Commercial and financial risks
Due to the nature of Solar’s business, results and equity can be affected by a range of commercial and financial risks. The company’s activities are largely focused on Northern Europe which is characterised by economic and political stability. The sections below describe a number of known risk factors that are considered to have a potential impact on result and balance sheet.
Commercial risks
Solar’s business is wholesale and distribution of electrical, plumbing and ventilation components, etc. for buildings, plants and production. The group has many years of experience in assessing and handling risks relating to this business area. No resources are channelled into other business areas or speculative or opportunistic measures.
Sensitivity to economic trends
As is the case with other international operators, Solar is affected by global as well as local economic trends. In recent years, however, the group’s business foundation has been expanded significantly. A substantial proportion of recent growth can, therefore, be attributed to an extension of the product range within, for instance, Offshore/Marine, Telecommunications and Security as well as Industry. Consequently, exposure to changes in trends within the construction industry has been reduced, and the group’s development increasingly follows general economic trends.
Customers
The customer portfolio composition means that Solar can withstand any loss of individual customers, thus, revenue from the largest customer represents for less than 2% of total revenue.
Suppliers
As many of Solar’s suppliers are complementary, the group only depends on individual suppliers to a limited extent.
IT
Activities are based on extensive application of advanced IT solutions. Most hardware is located at the corporate IT department and at another location which offers a complete operational mirror of the installation. Most of the applied software has been developed in-house, and substantial resources are spent on quality assurance of software. Solar’s IT strategy has been redefined to promote sustained positive development of group business activities, meaning that over the next three years, part of the group’s in-house developed ERP system will be replaced by SAP.
Insurance
With regards to risks that cannot be hedged through ongoing operations, hedging is undertaken through insurance. Solar seeks to minimise any financial impact on the group’s results from unpredictable events or through insurance schemes and has taken out policies considered relevant and customary in the sector and for groups of Solar’s size. Continuous assessments of insurance-related matters in respect of e.g. buildings, moveables, operating loss, transport, commercial and product liability are carried out to ensure that current policies are in keeping with Solar’s policies. Excess is not considered to exceed usual practice for the sector or for groups of Solar’s size. However, there is no guarantee that all risks have been assessed correctly or that there is sufficient insurance cover for all potential risks that Solar may be exposed to.
Financial risks
Results and equity are affected by a range of financial risks. Financial instruments are solely used for hedging of commercial and financial risks. All financial transactions are founded in commercial activity, and no speculative transactions are made.
Financial instruments measured at fair value are categorised using the following accounting hierarchy:
Level 1: Observable market prices of identical instruments
Level 2: Valuation models primarily based on observable prices or traded prices of comparable instruments.
Level 3: Valuation models primarily based on non-observable prices.
The fair value of Solar’s derived financial instruments (interest rate instruments) is fixed as fair value measurement at level 2, since fair value can be determined directly based on the actual forward rates and instalments on balance sheet dates.
The main banker of Solar A/S is Nordea Bank Danmark A/S.
Currency risks
As other international companies, Solar is exposed to currency risks in the form of conversion risks since a substantial proportion of revenue derives from enterprises outside the euro zone. The currencies used are euro, Danish kroner, Swedish kroner, Norwegian kroner and, to a lesser extent, Polish zloty.
The individual subsidiaries are not significantly affected by exchange rate fluctuations since revenue and costs in subsidiaries are in the same currencies. Solar has a number of investments in foreign subsidiaries where the translation of equity to euro depends on the exchange rate.
Investments in subsidiaries are usually not hedged as such investments are regarded as long-term and because hedging is seen as unlikely to create any long-term value.
Interest rate risk
Ongoing monitoring and adjustment of interest-bearing liabilities is made. Loans are only raised in the currency of the countries in which Solar operates. Of total interest-bearing liabilities, Solar endeavours to ensure that a maximum of half are based on variable interest fixed in accordance with current money market rates. The remaining interest-bearing liabilities are fixed-rate. The Solar Group has no significant non-current interest-bearing assets.
Solar’s main banker has made no covenant requirement in relation to interest-bearing liabilities. As a result of Solar’s policies, a certain interest rate risk exists, which means that any change to the interest rates will affect results.
Liquidity risks
Solar has a target of substantial self-financing to ensure independence from lenders and thus greater freedom of action. Financial management is controlled centrally, based on the individual subsidiary’s operating and investment cash requirements. It is ensured that there are always sufficient and flexible cash reserves and diversification of maturities of both long-term as well as short-term credit facilities.
Credit risk
Solar is subject to credit risk in respect of trade receivables and cash at bank. The maximum credit risk equates to the carrying value. No credit risk is deemed to exist in respect of cash as the counterparts are banks with good credit ratings. As a result of customer diversification, trade receivables are distributed so that the risk is not assessed as unusual. Credit granting to customers is regarded as a natural and important element in Solar’s business operations. Solar conducts efficient credit management at all times. To the extent possible, insurance is taken out to hedge against loss on customers with credit limits exceeding € 150,000, however with deductibles of € 100,000. Solar Polska Sp. z o.o. generally takes out insurance to hedge against loss to the extent possible. In 2009, we saw credit insurance businesses denounce a high number of policies on customers. Loss on trade receivables is a normal business risk and, therefore, will occur.
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