Note 29 – Financial Risk Management

29.1 Overall Risk Management Policy

Lonza is exposed in particular to credit and liquidity risk, as well as to risks from movements in foreign currency exchange rates, interest rates and market prices that affect its assets, liabilities, and forecasted transactions.

Lonza’s overall risk management policy aims to limit these risks through operational and finance activities.

The Board of Directors has overall responsibility for the establishment and oversight of Lonza’s risk management framework. Financial risk management is carried out by a central treasury department (Group Treasury). Group Treasury is responsible for implementing the policy, and identifies, evaluates and hedges financial risks in close cooperation with Lonza’s business units. Group Treasury also has the sole responsibility for carrying out foreign exchange transactions and executing financial derivative transactions with third parties.

Lonza’s risk management policies are established to identify and analyze the risks faced by Lonza, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and Lonza’s activities.

The Lonza Audit Committee oversees how management monitors compliance with Lonza’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by Lonza. The Lonza Audit Committee is assisted in its oversight role by Internal Audit (Lonza Audit Services). Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.

29.2 Credit Risk

Credit risk is the risk of financial loss to Lonza if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and mainly arises from Lonza’s receivables from customers.

Accounts Receivable

Lonza’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. Risk control assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. In monitoring customer credit risk, customers are grouped according to their credit characteristics, including geographic location, industry, and existence of previous financial difficulties.

Purchase limits are established for each customer, which are reviewed regularly. For customers domiciled in specific countries with high risk, Lonza has credit risk insurance covering the maximum exposure. The maximum credit risk is equal to the carrying amount of the respective assets. There are no commitments that could increase this exposure to more than the carrying amounts. In general, Lonza does not require collateral in respect of trade and other receivables, but uses credit insurance for country risk where appropriate.

Lonza has a history of low credit losses on accounts receivable. Credit losses that occurred in the past were primarily related to very few single customers. Furthermore, none of Lonza’s businesses had a heightened exposure to credit losses in the past and based on Lonza’s best estimate this is not expected to change in the foreseeable future.

Consequently, the bad debt allowance (as disclosed in note 11) represents primarily the credit risk of specific customers.

Ageing of Trade Receivables

million CHF

 

2018

 

2017

 

 

 

 

 

Not past due

 

521

 

644

Past due 1–30 days

 

113

 

124

Past due 31–120 days

 

53

 

51

Past due more than 120 days

 

19

 

29

Total

 

706

 

848

Financial Instruments and Cash Deposits

Credit risk from balances with banks and financial institutions is managed by the Group’s treasury department. Counterparty credit ratings are reviewed regularly. The carrying amount of financial assets represents the maximum credit exposure.

The maximum exposure to credit risk at the reporting date was as follows:

million CHF

 

Notes

 

2018

 

2017

 

 

 

 

 

 

 

1

Included in «Other receivables, prepaid expenses and accrued income» (see note 12)

Financial assets at amortized cost

 

 

 

 

 

 

Trade receivables, net

 

 

 

692

 

825

Other receivables

 

 

 

52

 

67

Accrued income

 

3

 

159

 

63

Non-current loans and advances

 

8

 

46

 

5

Cash and cash equivalents

 

 

 

461

 

479

Total financial assets at amortized cost

 

 

 

1,410

 

1,439

 

 

 

 

 

 

 

Financial assets at fair value

 

 

 

 

 

 

Derivative financial instruments

 

 

 

 

 

 

– Currency-related instruments1

 

 

 

16

 

5

– Interest-related instruments1

 

 

 

1

 

3

– Commodity-related instruments1

 

 

 

0

 

4

 

 

 

 

 

 

 

Contingent consideration from sale of business

 

 

 

31

 

40

 

 

 

 

 

 

 

Total financial assets at fair value

 

 

 

48

 

52

 

 

 

 

 

 

 

Total

 

 

 

1,458

 

1,491

29.3 Liquidity Risk

Liquidity risk is the risk that Lonza will not be able to meet its financial obligations as they fall due. Lonza’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to Lonza’s reputation. Group Treasury maintains flexibility in funding also using bilateral and syndicated credit lines. Lonza has concluded the following lines of credit: Committed credit lines of CHF 1,137 million (CHF 536 million used as of 31 December 2018), which are committed for up to five years and uncommitted credit lines of CHF 60 million (CHF 0 used as of 31 December 2018).

