REG - Essentra plc - RESULTS FOR THE FULL YEAR ENDED 31 DECEMBER 2014 <Origin Href="QuoteRef">ESNT.L</Origin> - Part 3
20/02/2015 07:00
- Part 3: For the preceding part double click ID:nRST4171Fb
- (2.1) - - (17.5)
Exceptional operating items (4.0) (11.6) (0.4) (0.2) - - (16.2)
Operating profit/(loss) 45.2 11.5 38.6 27.5 - (14.0) 108.8
17. Financial instruments
The table below sets out Essentra's accounting categories and fair value for each class of financial asset and liability.
2014 2013
Fair value Loans and receivables Amortised cost Total carrying value Fair value Loans and receivables Amortised cost Total carrying value
£m £m £m £m £m £m £m £m
Trade and other receivables - 161.4 - 161.4 - 136.0 - 136.0
Cash and cash equivalents - 46.0 - 46.0 - 44.1 - 44.1
Interest bearing loans and borrowings - - (110.0) (110.0) - - (261.2) (261.2)
Trade and other payables - - (94.4) (94.4) - - (94.4) (94.4)
Level 2 of fair value hierarchyDerivative assets 3.9 - - 3.9 0.2 - - 0.2
Derivative liabilities (0.1) - - (0.1) (0.3) - - (0.3)
Level 3 of fair value hierarchyOther non-current financial liabilities (3.5) - - (3.5) (5.4) - - (5.4)
Other current payables (2.3) - - (2.3) (0.8) - - (0.8)
(2.0) 207.4 (204.4) 1.0 (6.3) 180.1 (355.6) (181.8)
Total trade and other receivables carried at £168.5m (2013: £140.7m) include prepayments and accrued income of £7.1m (2013:
£4.7m) which are not financial assets and are therefore excluded from the above analysis. Fair values of forward foreign
exchange contracts and cross currency swaps have been calculated at year end forward exchange rates compared to contracted
rates. These are determined to be level 2 in the fair value hierarchy.
The only financial instrument with fair value determined by reference to significant unobservable inputs, which is
classified as level 3 in the fair value hierarchy, is the deferred contingent consideration of £5.8m relating to the
acquisition of Mesan Kilit A.S. (2013: £6.2m relating to the acquisitions of Ulinco Components and Mesan Kilit A.S.). The
fair value of the deferred contingent consideration is estimated based on an assessment of the likely outcome of the
acquired business' financial performance. There have been no transfers between levels of the fair value hierarchy. There
are no non-recurring fair value measurements. During the year, a fair value gain of £0.6m (2013: fair value gain of £0.8m)
in respect of financial instruments at level 3 fair value hierarchy was recognised within exceptional items (see note 3),
and £nil (2013: £0.4m) was settled in cash. No other fair value gains or losses were recorded in profit or loss and other
comprehensive income.
Included within interest bearing loans and borrowings are $160m US Private Placement Loan Notes. The Loan Notes are held at
amortised cost with a carrying value of £101.9m (2013: £95.5m). The Group estimates that the total fair value of the Loan
Notes at 31 December 2014 is £111.3m (2013: £105.7m).
All other financial assets, classified as 'loans and receivables', and trade and other payables, classified as 'amortised
cost', are held at amortised cost and have short terms to maturity. For this reason, their carrying amounts at the
reporting date approximate the fair values. Unsecured bank loans, included within interest bearing loans and borrowings,
incur interest at floating rates and as a result their carrying amounts also approximate their fair values at the reporting
date.
18. Cautionary forward-looking statements
This Report contains forward-looking statements based on current expectations and assumptions. Various known and unknown
risks, uncertainties and other factors may cause actual results to differ from any future results or developments expressed
or implied from the forward-looking statements. Each forward-looking statement speaks only as of the date of this document.
The Company accepts no obligation to publicly revise or update these forward-looking statements or adjust them to future
events or developments, whether as a result of new information, future events or otherwise, except to the extent legally
required.
19. Directors' responsibility statement
We confirm that to the best of our knowledge:
· The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and
fair view of the assets, liabilities and financial position and profit or loss of the Company and the undertakings included
in the consolidation taken as a whole; and
· This announcement includes a fair review of the development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal
risks and uncertainties that they face.
On behalf of the Board
Colin Day Matthew Gregory
Chief Executive Group Finance Director
20 February 2015
Management of Principal Risks
Introduction
The sound management of risk within the parameters of a clearly defined risk appetite has underpinned the delivery of the
Company's Vision 2015 strategy. The Company's effective management of its principal risks remains an essential component
in Drive for 2020 by focusing on the challenges which arise in the international environment in which Essentra conducts
business, and reflecting the Company's attitude to risk in the delivery of its business objectives. Essentra's risk
management practices are designed to ensure risks are continuously monitored, associated action plans are reviewed,
appropriate contingencies are provisioned and information is reported through established management control procedures.
The Company seeks continuously to improve its risk management processes and continues to develop new systems which serve to
enhance the Company's response to the risks inherent in its international business activities.
Throughout 2014, Essentra embedded a new risk management framework that includes both Operational and Executive Risk
Management Committees meeting on a quarterly basis to discuss and monitor the changing risk environment to which Essentra
is exposed and ensure any necessary mitigating actions are undertaken. The Board and Audit Committee review the output from
those respective committees in fulfilling their risk management responsibilities.
