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Fagron N.V. — Interim / Quarterly Report 2019
Mar 2, 2021
3949_rns_2021-03-02_fe7d9cae-867c-4f2c-9337-d7d5454d0464.html
Interim / Quarterly Report
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Publication
Fagron NV
Nazareth
Konzernabschluss zum Geschäftsjahr vom 01.01.2019 bis zum 31.12.2019
Report of the Board of Directors on the consolidated financial statements
Consolidated income statement
Fagron´s total turnover in 2019 was 534,695 million euros, an increase of 13.4% compared to 471,679 million euros in 2018. The organic turnover growth was 8.3% (+7.5% at constant exchange rates), to which all continents on which Fagron is active have contributed.
Fagron Europe (including RoW)
The Europe segment turnover increased by 2.8% in 2019 (+2.9% at constant exchange rates) to 257,001 million euros. Adjusted for the acquisition in July 2019 of Dr. Kulich Pharma (Czech Republic), the organic turnover growth was 1.9% (+2.1% at constant exchange rates). The REBITDA increased slightly and totalled 67.133 million euros. The REBITDA as a percentage of the turnover decreased by 60 basis points to 26.1%.
Turnover at Compounding Services decreased slightly as a result of the increasing number of registrations of non-sterile compounds by Fagron. As a result, this turnover now falls in the Premium Pharmaceuticals segment, which is seeing an increase in its share of total turnover. In Europe, the sterile GMP compounding facility in the Netherlands, which has been fully operational again since July, saw turnover growth flatten slightly in the fourth quarter due to the complex process of attracting and retaining new hospitals as Fagron customers.
The success of Fagron Genomics is reflected in the growth of the Brands share. The sale of genetic tests totalled more than 8,200 tests in 2019.
In October, Fagron Genomics introduced the NutriGen DNA test for professional nutrigenomic advice in Europe, South Africa and Mexico. Initial sales figures are very promising.
Fagron completed the acquisition of Dr. Kulich Pharma in the Czech Republic in July 2019. Dr. Kulich Pharma is a supplier of pharmaceutical raw materials, creams, ointments and packaging materials to compounding pharmacies in the Czech Republic. Dr. Kulich Pharma is the number two in the Czech Republic, after market leader Fagron. Established in 1992, Dr Kulich employs 66 employees (in FTE), is situated in Prague and has warehouses and repackaging facilities in Hradec Kralove as well as in Otrokovice. Dr. Kulich Pharma realised a turnover of approximately 5.1 million euros in 2018 and EBITDA margin of approximately 17.8%. The acquisition of Dr. Kulich Pharma provides significant operational synergies for Fagron. The integration of Dr. Kulich Pharma started immediately after the acquisition was completed.
Fagron Latin America
The Latin America segment turnover increased by 24.4% in 2019 (+27.1% at constant exchange rates) to 125.552 million euros. The organic turnover growth was 10.4% at constant exchange rates. The REBITDA increased by 20.5% to 25.351 million euros. The REBITDA as a percentage of the turnover decreased by 60 basis points to 20.2%.
The decrease in the share of Brands in total turnover is mainly due to the acquisitions in 2019, which are mainly active in Essentials.
At 19.0% (at constant exchange rates), the Compounding Services activities in Colombia also showed strong growth.
The integration of the companies acquired in Mexico (Cedrosa) and Brazil (Levviale, Apace and Ortofarma) started in the second half of the year.
Central de Drogas, S.A. de C.V. ('Cedrosa') is a leading supplier of raw materials (Essentials) to compounding pharmacies and the pharmaceutical industry in Mexico. With the acquisition of Cedrosa, Fagron enters the attractive (growing) Mexican market for personalised medicine and strengthens its position on the Latin American continent. Based in Naucalpan, a city northwest of Mexico City, Cedrosa employs 98 people (in FTEs), and generated 2018 turnover of Mex$ 480.0 million (approximately 22.5 million euros) and EBITDA margin of 14.5%.
Ortofarma is an innovative company that provides a wide range of services to more than 1,000 compounding pharmacies in Brazil. This provision ranges from analytical test solutions and consulting to the development of innovative products and training. The strong strategic fit between Ortofarma and Fagron, combined with the capacity expansion in product development, ensures that Fagron's position is further reinforced in the growing demand for Brands that are used in compounding. Ortofarma was established in 1999 and has 39 employees (in FTE). Ortofarma is situated in Juiz de Fora, a city in the southeast of Brazil.
Levviale is a supplier of pharmaceutical raw materials, excipients and Brands for compounding pharmacies in Brazil. The innovative Levviale Brands, such as Baseffer®, Celulomax® and Oro-tab®, are all based on excipients to increase the biological availability of drugs.
The Levviale Brands will also be introduced in Europe and North America at the beginning of 2020. Levviale was established in 1992 and has 75 employees (in FTE). Levviale is situated in São Paulo and has a repackaging facility for raw materials in Anapolis.
Apace is a developer and supplier of packaging materials to compounding pharmacies and the pharmaceutical industry in Brazil. Apace's product offering fully complements Fagron's comprehensive range. Apace, situated in Sao Paulo, was established in 1983 and has 41 employees (in FTE).
Fagron North America
The North America segment turnover increased by 28.6% in 2019 (+21.8% at constant exchange rates) to 145.910 million euros. The organic turnover growth was 22.7% (+16.5% at constant exchange rates). The REBITDA increased by 32.6% to 23.534 million euros. The REBITDA margin increased by 50 basis points to 16.1% compared to 2018.
The Fagron (Compounding Services) sterile activities in the United States are performing in line with expectations and achieved a 21.7% growth in turnover in 2019 (+15.3% at constant exchange rates). The turnover growth of the sterile compounding facilities in Wichita was 35.8% (+28.7% at constant exchange rates) in 2019. The sterile compounding facilities in Wichita are on track to achieve the stated turnover target in 2022 at the latest. As a result of a different service model to certain major customers, sales growth in Wichita in the fourth quarter was somewhat lower, but with higher profitability. AnazaoHealth achieved turnover growth of 12.9% (+7.0% at constant exchange rates). In the fourth quarter of 2019, Anazao increased the focus on the product range of the 503A facility in Tampa (Florida). As a result, Anazao discontinued a number of low-margin nuclear products.
The impact on turnover will be approximately 5 million US dollars annually.
Turnover at Brands and Essentials grew over the full year 2019 by 40.6% (+33.2% at constant exchange rates) compared to 2018. The organic turnover growth was 24.6% (+18.4% at constant exchange rates).
The intensive collaboration between Fagron and Humco, which was acquired in April 2018, creates commercial synergies and economies of scale, and results in a highly competitive player in the American market.
HL Technology
On 10 October 2019, Fagron signed an agreement with the management of HL Technology concerning the sale of the activities for 5.2 million euros.
The transaction was completed on 24 October 2019. HL Technology was deconsolidated as at 1 October 2019.
The consolidated gross margin (the difference between turnover on the one hand and trade goods on the other) amounted to 322.010 million euros in 2019. This represents 60.2% of the turnover compared to a gross margin of 61.6% in 2018.
The total operational costs, defined as services and other goods, personnel costs and other operational costs minus other operating income, were 208.304 million euros, an increase of 5.5% compared to 2018.
The cost coverage, defined as operational costs versus gross margin, was 64.7% in 2019.
Depreciation and amortisation increased by 49.8% from 19.575 million euros in 2018 to 29.319 million euros in 2019.
The operating profit amounted to 84.388 million euros in 2019, an increase of 14.9% or 10.916 million euros compared to 2018.
The financial result amounted to -14.502 million euros, a decrease of 4.135 million euros compared to 2018.
This brought the result before taxes to 69.886 million euros, an increase of 15.051 million euros compared to 2018. The effective tax rate as a percentage of the profit before taxes was 20.3% in 2019 compared to 21.1% in 2018. Taxes increased in 2019 to 14.199 million euros compared to 11.553 million euros in 2018.
The result for discontinued operations of -14.147 million euros primarily relates to the final settlement with the U.S. Department of Justice. The net result is 41.540 million euros, a decrease of 1.365 million euros compared to 2018.
Consolidated statement of financial position
The consolidated balance sheet total increased by 17.4% from 682.772 million euros in 2018 to 801.240 million euros in 2019.
Assets
Total non-current assets were 562,052 million euros, an increase of 79.006 million euros compared to 2018.
Goodwill increased by 24.191 million euros to 389.326 million euros.
This increase was mainly the result of the acquisitions in 2019. Intangible fixed assets increased by 2.559 million euros to 28.811 million euros.
Property, plant and equipment increased by 14.304 million euros to 87.606 million euros.
The net operational capex amounted to 22.174 million euros or 4.1% of the turnover in 2019. The net operational capex mainly consist of investments in a new repackaging facility for raw materials in Poland, existing facilities in the United States, Brazil and Spain (Fagron Genomics), automation of logistics processes and software implementations. Excluding the investment of 5.1 million euros in a new repackaging facility in Poland, the net operational investments were 3.2% of turnover in 2019.
The financial fixed assets, consisting of financial fixed assets and other fixed assets available for sale, amounted to 4.287 million euros in 2019, an increase of 2.128 million euros compared to 2018.
The leasing and similar rights increased by 33.465 million euros to 33.601 million euros due to the application of IFRS 16.
Deferred tax assets represented a value of 18.420 million euros.
The total current assets amount to 239.189 million euros in 2019 compared to 199.726 million euros in 2018, an increase of 39.463 million euros. Inventories increased by 2.821 million euros, trade receivables increased by 6.299 million euros, the other receivables were 1.238 million euros less, while cash and cash equivalents increased by 29.105 million euros.
Equity and liabilities
Total equity amounted to 246.440 million euros. This is an increase of 36.724 million euros compared to 2018. This increase was caused by the 2019 result (41.692 million euros), the capital increase (2.472 million euros), the dividend made payable (-8.621 million euros) and share-based payments (1.182 million euros).
Total liabilities increased from 473.056 million euros in 2018 to 554.800 million euros in 2019. This is an increase of 81.744 million euros.
Provisions decreased by 8.106 million euros to 5.653 million euros.
Pension obligations in 2019 were 5.778 million euros, an increase of 0.595 million euros compared to 2018.
Deferred tax liabilities relate to, among other things, temporary differences between reporting and tax accounting at the local entities. These amounted to 0.339 million euros in 2019 compared to 0.259 million euros in 2018.
Non-current interest-bearing financial liabilities (long-term borrowings and leasing liabilities) amounted to 350.808 million euros in 2019, an increase of 84.890 million euros compared to 2018. Current interestbearing financial liabilities (short-term borrowings and leasing liabilities) amounted to 40.723 million euros in 2019, a decrease of 23.232 million euros compared to 2018.
On 31 December 2019, the net financial debt (total current and non-current interest-bearing financial liabilities plus other non-current liabilities minus cash and cash equivalents) amounted to 284.847 million euros, compared to 252.294 million euros at end of year 2018.
The short-term trade payables were 13.385 million euros higher than in 2018 and amounted to 77.303 million euros.
The tax liabilities for the current year amounted to 9.736 million euros, an increase of 0.282 million euros compared to 2018.
Other current taxes, remuneration and social security amounted to 22.106 million euros, an increase of 0.165 million euros compared to 2018.
Other (current) debt amounted to 41.847 million euros in 2019 compared to 28.538 million euros in 2018.
Consolidated cash flow statement
The consolidated cash flow statement begins with the result before taxes of 55.739 million euros.
This amount is decreased by the outgoing cash flows before taxes of 15.741 million euros. Subsequently, the elements from operating activities not having a cash flow effect or not directly related to operating activities are reintroduced. This was a total of
37.287 million euros. This amount is made up of depreciations and impairments on tangible and intangible assets, interest paid and changes in provisions and deferred taxes.
The changes in working capital are then adjusted in the cash flow statement (a negative effect of 0.110 million euros). The total cash flow from operating activities amounted to 77.175 million euros, an increase of 5.3% compared to 73.278 million euros in 2018.
Total cash flows from investment activities produced an outflow of 43.588 million euros related to net investments of 22.174 million euros and payments for existing (subsequent payments) and new holdings of 24.554 million euros. Proceeds from holdings sold resulted in an inflow of 3.140 million euros.
The total of cash flows from financing activities represented an outflow of 4.486 million euros. The new borrowings (418.315 million euros) and capital increases (2.472 million euros) resulted in an inflow of 420.787 million euros. The outgoing cash flows consisted of the payment of interest on loans and other financial elements such as financial discounts of 14.941 million euros, the payment of the dividend (8.609 million euros) and the repayment on loans of 401.723 million euros.
In total, the cash and cash equivalents increased in 2019 by 29.102 million euros: from 77.579 million euros at the start of the period to 106.684 million euros at the end of the period.
The difference of 3 thousand euros between the changes in cash and cash equivalents of 29.102 million euros and the increase in cash and cash equivalents of 29.105 million euros was caused by currency translation differences.
Significant events after balance sheet date
For significant events after the balance sheet date, see Note 35 as included in the Notes to the consolidated financial statements.
Description of risk management
See Note 3 as included in the Notes to the consolidated financial statements.
Non-financial information
The non-financial information is included in the chapter 'Our responsibility (non-financial information and information regarding diversity)'.
Financial Annual Report 2019
Consolidated financial statements
Statement
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of financial position
Consolidated statement of changes in equity
Consolidated cash flow statement
Notes to the consolidated financial statements
1 General information
2 Financial reporting principles
3 Risk management
4 Critical accounting estimates and judgments
5 Segment information
6 Turnover
7 Other operating income
8 Services and other goods
9 Employee benefit expenses
10 Depreciation and amortisation
11 Other operating expenses
12 Financial result
13 Tax on profits
14 Discontinued operations
15 Earnings per share
16 Intangible fixed assets
17 Property, plant and equipment
18 Financial fixed assets
19 Taxes, remuneration and social security
20 Inventories
21 Trade receivables, other receivables, cash and cash equivalents
22 Equity
23 Provisions
24 Pension obligations
25 Financial debt and financial instruments
26 Trade payables
27 Other current payables
28 Leases
29 Total adjustments for non-cash items
30 Total changes in working capital
31 Contingencies
32 Related parties
33 Business combinations
34 Information on the Statutory Auditor, his remuneration and related services
35 Significant events after the balance sheet date
36 Additional notes
37 List of the consolidated companies
Statutory Auditor's report
Statutory financial statements
Condensed stand-alone income statement
Fagron NV
Condensed stand-alone balance sheet Fagron NV
Appropriation of results Fagron NV
Alternative performance indicators
Alphabetical terminology list
Forward-looking statements caution
Consolidated financial statements
The Report from the Board of Directors and the Corporate Governance Statement, as reported above, constitute an integral part of the consolidated financial statements.
Statement
We declare that, to the best of our knowledge, the consolidated financial statements for the year ended 31 December 2019, prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, and with the legal and regulatory requirements applicable in Belgium, reflect a true and fair view of the equity, the financial situation and the results of the Company and the companies that are included in the consolidation, and that the Annual Report provides a true and fair view of the development and the results of the company and of the position of the Company and the companies included in the consolidation, and provides a description of the main risks and uncertainties that they face.
In the name and on behalf of the Board of Directors,
10 April 2020
Rafael Padilla, CEO
Karin de Jong, CFO
Consolidated income statement
| (x 1,000 euros) | Note | 2019 | 2018 |
|---|---|---|---|
| Operating income | 536,681 | 473,395 | |
| Turnover | 6 | 534,695 | 471,679 |
| Other operating income | 7 | 1,985 | 1,716 |
| Operating expenses | 452,293 | 399,923 | |
| Trade goods | 212,685 | 181,253 | |
| Services and other goods | 8 | 81,995 | 82,144 |
| Employee benefit expenses | 9 | 124,695 | 112,573 |
| Depreciation and amortisation | 10 | 29,319 | 19,575 |
| Other operating expenses | 11 | 3,600 | 4,379 |
| Operating profit | 84,388 | 73,472 | |
| Financial income | 12 | 1,682 | 643 |
| Financial expenses | 12 | -16,183 | -19,279 |
| Profit before income tax | 69,886 | 54,835 | |
| Taxes | 13 | 14,199 | 11,553 |
| Net profit from continued operations | 55,687 | 43,282 | |
| Net result from discontinued operations (attributable to equity holders of the company) | 14 | -14,147 | -377 |
| Net result | 41,540 | 42,905 | |
| Attributable to: | |||
| Equity holders of the company (net result) | 41,056 | 42,486 | |
| Non-controlling interest | 485 | 419 | |
| Earnings (loss) per share from continued and discontinued operations attributable to the shareholders during the year | |||
| Profit (loss) per share (in euros) | 15 | 0.57 | 0,59 |
| From continued operations | 15 | 0.77 | 0.60 |
| From discontinued operations | 15 | -0.20 | -0.01 |
| Diluted profit (loss) per share (in euros) | 15 | 0.56 | 0.59 |
| From continued operations | 15 | 0.75 | 0.60 |
| From discontinued operations | 15 | -0.19 | -0.01 |
Consolidated statement of comprehensive income
| (x 1,000 euros) | Note | 2019 | 2018 |
|---|---|---|---|
| Net result for the financial year | 41,540 | 42,905 | |
| Other comprehensive income | |||
| Items that will not be reclassified to profit or loss | 24 | ||
| • Remeasurements of post-employment benefit obligations | -540 | -352 | |
| • Tax relating to items that will not be reclassified to profit or loss | 135 | 88 | |
| Items that may be subsequently reclassified to profit or loss | |||
| • Currency translation differences | 556 | -11,647 | |
| Other comprehensive income for the year net of tax | 151 | -11,911 | |
| Total comprehensive income for the year | 41,692 | 30,994 | |
| Attributable to: | |||
| Equity holders of the company | 42,207 | 30,575 | |
| Non-controlling interest | 485 | 419 | |
| Total comprehensive income for the year | 41,692 | 30,994 | |
| Total comprehensive income for the year attributable to equity holders of the company: | |||
| From continued operations | 55,354 | 30,952 | |
| From discontinued operations | 14 | -14,147 | -377 |
| Total comprehensive income for the equity holders | 41,207 | 30,575 |
The unrealised currency translation differences of 0.6 million euros in 2019 are primarily the result of the strengthening of the US dollar compared to the euro in 2019. In 2018, the negative result of -11.6 million euros was mainly caused by a weakening of the Brazilian real compared to the euro.
