22. Financial Instruments and Related Disclosures

The Group's financial instruments comprise cash deposits, bank loans and overdrafts, finance lease obligations, derivatives used for hedging purposes and trade receivables and payables.

Treasury Policy

The Group reports in Sterling and pays dividends out of Sterling profits. The role of the Group's treasury activities is to manage and monitor the Group's external and internal funding requirements and financial risks in support of the Group's corporate activities.

Treasury activities are governed by policies and procedures approved by the Board of Directors.

The Group uses a variety of financial instruments, including derivatives, to finance its operations and to manage market risks from these operations. Derivatives, principally comprising forward foreign currency contracts, foreign currency options and interest rate swaps, are used to hedge against changes in foreign currencies and interest rates.

The Group does not hold or issue derivative financial instruments for speculative purposes and the Group's treasury policy specifically prohibits such activity. All transactions in financial instruments are undertaken to manage the risks arising from underlying business activities, not for speculation.

Capital Management

The capital structure of the Group consists of net borrowings and Shareholders' equity. At 30 June 2013, net borrowings were £80.8 million, whilst Shareholders' equity was £174.6 million.

The Group maintains a strong capital base so as to maintain investors', creditors' and market confidence and to sustain future development of the business. The Group monitors both the demographic spread of Shareholders, as well as the return on capital, which the Group defines as total Shareholder return.

The Group manages its capital structure to maintain a prudent balance between debt and equity that allows sufficient headroom to finance the Group's product development programme and appropriate acquisitions.

The Group operates globally, primarily through subsidiary companies established in the markets in which the Group trades. The Group's operating subsidiaries are generally cash generative and none are subject to externally imposed capital requirements.

There are financial covenants associated with the Group's borrowings which are cash flow cover, interest cover, net debt to EBITDA and consolidated net worth. The Group comfortably complied with these covenants in 2013 and 2012. There were no changes in the Group's approach to capital management during the year.

Operating cash flow is used to fund investment in the development of new products as well as to make the routine outflows of capital expenditure, tax, dividends and repayment of maturing debt.

The Group's policy is to maintain borrowing facilities centrally which are then used to finance the Group's operating subsidiaries, either by way of equity investments or loans.

Financial Risk Management


The Group has exposure to the following risks from its use of financial instruments:

  • liquidity risk
  • market risk
  • credit risk

This note presents information about the Group's exposure to each of the above risks, and the Group's objectives, policies and processes for measuring and managing risk.

Liquidity Risk

Liquidity risk is the risk that the Group will not have sufficient funds to meet liabilities as they fall due. Cash forecasts identifying the liquidity requirements of the Group are produced quarterly. These are reviewed to ensure sufficient financial headroom exists for at least a 12 month period.

The Group manages its funding requirements through the following lines of credit:

  • £55 million term loan
  • £65 million revolving credit facility
  • £10 million working capital facility
  • various finance leases

The Group's undrawn borrowing facilities at 30 June 2013 are detailed in note 20.

Market Risk

Market risk is the risk that changes in market prices, such as foreign exchange rates or interest rates, will affect the Group's income or the value of its holding of financial instruments.

Interest Rate Risk Management

The majority of the Group's borrowings bear interest at floating rates linked to base rate or LIBOR and are consequently exposed to cash flow interest rate risk.

The Group has hedged interest rate risk on a proportion of its term loan and revolving credit facility by means of an interest rate swap arrangement whereby the Group's exposure to fluctuations in LIBOR is fixed at a rate of 0.83% on the term loan and 0.88% on the revolving credit facility. The amount of the term loan and revolving credit outstanding at 30 June 2013 was £115.1 million (2012: £120.8 million). The hedge is in place until 31 October 2016 and the amount hedged matches the repayment profile of the loan.

Foreign Exchange Risk Management

Foreign currency transaction exposure arising on normal trade flows is not hedged. The Group matches receipts and payments in the relevant foreign currencies as far as possible. To this end, bank accounts are maintained for all the major currencies in which the Group trades. Translational exposure in converting the income statements of foreign subsidiaries into the Group's presentational currency of Sterling is not hedged.

The Group hedges selectively expected currency cash flows outside normal trading activities, principally using foreign currency options.

Credit Risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations.

The Group considers its maximum credit risk to be £59,009,000 (2012: £102,996,000) which is the total carrying value of the Group's financial assets.

Cash is only deposited with highly rated banks.

The Group offers trade credit to customers in the normal course of business. Trade and bank references are obtained prior to extending credit. The financial statements of corporate customers are monitored on a regular basis.

