3 Capital and financial risk
management

Net debt, which is calculated as the difference between interest-bearing liabilities and cash and cash equivalents and marketable securities, decreased by CHF 63 million to CHF 54 million in the year under review (previous year: CHF 117 million). This decrease was primarily related to the free cash flow (CHF 110 million) minus the dividend payments to GF shareholders and minority shareholders amounting to CHF 72 million.

In the previous year, the financial flexibility and maturity profile were improved by the placement of a CHF 200 million bond with a maturity of 9.5 years. Furthermore, short-term bank loans in the amount of CHF 435 million were drawn and repaid during the previous year.

The following table shows in detail the various categories of interest-bearing financial liabilities by currency and interest rate:

The term of the syndicated loan was extended by one year to 2025 in the previous year:

The syndicated credit line provides the GF Corporation with the financial flexibility to act swiftly, for instance in the case of acquisitions, and was not drawn as of the end of the year 2021 and 2020. In addition to other terms, the syndicated credit line is subject to a covenant with respect to the net debt ratio (ratio of net debt to EBITDA). The conditions of the syndicated credit line are considered to represent standard conditions for such types of arrangements. As of 31 December 2021, the financial covenant was not breached.

The bonds as well as the syndicated credit line are subject to standard cross-default clauses, whereby the outstanding amounts may all become due if early repayment of another loan is demanded from GF or one of its subsidiaries, owing to a failure to meet the credit terms. As of the balance sheet date, the effective credit terms had been met.

The interest-bearing financial liabilities also included loans payable to employee benefit plans in the amount of CHF 2 million (previous year: CHF 3 million).

Assets pledged or restricted on title in part or whole amounted to CHF 8 million (previous year: CHF 9 million). They essentially contain CHF 5 million (previous year: CHF 5 million) of pledged assets related to accounts receivable and CHF 3 million (previous year: CHF 3 million) related to liquid assets. The assets are pledged or restricted on title as collateral for bank loans.

In the previous year, the result of associates includes a negative impact on the application of the equity accounting of CHF 4 million, additional value adjustments of CHF 4 million on the non-current loans to associates as well as gains from the sale of the remaining investments in associates.

In the year under review, the increase in lease obligations is mainly due to extensions of leases in China.

Liabilities relating to financial lease contracts in the amount of CHF 7 million (previous year: CHF 10 million) were mainly due to the leasing of machines by GF Piping Systems and GF Casting Solutions. The leasing obligations are included in “Other financial liabilities at fixed interest rates” and are disclosed in note 3.1 Interest-bearing financial liabilities.

As of 31 December 2021, the share capital comprised 4’100’898 registered shares with a par value of CHF 1 each. Total dividend-bearing nominal capital amounted to CHF 4’100’898.

Until 14 April 2022, the maximum authorized share capital is CHF 400’000 divided into 400’000 registered shares, each with a par value of CHF 1. The conditional capital consists of a maximum of 400’000 shares divided into 400’000 registered shares, each with a par value of CHF 1. The maximum amount of the authorized or conditional capital is reduced by the amount of authorized or conditional capital created through the issue of bonds or similar debt instruments or new shares.

The Board of Directors presents a proposal for the appropriation of retained earnings to the Annual Shareholders’ Meeting of GF. Over the medium term, the target is to distribute between 30% and 40% of the consolidated net profit to shareholders.

For the financial year 2021 the Board of Directors is proposing to the Annual Shareholders’ Meeting of GF a total dividend payment out of the retained earnings of CHF 20 per registered share (previous year: CHF 15 per registered share).

As of 31 December 2021, reserves that cannot be distributed to the shareholders amounted to CHF 97 million (previous year: CHF 82 million).

GF purchases treasury shares to meet its obligation under the different share-based compensation models offered to the Board of Directors, the Executive Committee, and the Senior Management. For further information on share-based compensation for the Board of Directors and the Executive Committee see Compensation Report, note 1.3 Operating expenses and 1.4 Personnel expenses.

The GF Corporation uses two ratios to monitor equity: the equity ratio and the return on equity. The equity ratio represents equity as a percentage of total assets. Return on equity is net profit expressed as a percentage of average equity. These ratios are reported to the Executive Committee and the Board of Directors on a regular basis. 

The GF Corporation aims to maintain an equity ratio of 35% to 40% with a return on equity above 15%. Although total equity increased, total assets increased, so that the equity ratio fell to 39.7% (previous year: 40.3%).

Enterprise risk management as a fully integrated risk management process was systematically applied in 2021 at all levels of the GF Corporation. A risk map was prepared in May for the GF Corporation, the three divisions, and all significant GF Corporate Companies and sales regions, including the key risks in the areas of strategy, markets, operations, management and resources, finance as well as sustainability. The likelihood of the risk occurring was classified into four categories. Where possible and appropriate, the identified risks were subject to a quantifiable assessment, taking into consideration any measures already implemented. Alternatively, a qualitative assessment of the risk exposure was applied.

