audit scope

We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.

The Group is structured along three divisions, GF Piping Systems, GF Casting Solutions and GF Machining Solutions, operating across three key geographical locations – Europe, North & South America and Asia. The Group’s financial statements are a consolidation of 145 reporting units, each of which, including both the Group’s operating businesses and the central service functions, is considered a component.

We identified 46 reporting units that, in our view, required a full scope audit and three reporting units that required specified procedures due to their size and or risk characteristics. These full scope audits addressed over 69% of the Group’s revenue and 70% of the Group’s total assets, while the specified procedures addressed 6% of the Group’s revenue and 3% of the Group’s total assets.

The remaining 25% of the Group’s revenue and 27% of the Group’s total assets was represented by a large number of smaller reporting units. None of these reporting units individually contributed more than 3.5% to consolidated revenue or total assets.

Where the work was performed by component auditors, we determined in addition to our instructions the necessary level of our involvement in the audit work, which consisted of visiting component audit teams, inspecting their work performed, conducting planning and closing calls, or reviewing their final reporting.

Where component audits were conducted by an auditor outside of the PwC network, the work performed was discussed and reviewed by PwC on a sample basis.

Further specific audit procedures on central service functions, the Group consolidation and areas of significant judgement (including M&A transactions, taxation, treasury and litigation) were led by the Group audit team.

Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Accounting for business combinations

 

 

 

Key audit matter

 

How our audit addressed the key audit matter

During the financial year, the Group made one acquisition, which we considered to have a material impact on the Group’s assets and liabilities and its income statement items. Accounting for business combinations is considered a key audit matter as it involves significant judgement by management. Management needs to determine the date of first consolidation as well as the consolidation method to be applied. Further, management may need to apply judgement when estimating the fair value of the assets and liabilities acquired. Management determined that the fair value of the net identifiable assets acquired is CHF 84 million. The goodwill arising from the acquisition amounts to CHF 73 million.

 

To assess the appropriateness of the accounting for business combinations, we assessed the procedures performed by management to identify the assets and liabilities acquired, and reviewed the relevant legal documents such as the share purchase agreement. In particular, we performed the following audit procedures: • We considered the appropriateness of the acquisition date determined by management by reviewing the relevant clauses of the related share purchase agreement. • We performed various substantive audit procedures to ensure the completeness of the identified assets and liabilities acquired and the reasonableness of the valuation methodologies applied by management. • This included, amongst other audit procedures, reviewing the valuation and accounting of the purchase consideration, the identification and valuation performed by management or its experts of the assets and liabilities acquired. • We verified the accuracy of the calculations performed, including their mathematical correctness. • We assessed whether the transaction was accounted for and disclosed in the consolidated financial statements in accordance with the provisions of Swiss GAAP FER 30. Based on the procedures performed, the valuation of the opening balances of the acquired company is reasonable and the related disclosures are appropriate.

Impairment of goodwill

 

 

 

Key audit matter

 

How our audit addressed the key audit matter

The impairment assessment for goodwill is considered a key audit matter due to the size of the balance (carrying amount: CHF 129 million) and the significant assumptions management has to apply. The main estimation uncertainty relates to the projection of future free cash flows. In line with the Georg Fischer accounting policy, the goodwill is fully offset against equity. The consequence of a theoretical recognition on the balance sheet and the subsequent amortisation is disclosed in the notes to the consolidated financial statements.

 

We obtained all impairment models prepared by management and performed the following audit procedures: • We ensured that the models are based on the latest business plans. Management follows a clearly documented process for estimating future cash flows. The forecast period used for future cash flows covers the years 2019 to 2023. The estimates are based on the latest budgets approved by the Board of Directors. • We assessed the reasonableness of the business plan by comparing the implicit growth rates with the market and analyst forecasts. Further, we verified whether the assumptions made by management in their models are internally consistent. • We compared the current year actual results with the forecast figures included in the prior year impairment tests. • We developed our own expectations of the risk adjusted weighted average cost of capital and the long-term growth rate. • We performed our own sensitivity analyses to obtain a better understanding of how strongly the current valuation of goodwill is supported. Overall, on the basis of our review of the impairment models, the supporting evidence obtained as well as the results of our own sensitivity analyses, we concluded that the impairment models used are appropriate, that results of the impairment tests are reasonable and that there is no impairment of goodwill.

Accounting for divestments

 

 

 

Key audit matter

 

How our audit addressed the key audit matter

As at 1 December 2018, Georg Fischer Group divested two automotive iron-casting plants in Germany (Singen and Mettmann) with a dedicated workforce of 2’000 employees and combined sales of approximately CHF 617 million (for the eleven months in 2018). The plants were acquired by Fondium B.V. & Co. KG, Mettmann, which is controlled by three former members of GF Casting Solutions management. Georg Fischer Group retains a share of 20% in the equity of the divested entities. The divestment of a subsidiary is not an everyday occurrence within the Group. Hence, there is a risk that not all related deconsolidation entries as well as disclosures, as required under Swiss GAAP FER, are correct and complete. The divestment of the two iron-casting plants is described in note 4.1 “Additions and disposals”.

 

Our audit work included the following procedures: • We read thoroughly the underlying share purchase agreement and performed an assessment of the contract’s key features on the accounting implications, including the appropriateness of the deconsolidation date. • We audited the pro-rata consolidation of the income statements of the two plants up to the date of the divestment. • We tested the deconsolidation entries. In particular, we tested the recycling from equity to income of the associated currency translation adjustments and the calculation of the respective results of the divestment of the two plants. • We assessed whether the presentation and disclosure were in accordance with the requirements of Swiss GAAP FER. On the basis of the work performed, we consider the accounting, presentation and disclosure of the divestment as reasonable.

Responsibilities of the Board of Directors for the consolidated financial statements

The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with Swiss GAAP FER and the provisions of Swiss law, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

A further description of our responsibilities for the audit of the consolidated financial statements is located at the website of EXPERTsuisse: http://expertsuisse.ch/en/audit-report-for-public-companies. This description forms part of our auditor’s report.

Report on other legal and regulatory requirements

In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors.

We recommend that the consolidated financial statements submitted to you be approved.

PricewaterhouseCoopers AG


Stefan Räbsamen

Audit expert
Auditor in charge


Diego J. Alvarez

Audit expert


Zurich, 21 February 2019