REG - ConvaTec Group PLC - Final Results <Origin Href="QuoteRef">CTEC.L</Origin> - Part 5

ConvaTecAnnouncement

15/02/2018 07:05

- Part 5: For the preceding part double click  ID:nRSO9401Ed 

at the exchange rate at
each statement of financial position date. Any cumulative translation difference is recorded within equity. 
 
The following exchange rates for the major currencies have been applied at 31 December 2017 and 2016: 
 
 Currency    Average rate/Closing rate    2017    2016  
 EUR/USD     Average                      1.13    1.11  
             Closing                      1.20    1.05  
                                                        
 GBP/USD     Average                      1.29    1.36  
             Closing                      1.35    1.23  
                                                        
 DKK/USD     Average                      0.15    0.15  
             Closing                      0.16    0.14  
 
 
Sensitivity analysis on currency risk 
 
The most significant exposure to foreign currency risk relates to certain borrowings. A reasonably possible 10% fluctuation
of the USD against the EUR applied to borrowings from third parties existing at 31 December 2017 would have affected equity
by the amounts shown below. This calculation assumes that the change occurred at the reporting date and had been applied to
borrowings from third parties existing at that date. This analysis assumes that all other variables, in particular interest
rates, remain constant and ignores any tax impact. 
 
                                             Equity  
                                             $m      
 10% strengthening of USD compared to EUR    63.9       
 10% weakening of USD compared to EUR        (63.9   )  
 
 
Interest rate risk 
 
The Group's interest rate risk arises from borrowings. Borrowings issued at variable rates expose the Group to interest
rate cash flow risk. 
 
Currency and Nature of Interest Rate of the Nominal Value of Borrowings 
 
The currency and rate structure of the Group's borrowings at 31 December 2017 and 2016 were as follows: 
 
                       2017               2016             
 Currency structure    $m         %       $m      %        
 USD                   1,176.8       64           1,200.4      67     
 EUR                   664.4         36           596.8        33     
 Total                 1,841.2       100          1,797.2      100    
                                                           
 Rate structure                                            
 Fixed                 25.6          1            23.0         1      
 Floating              1,815.6       99           1,774.2      99     
 Total                 1,841.2       100          1,797.2      100    
 
 
Sensitivity analysis on interest rate risk 
 
The loans under the Group's Credit Facilities bear interest at floating rates of interest per annum equal to LIBOR and/or
EURIBOR, or ABR, as adjusted periodically, plus a spread. A plus or minus change of 1% in the interest rates in effect on
31 December 2017 and 2016, would have a negative or positive impact on the Consolidated Statement of Profit or Loss and on
equity of $18.2 million and $17.7 million, respectively, assuming that all other variables remain constant and ignoring any
tax effect. The Group manage the risk centrally, by maintaining the appropriate mix between fixed and floating rate
borrowings, using interest rate swaps. 
 
Interest rate swap contracts 
 
As noted above, the Group has variable rate debt instruments and is exposed to market risks resulting from interest rate
fluctuations. In order to manage its exposure to variability in expected future cash outflows attributable to the changes
in LIBOR rates on the US Dollar Term A and B Loan Facility, in May 2017, the Group entered into interest rate swap
agreements. The Group interest rate swaps do not contain credit-risk related contingent features and are not subject to
master netting arrangements. The interest rate swaps are designated as hedging instruments in a cash flow hedging
relationship. As such, changes in the fair value will be recognised in other comprehensive income and accumulated in the
other reserve, with the fair value of the interest rate derivatives recorded in the statement of financial position. 
 
The following table presents the Group's outstanding interest rate swaps agreements, notional amounts and related fair
values at 31 December 2017. The fair values are based on market values of equivalent instruments at 31 December 2017. These
financial instruments are classified as level 2 based upon the degree to which the fair value movements are observable.
Level 2 fair value measurements are defined as those derived from inputs other than quoted prices that are observable for
the asset or liability, either directly (prices from third parties) or indirectly (derived from third party prices). 
 
                                                                                                Notional Amount at 31 December 2017  Fair Value(c) Assets/(Liabilities)       
                                                                 Effective Date  Maturity Date  $m                                   $m                                       
 3 Month LIBOR Float to Fixed Interest Rate Swap(a)              30 June 2017    30 June 2020   585.0                                                                    5.0    
 3 Month LIBOR Float to Fixed Interest Rate Swap(b)              30 June 2017    30 June 2020   297.0                                                                    2.4    
                                                                                                                                                                              
 Amounts recognised in Consolidated Statement of Profit or Loss                                                                      -                                        
 Amounts recognised in Consolidated Comprehensive Income                                                                             7.4                                      
                                                                                                                                                                                  
 
 
(a)   Under the interest rate swap agreement, commencing on 29 September 2017, the Group is entitled to receive quarterly
interest payments at a variable rate equal to the 3 month LIBOR, subject to an interest rate floor of 0% and is required to
make quarterly interest payments at a fixed rate of 1.709%. In addition, for hedging purposes, the notional amount is split
into six equal tranches. 
 