The table below analyzes the Group’s financial liabilities and derivative financial liabilities in relevant maturity groupings, based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows, including interest payments. Balances due within 12 months are equal to their carrying balances, as the impact of discounting is not significant.

Year ended 31 December 2018

million CHF

 

Carrying amount

 

1Contracual cash flows

 

Between 0 and 6 months

 

Between 7 and 12 months

 

Between 1 and 2 years

 

Between 2 and 3 years

 

Between 3 and 5 years

 

Over 5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Including interest payments

Straight bond (2012–2022)

 

105

 

118

 

0

 

3

 

3

 

3

 

109

 

0

Straight bond (2013–2019)

 

300

 

305

 

305

 

0

 

0

 

0

 

0

 

0

Straight bond (2015–2020)

 

150

 

152

 

0

 

1

 

151

 

0

 

0

 

0

Straight bond (2015–2023)

 

175

 

186

 

0

 

2

 

2

 

2

 

180

 

0

Straight bond (2016–2021)

 

249

 

251

 

0

 

0

 

0

 

251

 

0

 

0

Straight bond (2017–2021)

 

125

 

126

 

0

 

0

 

0

 

126

 

0

 

0

Straight bond (2017–2024)

 

110

 

115

 

0

 

1

 

1

 

1

 

2

 

110

Syndicated loan (2017–2023)

 

254

 

269

 

1

 

1

 

3

 

3

 

261

 

0

German private placement

 

1,082

 

1,176

 

7

 

14

 

21

 

386

 

595

 

153

Term loans

 

982

 

1,045

 

11

 

11

 

511

 

12

 

500

 

0

Other debt due to banks and financial institutions

 

300

 

338

 

107

 

4

 

7

 

7

 

14

 

199

Other debt due to others

 

219

 

289

 

40

 

3

 

39

 

4

 

30

 

173

Finance lease liabilities

 

11

 

15

 

1

 

1

 

1

 

1

 

3

 

8

Total debt

 

4,062

 

4,385

 

472

 

41

 

739

 

796

 

1,694

 

643

Trade payables

 

428

 

428

 

428

 

0

 

0

 

0

 

0

 

0

Other current liabilities

 

618

 

618

 

618

 

0

 

0

 

0

 

0

 

0

Derivative financial instruments

 

17

 

17

 

7

 

4

 

0

 

0

 

3

 

3

Contingent consideration

 

30

 

30

 

0

 

2

 

5

 

4

 

18

 

1

Total financial liabilities

 

5,155

 

5,478

 

1,525

 

47

 

744

 

800

 

1,715

 

647

Year ended 31 December 2017

million CHF

 

Carrying amount

 

1Contracual cash flows

 

Between 0 and 6 months

 

Between 7 and 12 months

 

Between 1 and 2 years

 

Between 2 and 3 years

 

Between 3 and 5 years

 

Over 5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Including interest payments

Straight bond (2011–2018)

 

140

 

144

 

0

 

144

 

0

 

0

 

0

 

0

Straight bond (2012–2018)

 

200

 

204

 

0

 

204

 

0

 

0

 

0

 

0

Straight bond (2012–2022)

 

105

 

121

 

0

 

3

 

3

 

3

 

112

 

0

Straight bond (2013–2019)

 

299

 

311

 

5

 

0

 

306

 

0

 

0

 

0

Straight bond (2015–2020)

 

150

 

153

 

0

 

1

 

1

 

151

 

0

 

0

Straight bond (2015–2023)

 

175

 

188

 

0

 

2

 

2

 

2

 

4

 

178

Straight bond (2016–2021)

 

249

 

251

 

0

 

0

 

0

 

0

 

251

 

0

Straight bond (2017–2021)

 

125

 

126

 

0

 

0

 

0

 

0

 

126

 

0

Straight bond (2017–2024)

 

110

 

116

 

0

 

1

 

1

 

1

 

2

 

111

Syndicated loan (2017–2022)

 

223

 

242

 

1

 

1

 

2

 

2

 

236

 

0

German private placement

 

1,108

 

1,234

 

8

 

15

 

23

 

23

 

565

 

600

Term loans

 

993

 

1,088

 

12

 

12

 

24

 

519

 

521

 

0

Other debt due to banks and financial institutions

 