Consolidated statement of financial position
| (x 1,000 euros) | Note | 2019 | 2018 |
|---|---|---|---|
| Non-current assets | 562,052 | 483,046 | |
| Goodwill | 16 | 389,326 | 365,135 |
| Intangible fixed assets | 16 | 28,811 | 26,252 |
| Property, plant and equipment | 17 | 87,606 | 73,302 |
| Leasing and similar rights | 28 | 33,601 | 137 |
| Financial fixed assets | 18 | 4,287 | 2,158 |
| Deferred tax liabilities | 19 | 18,420 | 16,061 |
| Current assets | 239,189 | 199,728 | |
| Inventories | 20 | 77,479 | 74,658 |
| Trade receivables | 21 | 44,588 | 38,289 |
| Other receivables | 21 | 10,438 | 9,200 |
| Cash and cash equivalents | 21 | 106,684 | 77,579 |
| Total assets | 801,240 | 682,772 | |
| Equity | 22 | 246,440 | 209,716 |
| Shareholders' equity (parent) | 242,028 | 205,841 | |
| Non-controlling interest | 4,413 | 3,875 | |
| Non-current liabilities | 363,029 | 285,250 | |
| Provisions | 23 | 5,653 | 13,759 |
| Pension obligations | 24 | 5,778 | 5,183 |
| Deferred tax liabilities | 19 | 339 | 259 |
| Borrowings | 25 | 322,619 | 265,883 |
| Lease liabilities | 28 | 28,189 | 35 |
| Financial instruments | 25 | 451 | 131 |
| Current liabilities | 191,771 | 187,806 | |
| Borrowings | 25 | 34,119 | 63,889 |
| Lease liabilities | 28 | 6,604 | 66 |
| Trade payables | 26 | 77,303 | 63,918 |
| Tax liabilities for the current year | 9,736 | 9,454 | |
| Other current taxes, remuneration and social security | 19 | 22,106 | 21,941 |
| Other current payables | 25 | 41,847 | 28,538 |
| Financial instruments | 56 | 0 | |
| Total liabilities | 554,800 | 473,056 | |
| Total equity and liabilities | 801,240 | 682,772 |
Consolidated statement of changes in equity
| (x 1,000 euros) | Note | Share capital & share premium | Other reserves | Treasury shares | Retained earnings | Total | Noncontrolling interest | Total equity |
|---|---|---|---|---|---|---|---|---|
| Balance as of 1 January 2018 | 507,670 | -233,226 | -18,823 | -74,223 | 181,398 | 3,483 | 184,881 | |
| Profit for the period | 0 | 0 | 0 | 42,486 | 42,486 | 419 | 42,905 | |
| Other comprehensive income | 0 | -11,884 | 0 | -11,884 | -27 | -11,911 | ||
| Total comprehensive income for the period | -11,884 | 42,486 | 30,602 | 392 | 30,995 | |||
| Capital increase | ||||||||
| Declared dividends | 22 | 0 | 0 | 0 | -7,184 | -7,184 | 0 | -7,184 |
| Share-based payments | 22 | 0 | 1,025 | 0 | 0 | 1,025 | 0 | 1,025 |
| Reclassification | ||||||||
| Balance as of 31 December 2018 | 507,670 | -244,085 | -18,823 | -38,921 | 205,841 | 3,875 | 209,716 | |
| Profit for the period | 0 | 0 | 0 | 41,056 | 41,056 | 485 | 41,540 | |
| Other comprehensive income | 0 | 98 | 0 | 98 | 53 | 151 | ||
| Total comprehensive income for the period | 0 | 98 | 0 | 41,056 | 41,154 | 538 | 41,692 | |
| Capital increase | 2,472 | 0 | 0 | 0 | 2,472 | 0 | 2,472 | |
| Declared dividends | 22 | 0 | 0 | 0 | -8,621 | -8,621 | 0 | -8,621 |
| Share-based payments | 22 | 0 | 1,182 | 0 | 0 | 1,182 | 0 | 1,182 |
| Reclassification | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |
| Balance as of 31 December 2019 | 510,142 | -242,805 | -18,823 | -6,486 | 242,028 | 4,413 | 246,440 |
Consolidated cash flow statement
| (x 1,000 euros) | Note | 2019 | 2018 |
|---|---|---|---|
| Operating activities | |||
| Profit before income taxes from continued operations | 69,886 | 54,835 | |
| Profit before income taxes from discontinued operations | -14,147 | -377 | |
| Taxes paid | -15,741 | -11,928 | |
| Adjustments for financial items | 14,502 | 18,636 | |
| Total adjustments for non-cash items | 29 | 22,785 | 19,837 |
| Total changes in working capital | 30 | -110 | -7,727 |
| Total cash flow from operating activities | 77,175 | 73,278 | |
| Investment activities | |||
| Capital expenditure | -22,174 | -15,694 | |
| Proceeds from sold shareholdings | 3,140 | ||
| Investments in existing shareholdings (subsequent payments) and in new holdings | -24,554 | -38,917 | |
| Total cash flow from investment activities | -43,588 | -54,611 | |
| Financing activities | |||
| Capital increase | 2,472 | ||
| Dividends | -8,609 | -7,174 | |
| New borrowings | 25 | 418,315 | 71,624 |
| Reimbursement of borrowings | 25 | -401,723 | -44,290 |
| Interest received | 1,682 | 643 | |
| Interest paid | -16,623 | -19,014 | |
| Total cash flow from financing activities | -4,486 | 1,789 | |
| Total net cash flow for the period | 29,102 | 20,456 | |
| Cash and cash equivalents - start of the period | 77,579 | 60,771 | |
| Gains or losses on currency translation differences | 3 | -3,648 | |
| Cash and cash equivalents - end of the period | 106,684 | 77,579 | |
| Changes in cash and cash equivalents | 29,102 | 20,458 | |
| Net cash flow from discontinued operations | |||
| Total cash flow from operating activities | -21,610 | -377 | |
| Total cash flow from investment activities | |||
| Total cash flow from financing activities | |||
| Total net cash flow from discontinued operations | -21,610 | -377 |
In April 2016, the Board of Directors decided to close Bellevue Pharmacy. The Bellevue Pharmacy cash flows were classified under net cash flows for discontinued operations. The negative net cash flow from discontinued activities in 2019 relates to the payment of a final settlement with the U.S. Department of Justice concerning a civil law investigation in the context of an industry-wide investigation into the pricing of pharmaceutical products.
The item "adjustments for financial items" relates to interest paid and received and to other financial expenses and income that are not cash flows, such as the revaluation of the financial instruments. The item "total adjustments for non-cash flow items" relates in particular to depreciation and amortisation and changes in provisions.
The item "total changes in working capital" concerns movements in the inventories, trade receivables and trade payables, other receivables and debts and all other balance sheet elements that are part of the working capital. The aforementioned changes are adjusted as necessary for non-cash flow items as presented above, for conversion differences and for changes in the consolidation scope.
Notes to the consolidated financial statements
1 General information
Fagron profile Fagron is a leading global company active in pharmaceutical compounding, focusing on delivering personalised medicine to hospitals, pharmacies, clinics and patients in 36 countries around the world.
The Belgian company Fagron NV is based in Nazareth and is listed on Euronext Brussels and Euronext Amsterdam under the ticker symbol 'FAGR'. Fagron's operational activities are managed through the Dutch company Fagron BV. Fagron BV's head office is located in Rotterdam.
These consolidated financial statements were approved for publication by the Board of Directors on 9 April 2020.
2 Financial reporting principles
The principal accounting policies applied in preparing these consolidated financial statements are detailed below. These policies have been consistently applied by all of the consolidated entities, including subsidiaries, for all of the years presented, unless stated otherwise.
The Fagron consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The consolidated financial statements have been prepared on the basis of the historical cost convention, with the exception of derivative financial instruments and contingencies, which are listed at fair value.
The consolidated financial statements for Fagron NV and its subsidiaries for the entire year of 2019 have been prepared on the going concern basis, which assumes that the company will continue to be able to meet its liabilities as they become due in the foreseeable future.
IFRS developments
The following amendments to standards and interpretations are mandatory for the first time for the financial year beginning 1 January 2019 and have been approved by the EU.
Published, mandatory and approved by the EU
IFRS 16 Leases 1 January 2019
The standard replaces the current standard, IAS 17, and is a major change to the accounting processing for lease agreements by the lessee. According to IAS 17, the lessee had to make a distinction between a financial lease (to be recognised in the balance sheet) and an operational lease (should not be recognised in balance sheet). IFRS 16, on the other hand, requires the lessee to recognise a debt in the balance sheet equal to the future lease payments and a right-of-use asset for virtually all leases. For lessors, the recording in the accounts remains almost entirely the same. However, the IASB has amended the definition of a lease (as well as the sections regarding the combination and segregation of contracts), as a result of which lessors are also impacted by the new standard. According to IFRS 16, a contract contains a lease if the contract includes a right to control an identified asset for a specified period of time in exchange for compensation.
Anticipated impact
Fagron has applied the modified retrospective method for the implementation of IFRS 16, without adjusting comparative figures for 2018.
Fagron elects to use the exemptions for lease agreements where the lease period ends within 12 months after the date of first application and for lease agreements where the underlying assets have a low value.
As a result of the implementation of IFRS 16, interest paid is included as part of the lease liability of the financing activities and the payment of the principal for a lease payment as part of the financing activities.
Under IAS 17, all operating lease payments were presented as part of the cash flow from operating activities. Under IFRS 16, the net cash flow from operating activities would be 7.4 million euros higher in 2018 and the cash flow from financing activities would have decreased by the same amount.
The application of IFRS 16 has no impact on the net cash flows.
If IFRS 16 had been applied in 2018, the EBITDA in 2018 would have been 7.4 million euros higher.
The incremental loan rate applied to the opening balance sheet as at 1 January 2019 amounts to between 0.7% and 8.92%, depending on the region where Fagron is active.
The reclassifications and adjustments resulting from the application of the new lease rules have been incorporated in the opening balance sheet as at 1 January 2019, whereby the Lease and similar rights and lease liabilities have increased by 38.1 million euros.
Due to the application of IFRS 16, the net financial debt/REBITDA ratio changed from 2.63 to 2.81 as at 1 January 2019.
The application of IFRS 16 has a limited impact on the net result and diluted earnings per share.
| Published, mandatory and approved by the EU | Anticipated impact | |
|---|---|---|
| IFRIC 23 Uncertainty over Income Tax Treatments 1 January 2019 | This interpretation clarifies the accounting treatment of uncertainties regarding income taxes. This interpretation must be applied for the determination of taxable profits (tax losses), the taxable basis, tax losses not used, tax credits and tax bases not used, in the event of any uncertainty regarding its treatment under IAS 12. | Fagron has established that the application of these standards will not have a material impact on the consolidated financial statements. |
| Amendments to IAS 19 Plan Amendment, Curtailment or Settlement 1 January 2019 | The changes require that an entity use updated assumptions to determine the current pension costs and the net interest value allocated to the service year for the remaining period after a change, containment or settlement of the plan. In addition, an entity must include any reduction in the proceeds in the income statement as part of the pension costs of elapsed service time or as a profit or loss upon settlement, even if that excess was not previously recorded due to the impact of the asset ceiling. The changes affect any entity that modifies the terms and conditions or the membership of a defined benefit plan in such a way that there are past service pension costs or a profit or loss at the settlement. | Fagron has established that the application of these standards will not have a material impact on the consolidated financial statements. |
| Amendments to IAS 28 Long term interests in Associates and Joint Ventures 1 January 2019 | Clarification with regard to the treatment of long-term interests in an associated entity or joint venture on which the equity method is not applied under IFRS 9. More specifically whether the valuation and reduction in value of such interests should have to occur using IFRS 9, IAS 28 or a combination of both. | Fagron has established that the application of these standards will not have a material impact on the consolidated financial statements. |
| Amendments to IFRS 9 Prepayment Features with Negative Compensation 1 January 2019 | Amendment that allows companies to value certain advance payable financial assets with so-called negative compensation at amortised cost price or at fair value via unrealised results, instead of at fair value through profit or loss, as they would otherwise not pass the SPPI test. In addition, this amendment explains an aspect of the accounting treatment of a change to a financial liability. | Fagron has established that the application of these standards will not have a material impact on the consolidated financial statements. |
| Annual improvements to IFRS Standards 2015-2017 Cycle 1 January 2019 | • IFRS 3 "Business Combinations" and IFRS 11 "Joint Arrangements". The amendments regarding IFRS 3 clarify that when an entity acquires control over a joint operation, previous interests in that company must be revalued. The amendments regarding IFRS 11 clarify that when an entity acquires joint control over a joint operation, the entity does not revalue the previous interests in that company. • IAS 12 "Income taxes". The amendments clarify that all dividend consequences on the income taxes must be recognised in the income statement, regardless of how this tax arises |
Fagron has established that the application of these standards will not have a material impact on the consolidated financial statements. Fagron has established that the application of these standards will not have a material impact on the consolidated financial statements. |
| IAS 23 "Borrowing costs". The amendments clarify that if one of the loans remains open after the relevant asset is ready for its intended use or sale, this loan will belong to the funds that an entity normally borrows for calculating capitalisation interest rate on general loans. | Fagron has established that the application of these standards will not have a material impact on the consolidated financial statements. |
The following new standards, changes to standards and interpretations have been issued and approved by the EU, but are not yet mandatory for the first time for the financial year beginning 1 January 2019.
| Published, not yet approved by the EU and not yet mandatory | Anticipated impact | |
|---|---|---|
| Amendments to IAS 1 and IAS 8 Definition of Material 1 January 2020 | The changes clarify the definition of "material" and increase the consistency between the IFRS. The amendment clarifies that the reference to unclear information regards situations in which the effect is comparable to omission or misrepresentation of that information. It also states that an entity must assess materiality in the context of the financial statements as a whole. In addition, the change also clarifies the meaning of "primary users of financial statements for general purposes to whom those financial statements are directed", by defining them as "existing and potential investors, credit providers and other creditors" who must appeal to the financial statements in order to also obtain a large portion of the financial information they need. The changes are not expected to have any significant impact on the preparation of the financial statements. | Fagron has determined that the application of these changes to these standards does not have any material effect on the consolidated financial statements. |
| Amendments to IFRS 3 Business Combinations 1 January 2020 | These changes revise the definition of "a company". The new guideline provides a framework in order to evaluate when an input and substantive process are present (including start-up companies that have not yet generated any outputs). In order to be a company without output, there must now be an organised workforce. The changes in the definition of a company will likely result in more acquisitions being considered "asset acquisitions" in all sectors, but particularly in the real estate, pharmaceutical and petrochemical sectors. Application of the changes will also affect the processing of disposal operations. | Fagron will review the effects of these amendments and process them if applicable. |
| Amendment to IAS 1 Classification of Liabilities as Current or Non-Current 1 January 2022 | The amendments are effective for annual reporting periods beginning on or after 1 January 2022 and must be applied retroactively. Earlier application is permitted. | Fagron will review the effects of these amendments and process them if applicable. |
The other new standards, amendments of standards and interpretations that were published but are not yet mandatory for this financial year starting 1 January 2019, are not applicable for Fagron.
Consolidation criteria
The consolidated financial statements comprise Fagron and its subsidiaries.
Subsidiaries are entities which the Group controls. The Group controls an entity when the Group has power over the entity and is exposed to, or has rights to, variable income from the entity and has the ability to affect the amount of variable income through its power over the entity. Subsidiaries are fully consolidated as of the date on which control is transferred to Fagron. They are no longer consolidated as of the date on which Fagron no longer has control.
Any contingent consideration to be entered into by the Group is recognised at fair value on the acquisition date. Changes to the fair value of the contingent consideration that is deemed to be an asset or liability are recognised in accordance with IFRS 9 in the income statement. Contingent considerations that are classified as equity are not revalued and its subsequent settlement is accounted for within equity.
An acquisition is recognised using the purchase method. The cost price of an acquisition is defined as the fair value of the assets given, shares issued and liabilities assumed on the date of the exchange. Identifiable assets acquired and liabilities and contingencies assumed in a business combination are initially recognised at their fair value on the acquisition date. For each business combination, Fagron values any minority interest in the party acquired at fair value or at the proportional share in the identifiable net assets of the party acquired. The acquisition costs already incurred are recognised as expenses. The positive difference between the acquisition price and the fair value of the share of Fagron in the net identifiable assets of the acquired subsidiary on the date of acquisition constitutes goodwill and is recognised as an asset.
Intra-group transactions, balances and unrealised gains on transactions between companies of the Group are eliminated. Unrealised losses are also eliminated, but are considered to be an indication of an impairment. Where necessary, the accounting basis for amounts reported by subsidiaries have been adjusted in accordance with the accounting policies of Fagron.
Transactions with minority interests that do not result in loss of control are accounted for as equity transactions - that is, as transactions with shareholders in their capacity as shareholders. For purchases from minority interests, the difference between the price that was paid and the corresponding share acquired against the carrying amount of the net assets of the subsidiary is recognised in equity. Gains or losses on disposals to minority interests are also recognised in equity.
Foreign currency conversion
Items included in the financial statements of all Fagron entities are measured using
the currency of the primary economic environment in which the company operates ("the functional currency"). The consolidated financial statements are presented in euros, the presentation currency of Fagron. To consolidate Fagron and each of its subsidiaries, the respective financial statements are converted as follows:
| • | Assets and liabilities at the year-end rate; |
| • | Income statement at the average exchange rate for the year; |
| • | Equity components at their historical exchange rates. |
Exchange rate differences arising from the conversion of the net investment in foreign subsidiaries at year-end exchange rate are recognised as shareholders' equity elements under "Cumulative conversion differences".
Transactions in foreign currencies
Transactions in foreign currencies are converted to the functional currency using the exchange rates that apply on the transaction date. Profits and losses from exchange rate differences resulting from settling these transactions and from the conversion of monetary assets and liabilities in foreign currencies at exchange rates valid at year-end are recognised in the income statement.
Exchange rates of key currencies
| Balance sheet | Income statement | |||
|---|---|---|---|---|
| 2019 | 2018 | 2019 | 2018 | |
| --- | --- | --- | --- | --- |
| US dollar | 1.123 | 1.145 | 1.119 | 1.181 |
| Brazilian real | 4.516 | 4.444 | 4.414 | 4.306 |
| Polish zloty | 4.257 | 4.301 | 4.297 | 4.261 |
Fixed Assets held for sale and discontinued operations (14)
Non-current assets and groups of assets to be sold are classified as fixed assets held for sale when the book value will be recovered principally through a sales transaction or through continued use of that asset.
In order to be classified as fixed asset held for sale, the following criteria must be satisfied in accordance with IFRS 5:
| • | Management has committed to the sale; |
| • | An active programme is initiated to locate a buyer for the assets; |
| • | The assets (or groups of assets that will be sold) are immediately available for sale, taking into account the usual conditions for sale,- |
| • | The sale is highly probable, expected to occur within 12 months after first classification as fixed asset available for sale,- |
| • | The asset is offered for sale in the market at a reasonable price; the price is in line with the fair value; |
| • | The actions required to complete the sale of the assets indicate that it is unlikely that the plan will significantly change or be withdrawn. |
If Fagron has committed to a plan to sell a subsidiary which results in Fagron relinquishing control over a subsidiary and the aforementioned criteria are satisfied, then all of the assets and liabilities from that subsidiary are classified as fixed assets held for sale and liabilities related to assets held for sale, regardless of whether Fagron will retain a non-controlling interest after the sale.
Assets held for sale and liabilities related to assets held for sale (or groups of assets that will be sold) are recognised at the lower of the original book value and the fair value less the costs to sell the asset.
A discontinued operation is a component of the Group that represents a separate, important operation or geographic business area, is part of a single coordination plan to dispose of a separate, important operation or geographic business area, or concerns a subsidiary that was acquired exclusively with the intention of selling it.
The classification as a discontinued operation will occur on the date when the transaction satisfies the conditions in order to be recognised as being held for sale or when an operation has been sold.
When an operation has been classified as a discontinued operation, the result from the discontinued operations over the reporting period will be presented separately in the income statement and in the statement of comprehensive income.
In addition to the requirements for the presentation in the balance sheet of groups of assets that will be sold, comparable figures are included in the income statement and in the statement of comprehensive income for the presentation of the results of discontinued operations. Furthermore, the net cash flows that can be attributed to the operating, investment and financing activities of the discontinued operations are reported separately.
Goodwill (16)
Goodwill represents the positive difference between the cost of an acquisition and the fair value of the Fagron share in the net identifiable assets of the acquired subsidiary on the acquisition date. Goodwill on acquisitions of subsidiaries is recognised under Intangible fixed assets. Goodwill is checked at least once per year for impairment, but also each time a trigger event occurs. Goodwill is recognised at cost price less accumulated impairment losses. Impairment losses on goodwill are never reversed. Gains and losses on the disposal of an entity include the book value of goodwill relating to the entity sold.
Intangible fixed assets (16)
Intangible fixed assets are valued at cost price less accumulated amortisation and impairment. All intangible fixed assets are checked for impairment when there is an indication that the intangible asset may require impairment.
Brands, licences, patents and other
Intangible fixed assets are recognised at cost, provided this cost is not higher than the reported economic value and the cost price is not higher than the recoverable value. No other intangible fixed assets with an unlimited useful life were identified.
The costs of brands with a definite useful life are capitalised and amortised on a straight-line basis over a period of 5 to 7 years. When a part of the acquisition price of a business combination relates to trade names, brand names, formulas and customer files, these will be considered an intangible asset.
Research and development
Research costs related to the prospect of gaining new scientific or technological knowledge and understanding are recognised as costs at the moment they are incurred.
Development costs are defined as costs incurred for the design of new or substantially improved products and for the processes preceding commercial production or use. They are capitalised when, among other things, the following criteria are met:
| • | Technical feasibility of the project; |
| • | Intention to complete and to use or sell the asset; |
| • | Ability to use or sell the asset; |
| • | Likelihood that the asset will generate future economic benefits; |
| • | Adequate resources to complete the asset; |
| • | Ability to measure the reliability of the costs. |
Development costs are amortised using the straight-line method over the period of their expected benefit, which is currently a maximum of 5 years. Amortisation starts at the moment these assets are ready for use.
