Notes to the consolidated financial statements
The COMET Group ("COMET", the "Group") is one of the world’s leading vendors of x-ray, radio frequency (RF) and ebeam technology. With high-quality components, systems and services, marketed under the "COMET", "YXLON" and "ebeam" brands, the Group helps its customers optimize the quality, reliability and efficiency of their products and processes. YXLON x-ray systems for non-destructive testing are supplied to end customers in the automotive, aerospace, electronics and energy sectors. Under the COMET brand, the Group builds components and modules such as x-ray sources, vacuum capacitors, RF generators and impedance matching networks, marketed to manufacturers in the automotive, aerospace, semiconductor and solar industries as well as for security applications at airports. Under the ebeam brand, the Group develops and markets compact ebeam sets and whole ebeam systems for the treatment of surfaces in the food and printing industries.
01 Nature of COMET’s business activities
The COMET Group ("COMET", the "Group") is one of the world’s leading vendors of x-ray, radio frequency (RF) and ebeam technology. With high-quality components, systems and services, marketed under the "COMET", "YXLON" and "ebeam" brands, the Group helps its customers optimize the quality, reliability and efficiency of their products and processes. YXLON x-ray systems for non-destructive testing are supplied to end customers in the automotive, aerospace, electronics and energy sectors. Under the COMET brand, the Group builds components and modules such as x-ray sources, vacuum capacitors, RF generators and impedance matching networks, marketed to manufacturers in the automotive, aerospace, semiconductor and solar industries as well as for security applications at airports. Under the ebeam brand, the Group develops and markets compact ebeam sets and whole ebeam systems for the treatment of surfaces in the food and printing industries.
02 Accounting policies
The consolidated financial statements (except with respect to certain financial instruments) have been drawn up under the historical cost convention. The fiscal year-end of the subsidiaries is December 31. Assets and liabilities are recognized if they are likely to result in inflows or outflows, respectively, of future economic benefits and if the associated amounts can be measured reliably. These consolidated financial statements for 2016 have been prepared in compliance with Swiss stock corporation law and International Financial Reporting Standards (IFRS). All IFRS in force at the balance sheet date and all interpretations (IFRIC) of the International Accounting Standards Board (IASB) were applied. COMET did not early-adopt new standards and interpretations except as specifically stated below. The significant accounting policies applied are unchanged from the prior year except as set out below.
02.1 Changes in accounting policies
Revised and new accounting rules
With effect from January 1, 2016, COMET has applied the following new or revised IFRS/IAS for the first time:
The first-time application of the above new or amended standards and interpretations had no effect on the balance sheet and income statement in these financial statements.
02.2 New accounting rules becoming effective in subsequent periods
The X-Ray Systems operating segment supplies customers with comprehensive and in some cases complex systems. Besides the equipment itself, the segment also provides services such as installation and complete integration into customers’ processes. Under the new standard, these services are no longer regarded as separable. As a consequence, the timing of revenue recognition for some systems will shift to a later date. The effect cannot be quantified.
In the Group's other operating segments, income from research and development services must be re-evaluated under IFRS 15 with respect to its classification as revenue from contracts with customers or as other operating income. This can result in a different classification than under the current standards. At present the impact of the reclassification cannot yet be quantified.
Other than the changes cited above and the expansion of disclosures, COMET does not expect any material effects on the financial position, results of operations and cash flows.
– Total assets and liabilities will increase due to the capitalization of the usage rights as non-current assets (“right-of-use assets”) and the recognition of the corresponding lease liabilities, which will result in a minor reduction in the equity ratio.
– For operating leases, the partition of the lease expense into depreciation and interest expense will not lead to a change in total net income over the term of the lease, only to a change in its timing: As a result of the discounting effect, expenses will no longer be recognized on a straight-line basis; instead, expenses near the beginning of the lease term will be slightly higher than before while expenses toward the end of the term will be lower. However, EBITDA operating earnings will improve by the amount of the interest expense, i.e., the EBITDA margin will see a slight increase.
02.3 Estimates
The consolidated financial statements of COMET Holding AG, Flamatt, Switzerland, contain assumptions and estimates that affect the reported financial position, results of operations and cash flows. These assumptions and estimates were made on the basis of management’s best knowledge at the time of preparation of the accounts. Actual results may differ from the values presented. The following estimates have the greatest effects on the consolidated financial statements:
02.4 Consolidation
02.4.1 Basis of consolidation
There were no changes in the basis of consolidation from the prior year. In the prior year, on May 1, 2015, COMET acquired sole ownership of PCT Engineered Systems LLC, Davenport, Iowa, USA, and the company has been fully consolidated from that date. The information on this transaction is provided below in note 4, "Acquisitions".
The consolidated financial statements comprise
the accounts of the companies listed below.
* The company PCT Engineered Systems LLC was merged into COMET Technologies USA, Inc. effective December 31, 2016.
02.4.2 Method of consolidation
The consolidated financial statements represent the aggregation of the annual accounts of the individual Group companies, which are prepared using uniform accounting principles. Those companies controlled by the COMET Group are fully consolidated. This means that these companies’ assets, liabilities, equity, expenses and income are entirely included in the consolidated financial statements. All intragroup balances and transactions, and unrealized gains and losses resulting from intragroup transactions and dividends, are eliminated in full. Interests in companies in which the Group holds between 20% and 50% of the voting power and over which it exerts significant influence, but which it does not control, are classified as investments in associates. These are consolidated by the equity method.
Acquisitions and goodwill
Companies are consolidated from the date on which effective control passes to the Group. Consolidation ends only when effective control ceases. On acquisition, the identifiable assets, liabilities and contingent liabilities are measured at fair value and included in the accounts using the purchase method. For acquisitions, intangible assets that arise from a contractual or legal right or are separable from the business entity, and whose fair value can be measured reliably, are reported separately as intangible assets. Goodwill, being the excess of the aggregate consideration transferred over the fair value of the net assets of the acquired subsidiary, is initially measured at cost. If the aggregate consideration transferred is lower than the fair value of the acquired net assets, the difference is recognized as negative goodwill in other operating income at the acquisition date. Goodwill and other intangible assets are allocated on acquisition to those companies expected to benefit from the acquisition or to generate future cash flows as a result of it. When consolidated companies are sold, the difference between their sale price and their net assets, plus accumulated currency translation differences, is recognized as operating income in the consolidated statement of income.