119

 

119

 

119

 

0

 

0

 

0

 

0

 

0

Other debt due to others

 

238

 

305

 

58

 

3

 

5

 

38

 

30

 

171

Finance lease liabilities

 

12

 

16

 

1

 

1

 

1

 

1

 

3

 

9

Total debt

 

4,246

 

4,618

 

204

 

387

 

368

 

740

 

1,850

 

1,069

Trade payables

 

400

 

400

 

400

 

0

 

0

 

0

 

0

 

0

Other current liabilities

 

595

 

595

 

595

 

0

 

0

 

0

 

0

 

0

Derivative financial instruments

 

20

 

20

 

7

 

13

 

0

 

0

 

0

 

0

Total financial liabilities

 

5,261

 

5,633

 

1,206

 

400

 

368

 

740

 

1,850

 

1,069

29.4 Market Risk

Market risk is the risk that changes in market prices will affect Lonza’s income or the value of its holdings of financial instruments. Lonza is exposed to market risk from changes in currency exchange and interest rates and commodities. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk. Lonza has established a treasury policy of which the objective is to reduce the volatility relating to these exposures. Lonza enters into various derivative transactions based on Lonza’s treasury policy that establishes guidelines in areas such as counterparty exposure and hedging practices. Counterparties to agreements are major international financial institutions with at least investment grade rating. Positions are monitored using techniques such as market value and sensitivity analyses. All such transactions are carried out within the guidelines set by the Audit Committee.

Foreign Exchange Risk

The Group operates across the world and is exposed to movements in foreign currencies affecting the Group financial result and the value of Group equity. Foreign exchange risk arises because the amount of local currency paid or received for transactions denominated in foreign currencies may vary due to changes in exchange rates («transaction exposures») and because the foreign currency denominated financial statements of the Group’s foreign subsidiaries may vary upon consolidation into the Swiss-franc-denominated Group Financial Statements («translation exposures»). Foreign exchange risks arise primarily on transactions that are denominated in USD, EUR and GBP.

In managing its exposure regarding the fluctuation in foreign currency exchange rates, Lonza has entered into a variety of currency swaps and forward contracts. These agreements generally include the exchange of one currency against another currency at a future date. Lonza adopts a policy of considering hedging for all the committed contractual exposure. The planned exposure is hedged within certain ranges. Hedge ratios are determined by the risk committee and depend on market expectation, risk bearing ability and risk appetite.

The table below shows the impact on post-tax profit if at 31 December a currency had strengthened (+) or weakened (–) versus the Swiss franc, with all other variables held constant as a result of the currency exposures outlined in the tables below:

million CHF

 

 

 

Post-tax profit 2018

 

Post-tax profit 2017

 

Other comprehensive income 2018

 

Other comprehensive income 2017

 

 

Sensitivity

 

+

 

 

+

 

 

+

 

 

+

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USD

 

+/–10%

 

8.7

 

(8.7)

 

261.5

 

(261.5)

 

0

 

0

 

0

 

0

EUR

 

+/–10%

 

(5.5)

 

5.5

 

(39.0)

 

39.0

 

0

 

0

 

0

 

0

GBP

 

+/–10%

 

3.3

 

(3.3)

 

2.9

 

(2.9)

 

0

 

0

 

0

 

0

The summary quantitative data relating to the Group’s exposure to currency risks as reported to the management of the Group is as follows:

Year ended 31 December 2018

million CHF

 

USD

 

GBP

 

EUR

 

SGD

 

DKK

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

10

 

0

 

0

 

0

 

0

 

1

 

11

Non-current financial assets

 

0

 

0

 

31

 

0

 

0

 

0

 

31

Trade receivables, net

 

113

 

35

 

55

 

0

 

2

 

1

 

206

Other receivables, prepaid expenses and accrued income

 

5

 

20

 

3

 

4

 

0

 

1

 

33

Cash and cash equivalents

 

100

 

15

 

31

 

3

 

1

 

22

 

172

Assets held for sale

 

2

 

0

 

2

 

0

 

0

 

0

 

4

Non-current debt

 

(841)

 

0

 

(1,296)

 

0

 

0

 

0

 

(2,137)

Other non-current liabilities

 

(1)

 

0

 

0

 

(5)

 

0

 

(1)

 

(7)

Other current liabilities

 

(27)