In-house development
Unique products developed in-house, including software controlled by Fagron, which are expected to generate future economic benefits, are capitalised at the cost directly related to their production. The software is depreciated over its useful life, which is currently estimated at 5 years.
Software
Acquired software is capitalised at cost price and then valued at cost price less accumulated depreciations and impairment losses. The assets are depreciated over the useful life, which is currently estimated at 5 years.
Impairment
Assets that have an indefinite useful life are not subject to amortisation and are checked for impairment on an annual basis. Amortised assets are reviewed for impairment when events or changes in circumstances indicate that the book value may not be recoverable. An impairment loss is recognised for the amount by which the asset's book value exceeds its recoverable amount. The recoverable amount is the greater of an asset's fair value less the sale costs and its value in use. For the purpose of amortisation, assets are grouped at the lowest level for which there are separately identifiable cash flows (cash-generating units).
Property, plant and equipment (17)
Property, plant and equipment are valued at the acquisition value or production costs plus directly attributable costs, if applicable. Depreciation is calculated pro rata based on the useful life of the asset in accordance with the following amortisation parameters: 3 to 5 years for equipment and machinery and between 25 and 33 years for buildings. Land is not depreciated.
All assets are depreciated using the straight-line method, based on the estimated economic life. Any residual value taken into account when calculating the depreciation is reviewed on an annual basis. The "right to use" assets are depreciated over the shorter period of the lease period and the useful life. When it is fairly certain that the ownership will be obtained at the end of the lease, the "right to use" assets is depreciated over the useful life.
Financial fixed assets (18)
Financial assets are recognised in the balance sheet of Fagron when Fagron becomes party to the contractual provisions of the instrument.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, if applicable, at initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in the income statement.
Income taxes (19)
Income taxes as recognised in the income statement include the income tax on the current year and deferred taxes. Current income taxes include the expected tax liabilities on Fagron's taxable income for the financial year, based on the applicable tax rates at balance sheet date, and any adjustments from previous years. Income tax due on dividends is recognised when a liability to pay the dividend is recognised.
Deferred taxes are recognised using the balance sheet liability method and are calculated on the basis of the temporary differences between the book value and the tax basis. This method is applied to all temporary differences arising from investments in subsidiaries and associates, except for differences where the timing of settling the temporary difference is controlled by Fagron and where the temporary difference is not likely to be reversed in the near future. The calculation is based on the tax rates as enacted or substantially enacted at balance sheet date and expected to apply when the related deferred tax is realised or the deferred tax liability is settled. Under this calculation method, Fagron is also required to account for deferred taxes relating to any difference between the fair value of the net acquired assets and their book value for tax purposes resulting from any acquisitions. Deferred taxes are recognised to the extent that the tax losses carried forward are likely to be offset in the foreseeable future. Deferred income tax receivables are fully written off when it ceases to be likely that the corresponding tax benefit will be realised.
Fagron will offset tax assets and tax liabilities if, and only if, Fagron has a legally enforceable right to offset the recognised amounts and either (a) intends to settle on a net basis or (b) to realise the asset and settle the liability simultaneously.
Inventories (20)
Raw materials, auxiliary materials, and trade goods are valued at the acquisition value in accordance with the FIFO method or the net realisable value (NRV) at the balance sheet date, whichever is lower. Work in progress and finished products are valued at production cost. In addition to the purchasing cost of raw materials and auxiliary materials, production costs and production overhead costs directly attributable to the individual product or the individual product group are included.
Trade receivables (21)
Trade receivables are initially valued at transaction price. After the initial valuation, trade receivables are valued at amortised cost. Provisions are made based on the lifetime expected loss allowance for all customers based on historical payment behaviour and forward-looking information.
If trade receivables are transferred to a third party (through factoring), the trade receivables are taken off the balance sheet provided that (1) there is no longer a right to receive cash flows and (2) Fagron has substantially transferred all risks and rewards.
Cash and cash equivalents (21)
Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less, and are valued at acquisition at fair value and subsequently recognised at cost. Adjustments are made to the book value when at balance sheet date the realisation value is less than the book value.
Capital (22)
Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of new shares or options are recognised in the equity as a deduction, net of taxes, from the proceeds.
If a company of Fagron purchases share capital of Fagron (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the shareholders of Fagron until the shares are cancelled, reissued or disposed of. If such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and related income tax effects, is included in equity attributable to the shareholders of Fagron.
Provisions (23)
Provisions exist for restructuring costs, legal claims, risk of losses or costs potentially arising from personal securities or collateral constituted as guarantees for creditors or commitments to third parties, from liabilities to buy or sell non-current assets, from the fulfilment of completed or received orders, technical guarantees associated with turnover or services already completed by Fagron, unresolved disputes, fines and penalties related to taxes, or compensation for dismissal. Fagron recognises a provision if:
| • | Fagron has an existing legal or actual obligation as a result of past events; |
| • | it is more likely than not that an outflow of resources will be necessary to fulfil the obligation; and |
| • | the amount can be estimated reliably. |
Provisions for restructuring costs comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses.
Provisions are recognised based on management's best estimate of the expenditure required to settle the present obligation at balance sheet date.
The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability.
Employee benefit expenses
Share-based payments (22)
Fagron operates an equity-based compensation plan, which is paid in shares.
The total amount to be recognised as costs over the vesting period is determined by reference to the fair value of the warrants or options granted, excluding the impact of any non-market unconditional commitments (for example, profitability and turnover growth targets). Non-market unconditional commitments are included in the assumptions about the number of warrants or options expected to become exercisable. At each balance sheet date, Fagron revises its estimates of the number of warrants or options expected to become exercisable. Fagron recognises any impact of the revision of original estimates in the income statement, and a corresponding adjustment to equity over the remaining vesting period. The proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium when the warrants are exercised. The modalities of the existing plans were not changed this year.
Pension obligations (24)
The companies of Fagron operate various pension schemes. The pension schemes are funded through payments to insurance companies, determined by periodic actuarial calculations. Fagron has both defined benefit and defined contribution plans.
The liability recognised on the balance sheet in respect of defined benefit plans is the present value of the future defined benefit obligations less the fair value of the plan assets. The obligation is calculated periodically by independent actuaries using the "projected unit credit" method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised immediately, in the period in which they arise, being added or deducted to or from the equity via the unrealised result.
For defined contribution plans, Fagron pays contributions to insurance companies.
Once the contributions have been paid, Fagron will cease to have any further liabilities. Contributions to defined contribution plans are recognised as costs in the income statement at the moment they are made.
Borrowings (25)
Borrowings are initially recognised at fair value, net of transaction costs incurred.
Borrowings are subsequently recognised at amortised costs; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities, unless Fagron has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Consultancy costs for the refinancing are part of the financial costs.
Debt instruments that meet the following conditions are subsequently valued at amortised cost price:
| • | The financial asset is held within a business model that aims to hold financial assets to collect contractual cash flows; and |
| • | The contractual terms and conditions of the financial asset give rise to cash flows on specified dates that are exclusively payments of principal and interest on the principal outstanding. |
In 2019, Fagron group entered into a new (sustainable) syndicated credit facility with its financiers. If a new credit facility is refinanced on substantially different terms, a new debt position will be recognised on the balance sheet and the old debt position replaced. If the newly agreed terms and conditions of an existing credit facility change substantially, a new debt position will also be included on the balance sheet. Substantial change means a change in net present value of future cash flows (including fees paid and received) from the new facility of at least 10 percent compared to the net present value of cash flows from the old facility. If the changes in new terms and conditions do not differ substantially, the difference between (1) the current debt position on the balance sheet; and (2) the net present value of cash flows after changes to the terms and conditions are included in the income statement under 'Other Gains and Losses'.
Derivative financial instruments (25)
Fagron uses derivative financial instruments to limit risks relating to unfavourable fluctuations in interest rates and exchange rates. No derivatives are employed for trade purposes.
Derivative financial instruments are recognised at fair value on the balance sheet. Fair values are derived from market prices. Since the Fagron derivative contracts do not satisfy the criteria as specified in IFRS 9 to be considered as hedging instruments, changes in the fair value of derivatives are recognised in the income statement.
Leases (28)
With effect from 1 January 2019, IFRS 16 Leases supersedes current reporting requirements for lease agreements and introduces significant changes in reporting for lessees. The new standard requires lessees to include a "right to use" asset and a lease obligation. IFRS 16 also requires that depreciation costs linked to the "right to use" assets and interest expenses on these lease liabilities be recognised compared to the recognition of rental costs on a straight-line basis over the lease period under the previous standard.
Fagron assesses whether a contract is or contains a lease at the start of the contract. Fagron recognises a "right of use" asset and a lease liability in respect of all leases in which it is the lessee, except for short-term leases (defined as leases with a lease period of 12 months or less) and leases of low-value assets. For these leases, the Group recognises lease payments on a straight-line basis as operational costs over the lease period, unless another systematic basis is more representative of the time pattern in which the economic benefits of the leased assets are consumed.
For 2018, the following leasing principles were applied:
Lease contracts in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments under operating leases are made on a straight-line basis over the life of the operating lease.
Lease contracts regarding property, plant and equipment whereby Fagron retains virtually all risks and rewards of ownership are classified as financial leases. Financial leases are capitalised at the inception of the lease contract at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between liability and financing costs, so as to achieve a constant amount on the outstanding financing balance.
Revenue recognition
Fagron uses the five-step model in order to recognise revenue that results from sales to customers. The revenue is recognised at the value that we expect to receive for the delivery of the goods or services. Any liabilities related to these sales will be deducted here. Contracts for the sale of goods to customers have only one performance obligation.
Sales of goods are recognised at the moment that control over the goods has transferred to the customer, the customer has accepted the goods and the related receivables are likely to be collectable. This is normally the case at the time the goods are delivered. Turnover of services is recognised in the accounting period in which the services have been provided.
Segment reporting
IFRS 8 defines an operating segment as:
| • | a component of an entity that engages in business activities from which it may earn turnover and incur expenses; |
| • | whereby the operating results are regularly reviewed by the entity's Chief Operating Decision Maker to make decisions about resources to be allocated to the segment and assess its performance; and |
| • | for which concrete financial information is available. |
Fagron determines and presents operational segments based on the information that is provided internally to the Executive Committee, Fagron's decision-making body in 2019. An operating segment is a group of assets and activities engaged in providing products or services that are the basis of the internal reporting to Fagron's Executive Committee.
The reporting structure and presentation of the financial results per Fagron segment are in line with the way in which the business is managed. The financial information of the Fagron segments provided to the Executive Committee is split into Fagron Europe, Fagron North America, Fagron Latin America and HL Technology.
Earnings per share (EPS) (15)
Fagron presents basic and diluted earnings per share (EPS) for common shares.
Basic EPS is calculated by dividing the profit or loss for the period attributable to holders of common shares by the sum of the weighted average number of common shares outstanding during the period. Dividend distribution to the shareholders of Fagron is recognised as a liability in the financial statements in the period in which the dividends are approved by the shareholders.
For the purpose of calculating diluted EPS, the profit or loss for the period attributable to holders of common shares adjusted for the effects of all dilutive potential shares is divided by the sum of the weighted average number of outstanding ordinary shares used in the basic EPS calculation and the weighted average number of shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.
3 Risk management
Adequate and reliable financial reporting is essential for both the internal management reports and the external reporting. Group-wide reporting guidelines have been drawn up within Fagron to this end, based on IFRS and internal information needs.
Risk management is extremely important for Fagron in order to secure the long-term business objectives and the value creation of the company. The policy of Fagron is to focus on identifying all major risks, on developing plans to prevent and manage these risks, and on putting in place measures to contain the consequences should such risks effectively occur. Still, Fagron cannot conclusively guarantee that such risks will not occur or that there will be no consequences when they occur.
All entities periodically prepare business plans, budgets and interim forecasts at predetermined moments. Discussions with management of the entities take place periodically on the general course of affairs, including the realisation and feasibility of the forecasts issued and strategic decisions. With regard to tax regulations, Fagron makes use of the possibilities offered by the tax laws and regulations without taking any unnecessary risks in doing so. Fagron has the support of external tax advisers in this regard.
In addition to strategic and operational risks, Fagron is also subject to various financial risks. To sustain its day-to-day operations, Fagron has the following credit facilities at its disposal.
Sustainable syndicated credit facility
On 1 August 2019, Fagron refinanced the existing bank loans. The old multicurrency and term loan facilities were repaid through a new (sustainable) syndicated credit facility consisting of a revolving credit line of 245 million euros and a term loan facility of 130 million euros. The term of the new financing is 5 years with the option to extend twice for a year. The new credit lines have been agreed on improved terms and conditions and offer Fagron more flexibility and lower financing expenses.
Financial covenants syndicated credit facility
| Test period | Net financial debt/REBITDA | REBITDA/net interest expenses |
|---|---|---|
| Semi-annual test periods (June/December) | Max. 3.50x | Min. 4.00x |
As at the end of 2019, an amount of 140 million euros had been withdrawn under the syndicated credit facility (2018:131 million euros) and Fagron complied with the aforementioned financial covenants.
The credit facility is a so-called Sustainability Linked Loan, whereby the interest is linked to Fagron's sustainability aim to reduce greenhouse emissions (Scope 1 and Scope 2 of the GHG protocol) in six years by approximately 30%. Based on the annual progress measured, a discount or an addition can be applied to the credit facility's interest rate.
From 2020, the sustainability aim to reduce Fagron's greenhouse emissions by approximately 30% in six years also linked to the variable fee-based system for management.
Privately placed loans
Fagron NV issued a series of privately placed loans pursuant to a loan agreement originally dated April 15, 2014, which includes 45.0 million US dollars 4.15% Series A Senior Notes due April 15, 2017, 22.5 million euros 3.55% Series B Senior Notes due April 15, 2017, 15.0 million euros 4.04% Series C Senior Notes due April 15, 2019, 5.0 million euros Floating Rate Series D Senior Notes due April 15, 2019, 20.0 million US dollars 5.07% Series E Senior Notes due April 15, 2019 and 60.0 million US dollars 5.78% Series F Senior Notes due April 15, 2021. The Series A Senior Notes and the Series B Senior Notes were fully repaid in 2017. The other Senior Notes, with the exception of the Series F Notes, were fully repaid on 15 April 2019.
The total EBITDA, calculated as a result before interest, taxes, depreciation and amortisation, of the guarantors should be at least 70 percent of the consolidated Group EBITDA. At the end of 2019, Fagron complied with the financial covenants below.
Financial covenants privately placed loans
| Test period | Net financial debt/REBITDA | REBITDA/net interest expenses |
|---|---|---|
| After 30 June 2018 | Max. 3.25x | Min. 4.00x |
Capital management
The Group's objectives in relation to capital management are:
| • | to safeguard the company's equity in order to guarantee its continuity; and |
| • | to maintain the best possible capital structure so as to reduce capital costs. |
The amount to be paid on dividends can be adjusted by the Group (see note 22) in order to retain or adjust the capital structure. It may also issue new shares or dispose of assets in order to reduce indebtedness.
Fagron has a dividend policy that takes into account the profitability of the company and its underlying growth, as well as capital requirements and cash flows, where sufficient liquidity is maintained in order to follow the buy-and-build strategy. Fagron hereby expects to reinvest most of its free cash flow in the coming years and to pay out a relatively low, steady level of dividends to its shareholders.
Cash pool
Fagron manages the cash and financing flows and the risks arising from these by means of a group-wide treasury policy. In order to optimise the financial position and keep the related interest charges to a minimum, the cash flows of the companies are centralised as much as possible by means of domestic and cross border cash pooling. Fagron has a total of three local cash pools in the regions of North America and Europe (the Netherlands and Belgium). These are used by the operating companies, whereby zero balancing is applied in Europe and target balancing in North America. The three local cash pools are pooled daily into one central notional cash pool.
Liquidity risk
Liquidity risk is the risk that Fagron is unable to meet its financial obligations. The expected cash flow is assessed and analysed on a regular basis. The goal is to have sufficient financial resources available at all times to meet the liquidity needs.
Credit risk
Credit risk involves the risk that a debtor or other counterparty is unable to fulfil its payment liabilities to Fagron, resulting in a loss for Fagron. Fagron has an active credit policy and strict procedures to manage and limit credit risks. No individual customers make up a substantial part of either turnover or outstanding receivables. Fagron has an active policy to reduce operational working capital. From this perspective the Group aims to reduce the accounts receivable balance.
Below is an overview of the category, level, net book value of financial assets and the term of financial instruments. Where GK stands for Financial liabilities measured at amortised cost price and Level 2 method means that the valuation is based on inputs other than quoted prices in active markets as included in Level 1.
| Net book value financial assets | Category | Level | Gross value | Impairment | Net book value |
|---|---|---|---|---|---|
| Trade receivables | GK | 2 | 46,203 | -1,615 | 44,588 |
| Other receivables | GK | 2 | 11,434 | -996 | 10,438 |
| Cash and cash equivalents | GK | 2 | 106,684 |
| Term of financial instruments | Category | Level | Average effective interest | Total book value | < 1 year | 1 - 5 years | < 5 years |
|---|---|---|---|---|---|---|---|
| Leasing liabilities | GK | 2 | 3.6% | 34,793 | 6,604 | 21,171 | 7,018 |
| Credit institutions | GK | 2 | 2.5% | 356,697 | 34,119 | 322,578 | |
| Other financial debt | GK | 2 | 40 | 40 |
Interest risk
Fagron regularly assesses the maintained mix of financial debts with fixed and variable interest rates. At this moment, the financing consists in part of financing with a variable interest rate ranging from 1 to 6 months. A higher Euribor rate of 10 base points would have increased the variable interest charges of approximately 183 thousand euros before tax (2018:137 thousand euros).
Exchange rate risk
The exchange rate risk is the risk on results due to fluctuations in the exchange rates. Fagron reports its financial results in euros and is, because of the international distribution of its activities, subject to the potential impact of currencies on its profits. Exchange rate risk is the result on the one hand of several entities of Fagron operating in a functional currency other than euros and on the other hand of the circumstance that purchasing and retail prices of Fagron have foreign currencies as reference. The risk regarding the Fagron entities that operate in a functional currency other than the euro involves entities that operate in US dollars, Brazilian reals, Polish zloty, Czech crowns, Swiss francs, British pounds, Danish crowns, Colombian pesos, Chinese yuan, South African rand, Australian dollars, Croatian kuna, Canadian dollars and Mexican pesos. In 2019, these entities collectively represent 64.0% of the consolidated turnover.
Some of the Group's turnover is realised in currencies other than the euro, such as in Brazil, the United States, Poland, Switzerland and Mexico. The table below sets out the hypothetical supplementary effect of the euro strengthening or weakening by 10% against the US dollar, the Brazilian real and the Polish zloty for the year 2019 and its subsequent effect on profit before tax and equity.
| Profit before tax | Equity | |||
|---|---|---|---|---|
| (x 1,000 euros) | Strengthening | Weakening | Strengthening | Weakening |
| --- | --- | --- | --- | --- |
| US dollar | 219 | -268 | -4,187 | 5,118 |
| Brazilian real | -1,910 | 2,334 | -10,805 | 13,206 |
| Polish zloty | -1,416 | 1,730 | -4,422 | 5,405 |
The company also incurs indirect currency risk as a large part of its purchases in Brazil are actually transactions in US dollars. This means that the Group's products become relatively more expensive to Fagron's customers each time the US dollar rises against the Brazilian real. The risk is difficult to quantify, as such price increases are directly charged to the consumer entirely or partly.
Currency risks in relation to debt in foreign currency, privately placed loans (senior unsecured notes), some of which were borrowed in US dollars, have been hedged in part with intercompany loans to the US subsidiary.
Fair value risk
In 2019, Fagron used financial derivatives in order to hedge interest and currency
risks. Fagron hedged the variable interest rate for 42.5 million US dollars of financing. In accordance with IFRS, all financial derivatives are recognised either as assets or as liabilities. In accordance with IFRS 9, financial derivatives are recognised at fair value. Changes in fair value are recognised by Fagron directly in the income statement because these are financial derivatives that do not qualify as cash flow hedging instruments.