The risk council, consisting of representatives of the divisions and the Corporate Staff and headed by the Chief Risk Officer, held one meeting. The main content of the discussions was the analysis of the adapted risk management process and the new risk management reporting software. In addition, the divisional risk maps were closely analyzed.

In accordance with the annual risk reporting process, the Executive Committee and divisional management discussed the risk maps in June/July of the reporting year. They defined, at the appropriate level, the key risks of the GF Corporation, the divisions and the GF Corporate Companies and sales regions, and determined adequate measures to mitigate those risks. The outcome of these workshops was included in the risk report for 2021, which was approved by the Board of Directors in December 2021. In addition, the Board of Directors held a risk management workshop in November 2021 with the aim to define all relevant risks from a Board of Directors’ viewpoint and compare the findings with the risk assessment of the Executive Committee. The result of this workshop as well as the determined measures in order to mitigate or control the risks defined were included in the 2021 risk report.

The multi-stage procedure, including workshops at divisional management, Executive Committee, and Board of Directors level, has proven to be effective. In addition, Internal Audit assess the risk maps prepared by the GF Corporate Companies.

The following key risks were identified: the disruption of supply chains, the negative economic impact of the COVID-19 pandemic crisis, and cyber risks. Measures to reduce these and other risks were defined and are being implemented in line with the strategic targets of the GF Corporation and the three divisions.

Through its different business activities, the GF Corporation is exposed to various financial risks such as credit risk, market risk (including currency risk, interest rate risk, and price risk), and liquidity risk. The following sections provide an overview of the extent of the individual risks as well as the goals, principles, and processes employed for measuring, monitoring, mitigating, and managing the risks.

The Board of Directors bears ultimate responsibility for financial risk management. The Board of Directors has mandated the Audit Committee with monitoring the development and implementation of the risk management principles. The Audit Committee reports regularly to the Board of Directors on this matter.

The financial risk management principles are designed to identify and analyze the risks to which the GF Corporation is exposed and to establish appropriate control mechanisms. The principles of financial risk management are regularly reviewed, taking into consideration changes in the relevant financial markets and in the activities of the GF Corporation.

As of the balance sheet date, the maximum amount of credit risk including off-balance sheet commitments was as follows:

Cash is predominantly deposited with leading Swiss, German, US, and Chinese banks with a credit rating of at least BBB– (Standard & Poor’s). Furthermore and in accordance with the investment policy, all financial transactions are only entered into with counterparties deemed creditworthy. In addition, cash holdings are allocated to different banks in order to limit the counterparty risk. The maximum amount of cash to deposit with a bank is defined in relation to its credit rating. Cash deposits, current accounts, and cash investments have a maturity of less than three months.

Transactions involving derivative financial instruments are only entered into with counterparties with a credit rating of at least BBB– (Standard & Poor’s). The purpose of such transactions is to hedge against currency risks.

The risk of concentrated credit risks on trade accounts receivable is limited due to the large number of customers and their wide diversification across industries and regions. The extent of credit risk is determined by individual characteristics of the customers and in order to assess this risk, a review of creditworthiness based on the customer’s financial situation and historical experience is performed on a regular basis.

The maximum credit risk on financial instruments corresponds to their carrying amounts. No additional arrangements have been entered into that would increase the risk above the carrying amounts.

Currency risk occurs in connection with transactions (in particular the purchase and sale of goods) which are effected in currencies that differ from the functional currencies. Through such transactions the GF Corporation is mainly exposed to changes in the euro, US dollar, Chinese yuan, and Turkish lira exchange rates. These currency risks can be reduced by purchasing and producing goods in the functional currencies (congruency principle) or by entering into foreign currency forwards (cash flow hedges), usually for a maximum of 12 months.

The table below shows the foreign currency forward contract and actual values of the foreign currency contracts used to mitigate currency risk:

The balance sheet hedges include foreign currency forward contracts that are used to hedge loans to GF Corporate Companies in foreign currencies. Unrealized gains and losses from changes in the fair value are reported in the financial result. These hedges are mainly in euro, US dollars, Romanian leus, and Canadian dollars, and expire usually no later than 12 months from the balance sheet date.

The balance sheet hedges also include foreign currency forward contracts that serve to hedge currency risks on receivables and payables. Like the currency effects on the underlying balance sheet item, gains and losses from changes to the actual value of these contracts are recognized in “Other operating income”. These balance sheet hedges are mainly in US dollars and euro and expire no later than 12 months from the balance sheet date.

Liquidity risk is the risk that the GF Corporation is unable to meet its obligations when they fall due. Liquidity is constantly monitored to ensure that it is adequate. Liquidity reserves are held in order to offset the usual fluctuations in requirements. At the same time, the GF Corporation has unused credit lines in case more serious fluctuations occur. The total amount of unused credit lines as of 31 December 2021 was CHF 772 million (previous year: CHF 732 million). The credit lines are maintained with different banks in order to ensure swift and adequate access to these credit lines.