 

(1)

 

(2)

 

(14)

 

0

 

(2)

 

(46)

Trade payables

 

(30)

 

(2)

 

(32)

 

(14)

 

0

 

(3)

 

(81)

Group internal loans

 

1,307

 

0

 

1,049

 

0

 

0

 

0

 

2,356

Gross balance sheet exposure

 

638

 

67

 

(159)

 

(26)

 

3

 

19

 

542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency-related instruments

 

(531)

 

(27)

 

92

 

0

 

0

 

0

 

(466)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net exposure

 

107

 

40

 

(67)

 

(26)

 

3

 

19

 

76

Year ended 31 December 2017

million CHF

 

USD

 

GBP

 

EUR

 

SGD

 

DKK

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current financial assets

 

0

 

0

 

42

 

0

 

0

 

0

 

42

Trade receivables, net

 

120

 

37

 

53

 

2

 

3

 

1

 

216

Other receivables, prepaid expenses and accrued income

 

2

 

12

 

12

 

1

 

0

 

2

 

29

Current advances and financial assets

 

5

 

0

 

0

 

0

 

0

 

0

 

5

Cash and cash equivalents

 

146

 

5

 

27

 

1

 

0

 

2

 

181

Non-current debt

 

(770)

 

0

 

(1,344)

 

0

 

0

 

0

 

(2,114)

Other non-current liabilities

 

(2)

 

0

 

0

 

(4)

 

0

 

0

 

(6)

Other current liabilities

 

(56)

 

0

 

(17)

 

(10)

 

0

 

(3)

 

(86)

Trade payables

 

(26)

 

(2)

 

(36)

 

(13)

 

0

 

(4)

 

(81)

Group internal loans

 

3,703

 

0

 

743

 

0

 

0

 

0

 

4,446

Gross balance sheet exposure

 

3,122

 

52

 

(520)

 

(23)

 

3

 

(2)

 

2,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency-related instruments

 

29

 

(17)

 

50

 

0

 

0

 

0

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net exposure

 

3,151

 

35

 

(470)

 

(23)

 

3

 

(2)

 

2,694

The following exchange rates were applied during the year:

Balance Sheet Year-End Rates

 

 

 

2018

 

2017

 

 

 

 

 

 

EU

Euro

 

1.1267

 

1.1683

USA

Dollar

 

0.9852

 

0.9758

Great Britain

Pound sterling

 

1.2546

 

1.3178

Singapore

Singapore dollar

 

0.7230

 

0.7305

China

Renminbi

 

0.1432

 

0.1499

Income Statement Year-Average Rates

 

 

 

2018

 

2017

 

 

 

 

 

 

EU

Euro

 

1.1550

 

1.1119

USA

Dollar

 

0.9786

 

0.9846

Great Britain

Pound sterling

 

1.3057

 

1.2686

Singapore

Singapore dollar

 

0.7253

 

0.7132

China

Renminbi

 

0.1480

 

0.1458

Interest Rate

Risk arises from movements in interest rates which could affect the Group financial result or the value of Group equity. Changes in interest rates may cause variations in interest income and expense. In addition, they may affect the market value of certain financial assets, liabilities and hedging instruments. The primary objective of the Group’s interest rate management is to protect the net interest result.

Lonza’s policy is to manage interest cost using a mix of fixed and variable rate debt. Group policy is to maintain at least 50% of its borrowings in fixed-rate instruments. In order to manage this mix in a cost-efficient manner, Lonza enters into interest rate swaps and cross-currency interest rate swaps to exchange at specified intervals, the difference between fixed and variable interest amounts calculated by reference to a corresponding notional principal amount. Lonza adopts a policy of having one-third of the debt on a short-term basis and two-thirds of the debt on a long-term basis. The mix between floating and fixed rates depends on the market view of Lonza.

Lonza’s exposure to interest rate risk was as follows:

million CHF

 

Notes

 

2018

 

2017

 

 

 

 

 

 

 

1

Including effects from cross currency interest rate swaps and pension fund

Net debt

 

15

 

3,534

 

3,762

Net debt at fixed interest rates1

 

 

 

(2,523)

 

(2,396)

 

 

 

 

 

 

 

Interest risk exposure

 

 

 

1,011

 

1,366

If the interest rates had increased/decreased by 1% in 2018, with all other variables held constant, post-tax profit would have been CHF 8.3 million lower/higher (2017: CHF 11.3 million lower/higher).