4 Critical accounting estimates and judgments
Estimates and judgments are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are deemed reasonable given the circumstances.
Critical estimates and judgments
Fagron makes estimates and judgments concerning the future. The resulting estimates will, by definition, rarely match the related actual results. Those estimates and assumptions that entail a significant risk of causing the need for a material adjustment of the book value of assets and liabilities within the next financial year are discussed below. No significant estimates have been identified; an overview of the important judgments is provided below.
Estimated impairment loss for goodwill and other intangible fixed assets
Fagron performs an annual goodwill impairment test in accordance with the accounting policies specified in note 16. The recoverable amount of cash flow-generating units is the higher of the asset's fair value less the costs to sell and enterprise value. These calculations require the application of estimates. In 2018 and 2019, no impairment loss was recognised. Of the main cash flow-generating units, Fagron United States Essentials and Brands has the smallest relative difference between the net book value of the asset and its enterprise value, namely 31.6 million euros.
Provisions for disputes
As stated, provisions are valued at present value of the best estimate by management of the expenditure required to settle the existing obligation at the balance sheet date. Provisions for disputes require significant professional judgment in terms of the ultimate outcome of administrative law rulings or court judgments. Estimates are always based on all available information at the moment the financial statements are prepared. However, the need for significant adjustments cannot be absolutely precluded if a ruling or judgment proves not as expected. Hypotheses and estimates are continuously evaluated on the basis of past experience and other factors, including projected development of future events that are regarded as reasonable given the circumstances. See also note 23: Provisions and note 31: Contingencies.
Uncertain tax positions
The company is subject to tax on profits in different jurisdictions. Significant judgments must be made in determining the provision for tax on profits. There are some transactions and calculations for which the ultimate taxable amount is uncertain. When the final income tax is determined, the deviations will affect the current and deferred taxes and liabilities for the period in which the determination is made. See also note 19: Taxes, remuneration and social security and note 31: Contingencies.
5 Segment information
Fagron has adjusted the reporting structure and presentation of the financial results per segment bring these in line with the way in which the business is managed. Fagron's results are reported in the segments Fagron Europe, Fagron North America, Fagron Latin America and HL Technology. This structure is tailored to the various activities of Fagron and also supports effective decision-making and individual responsibility. This is in accordance with IFRS 8, which states that the operational segments must be determined on the basis of the components that the Executive Committee applies to assess the performance of the operational activities and on which the decisions are based.
Fagron is organised into four main operational segments:
| 1. | Fagron Europe refers to Fagron's European activities in the Netherlands, Belgium, Poland, Germany, Italy, Czech Republic, Spain, France, Denmark, Greece, Croatia and the United Kingdom, as well as the activities in South Africa and Australia. Fagron Europe is active in all product groups of Fagron; |
| 2. | Fagron North America encompasses all Fagron activities in the United States and Canada. Fagron North America is active in all product groups of Fagron; |
| 3. | Fagron Latin America refers to the Fagron activities in Brazil, Colombia and Mexico. In Latin America, Fagron is primarily active in Fagron Brands and Fagron Essentials; and |
| 4. | HLTechnology is located in Switzerland and develops and produces innovative precision components and orthopaedic tools for dental and medical industry professionals. On 10 October, Fagron signed an agreement with the management of HL Technology concerning the sale of the activities. The transaction was completed on 24 October. HL Technology was deconsolidated as at 1 October 2019. |
Fagron's activities can be subdivided into four categories:
| 1. | Fagron Compounding Services refers to all personalised medicine that is prepared in Fagron's sterile and non-sterile facilities; |
| 2. | Fagron Brands encompasses the innovative concepts, products and vehicles developed by Fagron, often in close cooperation with prescribers, pharmacies and universities; |
| 3. | Fagron Essentials refers to all pharmaceutical raw materials, equipment and supplies that a pharmacist needs in order to prepare medication himself/ herself in the pharmacy; and |
| 4. | Fagron Premium Pharmaceuticals is a limited number of non-sterile drugs registered by Fagron in the Netherlands. |
The segment results for continued operations for the period ending 31 December 2019 are as follows:
| 2019 | Fagron Europe | Fagron North America | Fagron Latin America | HL Technology | Total |
|---|---|---|---|---|---|
| (x 1,000 euros) | |||||
| --- | --- | --- | --- | --- | --- |
| Turnover | 257,001 | 145,910 | 125,552 | 6,233 | 534,695 |
| Intersegment | |||||
| turnover | 298 | 276 | 60 | 0 | 635 |
| Total turnover | 257,299 | 146,186 | 125,612 | 6,233 | 535,330 |
| Operating result per segment | 55,115 | 7,988 | 20,655 | 630 | 84,388 |
| Financial result | -14,502 | ||||
| Profit before taxes | 69,886 | ||||
| Taxes on profits | 14,199 | ||||
| Net profit from continued operations | 55,687 |
The segment results for continued operations for the period ending 31 December 2018 are as follows:
| 2018 | Fagron Europe | Fagron North America | Fagron Latin America | HL Technology | Total |
|---|---|---|---|---|---|
| (x 1,000 euros) | |||||
| --- | --- | --- | --- | --- | --- |
| Turnover | 250,086 | 113,488 | 100,930 | 7,174 | 471,679 |
| Intersegment | |||||
| turnover | 468 | 248 | 34 | 0 | 751 |
| Total turnover | 250,554 | 113,736 | 100,964 | 7,174 | 472,430 |
| Operating result per segment | 54,862 | 2,366 | 17,259 | -1,015 | 73,472 |
| Financial result | -18,636 | ||||
| Profit before taxes | 54,835 | ||||
| Taxes on profits | 11,553 | ||||
| Net profit from continued operations | 43,282 |
Other segmented items recognised in the income statement are as follows:
| 2019 | Fagron Europe | Fagron North America | Fagron Latin America | HL Technology | Total |
|---|---|---|---|---|---|
| (x 1,000 euros) | |||||
| --- | --- | --- | --- | --- | --- |
| Depreciation and amortisation | 9,871 | 11,560 | 4,179 | 353 | 25,962 |
| Depreciation on inventories | 1,225 | 2,105 | 0 | 0 | 3,329 |
| Depreciation on receivables | -26 | 113 | -59 | 0 | 27 |
| 2018 | Fagron Europe | Fagron North America | Fagron Latin America | HL Technology | Total |
|---|---|---|---|---|---|
| (x 1,000 euros) | |||||
| --- | --- | --- | --- | --- | --- |
| Depreciation and amortisation | 6,549 | 7,218 | 2,126 | 345 | 16,237 |
| Depreciation on inventories | 910 | 588 | 0 | 1,299 | 2,796 |
| Depreciation on receivables | 68 | 434 | 39 | 0 | 542 |
The assets and liabilities, and the capital expenditure (investments) are as follows:
| 2019 | Fagron Europe | Fagron North America | Fagron Latin America | HL Technology | Unassigned/ intersegment elimination | Total |
|---|---|---|---|---|---|---|
| (x 1,000 euros) | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| Total assets | 329,234 | 240,399 | 189,212 | 0 | 42,395 | 801,240 |
| Total liabilities | 72,486 | 194,340 | 43,470 | 0 | 244,505 | 554,800 |
| Capital expenditure | 9,000 | 12,518 | 5,296 | 891 | 0 | 27,706 |
| 2018 | Fagron Europe | Fagron North America | Fagron Latin America | HL Technology | Unassigned/ intersegment elimination | Total |
|---|---|---|---|---|---|---|
| (x 1,000 euros) | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| Total assets | 293,608 | 214,453 | 129,085 | 6,111 | 39,514 | 682,772 |
| Total liabilities | 53,752 | 176,495 | 20,101 | 2,466 | 220,242 | 473,056 |
| Capital expenditure | 7,005 | 6,251 | 2,916 | 1,506 | 0 | 17,678 |
The segment assets consist primarily of property, plant and equipment, intangible fixed assets, inventories, receivables and cash from operations. The difference between the aforementioned capital expenditure and the capital expenditure in the cash flow statement relates particularly to the impact of capital expenditure still to be paid at the end of 2018 and 2019 and proceeds from disposals.
Fagron has a large number of customers that are spread internationally, with a substantial portion of turnover realised with a wide range of smaller customers and no customer accounts for more than 10% of Fagron's income.
6 Turnover
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Sale of goods | 534,695 | 471,679 |
| Turnover | 534,695 | 471,679 |
7 Other operating income
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Gain on disposal of fixed assets | 277 | 267 |
| Other operating income | 1,708 | 1,449 |
| Total other operating income | 1,985 | 1,716 |
8 Services and other goods
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Sale and distribution costs | 28,367 | 25,631 |
| Contracted services | 22,663 | 20,467 |
| Other services and goods | 30,961 | 31,386 |
| Total services and other goods | 81,991 | 77,484 |
Other services and goods covers a wide range of services and goods such as maintenance, utilities, office supplies and travel expenses.
9 Employee benefit expenses
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Wages and salaries | 86,663 | 76,732 |
| Social security costs | 15,987 | 14,172 |
| Pension costs - defined benefit plans | 389 | 432 |
| Pension costs - defined contribution plans | 2,377 | 2,339 |
| Other post-employment benefit contributions | 1,889 | 2,168 |
| Other employee expenses | 17,390 | 16,731 |
| Total employee benefit expenses | 124,695 | 112,573 |
On 31 December 2019, Fagron's workforce (fully consolidated companies) for continued operations amounted to 2,728 (2018: 2,488) employees or 2,614.9 (2018: 2,360.4) full-time equivalents. The distribution of the number of full-time equivalents per operating segment is as follows:
| Full-time equivalents (rounded to one unit) | 2019 | 2018 |
|---|---|---|
| Europe (incl. Rest of the World) | 1,128 | 1,057 |
| North America | 585 | 596 |
| Latin America | 902 | 651 |
| HL Technology | 0 | 56 |
| Total | 2,615 | 2,360 |
10 Depreciation, amortisation and impairment
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Depreciation and amortisation | 18,201 | 16,004 |
| Depreciation leasing and similar rights | 7,761 | 233 |
| Write-down on inventories | 3,329 | 2,796 |
| Write-down on receivables | 27 | 542 |
| Depreciation and amortisation | 29,319 | 19,575 |
Depreciation, amortisation and impairment increased in 2019, mainly due to the application of IFRS 16 and acquisitions.
11 Other operating expenses
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Increase (decrease) in provisions for current liabilities | -32 | -625 |
| Increase (decrease) in provisions for pension liabilities | 81 | 82 |
| Taxes and levies (excluding income tax) | 1,127 | 985 |
| Other operating expenses | 2,423 | 3,937 |
| Total other operating expenses | 3,600 | 4,379 |
The decrease in other costs in 2018 primarily relate to the (non-recurring) settlement with the former owners of JCB Laboratories in the United States.
12 Financial result
The financial results are presented in the consolidated income statement as follows:
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Financial income | 1,447 | 643 |
| Currency translation differences | 235 | |
| Total financial income | 1,682 | 643 |
| Financial expenses | -3,666 | -4,921 |
| Interest expenses | -10,928 | -11,174 |
| Interest on leasing liabilities | -1,268 | 0 |
| Currency translation differences | -3,054 | |
| Revaluation of financial derivatives | -320 | -131 |
| Total financial expenses | -16,183 | -19,279 |
| Total financial result | -14,502 | -18,636 |
The revaluation of financial derivatives of -0.3 million euros in 2019 (2018: -0.1 million euros) relates to the change in the market value of the interest rate derivatives that are not a cash flow and cannot be presented as a hedge instrument in accordance with IFRS 9. The derivatives were valued on the basis of discounted cash flows.
The financial result, excluding the revaluation of the financial derivatives, amounts to -14.2 million euros in 2019 (2018: -18.5 million euros). On the one hand, this decrease is caused by an increase in financial income from 1.0 million euros to 1.7 million euros due to positive currency translation differences and higher cash deposits.
13 Income taxes
Income taxes from continued operations are as follows:
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Current tax expenses | 17,242 | 15,918 |
| Deferred taxes | -3,043 | -4,364 |
| Tax on profits | 14,199 | 11,553 |
| Effective tax rate | 20.32% | 21.07% |
| Profit before income tax from continued operations | 69,886 | 54,835 |
| Tax calculated at weighted Fagron NV's statutory tax rate | 20,672 | 16,220 |
| Effect of rate differences compared with foreign jurisdictions | -1,882 | -1,350 |
| Income not subject to taxes | -1,439 | -695 |
| Expenses not deductible for tax purposes | 723 | 1,669 |
| Tax on profit previous years | -109 | -4 |
| Other | -3,766 | -4,287 |
| Tax on profits | 14,199 | 11,553 |
The "Tax calculated based on Fagron NV's statutory tax rate" is the taxes expected based on the Belgian statutory rate. The "Effect of rate differences compared with foreign jurisdictions" pertains to the impact of the statutory rates to which the entities in the Group are subject compared to the Belgian statutory rate.
The "Income not subject to taxes" concerns the exempt income and expenses and is mainly related to ICMS in Brazil.
The "Expenses not deductible for tax purposes" are all costs that are not tax-deductible and relate mainly to non-deductible intercompany expenses and other non-deductible expenses.
The "Income tax previous years" is a reflection of all adjustments to earlier estimates for taxes.
The item "Other" concerns all other movements that impact the effective tax rate.
This primarily pertains to the use of tax losses that were not recognised earlier as a deferred tax claim and tax losses in the current year which have not been recognised because of insufficient expected future tax profits.
14 Discontinued operations
Fagron announced in April 2016 it would be closing Bellevue Pharmacy. The changed reimbursement system in the United States had a major impact on the turnover and profitability of Bellevue Pharmacy. After the impairment on Bellevue Pharmacy at the end of 2015 and the losses in the first quarter of 2016, the Group decided to close Bellevue Pharmacy. Bellevue was included in the discontinued operations since 2016. Because Bellevue Pharmacy is being shut down, it has not been included as an asset or liability held for sale.
The total result for the discontinued operations and the total of cash flows from the discontinued operations are shown below. The result in 2019 primarily relates to the final settlement with the U.S. Department of Justice.
Net result from discontinued operations
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Operating income | 0 | 0 |
| Turnover | 0 | 0 |
| Other operating income | 0 | 0 |
| Expenses | 14,147 | 377 |
| Profit before income tax | -14,147 | -377 |
| Attributable income taxes | 0 | 0 |
| Profit (loss) from revaluation to fair value, settlement costs and costs of sale | 0 | 0 |
| Profit (loss) for the year from discontinued operations (attributable to the company's shareholders) | -14,147 | -377 |
Net cash flows from discontinued operations
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Total cash flow from operating activities | -21,610 | -377 |
| Total cash flow from investment activities | 0 | 0 |
| Total cash flow from financing activities | 0 | 0 |
| Total net cash flows from discontinued operations | -21,610 | -377 |
15 Earnings per share
| (in euros) | 2019 | 2018 |
|---|---|---|
| Basic earnings (loss) per share | 0.57 | 0.59 |
| • from continued operations | 0.77 | 0.60 |
| • from discontinued operations | -0.20 | -0.01 |
| Diluted earnings (loss) per share | 0.56 | 0.59 |
| • from continued operations | 0.75 | 0.60 |
| • from discontinued operations | -0.19 | -0.01 |
The earnings used in the calculations are as follows:
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Profit (loss) attributable to equity holders of the company | 41,056 | 42,486 |
| • from continued operations | 55,202 | 42,863 |
| • from discontinued operations | -14,147 | -377 |
The diluted earnings are equal to the "basic" earnings.
The weighted average number of shares used in the calculations is as follows:
| (number of shares x 1,000) | 2019 | 2018 |
|---|---|---|
| Weighted average number of ordinary shares | 71,798 | 71,740 |
| Effect of warrants and stock options | 1,208 | 229 |
| Weighted average number of ordinary shares (diluted) | 73,006 | 71,969 |
No ordinary share transactions were executed after the balance sheet date which have impacted on earnings per share. The number of warrants and stock options that do not have any dilutive impact during the period, but which could possibly have an impact in the future, is equal to zero. These are warrants and stock options for which the exercise price is higher than the average Fagron stock price in 2019.
16 Intangible fixed assets
| (x 1,000 euros) | Goodwill | Development | Concessions & patents | Brands and customer relations | Software | Other | Intangible fixed assets | Total |
|---|---|---|---|---|---|---|---|---|
| Net book value as at 1 January 2018 | 322,837 | 3,870 | 1,200 | 12,125 | 4,447 | 16 | 21,658 | 344,495 |
| Investments | 0 | 2,289 | 4 | 242 | 1,474 | 25 | 4,035 | 4,035 |
| Acquisitions | 44,404 | 0 | 0 | 6,087 | 545 | 0 | 6,632 | 51,036 |
| Transfers and disposals | 0 | 143 | -2 | 0 | 736 | -13 | 865 | 865 |
| Amortisation | 0 | -1,185 | -187 | -4,424 | -1,832 | -2 | -7,629 | -7,629 |
| Exchange differences | -2,106 | 15 | 0 | 854 | -176 | -0 | 693 | -1,413 |
| Net book value as at 31 December 2018 | 365,135 | 5,132 | 1,015 | 14,884 | 5,195 | 26 | 26,252 | 391,388 |
| Gross book value | 614,179 | 9,254 | 2,020 | 91,202 | 20,074 | 48 | 122,597 | 736,776 |
| Accumulated amortisation | -249,043 | -4,122 | -1,005 | -76,317 | -14,879 | -22 | -96,345 | -345,388 |
| Net book value | 365,135 | 5,132 | 1,015 | 14,884 | 5,195 | 26 | 26,252 | 391,388 |
| Net book value as at 1 January 2019 | 365,135 | 5,132 | 1,015 | 14,884 | 5,195 | 26 | 26,252 | 391,388 |
| Investments | 0 | 2,722 | 142 | 209 | 894 | 0 | 3,968 | 3,968 |
| Acquisitions | 29,540 | 0 | 0 | 6,190 | 0 | 0 | 6,190 | 35,731 |
| Transfers and disposals | -6,916 | -251 | -4 | 1,227 | 120 | 0 | 1,092 | -5,824 |
| Amortisation | 0 | -1,351 | -177 | -5,732 | -1,880 | 0 | -9,141 | -9,141 |
| Exchange differences | 1,566 | 14 | 2 | 445 | -11 | 0 | 450 | 2,016 |
| Net book value as at 31 December 2019 | 389,326 | 6,265 | 978 | 17,224 | 4,318 | 26 | 28,811 | 418,137 |
| Gross book value | 638,369 | 11,448 | 2,145 | 40,023 | 16,650 | 48 | 70,314 | 708,683 |
| Accumulated amortisation | -249,043 | -5,183 | -1,167 | -22,799 | -12,333 | -22 | -41,503 | -290,547 |
| Net book value | 389,326 | 6,265 | 978 | 17,224 | 4,318 | 26 | 28,811 | 418,137 |
The intangible fixed assets have not been encumbered with collateral.
The category "Development" consists mainly of unique software developed in-house in full control of Fagron. The development costs (mainly employee benefit expenses) were fully capitalised in 2018 and 2019.
Impairment
Goodwill is checked at least once per year for impairment, but also each time a trigger event occurs. In 2018 and 2019, this did not lead to an impairment of the goodwill.
Goodwill
Goodwill acquired in business mergers and acquisitions is allocated to cash-generating units or groups of cash-generating units which are expected to have future economic benefits following the merger or acquisition. Goodwill is recognised at cost price less accumulated impairment losses.
The net book value of goodwill was attributed as follows to the cash-generating units:
| (in miljoen euros) | December 2019 | December 2018 |
|---|---|---|
| Fagron Europe Essentials and Brands | 113.6 | 112.5 |
| Fagron Europe Compounding Services and Premium Pharmaceuticals | 58.7 | 58.7 |
| Fagron United States Essentials and Brands | 77.8 | 76.3 |
| Fagron Sterile Services | 17.1 | 16.8 |
| AnazaoHealth | 30.6 | 30.1 |
| Fagron Latin America Essentials and Brands | 83.2 | 63.1 |
| Fagron Rest of the World | 7.9 | 7.6 |
| Total | 389.3 | 365.1 |
The increase in goodwill mainly relates to the acquisitions of Cedrosa in Mexico, Levviale, Apace and Ortofarma in Brazil and Dr Kulich Pharma in the Czech Republic.