Foreign currency translation
The functional currency of the Group companies is their respective national currency. Transactions in a currency other than the functional currency are translated at the exchange rate prevailing at the transaction date. Financial assets and liabilities are translated at the balance sheet date at the exchange rate as of that date; the resulting currency translation differences are reported in the income statement. The consolidated financial statements are presented in Swiss francs. The financial statements of Group companies are translated at average exchange rates for the year (the “average rate” in the table below) for the income statement and at year-end rates (the “closing rate”) for the balance sheet. The resulting currency translation differences are recognized in other comprehensive income. Currency translation differences from intragroup loans for the long-term financing of Group companies are also recognized in other comprehensive income, to the extent that repayment is neither planned nor is likely to occur in the foreseeable future.
The exchange rates used to translate the most important currencies are listed below:
02.5 Measurement and recognition policies
Financial assets and liabilities
Financial assets are initially measured at fair value, including transaction costs, except in the case of financial assets categorized as at fair value through profit or loss, for which transaction costs are recorded directly in financing expenses. All purchases and sales of financial assets are recognized at the transaction date.
In the case of derivatives used for cash flow hedges meeting the criteria of IAS 39, the remeasurement to fair value is recognized only in other comprehensive income until the underlying transaction has taken place. Once the transaction occurs, the remeasurement effect is reallocated to the underlying transaction and recognized in profit or loss. Fair value is measured based on quoted market prices and/or, in the case of derivatives, on the basis of market prices determined by banks. In the fiscal year and the prior year, no hedge accounting under IAS 39 was applied to any hedging transactions. Financial assets are recognized as soon as COMET acquires control of them, and derecognized when it ceases to have control, i.e., when it has sold the rights or they have lapsed. Financial liabilities are derecognized when the obligation specified in the contract is discharged or is canceled or expires.
Cash and cash equivalents
In addition to cash on hand and balances in checking accounts at banks, cash and cash equivalents can also include fixed-term deposits with original maturities of up to three months.
Trade and other receivables
Trade and other receivables are reported at their face value less any necessary write-downs. Such write-downs are based on uniform rules. On specific doubtful arrears, impairment charges are provided individually.
Inventories
Inventories are recorded at the lower of cost and net realizable value. Net realizable value represents the estimated normal sale price less the costs of completion, marketing, selling and distribution. Raw materials and purchased products are measured using the weighted-average method; internally produced goods are measured at target costs. Inventories include proportionate shares of production overheads.
Revenue recognition (sales and other income)
Net sales represent the revenue from goods sold and services rendered to third parties, net of discounts and other price reductions. In the case of the sale of goods, revenue is recognized at the time that the risks and rewards of ownership of the products sold are transferred to the customer. Depending on the product and the agreed shipment terms (Incoterms), this occurs at the time of shipment or only at the time of acceptance by the customer. Income (including revenue) is recognized only if an economic benefit is likely to accrue to the Group and the amount can be reliably measured. Customer contributions to development projects, including revenue from prototypes, are recorded in other operating income. Interest income is recognized on a time-proportion basis by the effective interest method unless the claim to the interest is in doubt. Dividend income is recognized when the right to receive payment is established.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment. Borrowing costs related to qualifying assets form part of the historical cost. Depreciation is provided on a straight-line basis over the estimated useful life of the assets. Land values are not depreciated. Impairment charges are recognized as a separate line item under accumulated depreciation. Maintenance costs are recognized as assets only if the maintenance extends the expected life of the asset, expands production capacity or otherwise increases asset values. The cost of maintenance and repair that does not increase asset values is charged directly to income.
The following estimated useful lives are applied in determining depreciation:
Intangible assets
The intangible assets recognized are goodwill, rights to trademarks and names, customer lists, technology, licenses, patents, and software. Intangible assets are recognized at cost and generally amortized on a straight-line basis over their expected useful life. Internally developed operating software for systems is in some cases amortized based on units of production, with the amortization period determined in advance. Goodwill and acquired rights to trademarks and names are not amortized but are tested annually for impairment (see section “Impairment of non-current assets” below). The expense for amortization of intangible assets with finite useful lives is recognized in the income statement under that expense category which corresponds to the function of the intangible asset in the Group.
The following estimated useful lives are applied in determining amortization:
Provisions
Provisions are recognized only where COMET has a present obligation to a third party arising from a past event and the amount of the obligation can be estimated reliably. Possible losses resulting from future events are not recognized. Warranty provisions are measured based on historical experience.
Employee benefits
The COMET Group maintains various employee benefit plans that differ according to the local circumstances of the individual Group companies. The benefit plans are financed by contributions to benefit arrangements that are separate legal entities (foundations or insurance companies) or by the accumulation of reserves in the balance sheet of the respective Group company. In the case of defined contribution plans or economically equivalent arrangements, the expenses accrued in the reporting period represent the agreed contributions of the Group company. For defined benefit plans, the service costs and the present value of the defined benefit obligation are calculated in actuarial valuations by independent experts using the projected unit credit method. The calculations are updated annually. The surplus or deficit recognized in the balance sheet is equal to the present value of the defined benefit obligation as determined by the actuary, less the fair value of plan assets. Any resulting net surplus is recognized as an asset only to the extent of the potential economic benefit that the Company may realize from this asset in the future, taking into consideration IFRIC 14. The expense charged to income is the actuarially determined service cost plus the net interest cost. Actuarial gains and losses are recognized in other comprehensive income. They comprise experience adjustments (the effects of differences between the previous actuarial assumptions and the observed outcomes) and the effects of changes in actuarial assumptions (particularly regarding the discount rate and life expectancy).
Length-of-service awards
COMET grants length-of-service awards to employees in Switzerland, Germany, the USA and China after ten years of service and every five years thereafter, in the form of lump-sum payments that increase in amount with the number of years of service. COMET calculates the resulting obligation using the projected unit credit method. The obligation is recalculated annually and any actuarial gains or losses from the remeasurement are immediately taken to income.
