26. Financial instruments and related disclosures

Financial risk management

Consort Medical plc reports in sterling and pays dividends out of sterling profits. The Group 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 the Group.

The Group 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 the Group.

External borrowings are managed centrally by the Group 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 plus net debt.

As at 30 April 2016, the Group is in a net debt position of £97.0m (30 April 2015: £99.2m); see note 23.

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 FY2016.

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:

  • Currency exchange contracts – based on market prices and exchange rates at the balance sheet date and
  • 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 fair value 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. In respect of the translational risk on the net investment in foreign subsidiaries, the Group has utilised a hedge of net investments in foreign operations. The Group uses a euro loan, which had a carrying value of £32.1m at the year end (2015: £29.5m), as a hedge of its exposure to foreign exchange risk on its investments in foreign subsidiaries.

Interest rate risk management

The Group's borrowings are arranged at floating rates, thus potentially exposing the Group to interest rate risk, against which, in the past, the Group has sought to protect itself through interest rate swaps. Although the Group/Company are currently in a net debt position, no interest rate swaps are held as the Group was not subject to any significant movements in these rates during the period. This will continue to be kept under review over time.

Foreign exchange risk management

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

Transactional exposure

The Group uses forward contracts to hedge a proportion of forecast foreign currency transactional exposure generally extending up to 12 months. At 30 April 2016, the Group held forward contracts to hedge the equivalent of £12.5m of forecast foreign currency transaction exposures (2015: £3.6m). The fair value of the forward exchange contracts was a liability of £256,593 at 30 April 2016 (2015: liability £117,000). 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 transactional exposures in the UK and European business are transactions denominated in the US dollar and the euro. A 10% decline in sterling against the US dollar and the euro (which is considered reasonably possible) would increase operating profit and equity by £0.5m (2015: £0.5m). A 10% increase in the value of sterling (which is considered reasonably possible) would have a similar but opposite effect.

Translational exposure

Following the acquisition of Aesica in the prior year, the Group also now has exposure in the retranslation of the German and Italian operations into sterling. The foreign currency translation sensitivity for the euro for the full year FY2016 was such that a change in the rate of €0.01: £1 would have impacted revenue by £0.6m and EBIT by £0.1m.

Committed facilities

As explained in note 23, the Group has committed facilities available at floating rates which expire in September 2019 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.

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
30 April
2016
£000
*Restated
30 April
2015
£000
30 April
2016
£000
30 April
2015
£000
Financial assets
Cash and cash equivalents16,25845,2012,452480
Trade receivables45,18646,967
Other receivables3,6592,62155
Amounts due from Group undertakings207,637164,641
Total loans and receivables48,84549,588207,692164,641
Contingent consideration2,547
Equity investments8,2506,2668,2506,266
Total available-for-sale financial assets8,2508,8138,2506,266
Financial liabilities
Trade payables(27,225)(24,120)(107)(211)
Other creditors and accruals(26,978)(47,136)(2,873)(4,518)
Interest-bearing loans and borrowings(114,547)(146,145)(114,544)(146,142)
Amounts due to Group undertakings(270,761)(174,796)
Total amortised cost(168,750)(217,401)(388,285)(325,667)
Contingent consideration(1,650)
Total available-for-sale financial liabilities(1,650)
Fair value through profit and loss — currency exchange contracts(256)(117)(20)

* Restated – see note 28

All financial liabilities have a contractual maturity date that is less than 12 months from the balance sheet date.

Hedge of net investments in foreign operations — Included in loans at 30 April 2016 was a borrowing of £32.1m which has been designated as a hedge of the net investments in the two subsidiaries in Italy and Germany, Aesica Pharmaceuticals GmbH and Aesica Pharmaceuticals SRL. This borrowing is being used to hedge the Group's exposure to the euro foreign exchange risk on these investments. Gains or losses on the retranslation of this borrowing are transferred to OCI to offset any gains or losses on translation of the net investments in the subsidiaries. There is no ineffectiveness in the year ended 30 April 2016.

The equity investments in Atlas Genetics Limited and Precision Ocular Limited are unquoted investments and are therefore held at cost, less any provision for impairment as their fair values cannot be measured reliably in the absence of an active market.

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 2016
Group
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Contingent consideration
At 30 April 2015
Group
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Contingent consideration2,5472,547
2,5472,547

Financial liabilities at fair value

At 30 April 2016
Group
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Contingent consideration
Currency exchange contracts(256)(256)
(256)(256)
At 30 April 2015
Group and Company
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Contingent consideration(1,650)(1,650)
Currency exchange contracts(117)(117)
(117)(1,650)(1,767)

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

  • 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 and
  • payments with a potential maximum value of US$40m related to the sales of King Vision products for the three years ended 30 April 2016

The fair value of contingent consideration at 30 April 2016 is £nil (30 April 2015: £2.5m), with the reduction primarily due to:

  • An amount of £1.5m (FY2015 : £2.8m) was received during the year, which related to contigent consideration based on sales of King Vision products.
  • King Vision sales by Ambu in FY2016 were insufficient to trigger a further contingent consideration payment to Consort Medical; therefore the remaining contingent consideration has been reduced to £nil.