Goodwill impairment test
The methodology for testing impairment is in accordance with IAS 36. Goodwill is tested at least annually for impairment with respect to cash-generating units and consistently when a trigger event occurs during the year which may result in an impairment loss. When the goodwill impairment test is conducted, the recoverable amount, being the value in use, is calculated per cash-generating unit. In 2019, as a result of IFRS 16, the book value, through leasing and similar rights, and the EBITDA were adjusted.
The key judgments, estimates and assumptions that are commonly used are as follows:
| • | The first year of the model is based on detailed financial budgets approved by management and the Board of Directors. |
| • | The year-one budget figures are extrapolated for the years two to five, taking into account an internal growth rate or using a business plan. The figures take into account economic assumptions and historical experience of market share, turnover and expenses, capital expenditures and working capital. |
| • | For the following years, an estimate of the perpetual growth is used. For the main cash flow-generating units, the following long-term growth rates were used: 2% for Fagron Europe Compounding Services and Premium Pharmaceuticals, Fagron Europe Essentials and Brands, Fagron United States Essentials and Brands, Fagron Sterile Services and AnazaoHealth and 7% for Fagron Brazil Essentials and Brands. The same growth rates were used in 2019. |
| • | Projections made for Brazil and the United States are done in their functional currency unit and are discounted at the weighted average capital cost of the unit. For the main cash flow-generating units, the following weighted average cost of capital was used: 8.0% (pre-tax: 9.9%) for Fagron Europe Compounding Services and Premium Pharmaceuticals, 8.0% (pre-tax: 10.1%) for Fagron Europe Essentials and Brands, 9.4% (pre-tax: 11.3%) for Fagron United States Essentials and Brands, 9.4% (pre-tax: 11.3%) for Fagron Sterile Services, 9.4% (pre-tax: 11.1%) for AnazaoHealth and 15.8% (pre-tax: 21.1%) for Fagron Latin America Essentials and Brands. |
Of the main cash flow-generating units, Fagron United States Essentials and Brands has the smallest relative difference between the net book value of the asset and its enterprise value. The difference is estimated at 3'1.6 million euros. In order to estimate the risk of amortisation of goodwill, a sensitivity analysis was performed on each important assumption.
The main assumptions are the maintenance capex as a % of sales, the discount rate, long-term growth and the gross margin.
The sensitivity analysis presented below represents the change (in basis points) of each individual assumption that is necessary to have the difference between the enterprise value and the net book value become nil.
| Increase in maintenance capex as % of sales (basis points) | Increase in discount rate (basis points) | Decrease in long-term growth (basis points) | Decrease in gross margin (basis points) | |
|---|---|---|---|---|
| Fagron United States Essentials and Brands | 1,669 | 233 | 437 | 381 |
The outcome of the impairment test for Fagron Europe Compounding Services and Premium Pharmaceuticals, Fagron Europe Essentials and Brands, Fagron Sterile Services, AnazaoHealth and Fagron Brazil Essentials and Brands shows that a reasonable change in the assumptions used will not lead to impairment.
17 Property, plant and equipment
| (x 1,000 euros) | Land and buildings | Machinery and installations | Furniture and vehicles | Leasing and other similar rights | Other property, plant and equipment | Assets under construction | Total |
|---|---|---|---|---|---|---|---|
| Net book value as at 1 January 2018 | 42,431 | 15,297 | 4,120 | 192 | 2,241 | 5,255 | 69,535 |
| Investments | 3,376 | 4,972 | 1,769 | 0 | 143 | 3,383 | 13,643 |
| Acquisitions | 544 | 324 | 144 | 0 | 0 | 0 | 1,012 |
| Transfers and disposals | -1,269 | 2,210 | 587 | 413 | 28 | -3,879 | -1,910 |
| Depreciation | -2,791 | -3,719 | -1,474 | -233 | -390 | 0 | -8,608 |
| Exchange differences | -82 | 181 | -148 | -235 | 17 | 34 | -233 |
| Net book value as at 31 December 2018 | 42,209 | 19,264 | 4,998 | 137 | 2,039 | 4,793 | 73,439 |
| Gross book value | 62,640 | 52,953 | 18,234 | 316 | 7,049 | 4,793 | 145,985 |
| Accumulated depreciation | -20,431 | -33,689 | -13,236 | -179 | -5,010 | 0 | -72,546 |
| Net book value | 42,209 | 19,264 | 4,998 | 137 | 2,039 | 4,793 | 73,439 |
| Net book value as at 1 January 2019 | 42,209 | 19,264 | 4,998 | 137 | 2,039 | 4,793 | 73,439 |
| Changes to the financial reporting principles (IFRS 16) | 0 | 0 | 0 | 38,113 | 0 | 0 | 38,113 |
| Investments, including additions for IFRS 16 | 1,204 | 2,300 | 2,133 | 4,817 | 105 | 17,996 | 28,555 |
| Acquisitions | 2,633 | 635 | 269 | 531 | 0 | 4 | 4,071 |
| Transfers and disposals | -2,303 | 335 | -41 | -2,185 | 47 | -2,341 | -6,488 |
| Depreciation and amortisation | -2,900 | -4,188 | -1,562 | -7,761 | -409 | 0 | -16,821 |
| Exchange differences | 203 | 174 | -16 | -49 | 12 | 15 | 339 |
| Net book value as at 31 December 2019 | 41,046 | 18,519 | 5,782 | 33,601 | 1,794 | 20,466 | 121,208 |
| Gross book value | 61,696 | 48,506 | 19,150 | 41,397 | 5,145 | 20,466 | 196,361 |
| Accumulated depreciation | -20,651 | -29,988 | -13,368 | -7,795 | -3,351 | 0 | -75,153 |
| Net book value | 41,046 | 18,519 | 5,782 | 33,601 | 1,794 | 20,466 | 121,208 |
The Group's liability regarding leasing is guaranteed on account of the lessor holding the legal property title to the leased assets. The other property, plant and equipment have no restrictions on the title of ownership. These assets have also not been pledged as security for liabilities, with the exception of the building owned by Fagron Services BV, see note 36: additional notes.
18 Financial fixed assets
| (x1,000 euros) | Investments | Loans and receivables | Total |
|---|---|---|---|
| Net book value as at 1 January 2018 | 1,214 | 1,018 | 2,232 |
| Investments | 0 | 76 | 76 |
| Transfers and disposals | -271 | 144 | -127 |
| Other movements | 0 | -22 | -22 |
| Net book value as at 31 December 2018 | 943 | 1,216 | 2,158 |
| Investments | 13 | 2,072 | 2,084 |
| Transfers and disposals | -7 | 37 | 31 |
| Other movements | 0 | 13 | 13 |
| Net book value as at 31 December 2019 | 948 | 3,338 | 4,287 |
The investments mainly consist of a minority interest of 0.9 million euros, whereby the investments are valued on a fair value basis and differences with respect to the fair value are shown in the income statement.
An analysis of the aforementioned assets showed that none of these assets need to be impaired in 2018 and 2019.
Loans and receivables concern receivables with different due dates. The book value approximates the fair value.
19 Taxes, remuneration and social security
a) Current taxes, remuneration and social security
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Tax liabilities for the current year | 9,736 | 9,454 |
| Other current tax and VAT payable | 8,981 | 8,418 |
| Remuneration and social security payable | 13,125 | 13,522 |
| Current taxes, remuneration and social security | 31,842 | 31,395 |
b) Deferred tax assets
| (x 1,000 euros) | Differences in depreciation rates | Employee benefits | Provisions | Tax losses | Other | Total |
|---|---|---|---|---|---|---|
| Balance on 1 January 2018 | 1,273 | 1,279 | 340 | 11,162 | -2,699 | 11,355 |
| Result | -672 | -1,194 | 539 | 4,160 | 1,713 | 4,546 |
| Change in scope of consolidation | 160 | 0 | 0 | 0 | 0 | 160 |
| Impairment | 0 | 0 | 0 | 0 | 0 | 0 |
| Balance on 31 December 2018 | 761 | 85 | 879 | 15,322 | -986 | 16,061 |
| Result | 37 | 1,335 | -253 | 1,863 | -805 | 2,177 |
| Change in scope of consolidation | 0 | 0 | 0 | 0 | 183 | 183 |
| Impairment | 0 | 0 | 0 | 0 | 0 | 0 |
| Balance on 31 December 2019 | 798 | 1,420 | 626 | 17,185 | -1,608 | 18,420 |
The category "Other" mainly concerns netting with deferred tax liabilities.
An impairment test on tax losses is performed twice per year. If it becomes clear that the losses cannot be offset within a reasonable time, they are written off. This calculation is based on result projections with a five-year forecast horizon, based on detailed financial budgets approved by the management for the first year and an extrapolation of these figures for the second through fifth year. Extending the result projection for one year in the region with the most significant deferred tax asset will result in its increase by approximately 5.0 million euros.
Based on the impairment test in 2019 on tax losses, no impairment occurred.
At the end of 2019, the tax losses came to 293.1 million euros, of which 79.1 million euros were assessed, resulting in a deferred tax asset of 17.2 million euros.
c) Deferred tax liabilities
| (x 1,000 euros) | Differences in depreciation rates | Other | Total |
|---|---|---|---|
| Balance on 1 January 2018 | 2,952 | -2,754 | 198 |
| Result | 61 | 0 | 61 |
| Change in scope of consolidation | 0 | 0 | 0 |
| Discontinued operations | 0 | 0 | 0 |
| Balance on 31 December 2018 | 3,013 | -2,754 | 259 |
| Result | 108 | 0 | 108 |
| Change in scope of consolidation | -28 | 0 | -28 |
| Discontinued operations | 0 | 0 | 0 |
| Balance on 31 December 2019 | 3,093 | -2,754 | 339 |
The category "Other" mainly concerns netting with deferred tax assets.
On the balance sheet date, the Group has not included any deferred tax liability for taxes payable as the result of any dividend payment. The Group has not included any deferred tax liability because no adopted intercompany dividend policy applies, and an autonomous decision can therefore be made as to when a dividend will be paid and in what amount. The unvalued deferred tax liability is nil.
20 Inventories
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Raw materials | 20,575 | 27,146 |
| Work in progress | 413 | 369 |
| Finished goods | 15,006 | 15,199 |
| Trade goods | 41,485 | 31,944 |
| Inventories | 77,479 | 74,658 |
The increase in inventories is primarily explained by acquisitions. This increase is compensated by lower inventories in Brazil. The inventories are not encumbered with collateral.
21 Trade receivables, other receivables, cash and cash equivalents
a) Trade receivables and other receivables
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Trade receivables | 46,203 | 40,989 |
| Provision for impairment of receivables | -1,615 | -2,701 |
| Total trade receivables | 44,588 | 38,289 |
| Other receivables | 10,438 | 9,200 |
There is no concentration of credit risk with respect to trade receivables, as a large number of Fagron's customers are internationally dispersed. If there are indications that trade receivables will be uncollectible, a provision has been made.
The increase in trade receivables is mainly attributable to acquisitions.
Fagron applies a strict credit policy with regard to its customers, ensuring that the company controls and minimises credit risk. No individual customers make up a substantial part of either turnover or outstanding receivables. Fagron uses factoring. The factoring balance on 31 December 2019 amounted to 20.4 million euros (22.2 million in 2018).
In 2018, Fagron adopted the simplified approach to IFRS 9 to determine expected credit losses, using a provision for expected losses over the life of all trade receivables based on historical losses and future expectations. Fagron analysed the impact of IFRS 9 and concluded that there was no material impact on the provision made for doubtful debts.
| (x 1,000 euros) | Carrying amount | Of which not overdue at year-end | Of which due at year-end | |||
|---|---|---|---|---|---|---|
| less than 30 days | between 31 and 90 days | between 91 and 150 days | more than 150 days | |||
| --- | --- | --- | --- | --- | --- | --- |
| Trade receivables at 31 December 2019 | 44,588 | 31,367 | 7,072 | 4,026 | 1,176 | 946 |
| Percentage expected credit losses 2019 | 0.1% | 3.5% | 7.5% | 15% | 50% | |
| Trade receivables at 31 December 2018 | 38,289 | 24,311 | 9,799 | 3,189 | 618 | 372 |
| Percentage expected credit losses 2018 | 0.1% | 3.5% | 7.5% | 15% | 50% |
| (x 1,000 euros) | Provision for impairment of receivables |
|---|---|
| Balance as of 1 January 2018 | -2,496 |
| Additions: | |
| • Through business combinations | -191 |
| • Other | -506 |
| Amounts used | 589 |
| Sale of operations | 0 |
| Other | -51 |
| Balance as of 31 December 2018 | -2,541 |
| Additions: | |
| • Through business combinations | -125 |
| • Other | -36 |
| Amounts used | 1,246 |
| Through business combinations | 0 |
| Other | 0 |
| Balance as of 31 December 2019 | -1,615 |
There is no major write off on trade receivables that have not expired. Fagron adopted the simplified approach to IFRS 9 to determine expected credit losses, using a provision for expected losses over the life of all trade receivables based on historical losses and future expectations. Fagron analysed the impact of IFRS 9 and concluded that there is no material impact on the provision made for doubtful debts. Fagron also assessed whether the historical pattern would change materially in the future and does not expect a significant impact.
b) Cash and cash equivalents
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Investments with a maturity of less than three months | 1,271 | 2,505 |
| Cash and cash equivalents | 105,413 | 75,074 |
| Cash and cash equivalents | 106,684 | 77,579 |
The increase in cash and cash equivalents is explained primarily by the positive cash flow from operations.
The majority of the cash comprises cash and cash equivalents in bank accounts and cash. The cash and cash equivalents are centralised as much as possible in a cash pool, held in accounts with banks that mostly have an A-rating. All new bank accounts are only opened with banks awarded at least an A-rating.
Trade receivables, other receivables and cash and cash equivalents are generally within a close range of their maturities. Therefore, the carrying amount approximates their fair value.
22 Equity
Authorised capital
The Extraordinary General Meeting decided on May 14, 2012 to renew the Board of Director's authorisation to increase the authorised share capital, such within the limits of the existing authorisation as set out in Article 5 bis of the Articles of Association, in one or more rounds by a maximum amount of 320,023,050.35 euros, such within a period of five years from the date of announcing such a decision in the Annexes of the Belgian Bulletin of Acts, Orders and Decrees.
This proxy to increase the capital may be exercised only subject to the approval of at least three fourths (3/4) of the directors present or lawfully represented.
By resolution of the Extraordinary General Meeting of 8 May 2017, the authorisation of the Board of Directors was renewed to increase the share capital in one or more times with a maximum amount of 494,192,221.68 euros.
On 29 June 2015, 224,133 new shares were issued in the context of the authorised capital. The number of voting securities of Fagron amounted to 31,667,794.
The total number of voting rights (denominator) amounted to 31,667,794.
The authorised capital amounted to 322,217,493.06 euros in order to increase the capital by 2,297,363.25 euros in the context of the authorised capital by contribution in kind upon the issue of new shares bringing it to 324,514,856.31 euros.
On 4 August 2015, 444,033 new shares were issued in the context of the authorised capital. The number of voting securities of Fagron amounted to 32,111,827. The total number of voting rights (denominator) amounted to 32,111,827. The authorised capital amounted to 324,514,856.31 euros in order to increase the capital by 4,551,338.25 euros in the context of the authorised capital by contribution in kind upon the issue of new shares bringing it to 329,066,194.56 euros.
Since the granting of the authorised capital authorisation to the Board of Directors, the Company's capital was therefore increased by 6,848,701.50 euros (on June 29, 2015 and August 4, 2015). The authorised capital authorisation was not used during the 2019 financial year.
If the capital is increased within the limits of the authorised capital, then the Board of Directors will be authorized to request payment of a share premium. If the Board of Directors adopts this decision, then this share premium will be deposited into a blocked account, the balance of which may only be reduced or transferred on the basis of a resolution adopted by a General Meeting of Shareholders in accordance with the clauses governing an amendment of the Articles of Association.
This power of the Board of Directors will apply to capital increases that are subscribed to in cash or in kind, or that result from capitalisation of reserves with or without the issue of new shares. The Board of Directors is permitted to issue convertible bonds or warrants within the limits of the authorised capital.
Statement of changes in the capital and in the number of shares
The movements in this balance sheet item are presented in the statement of changes in equity. No treasury shares were bought back in 2019 (2018: nil). As of 31 December 2019, Fagron NV owns 103,627 treasury shares (2018:103,627).
In accordance with IFRS, these shares are deducted from equity and do not affect the income statement. In 2019, 335,000 new shares were issued in the context of warrant plans (2018: nil). The nominal number of shares on 31 December 2019 was 72,178,904 (2018: 71,843,904). The total number of outstanding shares on 31 December 2019 was 72,075,277 (2018: 71,740,277).
| 2019 | 2018 | |||
|---|---|---|---|---|
| Number of ordinary shares and the equity value thereof | Number of shares | Value of shares | Number of shares | Value of shares |
| --- | --- | --- | --- | --- |
| x 1,000 | x 1,000 euros | x 1,000 | x 1,000 euros | |
| --- | --- | --- | --- | --- |
| Issued shares as at 1 January | 71,844 | 507,670 | 71,844 | 507,670 |
| Reclassification | 0 | 0 | 0 | 0 |
| Issued shares as at 31 December | 72,179 | 510,142 | 71,844 | 507,670 |
| Treasury shares as at 31 December | 104 | 18,823 | 104 | 18,823 |
| Shares outstanding as at | ||||
| 31 December | 72,075 | 491,319 | 71,740 | 488,847 |
All ordinary shares are fully paid. The ordinary shares have no nominal value denotation but have an accounting par value of 1/72,178,904th of the capital as of 31 December 2019 (2018: 1/71,843,904th). Each ordinary share carries one vote and a right to dividends.
Share-based payments
On June 3, 2014, the company's Board of Directors approved the Warrant Plan 2014 for employees, directors and consultants of the company and/or its subsidiaries. The warrants were issued in response to the decision taken by the Board of Directors dated 2 September 2014 in the presence of notary Luc De Ferm. In total 2,140,000 warrants were issued. In 2015, 50,000 warrants were granted at an exercise price of 38.06 euros.
On 13 June 2016, the company's Board of Directors approved the Warrant Plan 2016 for employees, directors and managers/consultants of Fagron and/or its subsidiaries, where this decision was ratified by resolution of the Extraordinary General Meeting of 1 July 2016 in the presence of Civil-law Notary, Liesbet Degroote, where it was resolved to issue 1,000,000 warrants. In 2016, there were 983,091 warrants granted at an exercise price of 7.38 euros.
On 13 April 2018, the company's Board of Directors approved the Warrant Plan 2018 for employees and consultants of Fagron NV and/or its subsidiaries, where this decision was ratified by resolution of the Extraordinary General Meeting of 14 May 2018 in the presence of Civil-law Notary, Liesbet Degroote, where it was resolved to issue 1,300,000 warrants. In 2018, there were 1,294,500 warrants granted at an exercise price of 13.94 euros and 5,500 warrants granted at an exercise price of 16.31 euros.
On 12 April 2019, the company's Board of Directors approved the Warrant Plan 2019 for employees, directors and consultants of the company and/or its subsidiaries. The warrants were issued in response to the decision taken by the Board of Directors dated 13 May 2019 in the presence of notary Barbara Glorieux and her colleague notary Liesbet Degroote. In total 335,000 warrants were issued. In 2019, 110,000 warrants were granted at an exercise price of 17.17 euros.
The condition for vesting warrants for employees is that they still have an employment contract with the company; for directors and consultants the condition is that their relationship with the company has not been terminated. The costs of the warrants have been determined at the warrants' real value on grant date and are spread over the vesting period of the warrants. The costs are incorporated in other employee benefit expenses and amount to 1.2 million euros for the 2019 financial year and 1.0 million euros for the 2018 financial year.
The warrants are settled via equity instruments.