Share-based payments
COMET pays some of the Board’s compensation, and some of the variable compensation of the operational management, in the form of shares of COMET Holding AG. The expense is recognized at the value of the shares earned, measured at the quoted market price (fair value) at the grant date. The amount accrued for those components of compensation which must be equity-settled (i.e., for which there is no option of cash payment) is recognized directly in equity. For components which the beneficiary can choose to receive in equity or in cash, the value of the option which this choice represents is determined and recognized as an increase in equity, while the rest of the obligation is recorded as a liability.
Deferred taxes
Deferred taxes are accounted for by the liability method. Under this approach, the income tax effects of temporary differences between the financial statements and the corresponding tax bases are recorded as non-current liabilities or as other non-current assets. Deferred taxes are calculated at actual or expected local tax rates. Changes in deferred taxes are included in income tax expense in the income statement, except for deferred taxes in respect of items that are recognized outside profit or loss. These are likewise recognized outside profit or loss; according to the underlying accountable event, they are recognized either in other comprehensive income or directly in equity. Deferred tax liabilities are recognized on all taxable temporary differences except for goodwill. Deferred tax assets are recognized for all deductible temporary differences, the carryforward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carryforward of unused tax credits and unused tax losses can be utilized, except:
Dividends
In accordance with Swiss law and the Company's Bylaws, dividends and other distributions to shareholders are recognized as distributions in the fiscal year in which they were approved by the Shareholder Meeting and paid, rather than the fiscal year in which they were accrued.
Leases
Leases of property, plant and equipment that transfer substantially all risks and rewards of ownership to Group companies are classified as finance leases. For assets acquired under finance leases, the lower of the fair value of the asset and the net present value of future non-cancelable lease payments is recognized as a non-current asset. Assets held under finance leases are depreciated over the shorter of their estimated useful life and the term of the lease. Service contracts (particularly outsourcing agreements) involving direct or indirect provisions on the use of specified assets are reviewed at inception as to whether the arrangements contain a lease under IFRS.
Unrealized income from sale-and-leaseback transactions that represent finance leases is deferred and realized over the term of the lease. Payments under operating leases are recorded as operating expenditure and recognized on a straight-line basis in profit or loss over the periods to which they relate.
Impairment of non-current assets
The value of property, plant and equipment and other non-current assets, including intangibles, is reviewed whenever it appears possible, as a result of changed circumstances or events, that the assets’ carrying amount represents an overvaluation. Intangible assets under construction are always tested for impairment annually. If the carrying amount exceeds the amount recoverable through use or sale of the asset, the carrying amount is reduced to this recoverable amount and the difference is recorded as an impairment charge in the income statement. The recoverable amount is the higher of realizable value or value in use. Value in use is determined on the basis of discounted expected future cash inflows. Any acquired goodwill and any rights to trademarks or names with an indefinite useful life are not amortized but are reviewed annually at the same date for impairment. This impairment test is based on the results for the fiscal year, the rolling multi-quarter forecast and the rolling multi-year plan.
03 Segment reporting
The Group is managed on the basis of the four operating segments described below, which are delineated based on the products and services offered. With effect from the beginning of 2016, the “X-Ray & ebeam Technologies” segment was split into the Industrial X-Ray Modules segment and the ebeam Technologies segment. The segment reporting was adjusted accordingly, including a restatement of the prior-year data to conform with the new segment structure. This had effects on the results of all segments, as the creation of the additional segment entailed the redistribution of overhead costs.
Segment operating income represents all revenues and expenses attributable to a particular segment. The only revenues and expenses not allocated to the segments are those of COMET Holding AG, certain government grants, and net financial items and income taxes. These unallocated expenses and revenues are reported in the “Corporate” column.
The segment assets and liabilities represent all operating items. The following assets and liabilities are not allocated to operating segments: the assets and liabilities of COMET Holding AG, all cash and cash equivalents, all current and long-term debt and all income tax assets and liabilities. These unallocated assets and liabilities are reported in the “Corporate” column.
03.1 Operating segments
1 Values adjusted to reflect the new organizational and reporting structure.
Reconciliation of aggregate segment assets and liabilities to consolidated results
03.2 Geographic information
The COMET Group markets its products and services throughout the world and has its own companies in Switzerland, Germany, Denmark, the USA, China, Japan and South Korea. Net sales are allocated to countries on the basis of customer location.
03.3 Sales with key accounts
In the year under review, the Plasma Control Technologies segment recorded sales of CHF 75.4 million with its largest customer, which represented 22.7% of Group sales (prior year: CHF 56.9 million and 20.1%, respectively).
04 Acquisitions
04.1 Acquisitions in 2016
In 2016 no companies were acquired or disposed of and there were no changes in the ownership interests that the Group controlled in other companies.
04.2 Acquisitions in 2015
At May 1, 2015, COMET acquired sole ownership of PCT Engineered Systems LLC, Davenport, Iowa, USA. Acting as a system integrator, the company develops, manufactures and markets solutions for the curing and enhancement of plastic films and printing inks using electron beams (ebeam). Through the acquisition, COMET gained direct access to the ebeam end-user market and expanded its product portfolio. The subsidiary is reported under the Group's ebeam Technologies segment.
04.2.1 Acquired net assets
The assets and liabilities identified at the acquisition date are shown in the following table.
The small "bargain purchase" excess of the identified net assets over the total consideration transferred resulted from differential cash flow projections for the acquired business and was recognized in other operating income.
The purchase price allocation – the measurement of the assets and liabilities at the acquisition date – was definitive at the end of 2015 and was thus not further adjusted.
For tax purposes in the USA the purchase was treated as an asset deal (a purchase of assets and liabilities) and therefore no deferred taxes arose at the acquisition date.
04.2.2 Purchase price
Both the non-contingent portion of the purchase price and the deferred,
contingent consideration were paid entirely in cash.