(b)   Under the interest rate swap agreement, commencing on 29 September 2017, the Group is entitled to receive quarterly
interest payments at a variable rate equal to the 3 month LIBOR, subject to an interest rate floor of 0.75% and is required
to make quarterly interest payments at a fixed rate of 1.749%. In addition, for hedging purposes, the notional amount is
split into three equal tranches. 
 
(c)    The fair values of the interest rate swaps are included in non-current Other assets in the Consolidated Statement of
Financial Position. The Consolidated Statement of Profit or Loss includes the negligible ineffective impact of the interest
rate swaps. 
 
Fair values of financial assets and financial liabilities 
 
The carrying amounts reflected in the Consolidated Statement of Financial Position at 31 December 2017 and 2016 for cash
and cash equivalents, trade and other receivables, restricted cash, trade and other payable, and certain accrued expenses
and other current liabilities approximate fair value due to their short-term maturities. There are no other assets or
liabilities measured at fair value on a recurring or non-recurring basis. 
 
Liabilities not Measured at Fair Value 
 
The borrowings are initially carried at fair value less any directly attributable transaction costs and subsequently at
amortised cost. At 31 December 2017 and 2016, the estimated fair value of the Group's borrowings, excluding finance leases
approximated $1,819.5 million and $1,775.2 million, in the aggregate, respectively. The fair values were estimated using
the quoted market prices and current interest rates offered for similar debt issuances. Borrowings are categorised as Level
2 measurement in the fair value hierarchy under IFRS 13 Fair Value Measurements. See Note 9 - Borrowings for the face and
the carrying values of the Group's borrowings. 
 
12.  Related Party Transactions 
 
Prior to listing, the Group maintained an agreement with its equity sponsors (the "Management Agreement"), whereby the
equity sponsors provided certain management advisory services.  For services rendered by the equity sponsors, an annual fee
of $3.0 million was payable in equal quarterly instalments.  The Group also paid other specified fees, in accordance with
the Management Agreement.  For the year ended 31 December 2016, the Group incurred $2.5 million ($1.8 million-Nordic
Capital and $0.7 million-Avista Capital Partners) in contractual fees to the equity sponsors for services rendered in
accordance with the Management Agreement. Upon completion of the IPO in 2016, the Management Agreement was terminated. 
 
The Group's revenue included $8.6 million and $7.4 million for the years ended 31 December 2017 and 2016, respectively, of
revenue to a related party (customers affiliated with Nordic Capital, shareholder and former equity sponsor). The
accompanying Consolidated Statement of Financial Position includes a receivable from the Group's related party revenue
recorded in Trade and other receivables in the amount of $2.1 million and $1.2 million at 31 December 2017 and 2016,
respectively. In addition, during the years ended 31 December 2017 and 2016, the Group purchased inventory product
totalling $6.3 million and $0.7 million, respectively, from a related party (vendors affiliated with Nordic Capital,
shareholder and former equity sponsor). The accompanying Consolidated Statement of Financial Position includes a payable
related to the Group's related party purchases recorded in Trade and other payables in the amount of $0.1 million at 31
December 2017. At 31 December 2016, such related party purchases were fully paid. 
 
Key management personnel compensation 
 
Key management personnel are those persons who have the authority and responsibility for planning, directing and
controlling the activities of the Group. The definition of key management personnel includes Directors (both executive and
non-executive) and other executives from the management team with significant authority and responsibility for planning,
directing and controlling the entity's activities. 
 
Key management personnel compensation for the years ended 31 December 2017 and 2016 comprised the following: 
 
                                 2017    2016a        
                                 $m      $m           
 Short-term employee benefits    9.7     9,200,000.0        8.7    
 Share-based expense             26.2                 38.2       
 Post-employment benefits        2.6                  0.7        
 Termination benefits            0.5                  -          
 Total                           39.0                 47.6       
                                                                   
 
 
(a)   The 2016 comparative has been restated to be on a consistent basis with the 2017 presentation. 
 
The above table does not include an outstanding loan of $0.2 million and $0.3 million at 31 December 2017 and 2016,
respectively, to the Group's CEO. The amounts of share-based compensation to the key management personnel disclosed in the
table above are based on the expense recognised under IFRS 2. 
 
13.  Subsequent Events 
 
The Group has evaluated subsequent events through 14 February 2018, the date the Financial Statements were approved by the
board of Directors. 
 
On 13 February 2018, the Board proposed the final dividend in respect of 2017 subject to shareholder approval at our Annual
General Meeting on 10 May 2018, to be distributed on 17 May 2018. Refer to Note 6 - Dividends for further details. 
 
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