In 2019, 335,000 shares (2018: nil) were issued as a result of the exercise of warrants under the Warrant Plan 2016. The number of Fagron shares with voting rights is currently 72,178,904 (2018: 71,843,904). The total number of voting rights (denominator) is currently 72,178,904 (2018: 71,843,904). The authorised capital amounts to 496,496,586.18 euros (2018: 494,192,221.68 euros).
The movements in the number of outstanding warrants under Warrant Plan 2014, Warrant Plan 2016, Warrant Plan 2018, Warrant Plan 2019 and their related weighted average exercise prices are as follows:
| Average exercise price | Number of warrants | |
|---|---|---|
| in euros | ||
| --- | --- | --- |
| Outstanding as at 1 January 2018 | 23.87 | 805,000 |
| Granted | 13.94 | 1,294,500 |
| Granted | 16.31 | 5,500 |
| Forfeited | 13.94 | -14,500 |
| Forfeited | 39.37 | -10,000 |
| Outstanding as at 31 December 2018 | 17.67 | 2,080,500 |
| Granted | 17.17 | 110,000 |
| Forfeited | 13.94 | -130,000 |
| Forfeited | 16.31 | -3,000 |
| Forfeited | 39.37 | -405,000 |
| Exercised | 7.38 | -335,000 |
| Outstanding as at 31 December 2019 | 13.94 | 1,317,500 |
The weighted average exercise price per share at year-end amounted to 13.94 euros in 2019 (2018: 17.67 euros). All warrant plans are equity settled plans.
As of 31 December 2019, the total number of warrants not yet exercised that could give cause to the issuance of the same number of Company shares amounted to 1,317,500. Their average exercise price amounts to 13.94 euros. Outstanding warrants at year-end have the following expiry dates and exercise prices:
| Average exercise price | Number of warrants | |
|---|---|---|
| Expiry date | in euros | |
| --- | --- | --- |
| 2021 - November (Warrant Plan 2016) | 7.38 | 30,000 |
| 2021 - July (Warrant Plan 2016) | 7.38 | 25,000 |
| 2021 - May (Warrant Plan 2018) | 13.94 | 575,000 |
| 2021 - May (Warrant Plan 2018) | 16.31 | 1,250 |
| 2022 - May (Warrant Plan 2018) | 13.94 | 575,000 |
| 2022 - May (Warrant Plan 2018) | 16.31 | 1,250 |
| 2023 - May (Warrant Plan 2019) | 17.17 | 110,000 |
| 13.94 | 1,317,500 |
Stock option plan
On 27 October 2011, the company's Board of Directors approved the Stock Option Plan 2011 for consultants and employees of Fagron NV and/or its subsidiaries, such under the suspensive condition of approval by the General Meeting.
The Stock Option Plan 2011 was approved by the Annual General Meeting of 14 May 2012. In 2012, the procedure of Article 523 of the Belgian Company Code was applied.
In June 2012, 250,000 stock options were granted at an exercise price of 13.73 euros. The options are settled via equity instruments. In 2014, 4,650 stock options were granted at an exercise price of 32.82 euros. No new stock options were granted in 2019.
During the 2018 and 2019 financial years, no options were expired.
| Average exercise price | Number of stock options | |
|---|---|---|
| in euros | ||
| --- | --- | --- |
| Outstanding as at 1 January 2018 | 32.82 | 4,650 |
| Outstanding as at 31 December 2018 | 32.82 | 4,650 |
| Outstanding as at 31 December 2019 | 32.82 | 4,650 |
Outstanding stock options at year-end have the following theoretical expiry dates and exercise prices:
| Theoretical expiry date | Average exercise price | Number of stock options |
|---|---|---|
| in euros | ||
| --- | --- | --- |
| 2020 - April | 32.82 | 4,650 |
| 32.82 | 4,650 |
Fair value
The fair value of the warrants and stock options was determined using the "Black & Scholes" valuation model at grant date. The main data used in the model were the share price at grant date, the above-mentioned exercise price, the standard deviation of Fagron share price returns during option life and expected dividend, the option life specified above, and the annual risk-free interest rate. Costs are recognised using the straight-line method from grant date to exercise date.
Dividends
In 2019, a dividend of 8.6 million euros was made payable (2018: 7.2 million euros). Notwithstanding that the Company announced on 13 February 2020 a dividend proposal of 0.15 euro per share as reflected in the previous version of this annual report of 10 April 2020, the Board of Directors decided on 13 April 2020 to propose to the Annual Meeting to reduce the dividend from 0.15 euro to 0.08 euro per share. A gross dividend of 0.08 euros per share will be proposed for 2019 at the Annual General Meeting of 11 May 2020, which represents a total dividend of 5.774 million euros. This dividend is not included in this financial statement.
A further explanation of the equity is included in the Corporate Governance Statement.
Other reserves
| (x 1,000 euros) | Consolidated reserves | Cumulative conversion differences | Transactions with non-controlling interest | Remeasurements of post-employment benefit obligations | Share-based payments | Total |
|---|---|---|---|---|---|---|
| Balance as of 1 January 2018 | -195,967 | -48,766 | -377 | -873 | 12,757 | -233,226 |
| Other comprehensive income | 0 | -11,647 | 0 | -264 | 0 | -11,911 |
| Share-based payments | 0 | 0 | 0 | 0 | 1,025 | 1,025 |
| Change in non-controlling interest | 0 | 27 | 0 | 0 | 0 | 27 |
| Balance as of 31 December 2018 | -195,967 | -60,386 | -377 | -1,137 | 13,782 | -244,085 |
| Other comprehensive income | 0 | 98 | 0 | 0 | 0 | 98 |
| Share-based payments | 0 | 0 | 0 | 0 | 1,182 | 1,182 |
| Change in non-controlling interest | 0 | 0 | 0 | 0 | 0 | 0 |
| Balance as of 31 December 2019 | -195,967 | -60,288 | -377 | -1,137 | 14,964 | -242,805 |
23 Provisions
| (x 1,000 euros) | Taxes | Disputes | Other | Total |
|---|---|---|---|---|
| Balance as of 1 January 2018 | 3,731 | 390 | 8,356 | 12,476 |
| Additions: | ||||
| • Through business combination | 0 | 0 | 0 | 0 |
| • Other | 1,746 | 4 | 0 | 1,750 |
| Amounts used | -3 | -211 | -369 | -583 |
| Release | 0 | 0 | -50 | -50 |
| Currency translation differences | -51 | -23 | 240 | 166 |
| Balance as of 31 December 2018 | 5,423 | 160 | 8,177 | 13,759 |
| Additions: | ||||
| • Through business combination | 0 | 0 | 0 | 0 |
| • Other | 0 | 114 | 100 | 214 |
| Amounts used | 0 | 0 | -7,482 | -7,482 |
| Release | -526 | -67 | -419 | -1,012 |
| Currency translation differences | -72 | -4 | 250 | 174 |
| Balance as of 31 December 2019 | 4,824 | 203 | 626 | 5,653 |
In November 2019, Fagron reached a final settlement with the U.S. Department of Justice regarding the civil investigation into the pricing of pharmaceutical products in the period primarily prior to the acquisition of Bellevue Pharmacy and Freedom Pharmaceuticals. Fagron used 7.5 million euros in provisions in 2019.
24 Pension obligations
Pension obligations and costs
The amounts recognised in the balance sheet are determined as follows:
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Defined benefit pension plans | 4,727 | 4,229 |
| Other defined benefit pension plans | 1,051 | 954 |
| Pension obligations | 5,778 | 5,183 |
The category "Defined benefit liabilities" include Fagron's Dutch defined benefit plans held by Fagron Services BV and Spruyt hillen BV. The "Other defined benefit liabilities" include multiple smaller defined benefit plans, which are not further disclosed due to their limited size.
In accordance with IAS19, defined benefit liabilities are estimated using the Projected Unit Credit method. Under this method, each participant's benefits under the plan are attributed to years of service, taking into consideration future salary increases and the plan's benefit allocation formula. Thus, the estimated total pension to which each participant is expected to become entitled at retirement is broken down into units, each associated with a year of past or future credited services. If an employee's service in later years will lead to a materially higher level of benefit than in earlier years, these benefits are attributed on a straight-line basis.
All defined benefit plans are final salary pension plans paid on a monthly basis. The amounts pertaining to post-employment medical plans are included in the liability but are not significant. There are no informal constructive liabilities.
The amounts recognised regarding the Dutch defined benefit plans held by Fagron Services BV and Spruyt hillen BV are determined as follows:
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Present value of defined benefit obligations | 22,922 | 20,218 |
| Fair value of plan assets | -18,195 | -15,989 |
| Present value of net defined benefit obligations | 4,727 | 4,229 |
| Net liability arising from defined benefit obligations | 4,727 | 4,229 |
Movements in the present value of the defined benefit liabilities and the fair value of the plan assets were as follows:
| (x 1,000 euros) | Present value of defined benefit obligations | Fair value of plan assets | Total |
|---|---|---|---|
| Balance as of 1 January 2018 | 20,725 | -16,845 | 3,880 |
| Pension costs attributed to the year of service | |||
| Interest expense (income) | 449 | -364 | 85 |
| Actuarial (gains)/losses: | |||
| • Return on plan assets (excluding interest income) | 0 | 827 | 827 |
| • Actuarial (gains)/losses arising from changes in demographic assumptions | -203 | 0 | -203 |
| • Actuarial (gains)/losses arising from changes in financial assumptions | -209 | 0 | -209 |
| • Actuarial differences as a result of adjustments in experience | -151 | 0 | -151 |
| Employer contributions | |||
| Plan contribution | -393 | 393 | 0 |
| Balance as of 31 December 2018 | 20,218 | -15,989 | 4,229 |
| Pension costs attributed to the year of service | |||
| Interest expense (income) | 439 | -346 | 93 |
| Actuarial (gains)/losses: | |||
| • Return on plan assets (excluding interest income) | 0 | -2,439 | -2,439 |
| • Actuarial (gains)/losses arising from changes in demographic assumptions | -45 | 0 | -45 |
| • Actuarial (gains)/losses arising from changes in financial assumptions | 2,889 | 0 | 2,889 |
| • Actuarial differences as a result of adjustments in experience | 0 | 0 | 0 |
| Employer contributions | |||
| Plan contribution | -579 | 579 | 0 |
| Balance as of 31 December 2019 | 22,922 | -18,195 | 4,727 |
The assets comprise qualifying insurance policies and are not part of the in-house financial instruments of Fagron. The pension insurer fully invested the assets in Aegon Strategic Allocation Fund 80/20.
Actuarial assumptions
The principal actuarial assumptions used for the actuarial valuations are:
| 31 December 2019 | 31 December 2018 | |
|---|---|---|
| Weighted average discount rate | 1.50% | 2.20% |
| Expected rate of salary increase | N/A | N/A |
| Expected rate of price inflation | N/A | N/A |
| Future rate of pension increases actives | 1.75% | 1.75% |
The life expectancy is determined on the basis of the AG2018 Forecast Table.
Realised and unrealised result
The amounts recognised in the realised and unrealised result in respect of these defined benefit plans are as follows:
| (x 1,000 euros) | 31 December 2019 | 31 December 2018 |
|---|---|---|
| Interest expense | 93 | 85 |
| Pension costs defined benefit plans recognised in the income statement | 93 | 85 |
| Actuarial differences on the present value of unfunded liabilities: | ||
| Return on plan assets (excluding interest income) | -2,439 | 827 |
| Actuarial (gains)/losses arising from changes in demographic assumptions | -45 | -203 |
| Actuarial (gains)/losses arising from changes in financial assumptions | 2,889 | -209 |
| Actuarial differences as a result of adjustments in experience | 0 | -151 |
| Pension costs defined benefit plans recognised in other comprehensive income | 405 | 264 |
| Total comprehensive income for the year | 498 | 349 |
There were no new entrants to the defined benefit plan; further accrual only takes place in a defined contribution plan. New employees are offered a defined contribution plan.
The expected defined benefit costs for 2019 are 0.1 million euros and only concern interest costs.
Sensitivity analysis
The sensitivity analysis shows the sensitivity of the defined benefit obligation on 31 December 2019 and the "pension costs attributed to the year of service" compared to the principal actuarial assumptions.
The following table shows the defined benefit obligation on 31 December 2019 for each principal actuarial assumption compared to the corresponding amounts if the actuarial assumption of the relevant scenarios would be applied. Salary increases are not included in the sensitivity analysis.
| Base scenario | Increase in base scenario | Decrease in base scenario | |
|---|---|---|---|
| Weighted average discount rate | 1.50% | 2.00% | 1.00% |
| Defined benefit obligation | 22,922 | 20,800 | 25,376 |
| Inflation increase | +1.75% | +2.25% | +1.25% |
| Defined benefit obligation | 22,922 | 23,460 | 22,452 |
| Life expectancy | +/- 0 jaar | + 1 jaar | -1 jaar |
| Defined benefit obligation | 22,922 | 23,576 | 22,262 |
Pension plans in Belgium
Fagron has nine pension plans in place in Belgium which are legally structured as defined contributions plans. Because of a previous legislative amendment in Belgium applicable to 2nd pillar pension plans (the Supplementary Pensions Act), all Belgian Defined Contribution plans have to be considered as defined benefit plans under IFRS. The Supplementary Pensions Act was established in 2015 as follows:
| • | The employer must continue to guarantee a minimum return of 3.75% on employee contributions and 3.25% on employer contributions made until December 31, 2015; |
| • | As of 2016, the employer must guarantee a minimum return ranging between 1.75% and 3.75% for all contributions, depending on the development of the average interest on OLO 10 years over a period of 24 months. The current guaranteed minimum return is 1.75%. |
Because of this minimum guaranteed return for defined contributions plans in Belgium, the employer is exposed to a financial risk. The employer has a legal obligation to pay further pension contributions in the financing fund if the fund does not hold sufficient assets to pay all current and future pension commitments. These Belgian defined contributions plans should therefore be classified and accounted for as defined benefit plans under IAS 19.
In the past, Fagron did not apply the defined benefit accounting for these plans because higher discount rates were applicable and the return on plan assets provided by insurance companies was sufficient to cover the minimum guaranteed return. As a result of continuous low interest rates on the European financial markets, the employers in Belgium effectively assumed a higher financial risk related to the pension plans with a minimum fixed guaranteed return than in the past. As a result, these plans need to be considered defined benefit plans.
Management made an estimate of the potential additional liabilities as of 31 December 2019. Based on this estimation, it has been established that there are no substantive liabilities. The 2019 employer contribution for these Belgian pension plans amounts to 0.1 million euros (2018: 0.1 million euros). The employee contribution for 2019 is nil (2018: nil); the employee contribution was stopped in 2014. The total amount of the fund investments as of 31 December 2019 amounts to 1.1 million euros (2018:1.0 million euros).
25 Financial debt and financial instruments
| (x1,000 euros) | 2019 | 2018 |
|---|---|---|
| Non-current | ||
| Financial lease liabilities | 28,189 | 35 |
| Bank borrowings | 322,578 | 265,682 |
| Other borrowings | 40 | 201 |
| Total non-current | 350,808 | 265,917 |
| Current | ||
| Financial lease liabilities | 6,604 | 66 |
| Bank borrowings | 34,119 | 63,889 |
| Total current | 40,723 | 63,955 |
| Total financial debts | 391,531 | 329,872 |
| 2019 | 2018 | |||
|---|---|---|---|---|
| (x 1,000 euros) | Financial leases | Bank borrowings | Financial leases | Bank borrowings |
| --- | --- | --- | --- | --- |
| Non-current borrowings by term | ||||
| More than 1 year but less than 5 years | 21,171 | 322,619 | 35 | 261,558 |
| More than 5 years | 7,018 | 0 | 0 | 2,163 |
| Total non-current borrowings | 28,189 | 322,619 | 35 | 265,883 |
| Non-cash change | ||||||
|---|---|---|---|---|---|---|
| (x 1,000 euros) | 2018 | Cash flow from financing activities | Additions IFRS 16 | Acquisitions/ divestments | Exchange rates | 2019 |
| --- | --- | --- | --- | --- | --- | --- |
| Non-current borrowings | 265,917 | 47,932 | 35,020 | 160 | 1,778 | 350,808 |
| Current borrowings | 63,955 | -31,340 | 6,720 | 1,149 | 239 | 40,723 |
| Total borrowings | 329,872 | 16,592 | 41,740 | 1,309 | 2,017 | 391,531 |
The cash flow from financing activities for the non-current borrowings consists of 392 million euros in borrowings and 344 million euros in reimbursement of borrowings. Of the current borrowings, 27 million euros consist of borrowings and 58 million euros in reimbursement of borrowings.
Bank borrowings and financial instruments
The book value of the bank borrowings is expressed in euros. The effective interest rate on the balance sheet date on 31 December 2019 was 2.50% (2018: 2.80%).
The increase in the loans (in total) is due to higher drawdowns on the multicurrency facility. The decrease in current borrowings is the result of the reimbursement of privately placed USPP loans.
Privately placed loans
On 15 April 2014, Fagron NV issued a series private loans comprising of 45.0 million US dollars 4.15% Series A Senior Notes due 15 April 2017, 22.5 million euros 3.55% Series B Senior Notes due 15 April 2017, 15.0 million euros 4.04% Series C Senior Notes due 15 April 2019, 5.0 million euros Floating Rate Series D Senior Notes due 15 April 2019, 20.0 million US dollars 5.07% Series E Senior Notes due 15 April 2019 and 60.0 million US dollars 5.78% Series F Senior Notes due 15 April 2021. The Series A, Series B Notes, Series C Notes, Series D Notes and Series E Notes were fully repaid at maturity. The total EBITDA, calculated as result before interest, taxes, depreciation and amortisation, of the Guarantors is at least 70 per cent of the consolidated Group EBITDA.
Financial covenants privately placed loans
| Test period | Net financial debt/REBITDA | REBITDA/net interest expenses |
|---|---|---|
| After 30 June 2018 | Max. 3.25x | Min. 4.00x |
Sustainable syndicated credit facility
On 1 August 2019, Fagron refinanced the existing bank loans. The old multicurrency and term loan facilities were repaid through a new (sustainable) syndicated credit facility consisting of a credit line of 245 million euros and a term loan facility of 130 million euros. The term of the new financing is 5 years with the option to extend twice for a year. The new credit lines have been agreed on improved terms and conditions and offer Fagron more flexibility and lower financing expenses.
Financial covenants syndicated credit facility
| Test period | Net financial debt/REBITDA | REBITDA/net interest expenses |
|---|---|---|
| Semi-annual test periods (June/December) | Max. 3.50x | Min. 4.00x |
At the end of 2019, an amount of 140 million euros had been withdrawn under the syndicated credit facility (2018:131 million euros). In addition to these financial covenants and as is the case with the privately placed loans, the EBITDA of the Guarantors must be at least 70 percent of the Group's consolidated EBITDA.
The credit facility is a so-called Sustainability Linked Loan, whereby the interest is linked to Fagron's sustainability aim to reduce greenhouse emissions (Scope 1 and Scope 2 of the GHG protocol) in six years by 30%. Based on the annual progress measured, a discount or an addition can be applied to the credit facility's interest rate.
From 2020, the sustainability aim to reduce Fagron's greenhouse emissions by 30% in six years also linked to the variable remuneration for management.
In 2018, Fagron used financial derivatives in order to hedge the interest risk for 42.5 million dollars of financing. These instruments were valued in accordance with a Level 2 method. This implies that the valuation was based on inputs other than the listed prices in active markets such as included in Level 1. The fair values of all derivatives held for hedging purposes were based on valuation methods. These methods maximise the use of detectable market data, where available, and minimise the impact of the company's estimates and projections. The interest hedging instruments are valued on the basis of discounted cash flows.
The parameters used for these models are those applicable as at year-end and are therefore classified as Level 2. The valuation was calculated using the discounted cash flows of the nominal value and interest flows. The term to maturity of the financial derivatives runs until March 2021.
The fair value of financial derivatives at year-end 2019 was -0.5 million euros (2018; -0.1 million euros). In 2019, the fair value of the derivatives decreased as a result of the lower interest rate in the U.S. (3m Libor).
All financial instruments are valued at amortised cost except for derivative financial instruments and contingent considerations for acquisitions, which are valued at fair value. The fair value of the financial instruments valued at the amortised cost price approximates the carrying amount.