The contingent consideration was governed by an earn-out agreement under which this further conditional payment was to be made in an amount that depended on the achievement of certain new-order targets during the twelve months following the acquisition. The potential range of this consideration extended from USD 0 to USD 8.0 million. See note 25, "Financial instruments", for details on the measurement of the contingent consideration.
The amount of the contingent consideration was determined in the second half of 2016 in accordance with the terms of the earn-out agreement and the amount owing was paid at the end of November.
04.2.3 Effect on consolidated results
The 2015 consolidated income statement included the acquired company’s results for the period from May 1 to December 31, which were sales of CHF 12.5 million and a net loss of CHF 2.1 million.
05 Trade and other receivables
COMET provides for doubtful accounts (impaired trade receivables) when there is an indication of payment difficulties on the part of customers.
The provision (the allowance account) for impaired trade receivables showed the following movement:
At the balance sheet date, full impairment was recognized and provided on CHF 472 thousand (prior year: CHF 810 thousand) of trade receivables. In all other receivables, there were no amounts past due and no impaired receivables. The Group does not hold security against trade and other receivables.
The aging schedule for past-due trade receivables for which impairment has been partly provided is summarized in the table below (at net amounts).
06 Other financial assets and liabilities
06.1 Other financial assets
06.2 Other financial liabilities
06.3 Derivative financial instruments
At the balance sheet date, open positions in forward exchange contracts were as follows:
The gains and losses from foreign exchange contracts are recognized as financing income or expense (see note 22). The contract amounts shown represent the notional principal amounts of the forward contracts. Consistent with the nature of the Group’s activities, the forward exchange contracts have maturities of less than one year; most are due within six months.
07 Inventories
The inventory amounts reflect any necessary individual write-downs for items with a market value below manufacturing cost. The expense recognized for inventory write-downs was CHF 3.1 million (prior year: CHF 2.2 million).
08 Property, plant and equipment
In the year under review, the disposals of other tangible assets included the reclassification of CHF 587 thousand of internally produced demonstration equipment to inventories, which did not result in an outflow of funds. The carrying amount of leased assets (under finance leases) within property, plant and equipment was CHF 297 thousand.
The assets under construction related largely to the building expansion in Flamatt. To finance it, a bond was issued on April 20, 2016 (see note 12). Interest cost at the effective interest rate of the bond is thus capitalized on the investment in this expansion construction. The capitalized interest in 2016 was CHF 106 thousand (2015: none).
Prepayments were made for assets under construction, with the outflow of funds shown as investment activity even if no addition of assets was yet recognized.
The building expansion in Flamatt is being carried out with a general contractor; the general contractor agreement was signed in the second half of 2016. COMET thus entered into an obligation to procure the deliverables defined in the contract. At the end of the year the amount of this obligation remaining was CHF 34.6 million, which is payable according to the progress of construction and is then capitalized as assets under construction. The completion and occupation of the new premises are planned for the end of 2018.
In the prior year, the disposals of other tangible assets included the reclassification of CHF 826 thousand of internally produced demonstration equipment in the X-Ray Systems segment to inventories, which did not result in an outflow of funds. The carrying amount of leased assets (under finance leases) within property, plant and equipment was CHF 410 thousand.
Assets pledged or assigned as collateral for Group obligations (encumbered assets)
09 Intangible assets
The categories “goodwill and trademarks”, “customer lists” and “technology” were capitalized in connection with business combinations. The residual useful lives of the customer lists ranged up to eight years. Under a long-term multi-brand strategy, the established YXLON name is used alongside the COMET brand.
The Group therefore deems the capitalized YXLON brand to have an indefinite useful life.
In 2015 in the X-Ray Systems segment, CHF 1,024 thousand of internal development work on the new software platform for the systems was capitalized.
10 Impairment test of goodwill and intangible assets with indefinite useful lives
The impairment test for goodwill and other intangible assets with indefinite useful lives was performed as at September 30, 2016. For the purpose of the impairment test, the assets to be tested were allocated to and measured as the following two cash generating units at the segment level or (in the case of IXT) the business unit level:
The impairment test is based on the value in use method. The recoverable amount is determined from the present value of the future cash flows (DCF valuation). The calculations are based on the Board-approved rolling forecast, and on the Board-approved rolling medium-term plan for 2017 to 2021, current at the time of the impairment test. Using experience-based estimates, the amounts in the forecast and in the medium-term plan are based on growth projections for net sales, operating income and other parameters, taking into consideration the estimated market trends in the various regions. Cash flows beyond the forecast period are extrapolated using an assumed growth rate of 1.5%, which is less than the expected rate of market growth. The assumptions applied in determining value in use correspond to the expected long-term average growth rate of the X-Ray Systems segment’s operating business and of the generator business of Industrial X-Ray Modules. Input variables with a critical impact on the outcome of the impairment test are the assumed rates of sales growth and the projected trend in operating income.
Sensitivities to the assumptions applied in the valuation model
The measurement of value in use of the X-Ray Systems CGU is sensitive to the following assumptions in the planning period (2017 to 2021):
COMET believes that, with a realistic change in the material assumptions, the recoverable amount would not fall below the carrying amount.
11 Income tax
11.1 Current and deferred income tax expense
11.2 Reconciliation of tax expense
COMET AG, based in Flamatt, has been granted conditional tax relief by the canton of Fribourg in the form of a reduction in cantonal and municipal taxes for the period to 2022. For 2016 the tax reduction amounted to 50% (prior year: 50%).
11.3 Deferred tax assets and liabilities
Deferred tax assets and liabilities can be analyzed by origin as follows:
The deferred tax assets and liabilities were measured at local tax rates, ranging from 15% to 39%. No deferred tax liabilities were established for temporary differences of CHF 63.2 million (prior year: CHF 50.4 million) in respect of the value of the ownership interests in Group companies. Distributions of retained earnings by subsidiaries are not expected to have an effect on income taxes, except for future distributions from China. There were no tax provisions for non-refundable withholding taxes on future distributions of foreign subsidiaries to COMET Holding AG. Distributions by COMET Holding AG to its shareholders have no effect on the reported or future income taxes.