Commodity Price Risk

Lonza needs liquefied petroleum gas (LPG) as raw material for a cracker in Visp. Butane, naphtha or propane can be used as feedstock for the cracker. The raw material ultimately used depends on its availability and specifications. The annual demand is approximately 110,000 metric tons. In order to minimize the risk of higher raw material prices, Lonza hedges the commodity price risk via swaps. At 31 December 2018, if the propane/naphtha price had weakened/strengthened by 10%, with all other variables held constant, other comprehensive income would have been CHF 2 million lower/higher (2017: CHF 2 million lower/higher).

29.5 Overview of Derivative Financial Instruments

The following table shows the contract or underlying principal amounts and fair values of derivative financial instruments by type of contract at 31 December 2018 and 2017. Contract or underlying principal amounts indicate the volume of business outstanding at the balance sheet date and do not represent amounts at risk. The fair values are determined by using the difference of the prices fixed in the outstanding derivative contracts from the actual market conditions which would have been applied at the year-end if we had to recover these trades.

Financial Instruments at Fair Value Through Profit or Loss

million CHF

 

Contract or underlying principal amount

 

Positive fair values

 

Negative fair values

 

Total net fair values

 

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency-related instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Forward foreign exchange rate contracts

 

400

 

40

 

7

 

0

 

0

 

0

 

7

 

0

– Currency swaps

 

753

 

734

 

9

 

5

 

(4)

 

(7)

 

5

 

(2)

Total currency-related instruments

 

1,153

 

774

 

16

 

5

 

(4)

 

(7)

 

12

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-related instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Cross currency interest rate swaps

 

75

 

407

 

1

 

3

 

0

 

(13)

 

1

 

(10)

Total interest-related instruments

 

75

 

407

 

1

 

3

 

0

 

(13)

 

1

 

(10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial instruments at fair value through profit or loss – held for trading

 

1,228

 

1,181

 

17

 

8

 

(4)

 

(20)

 

13

 

(12)

Offsetting of Financial Asset and Financial Liabilities

The Group enters into derivative transactions under International Swaps and Derivatives Association (ISDA) master netting agreements with the respective counterparties in order to mitigate counterparty risk. Under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one party to the other. The ISDA agreements do not meet the criteria for offsetting in the balance sheet as the Group does not have a currently enforceable right to offset recognized amounts, because the right to offset is only enforceable on the occurrence of future events, such as a default or other credit events.

The following table sets out the carrying value of derivative financial instruments and the amounts that are subject to master netting agreements.

million CHF

 

2018

 

2017

 

2018

 

2017

 

 

Assets

 

Assets

 

Liabilities

 

Liabilities

1

The Group has not entered into any collateral arrangements

 

 

 

 

 

 

 

 

 

Forward foreign exchange rate contracts

 

7

 

0

 

0

 

0

Currency swaps

 

9

 

5

 

(4)

 

(7)

Interest rate swaps

 

0

 

0

 

(6)

 

0

Cross currency interest rate swaps

 

1

 

3

 

0

 

(13)

Commodity-related instruments

 

0

 

4

 

(7)

 

0

Carrying value of derivative financial instruments

 

17

 

12

 

(17)

 

(20)

Derivatives subject to master netting agreements

 

(4)

 

(5)

 

4

 

5

Collateral arrangements1

 

0

 

0

 

0

 

0

Net amount

 

13

 

7

 

(13)

 

(15)

Financial Instruments by Type/Currency

million CHF

 

2018

 

2017

 

 

 

 

 

Forward foreign exchange rate contracts, currency swaps and FX options

 

 

 

 

USD

 

847

 

552

EUR

 

175

 

128

GBP

 

65

 

26

JPY

 

26

 

5

AUD

 

14

 

1

SGD

 

10

 

10

CAD

 

3

 

10

DKK

 

5

 

3

CZK

 

4

 

34

ILS

 

4

 

3

NZD

 

0

 

2

Total

 

1,153

 

774

Commodity swap

 

31

 

14

Cross currency interest rate swap

 

75

 

407

Interest rate swap

 

433

 

0

Total financial instruments

 

1,692

 

1,195

Positive fair values of derivatives are included as part of «Other receivables, prepaid expenses and accrued income». Negative fair values of derivatives are included as part of «Other current liabilities». Hedge accounting was applied to cash flow hedges on highly probable payments in foreign currencies and for raw materials (naphtha/propane).

