Risk management
Loewe AG has a centralized risk management approach for identifying, measuring and controlling risks.
With respect to its assets, liabilities and planned transactions, Loewe AG is in particular subject to mar- ket and price risks as well as risks arising from interest rate and exchange rate changes. Currency risks arising from planned foreign-currency expenditures are largely reduced by forward exchange transac-
tions using a rolling 36-month projection. A substantial portion of the expected foreign currency expen- ditures is currently covered in this manner.
The effectiveness of the risk control is reviewed on a regular basis. The goals, principles, responsibilities and competencies for the finance department are set down in Group internal guidelines with binding effect and follow the principle of segregation of functions.
Derivative financial instruments (cash flow hedges)
The hedging transactions used to hedge the currency risk for existing purchase contracts are based on
the following figures:
Hedge volume Intrinsic value
in EUR thousand in USD thousand in EUR thousand Longest residual maturity until Positive Negative Forward exchange transactions 131,000 96,675 September 18, 2015 2,606 369
Foreign currency options 19,000 14,734 September 18, 2015 0 691
Total 150,000 111,409 2,606 1,060
The above derivative financial instruments are recognized at fair value. The hierarchy provided by IAS 39 for the measurement of financial instruments at fair value is as follows:
Level 1 Quoted market prices in active markets for identical assets or liabilities
Level 2 Inputs other than quoted market prices that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices)
Level 3 Inputs for assets and liabilities that are not based on observable market data
The fair values recognized for derivative financial instruments within the Loewe Group are allocated to
Level 2.
The existing currency hedges in the form of currency options at a volume of USD 19,000 thousand (2011: USD 3,000 thousand) were not designated as cash flow hedges. The change of the intrinsic value of the currency options as of the balance sheet date in the amount of EUR 762 thousand is rec- ognized as other operating expenses in the income statement.
With respect to their residual maturity, the remaining existing currency hedging transactions are broken
down as follows:
USD thousand
Volume
Balance as of thereof maturing in:
Dec. 31, 2012 2013 2014 2015
Forward exchange transactions 131,000 71,000 41,000 19,000
Foreign currency options 19,000 15,000 0 4,000
Total 150,000 86,000 41,000 23,000
EUR thousand
Volume
Balance as of thereof maturing in:
Dec. 31, 2012 2013 2014 2015
Forward exchange transactions 96,675 52,423 29,792 14,460
Foreign currency options 14,734 11,875 0 2,859
Total 111,409 64,298 29,792 17,319
EUR thousand
Intrinsic value
Balance as of thereof maturing in:
Dec. 31, 2012 2013 2014 2015
Forward exchange transactions, positive 2,606 1,350 1,133 123
Forward exchange transactions, negative – 369 – 44 – 11 – 314
Foreign currency options, negative – 691 – 567 0 – 124
Total 1,546 739 1,122 – 315
Derivative financial instruments are used for hedging the risk of purchases in foreign currency. Their use is in compliance with relevant Group guidelines. The efficiency of the hedging relationships required
according to IFRS is in conformity with the intention pursued by Loewe that only risks from designated hedged items are hedged by derivatives, and derivatives may not be entered into at any time for specu- lative purposes.
The positive value of the forward exchange transactions is recognized in miscellaneous current finan-
cial assets, the negative value of spread options in miscellaneous current financial liabilities. As the for-
ward currency transactions are used to hedge future payment flows and were designated as cash flow hedges, the offsetting entry of the market value is recognized directly in equity (within Other reserves) with no effect on income in the amount of EUR 2,215 thousand. Deferred tax liabilities in the amount of EUR 618 thousand were recognized in these reserves.
Of the fair values recognized for derivative financial instruments within equity as of the end of fiscal year 2011, a volume of USD 71,000 thousand was used in the course of fiscal year 2012 to provide USD cur- rency exposures for the purchase of production materials and other services. As of December 31, 2011,
these hedging instruments were measured based on an intrinsic value of EUR 2,226 thousand.
