Risk management is part of all business operations, and its purpose is to identify, assess, manage and report significant risks. During 2018 the board approved the Risk Policy and the Financial Policy which was implemented during the year. The Group’s risk management covers risks associated with individual projects, operational risks and risk of failing to comply with laws and regulations, such as the risks involved in financial reporting. Market risks include the effects of economic conditions, trends, customer development, supplier dependence, political decisions and competition. Risks also include technological risk and production disturbances as well as the capacity to attract and retain key individuals. Financial risks include existing financing, options for future financing and currency- and interest risks. Legal risks consist of legislation, regulations, insurance, public authorities and supervisory bodies, as well as disputes and claims for damages. Risks that are managed well can lead to opportunities and generate value, while risks that are not dealt with correctly can cause damages and unnecessary costs for the company. For this reason, the ability to identify risk factors and manage risks is an important part of the company’s operational activities.
Sensys Gatso is exposed to financial risks in its international business due to changes in exchange- and interest rates, as well as liquidity, financing and credit risks. The Group’s policy for managing financial risks has been defined by the Board of directors and serves as a framework for risk management.
Currency risk refers to the fluctuations in exchange rates having a negative impact on the Group’s income statement, balance sheet and/or cash flow. Currency risk arises when future business transactions, or reported assets or liabilities, are expressed in a currency which is not the Group’s functional currency.
In the Group’s international operations, some customers pay in their own currency which means that the Group is exposed to transactional currency risks. This kind of currency risk also arises in conjunction with the import of raw material and components in a currency that is not the Group’s functional currency. Incoming flows or foreign currencies should be used for payment in the same currency. The subsidiaries within the group perform their business mostly in their functional currencies, therefore limiting transaction exposure risk.
Currency risk also arises in conjunction with the translation of foreign net Currency risk also arises in conjunction with the translation of foreign net assets and earnings, so-called translation exposure. This currency risk is not hedged and refers, primarily, to the translation of foreign subsidiaries’ income statement and balance sheets. Earnings from foreign subsidiaries are translated into Swedish krona based on the average exchange rate for each month. Net assets are translated into Swedish krona based on the exchange rate per last date of the month. The Group’s risk exposure in foreign currencies at the end of 2020, expressed in thousands of Swedish krona (TSEK) consisted of the following:
As indicated by the exposure table above, the Group is primarily exposed to changes in the EUR/SEK exchange rate.
The company enters into forward contracts to mitigate the currency risk on future expected cash receipt of customer contracts. These contracts are accounted for as a cash flow hedge in the financial numbers. The company also recognizes a risk on timing of payment and uses currency swap contracts to temporarily prolong the effect of a forward contract if needed. These currency SWAPs will be bought/sold on the settlement date of the forward contract(s). The Company has entered into swap contracts to buy the following currencies; USD 2.6 million (EUR/USD).
The company also, for time to time, enteres into currency swap contracts to mitigate currency risks on (short-term) intercompany loans in SEK, which are swapped to a foreign currency. These swap contracts are not accounted for as a cash flow hedge, therefore the fair value of these contracts are accounted for in the profit and loss. At the end of the financial year the company has the following outstanding swap contracts related to intercompany financing.
The company holds no interest-bearing assets and, accordingly, the Group’s income and cash flow from operating activities are, in all material aspects, independent of changes in market interest rates. The Group’s interest-rate risk arises in conjunction with long-term borrowing. The aim is to limit the interest risk in the Group’s interest-bearing liabilities. At the closing date, the Group had MSEK 89.9 (95.6) in interest-bearing liabilities and cash and cash equivalents amounted to MSEK 108.5 (52.4). Borrowing on the basis of floating interest rates, exposes the Group to interest–rate risks as regards to cash flow. Borrowing on the basis of fixed interest rates implies an interest-rate risk for the Group in terms of fair value. During 2020, the Group’s borrowings largely consisted of credit facilities provided by banks with three months fixed interest rates (EURIBOR and LIBOR). The group’s liabilities to shareholders are burdened with three months (EURIBOR) and fixed annual rates on subordinated loans. The interest rates and conditions are consistent with 2020. The Group holds no listed financial instruments.
LIQUIDITY AND FINANCIAL RISKS
Financing risk also refers to risks associated with existing and future financing, refinancing of overdue loans, or difficulties in raising external loans. Liquidity risk refers to the risk of being unable to fulfil payment commitments when they fall due as a consequence of insufficient liquidity. Both of these forms of risk are managed by the company preparing regular cash flow forecasts. The Board closely monitors rolling forecasts for the company’s liquidity reserve to ensure that the company has sufficient cash funds to meet the requirements of operating activities. The group has processes in place to monitor the bank covenants and the cash flow and is in control of cash requirements. For the liabilities the company has conventional covenants towards the banks, such as Debt Service Coverage Ratio, Solvency ratio, absolute EBITDA levels and certain restriction for new investments. In 2020 the installment of the vendor loan of EUR 1 million, is converted into shares (EUR 1 million, paid). At the end of 2020 the company has used MSEK 51.6 ( 46.1) of its credit facilities. The table below presents an analysis of the Group’s financial liabilities to be settled net, specified according to the contractual time to maturity, as of the closing date. The interest amounts stated in the table are the contractual,undiscounted cash flows. Amounts falling due within 12 months correspond with the carrying amounts, as the effect of discounting is negligible.
Credit risks are defined as the risk of loss if the opposite parties with whom the Group has invested cash and cash equivalents, fail to fulfil their obligations. Credit risks are to a large extent avoided through effective creditworthiness analyses/monitoring of existing and potential customers, and in certain cases by obtaining payments in advance or payment against a letter of credit. The Groups’ assets are recognised in the balance sheet after deduction for provisions for expected credit losses. The credit risk is limited to the carrying amount of each financial asset. A provision of MSEK 7,4 (9.2) was made for receivables that are not expected to be paid.
The Group’s objective with regard to the capital structure is to secure the Group’s ability to continue operating, so that it can continue to generate returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to keep the cost of capital down. To maintain or adjust the capital structure, the Group may change the dividend paid to shareholders, repay capital to shareholders, issue new shares or sell assets to reduce debt. The debt/equity ratio at 31 December 2020 was 67.3% (63.4%).
For Sensys Gatso, a major part of operational risk lies in the management of each individual project. Sensys Gatso works actively to integrate risk management in each customer project, and has developed an in-house tool, Risk Assessment Analysis, for this purpose. The tool enables the company to identify, manage and where necessary, accept and limit the risks involved in each project. The project manager is responsible for implementing Risk Assessment Analysis and subsequently following up and reporting on important matters. In addition to this, for larger projects, a member of the management team will be appointed to act as sponsor for the project and the point of contact for regular reports from the project manager.
Each entity manager is responsible for driving and developing his/her respective area of responsibility, which includes identifying opportunities and threats as well as continuously following up on activities. In the local management team meetings projects are discussed, resulting in operational decisions.
Price risk in the Group’s operations primarily arise in conjunction with the purchase of material used in manufacturing.
The Group has adequate insurance policies covering property, product liability, interruptions and transport, as well as an insurance policy covering the Board of Directors and CEO.
As computer-aided technology has assumed an increasingly greater scope within the companies, security requirements have also increased. The functional security of the databases and e-mail servers is checked via daily backups. The internet connection is fixed and completely isolated from other networks via hardware firewalls. Access via public networks is secured via security devices. User access to the system is regulated via Group authorisations and entitlements based on actual assignments and roles within the company. As of May 25, 2018, the group is in full compliance with new GDPR regulations.
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