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.
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.
The Board of Directors has approved a policy which governs all Treasury activities.
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.
The capital structure of the Group consists of net borrowings and shareholders' equity. At 30 June 2014, net borrowings were £5.0 million (2013: £80.8 million), whilst shareholders' equity was £204.8 million (2013: 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 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. There were no changes in the Group's approach to capital management during the year.
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 2014 and 2013.
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 is the risk that the Group will not have sufficient funds to meet liabilities as they fall due. Cash flows and covenants of the Group are monitored 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:
- £65.0 million revolving credit facility, of which £32.0 million was drawn down at 30 June 2014; and
- various finance leases
The Group's undrawn borrowing facilities at 30 June 2014 and details of its revised facility are detailed in note 20.
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 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 0.85% on the revolving credit facility. The amount of the revolving credit outstanding at 30 June 2014 was £32.0 million (2013: £115.1 million). The hedge is in place until 31 October 2016 and the amount hedged matches the repayment profile of the facility.
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 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 £55,955,000 (2013: £59,009,000) which is the total carrying value of the Group's financial assets.
Cash is only deposited with highly rated banks in line with our treasury policy.
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 8.4% of gross trade receivables at 30 June 2014 (2013: 2.0%). 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 2014 and 30 June 2013.
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 2014 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:
|Cash and cash equivalents||26,773||26,773||32,791||32,791|
|Loans and receivables|
|— trade receivables||28,325||28,325||25,296||25,296|
|— other receivables||857||857||922||922|
|Total financial assets||55,955||55,955||59,009||59,009|
|Bank loans and overdrafts||(32,039)||(32,039)||(115,073)||(115,073)|
|Held for trading financial liabilities|
|— derivatives designated as hedges||(161)||(161)||(15)||(15)|
|Finance lease liabilities||(110)||(110)||(480)||(480)|
|Deferred and contingent consideration||(7,809)||(7,809)||(5,928)||(5,928)|
|Total financial liabilities||(61,668)||(61,668)||(140,328)||(140,328)|
|Net financial liabilities||(5,713)||(5,713)||(81,319)||(81,319)|
Fair Value Hierarchy
The table below analyses the Group's financial instruments carried at fair value, by valuation method. Where possible, quoted prices in active markets are used (Level 1). Where such prices are not available, the asset or liability is classified as Level 2, provided all significant inputs to the valuation model used are based on observable market data. If one or more of the significant inputs to the valuation model is not based on observable market data, the instrument is classified as Level 3.
|30 June 2014||Level 1|
|Derivative financial liabilities||—||(161)||—||(161)|
|Deferred and contingent consideration for business combinations||—||—||(7,809)||(7,809)|
|30 June 2013||Level 1|
|Derivative financial liabilities||—||(15)||—||(15)|
|Deferred and contingent consideration for business combinations||—||—||(5,928)||(5,928)|
At 30 June 2014, the deferred and contingent consideration balance is made up of £3.4 million in relation to the DermaPet acquisition, £1.9 million for a US generic pharmaceutical product, and £2.5 million in relation to the Phycox acquisition. Movements in deferred and contingent consideration consist of a £0.1 million unwinding of discount and £0.4 million decrease due to foreign exchange differences in relation to the DermaPet acquisition, £0.1 million discount and £0.2 million decrease due to foreign exchange differences in relation to the US generic pharmaceutical, and a £2.5 million addition for Phycox.
Credit Risk — Overdue Financial Assets
The following table shows financial assets which are overdue and for which no impairment provision has been made:
|Up to one month||5,206||4,052|
|Between one and two months||270||415|
|Between two and three months||324||11|
|Over three months||11||—|
The movement in the impairment provision was as follows:
|At start of period||148||2,877|
|Impairment provision recognised/(released)||48||(7)|
|Transferred to held for sale||—||(2,667)|
|Impairment provision utilised||(20)||(55)|
|At end of period||176||148|
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 2014 and 30 June 2013. Where interest is at floating rates, the future interest payments have been estimated using current interest rates:
|At 30 June 2014||Deferred and|
|Arrangement fees netted off||—||(386)||—||—||(386)|
|Total committed cash flow||(9,761)||(32,241)||(110)||(21,549)||(63,661)|
|Within 6 months||(773)||(202)||(73)||(21,549)||(22,597)|
|Between 6 months and 1 year||(183)||—||(30)||—||(213)|
|Between 1 and 2 years||(4,221)||(32,039)||(7)||—||(36,267)|
|Between 2 and 3 years||(403)||—||—||—||(403)|
|Between 3 and 4 years||(423)||—||—||—||(423)|
|Between 4 and 5 years||(445)||—||—||—||(445)|
|Over 5 years||(3,313)||—||—||—||(3,313)|
|At 30 June 2013||Deferred and|
|Arrangement fees netted off||—||(1,963)||—||—||(1,963)|
|Total committed cash flow||(6,246)||(118,834)||(506)||(18,832)||(144,418)|
|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||—||—||—||—||—|
The contractual undiscounted cash flows in respect of derivative financial instruments are as follows:
|Within 6 months||34||83|
|Between 6 months and 1 year||34||(12)|
|Between 1 and 2 years||69||(25)|
|Between 2 and 5 years||24||(31)|
The Group has a contractual obligation to pay £34,000 (2013: £83,000) under its interest rate swap arrangement covering the period from 30 June to 30 September 2014.
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 2014 and 30 June 2013 were:
|At 30 June 2014||Danish|
|Bank loans and overdrafts||—||(6,258)||(28,321)||—|
|Net balance sheet exposure||1,357||2,447||(30,286)||12,454|
|At 30 June 2013||Danish|
|Bank loans and overdrafts||—||(11,990)||(29,567)||—|
|Net balance sheet exposure||2,924||(1,731)||(23,379)||8,012|
Interest Rate Risk
A 2.0% increase in interest rates compared to those ruling at 30 June 2014 would reduce Group profit before taxation and equity by £138,000 (2013: £621,000).
Foreign Currency Risk
The Group has significant cash flows and net financial assets and liabilities in Danish Krone, US Dollar and Euro.
The Group does not hedge either economic exposure or the translation exposure arising from the profits, assets and liabilities of non-Sterling businesses.
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:
The sensitivities above represent the Directors view of reasonably possible changes in each risk variable, not worst case scenarios or stress tests. The outputs from the sensitivity analysis are estimates of the impact of the effect of changes in market risks assuming that the specified changes occur at the year end and are applied to the risk exposures at that date. Accordingly they show the impact on the balance sheet of an instantaneous shock.
Actual results in the future may differ materially from these estimates due to commercial actions taken to mitigate any potential losses from such rate movements, to the interaction of more than one sensitivity occurring and to further developments in global financial markets. As such this table should not be considered as a projection of likely future gains and losses.
Cash Flow Hedges
The Group has entered into an interest rate swap on the revolving credit facility of £32.0 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 Consolidated Income Statement to offset gains and losses in the period in which the cash flows occur.
The amount recognised in equity in the year ended 30 June 2014 was a liability of £132,000 including an income tax credit of £29,000 (2013: £nil including an income tax credit of £15,000).