Credit risks
Credit risks can be seen as slight due to the fact that the receivables portfolio is broadly diversified and
transactions are only entered into with business partners who have an excellent credit rating. In addition, risk is mitigated by a system of credit lines. In all cases, the maximum default risk is limited to the carry- ing amount of the receivable in question.
Specific valuation allowances are only recognized for customer receivables. With receivables before valuation allowances amounting to EUR 59,162 thousand (2011: EUR 74,722 thousand), valuation allow-
ances were recognized in the amount of EUR 3,828 thousand (2011: EUR 4,009 thousand). The portfolio of receivables for which no valuation allowances were set up contains no receivables with significant
payment disruptions.
Market risks
Currency risks
The foreign currency risk for Loewe is essentially limited to the procurement of panels and components that are settled in US dollars. The anticipated foreign currency volume is determined using a rolling
36-month projection with the objective of hedging a defined percentage with forward exchange transac- tions or foreign currency options.
In addition, since the establishment of Loewe UK Ltd. in fiscal year 2007 and of Loewe Asia Holding Ltd. in fiscal year 2012, currency translation gains and losses have resulted from the relationship of EUR to GBP, and EUR to HKD and CNY, respectively.
Interest rate risks
Other market price risks
No appreciable price risks exist since the only assets subject to market prices are insignificant shares
in investment funds.
Liquidity risks
On March 8, 2013, the financing partners made a binding commitment regarding the prolongation of the
standstill agreement until March 31, 2014 in order to ensure the implementation of the planned restruc- turing measures. This prolongation is subject to qualitative and quantitative covenants which Loewe
is required to fulfil over time. In this context, Loewe AG relies on the support of stakeholders within the framework of the financing process.
Independent lines of credit totaling EUR 1.7 million (2011: EUR 1.7 million) were granted to foreign Group
companies in France and Italy by their banks.
Financial investment risks
The cash and cash equivalents available in accordance with our financial planning were invested in inter-
est-bearing deposits payable on demand and held at the financing banks subject to the German deposit
protection fund. Through this selection of investments, we seek the greatest possible minimization of risks.
Goals and methods of financial risk management
Capital management
The primary goal of the Group’s capital management is to secure or restore a credit rating appropriate for the support of its operating activities.
The Group manages its capital structure in order to reduce the cost of capital, follows a proactive ap- proach to working capital management, and undertakes the necessary business adjustments in light of changed general economic conditions.
No changes to the goals, guidelines and methods were undertaken as of December 31, 2012 and Decem- ber 31, 2011.
Contingencies and other financial obligations
Outstanding contributions for affiliated companies pursuant to Section 24 of the German Private
The following other financial liabilities exist:
EUR thousand
2012 2011
Total liabilities from tenancy and servicing agreements and leases
• due in 2013
(previous year: 2012)
5,471
(3,586)
• due between 2014 and 2017
(previous year: between 2013 and 2016)
3,040
(2,499)
• due after 2017
(previous year: after 2016)
306
(263)
The Loewe Group has entered into various operating lease agreements for factory and office equipment,
rental properties as well as motor vehicles. The terms usually range between two and three years. Most of the leases provide no renewal option.
There are no guarantees, contingent liabilities or notes payable towards third parties.
Transactions with shareholders and related parties
In fiscal year 2012, transactions with companies of the Sharp Group exclusively consisted of the delivery
of spare parts to Loewe.
All agreements are concluded on an arm’s length basis. Sharp, as a shareholder, has no influence over
Loewe management, is not represented on the Loewe Supervisory Board and does not participate in any
decision-making processes at Loewe. Therefore, it cannot be classified as a related party.
In addition to his activities as a member of the Supervisory Board, a consultancy contract was conclud- ed on an arm‘s length basis with Michael Blatz. Michael Blatz provides advisory services to Loewe within the framework of ongoing restructuring activities and syndicated lending facilities during negotiations