29.6 Financial Instruments Carrried at Fair Value

The Group applied the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

  • Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities
  • Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.
  • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

million CHF

 

2018

 

2017

 

 

Level 1

 

Level 2

 

Level 3

 

Total fair value

 

Level 1

 

Level 2

 

Level 3

 

Total fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

0

 

12

 

0

 

12

 

0

 

0

 

0

 

0

Derivative financial instruments

 

0

 

17

 

0

 

17

 

0

 

12

 

0

 

12

Contingent consideration related to sale of business

 

0

 

0

 

31

 

31

 

0

 

0

 

40

 

40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

0

 

(17)

 

0

 

(17)

 

0

 

(20)

 

0

 

(20)

Contingent consideration

 

0

 

0

 

(30)

 

(30)

 

0

 

0

 

0

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net assets and liabilities measured at fair value

 

0

 

12

 

1

 

13

 

0

 

(8)

 

40

 

32

In 2018 there were no transfers between Level 1 and Level 2 fair value measurements. Details of the determination of Level 3 fair value measurements are set out below.

Contingent Consideration Arrangements Related to Sale of Business

 

 

2018

 

2017

 

 

 

 

 

At 1 January

 

40

 

0

Arising from sale of business

 

0

 

37

Used for settlements

 

(8)

 

0

Currency translation effects

 

(1)

 

3

At 31 December

 

31

 

40

The agreement to sell the Peptides business (see note 5.4) includes a contingent consideration arrangement under which Lonza will receive a defined percentage of the net sales of the disposed business for the financial years 2017–2021 (estimated to be CHF 31 million at year-end 2018 exchange rates). Lonza’s estimate of the net present value of these future payments is reflected as a receivable in the consolidated balance sheet as of 31 December 2018.

Contingent Consideration Arrangements

 

 

2018

 

2017

 

 

 

 

 

At 1 January

 

0

 

18

Arising from business combinations

 

30

 

0

Used for settlements

 

0

 

(11)

Gains and losses included in the income statement

 

0

 

(7)

Currency translation effects

 

0

 

0

At 31 December

 

30

 

0

Lonza is party to certain contingent consideration arrangements arising from business combinations. The fair values are determined considering the expected payments. The expected payments are determined by considering the possible scenarios of regulatory approvals and forecast sales, which are the most significant unobservable inputs. The estimated fair value would increase if the forecast sales were higher or if the likelihood of obtaining regulatory approval was higher. At 31 December 2018 the total potential payments under contingent consideration arrangements could be up to CHF 73 million (2017: CHF 19 million primarily related to the InterHealth acquisition), primarily related to the Octane acquisition (see note 5.1). The estimated future payments amount to CHF 30 million at 31 December 2018. Based on InterHealth’s 2017 performance no payment was required and the contingent consideration liability has been adjusted accordingly in 2017.

29.7 Carrying Amounts and Fair Values of Financial Instruments by Category

The carrying values less impairment provision of trade receivables are assumed to approximate to their fair values due to the short-term nature of trade receivables. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date. The table below shows the carrying amounts and fair values of financial instruments by category.

Carrying Amounts and Fair Values of Financial Instruments by Category – 2018 (IFRS 9)

million CHF

 

Financial instruments mandatorily at fair value through profit or loss

 

Fair value – hedging instruments

 

Financial assets at amortized cost

 

Financial liabilities at amortized cost

 

Total carrying amount

 

Fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2018

 

 

 

 

 

 

 

 

 

 

 

 

1

The fair value of straight bonds for disclosure purposes is Level 1 and is calculated based on the observable market prices of the debt instruments

Other investments

 

12

 

0

 

0

 

0

 

12

 

12

Trade receivables, net

 

0

 

0

 

692

 

0

 

692

 

692

Other receivables

 

0

 

0

 

52

 

0

 

52

 

52

Accrued income

 

0

 

0

 

159

 

0

 

159

 

159

Non-current loans

 

0

 

0

 

46

 

0

 

46

 

46

Cash and cash equivalents

 

0

 

0

 

461

 

0

 

461

 

461

Contingent consideration from sale of business

 