The contingent consideration of £1.6m recognised in the prior year was in relation to contingent consideration on acquisition of Aesica (see note 28).

Interest rate profile of financial assets and liabilities

The interest rate profile of the financial assets and liabilities of the Group at 30 April in the current and prior years is as follows:

GroupCompany
At 30 April 2016
Financial assets
Cash
and cash
equivalents
£000
Forward
exchange
contracts
£000
Total
£000
Cash
and cash
equivalents
£000
Loans
receivable
from Group
undertaking
£000
Total
£000
Less than one year16,25816,2582,4528,41710,869
Loans with no fixed repayment date199,220199,220
Total16,25816,2582,452207,637210,089
Analysed as:
Floating rate interest2,452204,879207,331
Total interest earning2,452204,879207,331
Non-interest earning16,25816,2582,7582,758
Total16,25816,2582,452207,637210,089
GroupCompany
At 30 April 2016
Financial liabilities
Currency
exchange contracts
£000
Bank
borrowings
£000
Total
£000
Bank
borrowings
£000
Loans payable
to Group undertakings
£000
Total
£000
Less than one year(256)(114,547)(114,803)(114,544)(254,886)(369,430)
More than one year(15,875)(15,875)
Total(256)(114,547)(114,803)(114,544)(270,761)(385,305)
Analysed as:
Floating rate interest(114,547)(114,547)(114,544)(63,808)(178,352)
Total interest earning(114,547)(114,547)(114,544)(63,808)(178,352)
Non-interest earning(256)(256)(206,953)(206,953)
Total(256)(114,547)(114,803)(114,544)(270,761)(385,305)
GroupCompany
At 30 April 2015
Financial assets
Cash
and cash
equivalents
£000
Forward
exchange
contracts
£000
Total
£000
Cash
and cash
equivalents
£000
Loans
receivable
from Group
undertaking
£000
Total
£000
Less than one year45,20145,201480480
Loans with no fixed repayment date164,641164,641
Total45,20145,201480164,641165,121
Analysed as:
Floating rate interest480162,329162,809
Total interest earning480162,329162,809
Non-interest earning45,20145,2012,3122,312
Total45,20145,201480164,641165,121
GroupCompany
At 30 April 2015
Financial liabilities
Currency
exchange contracts
£000
Bank
borrowings
£000
Total
Group
£000
Bank
borrowings
£000
Loans payable
to Group undertakings
£000
Total
£000
Less than one year(117)(146,145)(146,262)(146,142)(158,921)(305,063)
More than one year(15,875)(15,875)
Total(117)(146,145)(146,262)(146,142)(174,796)(320,938)
Analysed as:
Floating rate interest(146,145)(146,145)(146,142)(144,591)(290,733)
Total interest earning(146,145)(146,145)(146,142)(144,591)(290,733)
Non-interest earning(117)(117)(30,205)(30,205)
Total(117)(146,145)(146,262)(146,142)(174,796)(320,938)

Currency profile of the financial assets and liabilities

The currency profile of the financial assets and liabilities of the Group and Company is as follows:

GroupCompany
At 30 April 2016Sterling
£000
US
dollar
£000
Euro
£000
Other
£000
Total
£000
Sterling
£000
US
dollar
£000
Euro
£000
Other
£000
Total
£000
Financial assets
Cash and cash equivalents10,7334184,35375416,2582,30071442,452
Loans receivable from Group undertakings105,65430,68671,183114207,637
10,7334184,35375416,258107,95430,69371,327114210,089
Financial liabilities
Interest-bearing loans and borrowings(82,400)(32,147)(114,547)(82,397)(32,147)(114,544)
Loans payable to Group undertakings(85,207)(29,510)(155,930)(114)(270,761)
(82,400)(32,147)(114,547)(167,604)(29,510)(188,077)(114)(385,305)
GroupCompany
At 30 April 2015Sterling
£000
US
dollar
£000
Euro
£000
Other
£000
Total
£000
Sterling
£000
US
dollar
£000
Euro
£000
Other
£000
Total
£000
Financial assets
Cash and cash equivalents1,98247242,09065745,2013894843480
Loans receivable from Group undertakings107,31927,68629,636164,641
1,98247242,09065745,201107,70827,73429,679165,121
Financial liabilities
Interest-bearing loans and borrowings(79,000)(67,145)(146,145)(79,000)(67,142)(146,142)
Loans payable to Group undertakings(64,859)(9,413)(100,524)(174,796)
(79,000)(67,145)(146,145)(143,859)(9,413)(167,666)(320,938)

Borrowing facilities

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

2016
£000
2015
£000
Expiring within one year5,6005,600
Expiring beyond one year46,6349,786

Derivative financial instruments

The table below sets out the net principal amounts and fair value of derivative contracts:

Contract or underlying
principal amount
£000
Fair value
Assets
£000
Liabilities
£000
At 30 April 2016
Currency exchange contracts12,518(256)
Total derivative financial instruments12,518(256)
At 30 April 2015
Currency exchange contracts3,635(117)
Total derivative financial instruments3,635(117)