As do the borrowing companies, Fagron NV and Fagron Capital NV, the following companies serve as guarantors for the bank loans concluded by Fagron:
Company name of guarantors
| ACA Pharma NV | Fagron Sp. Z.o.o. |
| Arseus Belgie NV | Freedom Pharmaceuticals Inc. |
| B&B Pharmaceuticals Inc. | Galfarm Sp. z.o.o. |
| Fagron Belgium NV | Pharma Cosmetic K.M. Adamowicz Sp. Z.o.o. |
| Fagron GmbH & Co KG | Pharmaline BV |
| Fagron Inc. | SM Empreendimentos Farmaceuticos Ltda |
| Fagron Nederland BV | Spruyt hillen BV |
26 Trade payables
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Payables | 71,894 | 62,701 |
| Investment payables | 5,409 | 1,217 |
| Trade payables | 77,303 | 63,918 |
Trade payables generally have due dates that are close to each other. The reported values approximate their fair values. The increase compared to the previous year can be explained, in particular, by acquisitions.
27 Other current payables
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Prepayments | 23 | 77 |
| Other payables | 36,796 | 22,995 |
| Accrued expenses | 5,028 | 5,467 |
| Other current payables | 41,847 | 28,538 |
The other debts relate to amounts still to be paid for existing participations (subsequent payments) for 32.9 million euros (2018: 20.0 million euros). This explains the increase compared to 2018.
The accrued expenses include an amount of 1.6 million euros (2018: 1.9 million euros) related to interest still to be paid. The remainder of this item concerns various accruals and deferrals.
The debts generally have due dates that are close to each other. The reported values approximate their fair values.
28 Leases
IFRS 16 "Leases" concerns the new standard for leases, as described in note 2, from 1 January 2019. Fagron has applied the modified retrospective method for the implementation of IFRS 16, without adjusting comparative figures for 2018. Fagron elects to use the exemptions for lease agreements where the lease period ends within 12 months after the date of first application and lease agreements where the underlying assets have a low value. The incremental loan rate applied to the opening balance sheet as at 1 January 2019 amounts to between 0.7% and 8.92%, depending on the region where Fagron is active.
The reclassifications and adjustments resulting from the application of the new lease rules have been incorporated in the opening balance sheet as at 1 January 2019, whereby the lease assets and lease liabilities have increased by 38.1 million euros. Due to the application of IFRS 16, the net financial debt/REBITDA ratio changed from 2.63 to 2.81 as at 1 January 2019.
Adjustments as a result of the application of IFRS 16 are as follows:
| (x 1,000 euros) | |
|---|---|
| Operating leasing liabilities as at 31 December 2018 | 42,928 |
| Reduced by lessees incremental lending rate on the date of initial application | -4,642 |
| Added: financial lease liability recognised as at 31 December 2018 | 101 |
| Reduced: short-term lease recognised as operational costs | -167 |
| Reduced: low-value lease recognised as operational costs | -6 |
| Lease liabilities as at 1 January 2019 | 38,214 |
Opening balance sheet of the leases on 1 January 2019 and closing balance sheet of 31 December 2019.
| (x 1,000 euros) | 31 December 2018 | Initial valuation under IFRS 16 | Opening balance sheet of leases on 1 January 2019 | Closing balance sheet of leases on 31 December 2019 |
|---|---|---|---|---|
| Assets | ||||
| Buildings & land | 87 | 36,012 | 36,099 | 31,857 |
| Machinery & installations | 35 | 613 | 648 | 515 |
| Furniture and vehicles | 14 | 1,489 | 1,503 | 1,229 |
| Total lease assets | 137 | 38,113 | 38,250 | 33,601 |
| Liabilities | ||||
| Lease liabilities - non-current | 35 | 31,874 | 31,909 | 28,189 |
| Lease liabilities - current | 66 | 6,239 | 6,305 | 6,604 |
| Total lease liabilities | 101 | 38,113 | 38,214 | 34,793 |
| (x 1,000 euros) | 2019 |
|---|---|
| Depreciation and amortisation | |
| Buildings & land | 6,715 |
| Machinery & installations | 291 |
| Furniture and vehicles | 755 |
| Total depreciation | 7,761 |
| Costs related to low-value leases | 24 |
| Costs related to short-term leases | 845 |
| Costs related to variable costs | 7 |
| Financial expenses | 1,268 |
29 Total adjustments for non-cash items
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Amortisation of intangible fixed assets | 9,141 | 7,629 |
| Depreciation of property, plant and equipment | 16,821 | 8,608 |
| Write down on inventories and receivables | 3,356 | 3,338 |
| (Profit)loss on sale of fixed assets | -273 | -220 |
| Movements in provisions | -7,442 | -543 |
| Share-based payments | 1,182 | 1,025 |
| Total adjustments for non-cash items | 22,785 | 19,837 |
30 Total changes in working capital
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Changes in operational working capital | 4,853 | -11,821 |
| Changes in other working capital | -4,963 | 4,094 |
| Total changes in working capital | -110 | -7,727 |
31 Contingencies
Fagron faces certain risks for which no provision has been made (such as the possible tax liabilities with regard to ICMS in Brazil or VAT in Poland) because it is unlikely that these risks will have a negative impact for the group. ICMS is a business tax incentive programme called Produzir for companies based in the Brazilian state of Goias. This is contested by several Brazilian states.
In Poland, a VAT audit was started in 2017 at two subsidiaries. The VAT percentage applied to almost all the products sold by the Polish subsidiaries is being questioned by the Polish tax authority. We are contesting this assertion. At one of the subsidiaries an assessment of PLN 4 million was issued for the February 2017 period. Fagron objected to the imposed assessment and has appealed this decision to the administrative court. After the legal proceedings, the highest administrative court ruled in favour of Fagron in December 2019, which is considered to be final. An assessment of 3.6 million PLN was imposed at the other company. Fagron objected to the imposed assessment, which was rejected.
In October 2019, Fagron appealed to the administrative court against this pronouncement.
Fagron received a tax assessment of 15.4 million euros in July 2018 regarding the amortisation of goodwill due to mergers in Brazil. We are disputing this assessment. Fagron objected to the imposed assessment and has not made any provision in this regard.
Fagron is also involved in a number of claims, disputes and legal proceedings within the normal conduct of its business. Management is of the opinion that it is unlikely that these claims, disputes and lawsuits will have a negative impact on the financial situation at Fagron. A provision has been made for claims where it is deemed probable that they will lead to a payment, and for which a reliable estimate can be made (see note 23).
32 Related parties
The overall remuneration package for members of the Executive Committee and the CEO individually, as well as the non-executive directors, is shown below for the financial years 2019 and 2018:
| (x 1,000 euros) | Fixed remuneration component | Variable remuneration component | Other remuneration components 1 |
|---|---|---|---|
| 2018 financial year | |||
| Rafael Padilla, CEO | 458 | 270 | 14 |
| Executive Committee, including the CEO | 968 | 369 | 75 |
| Non-executive members of the Board of Directors | 369 | 0 | 0 |
| 2019 financial year | |||
| Rafael Padilla, CEO | 475 | 280 | 13 |
| Executive Committee, including the CEO | 1,004 | 400 | 67 |
| Non-executive members of the Board of Directors | 339 | 0 | 0 |
1 Includes costs for pensions, insurance and the cash value of the other benefits in kind.
The variable remuneration component regards the bonus realised over the course of 2019 that is paid out in 2020. The Nomination and Remuneration Committee annually prepares proposals for the remuneration policy and/or other benefits for members of the Executive Committee and the CEO.
In 2019, there were no stock options and no warrants granted to the members of the Executive Committee, in the composition in effect on 31 December 2019.
In 2019, Mr Padilla and the other members of the Executive Committee exercised 117.500 warrants. In 2019, 285,000 warrants owned by Mr Padilla and the other members of the Executive Committee expired. The members of the Executive Committee, in the composition in effect on 31 December 2019, together hold 437.500 stock options and warrants.
33 Business combinations
Fagron completed a number of acquisitions in the 2019 financial year. Full control was acquired from all companies.
Fair value of the acquired Humco assets and liabilities
Fagron acquired the American company Humco in April 2018. The acquisitions were paid with approximately 57.6 million euros of cash and cash equivalents, representing an increase in goodwill of 44.4 million euros. Humco was included in the consolidated figures as of April 2018. Humco is a leading developer, manufacturer and supplier of patented vehicles (means of administering) and pharmaceutical brand products.
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Intangible fixed assets | 6,632 | 6,632 |
| Property, plant and equipment | 4,656 | 993 |
| Deferred tax liabilities | 160 | 160 |
| Inventories | 4,707 | 4,626 |
| Trade receivables | 2,944 | 3,137 |
| Other receivables | 321 | 293 |
| Cash and cash equivalents | 996 | 996 |
| Total assets | 20,416 | 16,837 |
| Lease liabilities | 3,362 | |
| Trade payables | 2,153 | 2,153 |
| Other current payables | 1,483 | 1,483 |
| Total liabilities | 7,298 | 3,636 |
| Net acquired assets | 13,118 | 13,201 |
| Goodwill | 44,495 | 44,410 |
| Total acquisition amount | 57,611 | 57,611 |
Fair value of the acquired assets and liabilities of other companies in Brazil and Czech Republic
The activities acquired in 2019 in Brazil and Czech Republic were paid with approximately 15.8 million euros of cash and cash equivalents, representing an increase in goodwill of 14.4 million euros. The goodwill is expected to not be tax-deductible. The final fair value of the acquired assets and liabilities is detailed below.
| (x 1,000 euros) | 2019 |
|---|---|
| Intangible fixed assets | 4 |
| Property, plant and equipment | 3,393 |
| Other non-current assets | 12 |
| Deferred tax liabilities | 183 |
| Inventories | 2,815 |
| Trade receivables | 1,072 |
| Other receivables | 130 |
| Cash and cash equivalents | 715 |
| Total assets | 8,919 |
| Borrowings | 994 |
| Trade payables | 2,326 |
| Other current payables | 4,185 |
| Total liabilities | 7,505 |
| Net acquired assets | 1,242 |
| Goodwill | 14,354 |
| Total acquisition amount | 15,769 |
Fair value of the acquired assets and liabilities of Cedrosa
For the acquisition of Cedrosa in Mexico in 2019, approximately 20.8 million euros were paid in cash and cash equivalents, representing an increase in goodwill of 8.0 million euros. The goodwill is expected to not be tax-deductible. The final fair value of the acquired assets and liabilities is detailed below.
| (x 1,000 euros) | 2019 |
|---|---|
| Intangible fixed assets | 6,187 |
| Property, plant and equipment | 678 |
| Inventories | 5,645 |
| Trade receivables | 3,238 |
| Other receivables | 124 |
| Cash and cash equivalents | 639 |
| Total assets | 16,512 |
| Borrowings | 1,045 |
| Lease liabilities | 359 |
| Trade payables | 1,227 |
| Other current payables | 1,079 |
| Total liabilities | 3,709 |
| Net acquired assets | 12,803 |
| Goodwill | 7,971 |
| Total acquisition amount | 20,774 |
At the end of the year, the Group had an amount of approximately 32.9 million euros in liabilities outstanding to former shareholders, which were determined on the basis of business plans at the time of acquisition, see also Note 27.
The deferred payments for business combinations relate to Mexico, Brazil, Croatia and the United States. It is expected that these will be paid in 2020 and 2021.
The deferred payments for business combinations range from 0 euros to a maximum of 32.9 million euros. The retrospective payments are valued at fair value at the moment of acquisition. This is estimated based on the maximum compensation if the conditions are met. The current expectation is that the remunerations will be paid on the expiration dates.
34 Information on the Statutory Auditor, his remuneration and related services
The statutory Auditor of the Company is Deloitte Bedrijfsrevisoren, represented by Mrs Ine Nuyts.
| (x 1,000 euro) | 2019 | 2018 * |
|---|---|---|
| Audit fee for the Group audit | ||
| Fagron Group | 463 | 476 |
| Remuneration for Deloitte Bedrijfsrevisoren | 343 | 287 |
| Remuneration for parties linked to Deloitte Bedrijfsrevisoren | 120 | 189 |
| Remuneration for additional services rendered by the Statutory Auditor to Fagron | ||
| Other audit assignments | 6 | 13 |
| Other non-auditing assignments | 2 | 8 |
| Remuneration for additional services rendered by parties linked to the Statutory Auditor | ||
| Tax advisory assignments | 48 | |
| Other non-auditing assignments | 96 | 108 |
* In 2018, PriceWaterhouseCoopers LLC audited the companies.
35 Significant events after the balance sheet date
1. Acquisition of Gako
At the end of January 2020, Fagron completed the acquisition of the activities of the German company Gako. Gako is a leading global developer, manufacturer and supplier of mixing equipment that pharmacists can use for the compounding of semi-solid dermatological formulations (primarily creams and ointments) directly in the final packaging or in bulk packaging. In 2019 Gako generated turnover of 4.5 million euros with an EBITDA margin of approximately 15%. The acquisition price for the Gako activities was 5.7 million euros with the transaction comprising all the technologies, scientific data, and patents and trademarks, as well as the Gako production facility in Bamberg (Germany).
2. COVID-19
Since the start of 2020, the impact of the COVID-19 virus has created a new reality. This applies both to the set-up of our operations and the demand for and availability of our products. At the time of publication of these financial statements, we classify the ultimate impact of COVID-19 virus on the performance of Fagron as immaterial. The impact in the medium to long term is currently difficult to predict, because in many of the markets in which we operate, the virus is still in the midst of the outbreak phase. The COVID-19 virus therefore represents an uncertainty and a risk to the company's financial performance.
Fagron's priority is fully focused on the safety of all our employees and ensuring the continuity of our activities to maximise the facilitation of physicians, pharmacists and nursing staff. The measures taken to ensure the safety of our employees and the continuity of our work are continuously evaluated and adjusted if necessary. The policy and advice of the various (inter)national authorities are leading in this regard.
At the time of the publication of these financial statements, all Fagron activities are operational in Europe, North America, Latin America and South Africa, all sites are supplied and deliveries to customers are proceeding as agreed. For the few products where we see supply problems arise, alternative sourcing is sought in other countries or via distributors. We also see a (temporary) shift in demand for COVID-19-related products, including protective materials, products to protect the immune system, pain relief (paracetamol powders) and choloquine (as a treatment). Due to a strong increase in demand, we are seeing shortages of certain products arise. As a result of the measures taken by countries at national level, unnecessary interventions in hospitals and clinics, and visits to prescribers are postponed. This has resulted in a decrease in demand for products in segments such as dermatology and ophthalmology.
The global degree of uncertainty about the impact of the COVID-19 virus for the remainder of the year does not allow for a proper concrete estimate of the impact on Fagron's activities and results for 2020. Taking into account the current situation and facts and circumstances known at this time, we believe that the effects of the virus will not have a material adverse impact on our financial condition or liquidity.
36 Additional notes
1. Off-balance sheet rights and liabilities - collateral:
Fagron Services BV has a liability in the amount of 0.5 million euros, the initial mortgage loan amounts to 2.0 million euros. The Group does not have any material liabilities to purchase fixed assets at the moment.
2. Fagron NV signed a liability statement on behalf of a number of Dutch subsidiaries, specifically:
Fagron Brazil Holding BV
Fagron BV
Fagron Nederland BV
Fagron Services BV
Fagron Steriele Bereidingsapotheek BV
Infinity Pharma BV
Fagron Holding NL BV
Pharmaline BV
Pharma Assist BV
Spruyt hillen BV
Twipe BV
3. Exemption from a German subsidiary:
Fagron GmbH & Co KG in Barsbuttel (Germany) is exempt from the obligation to set up its financial statements and financial report according to §264b of the German commercial code, and to audit and publish these in line with the applicable regulations for businesses.