The principal customers of the Pharmaceuticals segments are European and US wholesalers. The failure of a large wholesaler could have a material adverse impact on the Group's financial results.

The largest customer of the Group (excluding assets relating to discontinued operations) accounted for approximately 2.0% of gross trade receivables at 30 June 2013 (2012: 1.5%). No customer accounted for more than 10% of total Group revenues.

Receivables are written off against the impairment provision when management considers the debt to be no longer recoverable.

Fair Value of Financial Assets and Liabilities

The following table presents the carrying amounts and the fair values of the Group's financial assets and liabilities at 30 June 2013 and 30 June 2012.

The following assumptions were used to estimate the fair values:

  • Cash and cash equivalents — approximates to the carrying amount.
  • Forward exchange contracts — based on market price and exchange rates at the balance sheet date.
  • Interest rate swaps — based upon the amount that the Group would receive or pay to terminate the instrument at the balance sheet date, being the market price of the instrument.
  • Receivables and payables — approximates to the carrying amount.
  • Bank loans and overdrafts — based upon discounted cash flows using discount rates based upon facility rates renegotiated after the 30 June 2012 year end.
  • Finance lease obligations — based upon discounted cash flows using discount rates based upon the Group's cost of borrowing at the balance sheet date.

Analysis of Financial Instruments

The financial instruments of the Group are analysed as follows:

20132012
Carrying
value
£'000
Fair
value
£'000
Carrying
value
£'000
Fair
value
£'000
Financial assets
Cash and cash equivalents32,79132,79132,43532,435
32,79132,79132,43532,435
Loans and receivables
— trade receivables25,29625,29669,59669,596
— other receivables922922965965
26,21826,21870,56170,561
Total financial assets59,00959,009102,996102,996
Financial liabilities
Bank loans and overdrafts(115,073)(115,073)(120,757)(120,757)
Held for trading financial liabilities
— derivatives designated as hedges(15)(15)(387)(387)
Finance lease liabilities(480)(480)(941)(938)
Trade payables(11,859)(11,859)(63,559)(63,559)
Other payables(6,973)(6,973)(13,222)(13,222)
Deferred and contingent consideration(5,928)(5,928)(13,863)(13,863)
Total financial liabilities(140,328)(140,328)(212,729)(212,726)
Net financial liabilities(81,319)(81,319)(109,733)(109,730)

Fair Value Hierarchy

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

  • Level 1 — quoted prices (unadjusted) in active market for identical assets or liabilities.
  • Level 2 — inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
  • Level 3 — inputs for the asset or liability that are not based on observable market data (unobservable inputs).
30 June 2013Level 1
£'000
Level 2
£'000
Level 3
£'000
Total
£'000
Derivative financial liabilities(15)(15)
Deferred and contingent consideration(5,928)(5,928)
Total(15)(5,928)(5,943)
30 June 2012Level 1
£'000
Level 2
£'000
Level 3
£'000
Total
£'000
Derivative financial liabilities(387)(387)
Deferred and contingent consideration(13,863)(13,863)
Total(387)(13,863)(14,250)

At 30 June 2013, the deferred consideration balance is made up of £3.8 million in relation to the Dermapet acquisition and £2.1 million for a US generic pharmaceutical product. Movements in deferred and contingent consideration consists of a £0.3 million payment made under the terms of the Genitrix acquisition, a £10.0 million payment offset by a £0.3 million unwinding of discount and £0.1 million decrease due to foreign exchange differences in relation to the DermaPet acquisition, and a £2.1 million addition for a US generic pharmaceutical.

Credit Risk — Overdue Financial Assets

The following table shows financial assets which are overdue and for which no impairment provision has been made:

2013
£'000
2012
£'000
Overdue by:
Up to one month4,0525,810
Between one and two months415983
Between two and three months11644
Over three months2,649
4,47810,086

The movement in the impairment provision was as follows:

2013
£'000
2012
£'000
At start of period2,8772,911
Impairment provision (released)/recognised(7)231
Transferred to held for sale(2,667)
Impairment provision utilised(55)(265)
At end of period1482,877

Liquidity Risk — Contracted Cash Flows of Financial Liabilities

The following table shows the cash flow commitments of the Group in respect of financial liabilities excluding derivatives at 30 June 2013 and 30 June 2012. Where interest is at floating rates, the future interest payments have been estimated using current interest rates:

At 30 June 2013Deferred and
contingent
consideration
£'000
Bank loans
and
overdrafts
£'000
Finance
leases
£'000
Trade and
other
payables
£'000
Total
£'000
Carrying value(5,928)(113,110)(480)(18,832)(138,350)
Arrangement fees netted off(1,963)(1,963)
Future interest(318)(3,761)(26)(4,105)
Total committed cash flow(6,246)(118,834)(506)(18,832)(144,418)
Payable:
Within 6 months(6,203)(354)(18,832)(25,389)
Between 6 months and 1 year(986)(5,639)(7)(6,632)
Between 1 and 2 years(3,945)(11,053)(137)(15,135)
Between 2 and 3 years(1,315)(13,233)(8)(14,556)
Between 3 and 4 years(82,706)(82,706)
Between 4 and 5 years
Over 5 years
(6,246)(118,834)(506)(18,832)(144,418)
At 30 June 2012Deferred and
contingent
consideration
£'000
Bank loans
and
overdrafts
£'000
Finance
leases
£'000
Trade and
other
payables
£'000
Total
£'000
Carrying value(13,863)(118,211)(941)(76,781)(209,796)
Arrangement fees netted off(2,546)(2,546)
Future interest(467)(6,056)(42)(6,565)
Total committed cash flow(14,330)(126,813)(983)(76,781)(218,907)
Payable:
Within 6 months(756)(365)(76,781)(77,902)
Between 6 months and 1 year(10,336)(6,760)(365)(17,461)
Between 1 and 2 years(11,666)(217)(11,883)
Between 2 and 3 years(3,994)(11,315)(36)(15,345)
Between 3 and 4 years(15,921)(15,921)
Between 4 and 5 years(80,395)(80,395)
Over 5 years
(14,330)(126,813)(983)(76,781)(218,907)

The contractual undiscounted cash flows in respect of derivative financial instruments are as follows:

20132012
£'000£'000
Due:
Within 6 months8381
Between 6 months and 1 year(12)94
Between 1 and 2 years(25)212
Between 2 and 5 years(31)
15387

The Group has a contractual obligation to pay £83,000 (2012: £81,000) under its interest rate swap arrangement covering the period from 30 June to 30 September 2013.

With the exception of the above disclosed, there are no other assets that have been impaired during the year.

Foreign Currency Exposure

The Sterling equivalents of financial assets and liabilities denominated in foreign currencies at 30 June 2013 and 30 June 2012 were:

At 30 June 2013Danish
Krone
£'000
Euro
£'000
US
Dollar
£'000
Other
£'000
Financial assets
Trade receivables526,0634,0555,844
Other receivables33923211
Cash balances2,9035,3383,4992,081
2,95811,4407,5778,136
Financial liabilities
Bank loans and overdrafts(11,990)(29,567)
Trade payables(34)(1,181)(1,389)(124)
(34)(13,171)(30,956)(124)
Net balance sheet exposure2,924(1,731)(23,379)8,012
At 30 June 2012Danish
Krone
£'000
Euro
£'000
US
Dollar
£'000
Other
£'000
Financial assets
Trade receivables6,6669,9024,0192,222
Other receivables1472842073
Cash balances2,7664,9007,3723,042
Other financial assets24249171
9,82115,13511,4115,508
Financial liabilities
Bank loans and overdrafts(17,264)(28,675)
Finance leases(248)
Trade payables(1,794)(2,333)(1,210)(142)
Other financial liabilities(3,921)(1,902)(1,669)
(5,715)(21,747)(29,885)(1,811)
Net balance sheet exposure4,106(6,612)(18,474)3,697

Sensitivity Analysis

Interest Rate Risk

A 2.0% increase in interest rates compared to those ruling at 30 June 2013 would reduce Group profit before taxation and equity by £621,000 (2012: £168,000).

Foreign Currency Risk

The Group has significant cash flows and net financial assets and liabilities in Danish Krone, US Dollar and Euro.


The following table shows the impact on the Group's profit before taxation and net assets of a 10% appreciation of Sterling against each of these currencies:

Profit before
taxation
£'000
Net
assets
£'000
Danish Krone50(15)
US Dollar(111)(359)
Euro(3,195)(12,286)

Hedges

Cash Flow Hedges

The Group has entered into an interest rate swap on the term loan of £55 million and the revolving credit facility of £65 million. The Group has designated this a cash flow hedge. The risk being hedged is the variability of cash flows arising from movements in interest rates. No ineffectiveness arose on the hedge.

The hedge is in place until 31 October 2016. The amounts recognised in equity are recycled to the income statement to offset gains and losses in the period in which the cash flows occurs.

The amount recognised in equity in the year ended 30 June 2013 was a liability of £nil including an income tax credit of £15,000 (2012: £286,000 including an income tax credit of £101,000).