11.4 Movement in deferred tax assets and liabilities
11.5 Unrecognized tax assets
Deferred tax assets, including tax loss carryforwards and expected tax credits, are recognized only if it is likely that future taxable profits will be available to which these deferred tax assets can be applied. Temporary differences (between the IFRS financial statements and the corresponding tax base) for which no tax assets were recognized were CHF 11 thousand (prior year: CHF 300 thousand). In addition, there were tax loss carryforwards on which no deferred tax assets were recognized, as presented in the following overview.
12 Current and long-term debt
On April 20, 2016 a five-year, CHF 60 million bond was issued. The bond has a coupon rate of 1.875% and is listed on the SIX Swiss Exchange (ticker symbol COT16; security number 32 061 943). Its effective interest rate is 2%.
12.1 Current debt
At the end of the fiscal year under review the COMET Group had undrawn credit facilities of CHF 36.8 million (prior year: CHF 23.1 million).
12.2 Long-term debt
The long-term debt consisted of the five-year bond maturing in 2021 and mortgage loans in respect of the Group's premises in Flamatt, Switzerland. In the year under review, all interest and principal payments were made as contractually agreed.
All long-term debt consisted of fixed-rate debt instruments denominated in CHF with fixed maturities. Loans with original maturities of more than twelve months coming due in the subsequent year were reclassified to current debt.
12.3 Finance lease obligations
Current and long-term debt included finance lease obligations with the following maturity schedule:
13 Trade and other payables
14 Accrued expenses
Accrued staff costs consist mainly of the amount accrued for performance-based compensation, and employees' vacation and overtime credits. The item "other accrued expenses" consists largely of deliverables still to be supplied under projects already invoiced and recognized in sales, such as installation and similar non-material elements of orders.
15 Provisions
Provisions are classified as current to the extent that the related cash outflows are expected to occur within one year from the balance sheet date. Conversely, the cash outflows in respect of non-current provisions are expected to occur more than twelve months after the balance sheet date. Where the interest effect is material, the cash outflows are discounted. The provision for warranties covers the risk of expenses that have not occurred to date, but could potentially occur until the end of the warranty periods. COMET believes that the amount provided is sufficient to cover the expected costs over the warranty periods.
16 Employee benefits
16.1 Defined benefit plans
The COMET Group maintains defined benefit pension plans in Switzerland and Germany. These plans differ according to their particular purpose (retirement, disability, and/or survivor benefits) and are based on the legal requirements in the respective countries.
Switzerland
The defined benefit plans are managed within a multi-employer pension fund. This is a separate legal entity falling under the Swiss Federal Act on Occupational Retirement, Survivors' and Disability Pensions (the BVG). The pension fund is managed by an administration committee, composed of equal numbers of employee and employer representatives, that is required to act in the interests of the plan participants. This committee sets the investment strategy and makes the investment decisions.
The pension fund maintains a main ("base") plan for employees that provides the legally required benefits, and a supplemental plan that provides benefits in respect of pay components above the statutory range. Both plans are administered by the multi-employer pension fund, which is in the form of a foundation organized by an insurance company. Retirement, disability and survivor benefits are thus insured, but the investment risk is carried by the pension plans.
Plan participants are insured against the financial consequences of old age, disability and death. The benefits are specified in a set of regulations. Minimum levels of benefits are prescribed by law. Contribution levels are set as a percentage of the insured portion of employees' pay. The retirement benefit is calculated as the retirement pension asset existing at the time of retirement, multiplied by the conversion rate specified in the regulations. Plan participants can opt to receive their capital as a lump sum instead of drawing a pension. The retirement benefit from the additional plan is always paid as a lump sum. The amounts of the disability and survivor pensions are defined as a percentage of insured pay.
Germany
In Germany there is a closed plan with pension commitments which no longer has active participants. The obligations in respect of current pension payments and deferred pensions are recognized in the balance sheet. In addition, there is a partial early retirement agreement, which is in its latter, inactive phase. The Group's obligations are for the additional contributions (bonus element of the partial early retirement pay and additional contributions to the government pension plan) and the compensation arrears under the so-called block model: In standard block-model partial retirement, employees work full-time at half pay for the first half (the working phase) of the partial early retirement period, and then do not work at all during the second half (the inactive phase) but still receive half pay to complete the compensation for the service in the earlier, working phase.
Movement in present value of defined benefit obligation,
in plan assets and in net carrying amount for defined benefit plans.
The demographic assumptions are based on the BVG 2015 cohort life tables.
The average duration of the defined benefit obligation was 13.1 years.
The pension costs of CHF 5.9 million recognized in 2016 in other comprehensive income arose primarily from the increase in the present value of the defined benefit obligation of the base plan in Switzerland, as a result of the additional percentage rate of return granted to the individual pension accounts of the plan’s active participants.
For certain pension entitlements insured under the defined benefit plan in Switzerland, it was decided in the first half of 2016 to reduce the so-called conversion rate (the factor applied to occupational retirement assets at retirement age to arrive at an annual pension amount). This decision resulted in a one-time reduction in the present value of the defined benefit obligation measured in accordance with IFRS (IAS 19). As IFRS require such effects of plan changes to be recognized in profit or loss, the impact on income before tax was a total increase of CHF 1.6 million. Of this total, CHF 0.9 million was reflected in cost of sales, CHF 0.3 million was included in development expenses, CHF 0.1 million arose in marketing and selling expenses, and CHF 0.3 million was represented in general and administrative expenses. The breakdown of the effect by segment was CHF 0.5 million for the PCT segment, CHF 0.9 million for the IXM segment and CHF 0.2 million for the EBT segment.
The employer contributions to the plans in Switzerland for fiscal year 2017 are expected to amount to CHF 2,307 thousand.
COMET does not invest the plan assets directly but only through investment funds offered by insurance companies or banks. These investment products could contain equity securities or debt instruments of COMET Holding AG; however, COMET has no influence of any kind on the investment decisions of the fund managers.
Companies of the COMET Group do not make loans to the pension plans and do not utilize any real estate held by the plans.
Sensitivities
The following table presents an analysis of how the reported present value of the defined benefit obligation would change in response to hypothetical changes in the actuarial assumptions.
16.2 Defined contribution plans
The contributions paid to defined contribution plans in the fiscal year amounted to CHF 5,208 thousand (prior year: CHF 3,875 thousand).
16.3 Length-of-service awards
COMET grants length-of-service awards to employees in Switzerland, Germany the USA and China after ten years of service and every five years thereafter, in the form of lump-sum payments that increase in amount with the number of years of service. The provision for this item changed as follows in the year under review:
17 Net sales
Sales revenues from products and services supplied to third parties are stated on a net basis, that is, after deducting price discounts, sales taxes and value-added taxes, credits and refunds. Sales in the year under review did not include any amounts from current customer projects accounted for using the percentage of completion method (prior year: none).
18 Other operating income
19 Staff costs and staff count
19.1 Staff costs
19.2 Staff count
20 Development expenses
Development expenses comprise the costs of new-product development, improvement of existing products, and process engineering. The COMET Group’s development activities focus on the fields of vacuum technology, high voltage engineering and material science, and on the further development of the segments’ core products. In view of the uncertainty of future economic benefits that may flow from development projects, COMET as a rule does not capitalize development costs but charges them directly to the income statement.
In 2015 in the X-Ray Systems segment, CHF 1,024 thousand of internal development work on the new software platform for the systems was capitalized. This software development was completed in 2015.
21 Amortization and depreciation
22 Financing income and expenses
In the year under review, financing costs of CHF 106 thousand for the building expansion in Flamatt were capitalized (2015: none).
Foreign currency translation gains and losses resulted largely from items denominated in US dollars and euros.
23 Earnings per share
Basic earnings per share represents the reporting period’s consolidated net income divided by the average number of shares outstanding.
There are no outstanding stock options or stock subscription rights that could lead to a dilution of earnings per share.
24 Off-balance sheet transactions
24.1 Contingent liabilities
As a global company, COMET is exposed to numerous legal risks. These can include, especially, risks relating to product liability and patent, tax and competition law. The outcomes of currently pending and future legal proceedings cannot be predicted with certainty. Expenses may therefore be incurred that are not, or not fully, covered by insurance benefits and which may thus have effects on business and on future financial results.
Provisions are established inasmuch as the financial consequences of a past event can be estimated reliably and the estimate can be confirmed by independent expert opinion. Contingent liabilities that are likely to result in an obligation are included in provisions.
In 2006 COMET sold a property in Switzerland that is listed in the register of contaminated sites. Although the experts involved do not believe that the situation will change significantly in the short to medium term, the site must be regularly monitored by means of test drilling. If the ground water testing under this monitoring does not produce new, significantly poorer findings, all monitoring activities will be terminated at the end of 2019. The site would then not require any further monitoring. At present a final assessment cannot yet be made of the matters at issue, and any resulting as yet unprovided additional costs cannot yet be estimated. However, based on the results of the groundwater sampling to date, COMET believes it is currently unlikely that any significant costs will be incurred.
24.2 Other off-balance sheet obligations
In the course of its operating activities, the COMET Group has concluded long-term rental and lease agreements resulting in payment obligations that come due as follows:
The payment obligations arise from off-balance sheet operating leases for business premises and for road vehicles, office equipment and similar assets. The expense recognized in the fiscal year for operating leases was CHF 3,859 thousand (prior year: CHF 3,583 thousand).
25 Financial instruments
25.1 Classes of financial instruments
* The carrying amount approximates fair value.
There were no available-for-sale financial assets or held-to-maturity investments. IFRS require all financial instruments which are held at fair value, and all reported fair values, to be categorized into three classes (or “levels”) according to whether the fair values are based on quoted prices in active markets (Level 1), on models using other observable market data (Level 2), or on models using unobservable inputs (Level 3). The only financial instruments that COMET recognized at fair value were derivatives held for currency hedging and the liability for contingent consideration for the acquisition of PCT Engineered Systems LLC. The measurement of the derivatives falls into Level 2 and the measurement of the liability for contingent consideration represents Level 3 of the fair value measurement hierarchy under IFRS 13.
The amount of the deferred consideration under the purchase agreement for PCT Engineered Systems LLC, Davenport, Iowa, USA was determined in the second half of 2016 in accordance with the earn-out agreement, and the amount of USD 2.6 million was paid at the end of November. The amount was contingent upon the achievement of certain threshold values related to new orders booked in the first twelve months after the acquisition and to the resulting payments from customers. The difference relative to the latest measurement of the liability was recognized in other operating income.
* The carrying amount approximates fair value.
The deferred consideration specified in the purchase agreement for PCT Engineered Systems LLC, Davenport, Iowa, USA, was contingent on the achievement of certain threshold values related to new orders booked in the first twelve months after the acquisition and to the resulting payments from customers.
The unobservable material inputs used in the valuation were the probability of the expected new orders; the resulting contingent consideration, for which a range of USD 0 to USD 4.0 million was assumed; and the discount rate of 11.3%.
The movement in the liability for contingent consideration was as follows:
* Recognized in the ebeam Technologies segment under “general and administrative expenses”.
25.2 Fair values of financial instruments
The only differences between fair values and carrying amounts occurred in fixed-rate long-term debt. For the CHF 60 million bond, the quoted market price is used as the fair value. The fair values of the other items of fixed-rate debt are determined by discounting the future cash flows at the interest rate prevailing at the year-end. The interest rate spreads used are those of the most recently obtained or refinanced loans.
26 Management of financial risks
COMET operates its own subsidiaries in a number of countries and also exports products to still other countries. As an international company, the Group is subject to various financial risks which are inseparable from its business activities. COMET seeks to avoid unreasonable financial risks and to mitigate risks through appropriate hedges. The key elements of risk management form an integral part of Group strategy. Clearly defined management information and control systems are used to measure, monitor and control risks. Detailed risk reports are produced on a regular basis.
26.1 Capital management
The primary goal of capital management is to manage equity and debt capital in such a way as to ensure the Group’s high creditworthiness and an equity ratio appropriate to the Group’s risk profile, thus supporting its business activities. COMET manages the Group’s capital structure to meet liquidity requirements and pursue growth and profitability targets, taking into account the economic environment and the financial results achieved and planned. On this basis, the Board of Directors proposes dividend payments or capital repayments to the shareholders or recommends increases in capital stock.
COMET monitors and evaluates its capital structure by reference to net debt and the equity ratio, with the aim of ensuring that the capital structure covers the business risks and assures the Group’s lasting financial flexibility.
26.2 Risks in connection with financial instruments
COMET is exposed to many risks associated with financial instruments. These can be divided into market risks, credit risks and liquidity risks.
26.2.1 Market risk
Market risk is the risk of changes in the price of financial assets, in currency exchange rates, interest rates and the price of exchange-traded commodities. As a manufacturer, COMET is inherently exposed to commodity price risks (for example, for inputs such as energy, copper and ceramics), but these are not considered financial risks for the purposes of IFRS 7, as COMET procures commodities only for use in manufacturing, not for trading of commodity contracts. Consequently, these risks are not explicitly determined and are not separately disclosed in the consolidated financial statements.
Exchange rate risk
With its worldwide activities and strong focus on exports, COMET has particularly high exposure to exchange rate risks, as revenues and costs often do not arise in the same currency. The currency risk from operations is reduced by purchasing and selling in local currency where possible, an approach known as natural hedging. In addition, to protect against fluctuation in exchange rates, significant foreign currency orders in the X-Ray Systems segment are hedged by means of forward exchange contracts at the time the order is received. The Industrial X-Ray Modules segment, ebeam Technologies segment and Plasma Control Technologies segment non-selectively hedge a large portion of the expected cash flows up to a one-year time horizon, using forward exchange contracts to do so. As COMET hedges only cash flows, there are no hedges of net investments in foreign operations. The table below shows the sensitivity of income before tax and of shareholders’ equity to a possible movement in those exchange rates that are material for COMET, with all other variables held constant. The most important monetary foreign currency positions in the balance sheets of the Group companies are in euros and US dollars. The percentages of movement in exchange rates are based on an estimated potential range of fluctuation.
A reduction in exchange rates of the same percentage amount produces an equal and opposite effect. The sensitivity analysis covers only monetary balance sheet items that, relative to the functional currency of the respective Group company, are settled in foreign currencies.
Interest rate risk
COMET’s debt financing exposes it to the risk of interest rate fluctuation. As the loans and bond of the COMET Group carry fixed rates of interest, movements in market interest rates have no short-term effect on the amounts of interest payable and hence on the income statement. All loans are measured at amortized cost; therefore, in the year under review and the prior year, changes in market interest rates did not have an effect on the carrying amounts of the loans, nor therefore on income before tax or on equity. The fair values of long-term debt based on the current interest rate situation are presented on an indicative basis in note 25.1.
26.2.2 Credit risk
Credit risk is the risk that a counterparty will not be willing or able to meet its obligations. To mitigate this risk, COMET deals with multiple well-established banks and spreads the credit risk as widely as necessary and reasonable.
Banking transactions: The COMET Group spreads its cash holdings among different banks in order to minimize the potential for losses from credit risk. Banking transactions are conducted only with reputable banks of national and international standing. The types of transactions in which subsidiaries are permitted to engage is determined centrally. The following table shows the amounts held at the four most important counterparties at the balance sheet date:
* Long-term credit rating from Standard & Poor’s (except bank C: Moody’s)
Trade receivables: COMET operates worldwide, selling its products in various countries and to a large number of customers. Consequently there are no excessive concentration risks in individual countries or with respect to individual customers. Payment terms vary according to the market and customer. The credit limits and payment receipts for each customer are monitored by the individual Group companies and the resulting information is made available to Group management in the form of monthly special reports. Appropriate allowance for expected risk of default is made through the provision for doubtful accounts. Receivables are written off only when payment is highly unlikely to be forthcoming. Detailed information on the provision for doubtful accounts and its movement in the year can be found in note 5.
The amount of exposure to credit risk equals the carrying amount of the respective financial instruments in the balance sheet.
26.2.3 Liquidity risk
COMET defines liquidity risk as the risk that, at any time, it will not be able to meet its financial obligations fully as they become due. The foremost goal of financial management is the permanent assurance of the Group’s solvency in order to prevent such a contingency. To this end, using liquidity planning, COMET always maintains sufficient liquid assets and credit lines to avoid shortages of liquidity. Ensuring solvency also includes active working capital management. The Group’s credit quality is safeguarded by monitoring the leverage ratio of net debt to EBITDA. Liquidity planning and liquidity procurement are to a large extent performed centrally for the whole Group. A rolling three-month cash flow forecast is prepared monthly based on a decentralized, bottom-up approach. The long-term financing of subsidiaries is normally arranged through loans of COMET Holding AG. Following is an overview of all contractual payment obligations as at the balance sheet date, on an undiscounted basis:
Current and long-term debt represents both the principal amounts of these borrowings and the contractual interest payments.
The key assumptions of the above summary of payment obligations are:
The contract amounts of open derivative positions are presented in note 6.3.
27 Equity capital structure and shareholders
Capital stock
The capital stock at January 1, 2016 was CHF 7,738,010, divided into 773,801 registered shares with a par value of CHF 10 per share. In fiscal year 2016 the capital stock was increased by 742 shares from the portion of authorized capital designated for equity-based compensation. Including the increase of 742 shares from this portion of authorized capital, COMET Holding AG at December 31, 2016 thus had CHF 7,745,430 of capital stock, divided into 774,543 registered shares with a par value of CHF 10 per share. The capital stock is fully paid in. At its meeting on August 11, 2016 the Board of Directors established that the capital increase from authorized capital for equity compensation was properly performed. The information on COMET Holding AG in the commercial register was updated to reflect the change in capital stock.
At the balance sheet date, COMET Holding AG held no treasury stock (prior year: none).
Authorized capital for equity compensation
Under section 3b of its Bylaws, a portion of the Company’s unissued authorized capital is designated for use only as equity-based compensation (in German this portion is known as “bedingtes Aktienkapital”). In such an increase, shares are issued to Executive Committee members and / or Board members of COMET Holding AG. With respect to this portion of authorized capital, the other shareholders’ pre-emptive rights are excluded. The issuance of stock or stock subscription rights is based on a compensation plan (in the form of a written regulation) adopted by the Board of Directors. Grants of stock and of subscription rights may be made at less than the market price.
In May 2016, in accordance with the compensation plan, the members of the Board of Directors were granted a total of 208 shares of stock in payment of CHF 85,605 of fixed retainers due for fiscal year 2015. In addition, under fixed retainers for 2016, the members of the Board of Directors were granted a total of 104 shares in payment of CHF 42,803 of compensation due for the period from January 1, 2016 to the 2016 Annual Shareholder Meeting. The fully paid shares were applied to the compensation due at a price of CHF 411.56 per share.
Members of the Executive Committee were granted a total of 430 shares in payment of CHF 276,520 of profit-sharing compensation due for fiscal year 2016. The fully paid shares were applied to the compensation due at a price of CHF 643.07 per share.
As a result of these grants of a total of 742 shares during the year under review, the Company’s unissued authorized capital for equity-based compensation showed the following movement:
Authorized capital for other capital increases
At December 31, 2016, in addition to shares outstanding and unissued authorized capital for equity compensation, the Company had unissued authorized capital for purposes set out in section 3a of the Bylaws (in German: “genehmigtes Aktienkapital”). The Board of Directors is authorized, at any time until April 21, 2018, to increase the capital stock by a maximum of CHF 1.4 million by issuing up to 140,000 fully payable registered shares with a par value of CHF 10.00 per share. Increases by firm commitment underwriting and increases by part of the total authorized amount are permitted. The amount of the respective issue, the date when entitlement to dividend commences, the terms of any exercise of pre-emptive rights and the nature of the contributions are determined by the Board of Directors.
The Board of Directors is authorized to exclude shareholders’ subscription rights and assign these rights to third parties if the shares in question are to be used for the acquisition of companies via equity swaps or to finance the cash purchase of companies or parts of companies, or to finance new investment projects of COMET Holding AG, or for providing an ownership interest to an industrial partner (either in order to cement a strategic alliance or in the event of a takeover offer for the Company). Stock for which pre-emptive rights are granted but not exercised must be sold by the Company at market prices.
27.1 Significant shareholders
At December 31, 2016 the Company, according to disclosure notifications, had the following significant shareholders (defined for this purpose as holding voting rights in excess of 3% of the COMET capital stock recorded in the Swiss commercial register of companies):
The Company has not been notified of nor is aware of any other shareholders that held more than 3% of its shares. To the best of the Company’s knowledge, there were no voting pool agreements.
28 Share-based payments
Main elements of the compensation system
The compensation system of the COMET Group is designed to attract and retain excellent management and specialist staff. COMET seeks to set compensation levels that reflect individual levels of skills and responsibility in the Group and that are competitive with other employers.
For all employees (including the Executive Committee), the compensation system of the COMET Group provides a fixed base salary paid in cash, and a profit-sharing component. One-half of the profit-sharing remuneration of the Executive Committee members is paid in shares of COMET stock, as a long-term element of compensation. The other employees are paid their profit-sharing compensation entirely in cash. The compensation system for the Board of Directors does not have a performance-based element.
The compensation elements in place take into account short-term and long-term aspects of sustainable company performance and development. COMET is confident that its remuneration architecture creates an effective link between compensation and performance that generates lasting value for shareholders.
Compensation of the Board of Directors
To ensure the independence of the Board of Directors in its supervision of the Executive Committee, the Board members receive only a fixed retainer, of which 75% is paid in cash and 25% is paid in stock of the Company.
Compensation of the Executive Committee
The compensation of the members of the Executive Committee includes a fixed base salary and a flat expense allowance. In addition to the base salary, the compensation plan provides a performance-related pay component, of which one-half must be drawn in stock. No termination benefits are provided.
Calculation of grant price for share awards
The grant price, at which the stock is awarded and transferred to recipients, is the average closing price of the stock (during the period from the stock’s first trading day after the date of the annual results press conference, to its last trading day before the Annual Shareholder Meeting) less a discount of 36%. The discount is intended to make up for the deferral of the compensation and for the price risks associated with the holding period. The shares awarded are subject to a holding period of three years from the date of the award, during which they cannot be sold. All other shareholder rights are already effective during the holding period, including rights to dividends and similar distributions and the right to participate in Shareholder Meetings.
Expenses recorded
The expense recognized for share-based payments in the year under review was CHF 1,107 thousand (prior year: CHF 492 thousand). The amount included CHF 68 thousand for shares already awarded to the Board of Directors in 2016.
29 Compensation of the Board of Directors and Executive Committee
Transactions with related parties are conducted at arm’s length. The expense for compensation of the members of the Executive Committee and Board of Directors can be analyzed as follows:
The expense for share-based payments was higher than the corresponding addition to equity shown in the consolidated statement of changes in equity. The reason for the difference is that the issuance stamp duty of CHF 5 thousand (prior year: CHF 12 thousand) payable on the capital increase was charged directly to additional paid-in capital.
Additional compensation for legal services
In the year under review the law firm Notter, Mégevand & Partner invoiced services in the amount of CHF 34,320 (prior year: CHF 30,600). Hans Leonz Notter (a Board member until April 21, 2016) is a partner at this firm, whose members provide legal advice and other legal services to the COMET Group.
30 Events after the balance sheet date
There have been no events after the balance sheet date with a material effect on the amounts in the consolidated financial statements.
31 Proposed distribution to shareholders
The Board of Directors will propose at the Annual Shareholder Meeting to pay a distribution of CHF 12.00 per share (prior year: CHF 11.00) to shareholders from distributable paid-in capital. The total amount of the proposed distribution is CHF 9,295 thousand (prior year: CHF 8,512 thousand).
32 Release of the consolidated financial statements for publication
The Board of Directors released these annual financial statements on March 7, 2017 for publication and will present them to shareholders for approval at the Annual Shareholder Meeting on April 20, 2017.