Financial risks are managed by Corporate Treasury, in accordance with a set of risk management principles approved by the Board of Directors.
Currency risk is linked to changes in the value of Fiskars’ cash flows, its balance sheet, and/or its competitiveness resulting from changes in exchange rates. Fiskars’ currency position is split between its transaction position and translation position, both of which are managed separately.
Transaction risk results from the possibility that the value of expected cash flow denominated in a particular currency may change as a result of changes in exchange rates. Translation risk refers to the impact that changes in exchange rates can have on the consolidated balance sheet, and which can affect the value of balance sheet assets, equity, and debt liabilities. In addition to balance sheet values, changes in exchange rates can also result in changes in key indicators, such as the Group’s equity ratio and gearing.
Fiskars aims to manage its currency risks primarily through business means. Acquisition of production inputs and sale of products are primarily denominated in the local currencies of the Group companies, of which the euro (41% of consolidated net sales), the US dollar (32%), the Swedish krona (8%), the Norwegian krone (4%), The Danish krone (4%) and the pound sterling (3%) are the most important. Higher levels of imports indirectly expose Fiskars to risks linked to changes in the local currencies of its suppliers, of which the most important are the Chinese renminbi and the Thai baht.
The objective of Fiskars’ approach to managing its transaction risk is to reduce the impact of changes in exchange rates on the Group’s budgeted profitability and cash flows. Business units are responsible for managing the currency risks associated with their projected and agreed commercial cash flows. Units hedge their exposure using currency forwards with the Corporate Treasury.
Transaction risk is measured by net of the Group’s commercial and financial receivables and liabilities denominated in foreign currencies. The net position is hedged by currency derivatives in accordance with the Treasury Policy approved by the Board of Directors. Currency forwards and swaps are the most widely used instruments in hedging currency risks. Derivatives are used solely for hedging purposes.
Fiskars does not apply hedge accounting as defined under IAS 39 for transaction risk purposes. All gains and losses made on currency derivatives are booked in the income statement. If hedge accounting had been applied to currency derivatives Fiskars’ consolidated profit before tax for 2012 would have been EUR 0.6 million above the reported figure (2.9 million below).
Interest rate risk refers to possible changes in cash flow or in the value of assets or liabilities resulting from changes in interest rates. Interest rate risk is measured by the average reset period of interest rates of financial assets and liabilities. The average reset period reflects the time it takes on average for the change in interest rates to effect on the interest costs of net debt portfolio. The risk is quantified in monetary terms as the change in interest costs during the observation period caused by a permanent one percentage point rise in interest rates. The shorter the average reset period, the more unpredictable are the interest costs and thus the higher the interest rate risk.
Derivatives are used in the management of interest rate risks. The objective is to maintain the average reset period within the agreed limits of 4 to 18 months as set in the Treasury Policy. As of December 31, 2012 the nominal amount of outstanding interest rate derivatives was EUR 32.5 million (22.5).
The Group’s interest-bearing net debt as of December 31, 2012 was EUR 72.4 million (150.8). 44% (78) of the net debt was linked to variable interest rates and including effect from interest rates derivatives 56% (22) to fixed interest rates. The average interest rate reset period of interest-bearing debt was 11 months (8).
Sensitivity of interest expenses on changes in market rates has been calculated by assuming permanent one percentage unit increase change in market rates and assuming no change in the net debt during the year. The calculated impact on the consolidated result before tax would be EUR 0.3 million (1.0) in 2013.
Liquidity risk refers to the possibility of the Group’s financial assets proving insufficient to cover its business needs or a situation in which arranging such funding would result in substantial additional costs. The objective of liquidity management is to maintain an optimal amount of liquidity to fund the business operations of the Group at all times while minimizing interest costs. Liquidity is considered to be the sum of cash and cash equivalents and available committed credit lines.
Re-financing risk refers to the possibility of such a large amount of liabilities falling due over such a short space of time that the re-financing needed might be unavailable or prohibitively expensive. The objective is to minimize the re-financing risk by diversifying the maturity structure of the debt portfolio.
The Group has extensive unused credit facilities at its disposal to guarantee its liquidity. As of the end of the year, the aggregate of unutilized committed revolving credit facilities and overdraft facilities totaled EUR 442.1 million (471.1). In addition, the Group’s parent company in Finland has a commercial paper program with a number of leading banks amounting to EUR 400.0 million, of which EUR 5.0 million (72.0) was utilized as of the end of the year.
Fiskars may use derivatives to hedge its exposure to commodity price fluctuations where appropriate. As of the end of the year, the Group held no commodity derivative contracts other than electricity futures with a nominal value of EUR 2.9 million (2.5) recognized at market value through the Income Statement.
Corporate Treasury is responsible for evaluating and monitoring financial counterparty risk. The Group minimizes this risk by limiting its counterparties to a limited number of major banks and financial institutions and by working within agreed counterparty limits. Business units are responsible for monitoring customer credit risks. The Group’s clientele is extensive and even the largest customer represent less than 10% of the outstanding receivables. As of the end of the year, the Group’s sales receivables totaled EUR 101.0 million (111.0), and the financial statements include provisions for bad debts related to sales receivables totaling EUR 3.2 million (3.4).
Fiskars is not subject to any externally imposed capital requirements (other than eventual local company law requirements effective in the jurisdictions where Fiskars Group Companies are active).
The Group’s objectives when managing capital are: