26. Financial instruments and related disclosures

Financial risk management

Consort Medical plc reports in sterling and pays dividends out of sterling profits. Group Finance manages and monitors the Group's external and internal funding requirements and financial risks in support of Group corporate objectives. Treasury activities are governed by policies and procedures approved by the Board and monitored by Group Finance.

Group Finance maintains treasury control systems and procedures to monitor interest rate, foreign exchange, credit and liquidity risks.

Consort Medical plc uses a variety of financial instruments, including derivatives, to finance and to manage market risks of its operations. Financial instruments include cash and liquid resources, borrowings, forward foreign exchange contracts and interest rate swaps.

Liquid assets surplus to the immediate operating requirements of Group undertakings are invested and managed centrally by Group Finance.

External borrowings are managed centrally by Group Finance and comprise a combination of long and short-term finance.

Consort Medical plc does not hold or issue derivative financial instruments for speculative trading purposes and the Group's Treasury policies specifically prohibit such activity. All transactions in financial instruments are undertaken to manage the risks arising from underlying business activities.

Capital management

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern, to provide returns for shareholders and benefits for other stakeholders and to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Selling margins are sufficient to cover normal operating costs and the Group's operating subsidiaries are cash-generative. None of the entities in the Group are subject to externally imposed capital requirements. Operating cash flow is used to fund investment in new product development as well as to make the routine outflows of capital expenditure, tax, dividends and repayment of maturing debt.

The Group's policy is to borrow centrally to meet anticipated funding requirements.

The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as borrowings less cash and cash equivalents. Total capital is calculated as total equity as shown in the consolidated balance sheet less cash or plus net debt.

As at 30 April 2013, the Group is in a net cash position following the settlement of debt on completion of the disposal of King Systems (see note 28).

The gearing ratios at 30 April 2013 and 30 April 2012 were as follows:

2013
£000
2012
£000
Total borrowings252,338
Less: cash and cash equivalents(36,966)(14,685)
Net (cash)/debt(36,964)37,653
Total equity103,75590,283
Total capital66,781127,936
Gearing ratioN/A29%

The Group has historically monitored two widely used ratios to measure the ability to service debt, being net debt/EBITDA and EBITDA interest cover. These measures were ahead of target throughout 2013.

Fair value of financial assets and liabilities

The table entitled 'Fair value of financial assets and liabilities' presents the carrying amount and the fair values of the Group's financial assets and liabilities under IFRS. Where available, market values have been used to determine fair values. Where market values are not available, fair values are determined using the prevailing interest and exchange rates.

The methods and assumptions used to estimate the fair values of financial instruments are as follows:

Forward exchange contracts — based on market prices and exchange rates at the balance sheet date;

Interest rate swaps — based on the market values at the balance sheet date;

Contingent consideration — the discounted value of anticipated future receipts.

The fair value of other assets and liabilities approximates to the carrying amount reported in the balance sheet.

Fair value and cash flow hedging activities

All derivative financial instruments are recognised as assets or liabilities in the balance sheet at fair value. Gains and losses are recognised in the consolidated income statement unless they are designated as hedging instruments and tested to be effective under IAS 39 'Financial instruments — Recognition and measurement', in which case the element of gains and losses that fulfil the hedge effectiveness criteria are taken directly to equity.

Consort Medical plc's hedging strategy is unchanged in respect of covering the transactional risk of foreign currency sales and purchases and hedging the net investment position of foreign subsidiaries.

Interest rate risk management

The Group's borrowings are arranged at floating rates, thus exposing the Group to interest rate risk, against which, in the past, the Group has sought to protect itself through interest rate swaps. As the Group is currently in a net cash position, no interest rate swaps are now held.

Foreign exchange risk management

The Group's principal currency exposure is movement between Sterling and the US dollar.

Transactional exposure

The Group uses forward contracts to hedge transactional currency exposures. As a result there were no material net monetary assets or liabilities in foreign currencies, having taken into account the effect of forward exchange currency contracts that have been used to match foreign currency exposures.

The Group hedges a proportion of forecast foreign currency transaction exposure generally extending up to 12 months. At 30 April 2013, the Group held forward contracts to hedge the equivalent of £2.4m of forecast foreign currency transaction exposures (2012: £3.2m). The fair value of the forward exchange contracts was a liability of £55,000 at 30 April 2013 (2012: asset £95,000). The Group currently does not designate these forward contracts as cash flow hedges and so gains and losses are recognised in the income statement.

The primary exposures in the UK business are transactions denominated in the USD and the Euro. A 10% decline in Sterling against the USD and the Euro (which is considered reasonably possible) would increase operating profit and equity by £0.2m (2012: £0.3m). A 10% increase in the value of Sterling (which is considered reasonably possible) would have a similar but opposite effect.

Translational exposure

The income statement of the Group's US business is converted into Sterling each month for reporting purposes at the average exchange rate throughout the year. Consequently, there is a translational exposure arising from movements in the Sterling/USD exchange rate. The Group does not hedge this translation exposure.

At 30 April 2012 the Group had a borrowing of $59m (£36.3m) which was designated as a hedge of the Group's net investments in the United States. Gains or losses on the retranslation of this borrowing were transferred to equity to offset gains or losses on translation of the net investments in the subsidiaries. The borrowing was repaid following the disposal of King Systems. In the year ended 30 April 2013 there was a gain of £1.8m taken to equity on retranslation of the Group's net investment in its US business (2012: gain of £1.0m).

A decline of 10% in the value of Sterling at the year end would increase the value of the Group's net assets and equity by £1.5m (2012: increase of £4.6m). A 10% increase in the value of Sterling would have a similar but opposite effect.

Committed facilities

As explained in note 23, the Group has committed facilities available at floating rates which expire in November 2016 and an overdraft facility that expires within one year.

Market risk of financial assets

The Group invests centrally managed liquid assets in short-term investments with banks at floating interest rates. These investments are classified as cash and cash equivalents.

Credit risk

The Group is exposed to a concentration of credit risk in respect of its major customers such that, if one or more of them is affected by financial difficulty, it could materially and adversely affect the Group's financial results. However, the Group generally does not expect its customers to fail to meet their obligations.

The Group does not believe that it is exposed to major concentrations of credit risk on other classes of financial instruments. The Group is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but does not expect any counterparties to fail to meet their obligations.

The Group applies Board-approved limits to the amount of credit exposure to any one counterparty and employs strict minimum creditworthiness criteria as to the choice of counterparty. The Group takes out credit insurance cover against the majority of export sales.

Liquidity risk

The Group operates internationally, primarily through subsidiary companies established in the markets in which the Group trades. Selling margins are sufficient to exceed normal operating costs and the Group's main operating subsidiaries are cash-generative.

Operating cash flow is used to fund investment in the research and development of new products as well as routine outflows of capital expenditure, tax, dividends and repayment of maturing debt. The Group may, from time to time, have additional demands for finance, such as acquisitions.

Fair value of financial assets and liabilities

The following table sets out the classification of the Group's financial assets and liabilities. Receivables and payables have been included to the extent that they are classified as financial assets and liabilities in accordance with IAS 32, Financial Instruments: Presentation. Provisions have been included where there is a contractual obligation to settle in cash.

GroupCompany
2013
£000
2012
£000
2013
£000
2012
£000
Financial assets
Cash and cash equivalents36,96614,68533,4838,558
Trade receivables13,11715,933
Other receivables1,0409235261,398
Total loans and receivables51,12331,54134,0099,956
Available-for-sale financial asset: contingent consideration11,676
Equity investment in Atlas Genetics Limited3,6502,5483,6502,548
Fair value through profit and loss — cash flow hedges95
Financial liabilities
Trade payables(11,362)(10,648)(89)(267)
Other creditors and accruals(7,621)(11,786)(99,117)(61,119)
Total amortised cost(18,983)(22,434)(99,206)(61,386)
Fair value through profit and loss — cash flow hedges(55)(539)(539)

The following tables categorise the Group's and Company's financial assets and liabilities held at fair value by the valuation methodology applied in determining fair value. 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 are based on observable market data. In other cases the instrument is classified as Level 3. The Company has no financial assets held at fair value through profit or loss.

Financial assets at fair value

At 30 April 2013
Group
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Available-for-sale financial asset
Contingent consideration11,67611,676
11,67611,676
At 30 April 2012
Group
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Held for trading financial instruments
Currency exchange contracts9595
9595

Financial liabilities at fair value

At 30 April 2013
Group
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Financial instruments
Currency exchange contracts(55)(55)
(55)(55)
At 30 April 2012
Group and Company
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Financial instruments
Interest rate swaps — cash flow hedges(539)(539)
(539)(539)

Under the terms of the disposal of King Systems, completed on 15 February 2013, the purchaser, Ambu A/S, is due to pay amounts of consideration contingent upon the performance of King following disposal. This comprises:

  • a milestone payment of US$10m upon completion of the first commercial sale of a video laryngoscope currently under development by King with a reusable display and an adaptor containing reusable optics and a disposable blade;
  • payments with a potential maximum value of US$40m related to the sales of King Vision products for the three years ending 30 April 2016.

In arriving at the fair value of contingent consideration, the directors have assessed the amounts of contingent consideration expected to arise together with the anticipated timing of collection by Consort. They have taken account of a statement made on 2 May 2013 by Ambu A/S that the first commercial sale of the video laryngoscope is expected by the end of Ambu's current financial year, being 30 September 2013. The projected amounts receivable have been discounted with reference to the cost of capital in Ambu and therefore the risk of a receivable value from it. The dollar amount receivable is converted to sterling at spot exchange rates.

As at the date of disposal of King, the fair value of contingent consideration is valued at £11,490,000. As at 30 April 2013 this value is £11,676,000, with an increase of £199,000 as a result of the unwinding of discounting with the passage of time and with a reduction of £13,000 as a result of exchange.

Interest rate profile of financial assets and liabilities

The interest rate profile of the financial assets and liabilities of the Group at 30 April 2013 is as follows:

GroupCompany
At 30 April 2013
Financial assets
Cash and
cash
equivalents
£000
Forward
exchange
contracts
£000
Total
£000
Cash and
cash
equivalents
£000
Loans
receivable
from Group
undertakings
£000
Total
£000
Less than one year36,96636,96633,48333,483
Loans with no fixed repayment date48,66748,667
Total36,96636,96633,48348,66782,150
Analysed as:
Floating rate interest33,45333,45333,45348,66782,120
Total interest earning33,45333,45333,45348,66782,120
Non-interest earning3,5133,5133030
Total36,96636,96633,48348,66782,150
At 30 April 2013
Financial liabilities
Forward
exchange
contracts
£000
Obligations
under finance
leases
£000
Total
Group
£000
Less than one year(55)(2)(57)
Total(55)(2)(57)
Analysed as:
Fixed rate interest(2)(2)
Total interest earning(2)(2)
Non-interest earning(55)(55)
Total(55)(2)(57)
GroupCompany
At 30 April 2012
Financial assets
Cash and
cash
equivalents
£000
Forward
exchange
contracts
£000
Total
£000
Cash and
cash
equivalents
£000
Loans
receivable
from Group
undertakings
£000
Total
£000
Less than one year14,6859514,7808,5588,558
Loans with no fixed repayment date75,51575,515
Total14,6859514,7808,55875,51584,073
Analysed as:
Floating rate interest8,5338,5338,53375,51584,048
Total interest earning8,5338,5338,53375,51584,048
Non-interest earning6,152956,2472525
Total14,6859514,7808,55875,51584,073
At 30 April 2012
Financial liabilities
Long-term
borrowings
£000
Effect of
interest rate
swaps
£000
Subtotal —
Company
£000
Obligations
under finance
leases
£000
Total
Group and
Company
£000
Less than one year(4,000)(312)(4,312)(3)(4,315)
Between one and two years(48,335)(227)(48,562)(48,562)
Total interest earning(52,335)(539)(52,874)(3)(52,877)
Analysed as:
Fixed rate interest(35,252)(539)(35,791)(3)(35,794)
Floating rate interest(17,083)(17,083)(17,083)
Total interest earning(52,335)(539)(52,874)(3)(52,877)
Non-interest earning
Total(52,335)(539)(52,874)(3)(52,877)

Currency profile of the financial assets and liabilities

The currency profile of the financial assets and liabilities of the Group and Company at 30 April 2013 is as follows:

GroupCompany
At 30 April 2013Sterling
£000
US
dollar
£000
Euro
£000
Other
£000
Total
£000
Sterling
£000
US
dollar
£000
Total
£000
Financial assets
Cash and cash equivalents35,5105578435636,96633,16132233,483
Loans receivable from Group undertakings10,23838,42948,667
35,5105578435636,96643,39938,75182,150
Financial liabilities
Obligations under finance leases(2)(2)
(2)(2)
GroupCompany
At 30 April 2012Sterling
£000
US
dollar
£000
Euro
£000
Other
£000
Total
£000
Sterling
£000
US
dollar
£000
Total
£000
Financial assets
Cash and cash equivalents7,3275,1081,86338714,6856,7101,8488,558
Forward exchange contracts9595
Loans receivable from Group undertakings8,37667,13975,515
7,3275,2031,86338714,78015,08668,98784,073
Financial liabilities
Loan repayable by October 2013(16,000)(36,335)(52,335)(16,000)(36,335)(52,335)
Effect of interest rate swaps(38)(501)(539)(38)(501)(539)
Obligations under finance leases(3)(3)
(16,041)(36,836)(52,877)(16,038)(36,836)(52,874)

Borrowing facilities

At 30 April 2013, the Group and Company had the following undrawn committed borrowing facilities:

2013
£000
2012
£000
Expiring within one year1,0001,000
Expiring beyond one year76,11313,152

Derivative financial instruments

The table below sets out the net principal amounts and fair value of derivative contracts held by Consort Medical plc:

Contract or
underlying
principal amount
£000
Fair value
Assets
£000
Liabilities
£000
At 30 April 2013
Foreign exchange contracts2,370(55)
Interest rate swaps
Total derivative financial instruments2,370(55)
At 30 April 2012
Foreign exchange contracts3,07995
Interest rate swaps35,252(539)
Total derivative financial instruments38,33195(539)