31

 

0

 

0

 

0

 

31

 

31

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

– Currency-related instruments

 

0

 

16

 

0

 

0

 

16

 

16

– Interest-related instruments

 

0

 

1

 

0

 

0

 

1

 

1

– Commodity-related instruments

 

0

 

0

 

0

 

0

 

0

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

 

43

 

17

 

1,410

 

0

 

1,470

 

1,470

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt:

 

 

 

 

 

 

 

 

 

 

 

 

– Straight bonds1

 

0

 

0

 

0

 

1,214

 

1,214

 

1,231

– Other debt

 

0

 

0

 

0

 

2,848

 

2,848

 

2,848

Current liabilities

 

0

 

0

 

0

 

618

 

618

 

618

Trade payables

 

0

 

0

 

0

 

428

 

428

 

428

Contingent consideration

 

30

 

0

 

0

 

0

 

30

 

30

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

– Currency-related instruments

 

0

 

4

 

0

 

0

 

4

 

4

– Interest-related instruments

 

0

 

6

 

0

 

0

 

6

 

6

– Commodity-related instruments

 

0

 

7

 

0

 

0

 

7

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial liabilties

 

30

 

17

 

0

 

5,108

 

5,155

 

5,172

Carrying Amounts and Fair Values of Financial Instruments by Category – 2017 (IAS 39)

million CHF

 

Available for sale

 

Fair value – hedging instruments

 

Fair value –
designated

 

Loans and receivables

 

Financial liabilities at amortized cost

 

Total carrying amount

 

Fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

The fair value of straight bonds for disclosure purposes is Level 1 and is calculated based on the observable market prices of the debt instruments

At 31 December 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments – available for sale – carried at cost

 

16

 

0

 

0

 

0

 

0

 

16

 

16

Trade receivables, net

 

0

 

0

 

0

 

825

 

0

 

825

 

825

Other receivables

 

0

 

0

 

0

 

67

 

0

 

67

 

67

Accrued income

 

0

 

0

 

0

 

63

 

0

 

63

 

63

Non-current loans

 

0

 

0

 

0

 

5

 

0

 

5

 

5

Cash and cash equivalents

 

0

 

0

 

0

 

479

 

0

 

479

 

479

Contingent consideration from sale of business

 

0

 

0

 

40

 

0

 

0

 

40

 

40

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Currency-related instruments

 

0

 

5

 

0

 

0

 

0

 

5

 

5

– Interest-related instruments

 

0

 

3

 

0

 

0

 

0

 

3

 

3

– Commodity-related instruments

 

0

 

4

 

0

 

0

 

0

 

4

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

 

16

 

12

 

40

 

1,439

 

0

 

1,507

 

1,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Straight bonds1

 

0

 

0

 

0

 

0

 

1,553

 

1,553

 

1,590

– Other debt

 

0

 

0

 

0

 

0

 

2,693

 

2,693

 

2,693

Current liabilities

 

0

 

0

 

0

 

0

 

595

 

595

 

595

Trade payables

 

0

 

0

 

0

 

0

 

400

 

400

 

400

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Currency-related instruments

 

0

 

7

 

0

 

0

 

0

 

7

 

7

– Interest-related instruments

 

0

 

13

 

0

 

0

 

0

 

13

 

13

– Commodity-related instruments

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial liabilties

 

0

 

20

 

0

 

0

 

5,241

 

5,261

 

5,298

29.8 Capital Management

The Board’s policy is to maintain a strong capital base so as to retain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors monitors both the demographic spread of shareholders and the return on capital, which Lonza defines as total shareholders’ equity, excluding non-controlling interest, and the level of dividends to ordinary shareholders.

The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowing and the advantages and security afforded by a sound capital position. Lonza’s target is to achieve a return on invested capital in excess of 10% by 2022. In 2018, the return was 8% (2017: 8.4%). In comparison, the weighted average interest expense on interest-bearing borrowings (excluding liabilities with imputed interest) was 1.75% (2017: 1.6%).

From time to time, Lonza purchases its own shares on the market; the timing of these purchases depends on market prices. Primarily, the shares are intended to be used for issuing shares under Lonza’s share programs. Lonza does not have a defined share buy-back plan. Neither Lonza Group Ltd nor any of its subsidiaries is subject to externally imposed capital requirements.