Essentra recognises that the ability to monitor, assess and respond to business risks quickly and effectively may provide a
competitive advantage. Reporting within the Group is structured so that key issues are escalated as appropriate at the
earliest opportunity. Each area of the business is required to review its areas of risk and uncertainty formally and
regularly. There is an ongoing process to ensure that there are clear and consistent procedures for monitoring, updating
and implementing appropriate controls to manage identified risks. Essentra's short- and long-term performance may be
impacted by many risks and uncertainties, not all of which are within the Company's control. Outside of the formal
processes, the Company also seeks to ensure risk management is embedded within its everyday activities and the subject of
ongoing review and discussions
The Company is subject to the general risks and uncertainties which impact other international organisations, including
political instability in the countries in which the Company operates and sources raw materials, the impact of natural
disasters and changes in general economic conditions, including currency and interest rate fluctuations, tax regimes and
raw material costs.
Detailed on the next page are the principal risks and uncertainties which the Board believes are specific to Essentra,
having regard to its strategic objectives, together with the Company risk management response thereto. The details provided
are not exhaustive and do not purport to be a complete explanation of all potentially relevant issues. There may be other
risks and uncertainties which are unknown to the Board or which may not be deemed by the Board to be material at present
but which could prove to be material in the future.
1. Disruption to infrastructure
A catastrophic loss of the use of all or a portion of any of Essentra's manufacturing or distribution facilities due to
accident, labour issues, fire, terrorist attack, natural disaster, information technology failure, cyber security attack or
otherwise which whether short- or long-term could adversely affect the Company's ability to meet the demands of its
customers. Some of the assets maintained by the Company, such as tooling and IT systems, are critical to the manufacture
and delivery of particular products.
Impact Mitigation
A material disruption to operational facilities or the loss of critical assets may negatively affect the Company's:> Production capability and asset base> Supply chain management> Customer relationships> Reputation> Revenue> Profit> Financial condition Essentra seeks to manage the risk of potential disruption of the supply of its customers by:> Operating within a flexible global infrastructure > Installing fire and other risk prevention systems > Implementing disaster recovery and business continuity
plans> Assessing operational risks > Maintaining a comprehensive insurance programme>Alignment of Group information technology resources
2. Emerging technologies and competition pressures
Essentra faces pressures from direct competitors as well as competition from alternative technologies. Some of the
Company's competitors may derive competitive advantage from greater financial resources, economies of scale, additional
purchasing power or a lower cost base, and Essentra may face aggressive pricing practices.
Impact Mitigation
Demand for competitors' products and the development of competing technologies may result in: > Loss of market positions > Erosion of margins > Intellectual property challenges > Decline in revenue > Decline in profitability > Deterioration in financial condition Essentra seeks to mitigate the risk of competitive pressure by: > Sustained investment in research and development to develop the quality and breadth of its product and service offering > Exploiting innovation and manufacturing capabilities in new
technologies, products and services > Developing long-term relationships with customers at a senior level > Protecting its intellectual property rights > Expanding its international distribution, sales and marketing expertise > Investing in both organic
and acquisition growth opportunities
3. Failure to drive business development
Essentra's development and growth has benefited from the success of start-up operations and the continued growth of already
established businesses. The rate of success of any development may in part be dependent on the Group's innovative pipeline
and / or employees who have the ability to successfully extend the product range, or identify and develop products.
Additionally, future business development will be dependent on the continued successful implementation of the new
organisational structure. There can be no assurance that the Company will develop, complete and commercialise current and
suitable new products, nor expand further through start-up operations.
Impact Mitigation
If Essentra fails to meet the challenges of business development, the Company may experience: > Lower growth rates > Delay in the achievement of strategic objectives > Reduced profitability Essentra addresses the challenges of international business development with:>Experienced and skilled management >Detailed due diligence and planning>Project risk reviews>External expert advice>Regional structure development
4. Mergers and acquisitions
Essentra's development and growth has benefited from value-adding acquisitions. The rate of any future acquisition
integration may in part be dependent on the success of identifying the correct acquisitions and having sufficient resources
available for integration. There can be no assurance that the Company will be successful in completing and integrating
suitable acquisitions.
Impact Mitigation
If Essentra fails to meet the challenges of business development arising from acquisitions the Company may experience: > Lower growth rates > Delay in the achievement of strategic objectives > Increased costs > Reduced profitability Essentra addresses the challenges of mergers and acquisitions with: >Experienced and skilled management >Detailed due diligence and planning >Project risk reviews >External expert advice
5. Customer profile
In some of Essentra's businesses the customer base is relatively concentrated. In addition, trends in certain markets may
reduce the demands for the Company's products. Should Essentra's customers decide to satisfy their requirements internally
or from other suppliers and if Essentra were unable to secure new business this could result in a significant loss of
business. Due to the acquisitions that the company has made in 2014, Essentra must serve an increased size and complexity
profile of customers who will be heavily reliant on our business in some cases. There is now an increased expectation on
Essentra from these customers and the company risks losing business should it fail to adequately measure customer
satisfaction and manage customer relationships.
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