37 List of the consolidated companies
| Name | Address | Ownership |
|---|---|---|
| ABC Chemicals NV | Venecoweg 20A, 9810 Nazareth (Belgium) | 100.0% |
| ABC Dental & Pharmaceutical Consultancy NV | Venecoweg 20A, 9810 Nazareth (Belgium) | 100.0% |
| ACA Pharma NV | Venecoweg 20A, 9810 Nazareth (Belgium) | 100.0% |
| All Chemistry Do Brasil Ltda | Rua Cocais 300 - Jardim Oriental, 04347-170 São Paulo (Brazil) | 100.0% |
| AnazaoHealth Inc. | 5710 Hoover Boulevard, 33634 Tampa, Florida (United States) | 100.0% |
| A Apace Embalagens Em Vidro E Plastico Ltda | Rua Gustavo da Silveira, n° 164, Vila Santa Catarina (Brazil) | 100.0% |
| ApodanNordic PharmaPackaging A/S | Kigkurren 8M 2. Sal, 2300 Copenhagen (Denmark) | 100.0% |
| Arseus Belgie NV | Venecoweg 20A, 9810 Nazareth (Belgium) | 100.0% |
| Arseus Capital NV | Venecoweg 20A, 9810 Nazareth (Belgium) | 100.0% |
| Arseus Dental Solutions SAS | 37 Rue Helene Muller, 94320 Thiais (France) | 100.0% |
| B&B Pharmaceuticals Inc. | 8591 Prairie Trail Drive, 80112 Englewood, Colorado (United States) | 100.0% |
| Central de Drogas S.A. de C.V. | Atenco 17, La Perla, Alce Blanco, 53348 Naucalpan de Juárez (Mexico) | 100.0% |
| Coast Quality Pharmacy LLC | 5710 Hoover Boulevard, 33634 Tampa, Florida (United States) | 100.0% |
| DPI Inc. | 5967 S. Garnett Rd., 74146 Tulsa, Oklahoma (United States) | 100.0% |
| Ducere LLC | 5710 Hoover Boulevard, 33634 Tampa, Florida (United States) | 100.0% |
| Dr Kulich Pharma S.R.O | Piletická 178/61, 500 03 Hradec Králové (Czech Republic) | 100.0% |
| Dynaceuticals Ltd | 55 14th Avenue, Northcliff, Gauteng (South Africa) | 100.0% |
| Fagron a.s. | Holicka 1098/31M, 77900 Olomouc (Czech Republic) | 73.1% |
| Fagron Academy LLC | 1111 Brickell Avenue, Suite 1550, 33131 Miami, Florida (United States) | 100.0% |
| Fagron Belgium NV | Venecoweg 20A, 9810 Nazareth (Belgium) | 100.0% |
| Fagron Brazil Holding BV | Lichtenauerlaan 182, 3062 ME Rotterdam (The Netherlands) | 100.0% |
| Fagron BV | Lichtenauerlaan 182, 3062 ME Rotterdam (The Netherlands) | 100.0% |
| Fagron Canada Inc. | 1 Place Ville-Marie, Porte 1300, H3B OE6, Montréal, Quebec (Canada) | 100.0% |
| Fagron Colombia SAS | Calle 90 19A-49 Bogota (Colombia) | 100.0% |
| Fagron Compounding Services LLC | 8710 E. 34th St. N., 67226 Wichita, Kansas (United States) | 100.0% |
| Fagron Compounding Services NV | Woestijnstraat 53, 2880 Bornem (Belgium) | 100.0% |
| Fagron Compounding Supplies Australia Pty Ltd | Atkinson Road 2/16, Taren Point, 2229 Sydney (Australia) | 100.0% |
| Fagron Essentials Holding LLC | 2400 Pilot Knob Road, 55120 St. Paul, Minnesota (United States) | 100.0% |
| Fagron Genomics S.L.U. | Carrer de Josep Tapiolas 150, 08226 Terrassa (Spain) | 100.0% |
| Fagron GmbH & Co KG | Von-Bronsart-StraBe 12, 22885 Barsbüttel (Germany) | 100.0% |
| Fagron Hellas A.B.E.E. | 12km NR, 42100 Trikala-Larissa (Greece) | 100.0% |
| Fagron Hrvatska d.o.o. | Donjozelinska ul. 114, 10382 Donja Zeline (Croatia) | 100.0% |
| Fagron Holding NL BV | Lichtenauerlaan 182, 3062 ME Rotterdam (The Netherlands) | 100.0% |
| Fagron Holding USA LLC | 2400 Pilot Knob Road, 55120 St. Paul, Minnesota (United States) | 100.0% |
| Fagron Iberica SAU | Carrer de Josep Tapiolas 150, 08226 Terrassa (Spain) | 100.0% |
| Fagron Inc. | 2400 Pilot Knob Road, 55120 St. Paul, Minnesota (United States) | 100.0% |
| Fagron Italia SrL | Via Lazzari 4-6, 40057 Granarolo Dell'Emilia, Quarto Inferiore (Italy) | 100.0% |
| Fagron Lékárna Holding s.r.o. | Holicka 1098/31M, 77900 Olomouc (Czech Republic) | 100.0% |
| Fagron Nederland BV | Venkelbaan 101, 2908 KE Capelle aan den IJssel (The Netherlands) | 100.0% |
| Fagron Nordic A/S | Kigkurren 8M 2. Sal, 2300 Copenhagen (Denmark) | 100.0% |
| Fagron NV | Venecoweg 20A, 9810 Nazareth (Belgium) | 100.0% |
| Fagron Sarl | Intendente Neyer 924, B1643 Beccar (Argentina) | 100.0% |
| Fagron SAS | 37 Rue Helene Muller, 94320 Thiais (France) | 100.0% |
| Fagron Services Brazil Ltda | Via Primaria 5D, Daia, 75132-120 Anapolis (Brazil) | 100.0% |
| Fagron Services BV | Molenwerf 13,1911 DB Uitgeest (The Netherlands) | 100.0% |
| Fagron SH Ltd | 2315 Ocean Tower, 550 Yan An East Road, 200001 Shanghai, (China) | 100.0% |
| Fagron South Africa Ltd | 55 14th Avenue, Northcliff, Gauteng (South Africa) | 100.0% |
| Fagron Sp. z o.o | UI. Pasternik 26, 31354 Krakau (Poland) | 100.0% |
| Fagron Steriele Bereidingsapotheek BV | Siemensstraat 4, 7903 AZ Hoogeveen (The Netherlands) | 100.0% |
| Fagron Technologies Ltda | Avenida 9 de Julho 3575,13208-056 Jundiai (Brazil) | 100.0% |
| Fagron UK Ltd | 4B Coquet Street, NE1 2QB Newcastle upon Tyne (United Kingdom) | 100.0% |
| Fagron Verwaltungsgesellschaft mbH | Von-Bronsart-Straße 12, 22885 Barsbüttel (Germany) | 100.0% |
| Florien Fitoativos Ltda | Estrada Vicente Bellini 175, 13427-225 Piracicaba City (Brazil) | 100.0% |
| Freedom Pharmaceuticals Inc. | 801 W. New Orleans Street, 74011 Broken Arrow, Oklahoma (United States) | 100.0% |
| Galfarm Sp. z.o.o. | III. Przemystowa, 12, 30701 Krakow (Poland) | 100.0% |
| HL Technology SA | Rue Jardiniere 153, 2300 La Chaux-de-Fonds (Switzerland) | 0.0% |
| Humco Holding Group Inc. | 201 W. 5th Street, 12th floor, 78701 Austin, Texas (United States) | 100.0% |
| Humco Qsub 1 Inc. | 7400 Alumax Drive, 75501 Texarkana, Texas (United States) | 100.0% |
| Infinity Pharma BV | Steenovenweg 15, 5708 HN Helmond (The Netherlands) | 100.0% |
| JCB Laboratories LLC | 7335 W. 33rd Street. North, 67205 Wichita, Kansas (United States) | 100.0% |
| Jupiter Health Holding LLC | Millwell Drive 212, Maryland Heights, 63043 Missouri (United States) | 100.0% |
| Levviale Industria de Insumos Farmacêuticos Ltda | VP - 1D - Quadra 2 - Módulos 3 e 4 - D.A.I.A., Anápolis - GO, 75132-035 (Brazil) | 100.0% |
| Liberty Rx LLC | Millwell Drive 212, Maryland Heights, 63043 Missouri (United States) | 100.0% |
| Link Medical LLC | Millwell Drive 212, Maryland Heights, 63043 Missouri (United States) | 100.0% |
| Mar-Kern Ltd | Main Road 20, Knysna, 6570 George (South Africa) | 100.0% |
| Mercury Innovations LLC | Millwell Drive 212, Maryland Heights, 63043 Missouri (United States) | 100.0% |
| Midwest Rx LLC | Millwell Drive 212, Maryland Heights, 63043 Missouri (United States) | 100.0% |
| Northern Rx LLC | Millwell Drive 212, Maryland Heights, 63043 Missouri (United States) | 100.0% |
| Ortofarma Laboratorio de Controle de Qualidade LTDA | BR 040 - Empresarial Park Sul 39, 36120-0100 - Matias Barbosa / MG (Brazil) | 100.0% |
| Pharma Assist BV | Dieselstraat 3, 7903 AR Hoogeveen (The Netherlands) | 100.0% |
| Pharmacy Services Inc. | Millwell Drive 212, Maryland Heights, 63043 Missouri (United States) | 100.0% |
| Pharmaline BV | Munsterstraat 4, 7575 ED Oldenzaal (The Netherlands) | 100.0% |
| Pierson Laboratories Inc. | 7400 Alumax Drive, 75501 Texarkana, Texas (United States) | 100.0% |
| PSI Services Inc. | Millwell Drive 212, Maryland Heights, 63043 Missouri (United States) | 100.0% |
| Rausa Kem Pharmacy Ltd | Clarendon Street 61, Parow Valley, 7500 Kaapstad (South Africa) | 100.0% |
| SM Empreendimentos Farmaceuticos Ltda | Rua Olimpiadas 66, 7th floor - Vila Olimpia, 04555-010 Sao Paulo (Brazil) | 100.0% |
| Southern Rx LLC | Millwell Drive 212, Maryland Heights, 63043 Missouri (United States) | 100.0% |
| Spruyt hillen BV | Tinbergenlaan 1, 3401 MT IJsselstein (The Netherlands) | 100.0% |
| Texas Southern Rx LLC | Millwell Drive 212, Maryland Heights, 63043 Missouri (United States) | 100.0% |
| Twipe BV | Tinbergenlaan 1, 3401 MT IJsselstein (The Netherlands) | 100.0% |
Statutory Auditor's Report
Statutory auditor's report to the shareholders' meeting of Fagron NV for the year ended 31 December 2019 - Consolidated financial statements
In the context of the statutory audit of the consolidated financial statements of Fagron NV ("the company") and its subsidiaries (jointly "the group"), we hereby submit our statutory audit report. This report, issued after the decision of the board of directors to revise the dividend, replaces our audit report dated 10 April 2020 and includes our report on the consolidated financial statements and the other legal and regulatory requirements. These parts should be considered as integral to the report.
We were appointed in our capacity as statutory auditor by the shareholders' meeting of 13 May 2019, in accordance with the proposal of the board of directors ("bestuursorgaan" / "organe d'administration") issued upon recommendation of the audit committee. Our mandate will expire on the date of the shareholders' meeting deliberating on the financial statements for the year ending 31 December 2021. We have audited the consolidated financial statements of Fagron NV for the first time during the financial year referred to in this report.
Report on the consolidated financial statements
Unqualified opinion
We have audited the consolidated financial statements of the group, which comprise the consolidated statement of financial position as at 3'1 December 2019, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, as well as the summary of significant accounting policies and other explanatory notes. The consolidated statement of financial position shows total assets of 801.240 (000) EUR and the consolidated income statement shows a profit for the year then ended of 41.540 (000) EUR.
In our opinion, the consolidated financial statements give a true and fair view of the group's net equity and financial position as of 31 December 2019 and of its consolidated results and its consolidated cash flow for the year then ended, in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and with the legal and regulatory requirements applicable in Belgium.
Basis for the unqualified opinion
We conducted our audit in accordance with International Standards on Auditing (ISA), as applicable in Belgium. In addition, we have applied the International Standards on Auditing approved by the IAASB applicable to the current financial year, but not yet approved at national level. Our responsibilities under those standards are further described in the "Responsibilities of the statutory auditor for the audit of the consolidated financial statements" section of our report. We have complied with all ethical requirements relevant to the statutory audit of consolidated financial statements in Belgium, including those regarding independence.
We have obtained from the board of directors and the company's officials the explanations and information necessary for performing our audit.
We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
| Key audit matters | How our audit addressed the key audit matter |
|---|---|
| Goodwill - impairment testing | |
| Goodwill amounts to 389 326 (000) EUR and represents 49% of the total consolidated statement of financial position at 31 December 2019. Goodwill is tested annually for impairment at the level of cash generating units. The key judgments are the discount rate, the long term growth rate, the gross margin growth rate and future results. We consider the annual impairment test of goodwill as a key audit matter because of the complexity and the fact that a high level of management judgment is involved. We focused our impairment assessment on the Fagron US Essentials and Brands and Fagron US Sterile Services cash generating units. The 2019 impairment assessment did not result in an additional impairment. | Our audit procedures consisted of the evaluation of the impairment methodology, testing of the key assumptions and the supporting calculations. Supported by valuation specialists, we compared the key assumptions to external market data (for example growth expectations) and own independent considerations (for example the discount rate). We have assessed the historical accuracy of management's forecasts. We also assessed the adequacy of the disclosures on goodwill and related assumptions in the consolidated financial statements. We specifically focused on the sensitivity by evaluating whether a reasonably possible change in assumptions could result in an impairment. |
| We refer to note 4 and 16 to the consolidated financial statements. |
Taxes - provisions for uncertain tax positions
The company is subject to income tax in numerous jurisdictions. There are transactions for which the ultimate tax position is uncertain and which requires significant judgment to determine the provision for income tax.
In those cases where the amount of tax payable is uncertain, the company establishes provisions based on its judgment of the probable amount of the payable.
Some subsidiaries of the group are currently subject to tax audits and local enquiries usually in relation to prior years. Investigations and negotiations with local tax authorities can take considerable time to conclude. Due to the level of judgment involved and the uncertain nature of the tax positions, we consider this to be a key audit matter in our audit.
We refer to note 4, 19 and 31 to the consolidated financial statements.
We obtained a detailed understanding of the key technical tax issues and risks related to business and legislative developments. We assessed the status of ongoing local tax authority audits using, where applicable, experts.
We evaluated and challenged management's judgment in respect of estimates of tax exposures and contingencies. We considered correspondence with tax authorities and also assessed legal opinions from third party tax advisors who act on behalf of the company.
We also assessed the adequacy of the disclosures to the consolidated financial statements.
Other matters
The consolidated financial statements for the previous financial year were audited by another statutory auditor who has issued an unqualified opinion.
Responsibilities of the board of directors for the preparation of the consolidated financial statements
The board of directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and with the legal and regulatory requirements applicable in Belgium and for such internal control as the board of directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the board of directors is responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters to be considered for going concern and using the going concern basis of accounting unless the board of directors either intends to liquidate the group or to cease operations, or has no other realistic alternative but to do so.
Responsibilities of the statutory auditor for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue a statutory auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
During the performance of our audit, we comply with the legal, regulatory and normative framework as applicable to the audit of consolidated financial statements in Belgium. The scope of the audit does not comprise any assurance regarding the future viability of the company nor regarding the efficiency or effectiveness demonstrated by the board of directors in the way that the company's business has been conducted or will be conducted.
As part of an audit in accordance with ISA, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
| • | identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from an error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; |
| • | obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group's internal control; |
| • | evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the board of directors; |
| • | conclude on the appropriateness of the use of the going concern basis of accounting by the board of directors and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our statutory auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our statutory auditor's report. However, future events or conditions may cause the group to cease to continue as a going concern; |
| • | evaluate the overall presentation, structure and content of the consolidated financial statements, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. |
| • | obtain sufficient appropriate audit evidence regarding the financial information of the entities and business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. |
We communicate with the audit committee regarding, amongst other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the audit committee with a statement that we have complied with relevant ethical requirements regarding independence, and we communicate with them about all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated to the audit committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters.
We describe these matters in our report unless law or regulation precludes any public disclosure about the matter.
Other legal and regulatory requirements
Responsibilities of the board of directors
The board of directors is responsible for the preparation and the content of the directors' report on the consolidated financial statements, the statement of non - financial information attached to the directors' report on the consolidated financial statements and other matters disclosed in the annual report on the consolidated financial statements.
Responsibilities of the statutory auditor
As part of our mandate and in accordance with the Belgian standard complementary to the International Standards on Auditing (ISA) as applicable in Belgium, our responsibility is to verify, in all material respects, the director's report on the consolidated financial statements, the statement of non-financial information attached to the directors' report on the consolidated financial statements and other matters disclosed in the annual report on the consolidated financial statements, as well as to report on these matters.
Aspects regarding the directors' report on the consolidated financial statements and other information disclosed in the annual report on the consolidated financial statements
In our opinion, after performing the specific procedures on the directors' report on the consolidated financial statements, this report is consistent with the consolidated financial statements for that same year and has been established in accordance with the requirements of article 3:32 of the Code of companies and associations.
In the context of our statutory audit of the consolidated financial statements we are responsible to consider, in particular based on information that we became aware of during the audit, if the directors' report on the consolidated financial statements and other information disclosed in the annual report on the consolidated financial statements, are free of material misstatements, either by information that is incorrectly stated or otherwise misleading. In the context of the procedures performed, we are not aware of such a material misstatement.
The non-financial information as required by article 3:32, § 2 of the Code of companies and associations, has been disclosed in a separate report that is part of section "Our responsibility" of the annual report. This statement on non-financial information includes all the information required by article 3:32, § 2 of the Code of companies and associations and is in accordance with the consolidated financial statements for the financial year then ended. The non-financial information has been established by the company in accordance without the use of a recognised framework.
Statements regarding independence
| • | Our audit firm and our network have not performed any prohibited services and our audit firm has remained independent from the group during the performance of our mandate. |
| • | The fees for the additional non-audit services compatible with the statutory audit, as defined in article 3:65 of the Code of companies and associations, have been properly disclosed and disaggregated in the notes to the consolidated financial statements. |
Other statements
| • | This report is consistent with our additional report to the audit committee referred to in article 11 of Regulation (EU) No 537/2014. |
Antwerp, 16 April 2020
The statutory auditor
Deloitte Bedrijfsrevisoren/Réviseurs d'Entreprises CVBA/SCRL
Represented by Ine Nuyts
Condensed stand-alone income statement Fagron NV
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Operating income | 2,255 | 5,611 |
| Turnover | 0 | 0 |
| Other operating income | 2,255 | 5,611 |
| Non-recurring operating income | 0 | 0 |
| Operating expenses | 2,996 | 6,355 |
| Trade goods, raw and auxiliary materials | 0 | 0 |
| Services and other goods | 2,710 | 3,264 |
| Employee benefit expenses | 204 | 3,012 |
| Depreciation and amortisation | 3 | 12 |
| Provisions for risks and costs | -5 | -8 |
| Other operating expenses | 9 | 1 |
| Non-recurring operating expenses | 74 | 74 |
| Operating result | -741 | -744 |
| Financial result | 35,732 | 15,862 |
| Recurring financial result | 35,732 | 15,862 |
| Non-recurring financial result | 0 | 0 |
| Profit for the financial year before taxes | 34,990 | 15,118 |
| Tax on the result | 119 | 0 |
| Net result for the financial year | 34,872 | 15,118 |
Condensed stand-alone balance sheet Fagron NV
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Non-current assets | ||
| Formation expenses | 0 | 0 |
| Intangible fixed assets | 0 | 4 |
| Property, plant and equipment | 0 | 0 |
| Financial fixed assets | 498,072 | 498,072 |
| Current assets | 225,765 | 225,129 |
| Debtors due after one year | 0 | 0 |
| Inventories and orders in progress | 0 | 0 |
| Debtors due within one year | 203,230 | 194,16 1 |
| Investments | 2,003 | 1,480 |
| Cash and cash equivalents | 19,295 | 28,264 |
| Accrued expenses | 1,237 | 1,224 |
| Total assets | 723,837 | 723,205 |
| Equity | 534,748 | 503,178 |
| Capital | 496,497 | 494,192 |
| Share premiums | 168 | 0 |
| Legal reserves | 2,867 | 1,124 |
| Unavailable reserves | 2,003 | 1,480 |
| Available reserves | 33,213 1 | 6,382 |
| Retained earnings | 0 | 0 |
| Provisions and deferred tax | 0 | 5 |
| Provision for other risks | 0 | 5 |
| Liabilities | 189,089 | 220,022 |
| Creditors due after one year | 53,409 | 52,402 |
| Creditors due within one year | 134,921 1 | 166,365 |
| Accrued expenses | 759 | 1,255 |
| Total liabilities | 723,837 | 723,205 |
1 Change as a result of the reduction of the dividend from 0.15 euro per share to 0.08 euro per share as explained on page 35.
Appropriation of results Fagron NV
| (x 1,000 euros) | 2019 | 2018 |
|---|---|---|
| Profit to be appropriated | 34,872 | 15,118 |
| Profit for the year to be appropriated | 34,872 | 15,118 |
| Profit carried forward from the previous year | 0 | 0 |
| Transfers from capital and reserves | 0 | 0 |
| From the capital and share premiums | 0 | 0 |
| From the reserves | 0 | 0 |
| Addition to capital and reserves | 29,098 | 6,497 |
| To the legal reserves | 1,744 | 756 |
| To the other reserves | 27,354 1 | 5,741 |
| Profit to be carried forward | 0 | 0 |
| Profit to be carried forward | 0 | 0 |
| Profit to be distributed as dividends | 5,774 | 8,621 |
| Dividend | 5,774 1 | 8,621 |
1 Change as a result of the reduction of the dividend from 0.15 euro per share to 0.08 euro per share as explained on page 35.
Accounting policies
The accounting policies used for the stand-alone statutory financial statements of Fagron NV are in accordance with the KB of 31.01.2001 implementing the Belgian Company Code.
Statutory financial statements of Fagron NV
As required under Article 3.17 of the Belgian Company Code, this annual report is a condensed version of the statutory financial statements of Fagron NV. The annual report and the Statutory Auditor's report will be filed and will be available for inspection at the company's registered office.
The Statutory Auditor has expressed its unqualified opinion on the Fagron NV statutory financial statements for the 2019 financial year.
Alternative performance indicators
In addition to the terms as defined in IFRS, this interim financial information also includes other terms. These "alternative performance indicators" are set out below:
| (x 1,000 euros) | Note | 2019 | 2018 |
|---|---|---|---|
| Operating profit (EBIT) | 84,388 | 73,472 | |
| Depreciation and amortisation | 29,319 | 19,575 | |
| EBITDA | 113,706 | 93,047 | |
| EBITDA | 113,706 | 93,047 | |
| Non-recurrent result | 3,294 | 6,012 | |
| REBITDA | 117,001 | 99,059 | |
| Net financial debt | |||
| Non-current financial debt | 322,619 | 265,883 | |
| Non-current lease liabilities | 28,189 | 35 | |
| Current financial debt | 34,119 | 63,889 | |
| Current lease liabilities | 6,604 | 66 | |
| Cash and cash equivalents | 106,684 | 77,579 | |
| Net financial debt | 284,847 | 252,294 |
The non-recurrent result mainly relates to the settlement reached in 2019 with the former owner of AnazaoHealth in the United States, redundancy costs and acquisition costs.
Alphabetical terminology list
In addition to the terms as defined in IFRS, this annual report also includes other terms. These "alternative performance indicators" are defined below. The IFRS terminology is in italics.
| Operating profit | Result of operating activities, EBIT ('Earnings Before Interests and Taxes') |
| Gross margin | Turnover less acquired trade goods, raw and auxiliary materials and adjusted for changes in inventories and work in progress as a percentage of turnover |
| EBIT | 'Earnings Before Interests and Taxes', Profit (loss) from operating activities |
| EBITDA | 'Earnings Before Interests, Taxes, Depreciations and Amortisations', Profit (loss) from operating activities plus depreciations and amortisations, including writedowns on inventories and receivables |
| Financial result | Net financing costs, balance of financing income and financing costs |
| Net operational capex | Net capital expenditures, intangible assets and property, plant and equipment (excluding acquisitions) that have been acquired and manufactured, less sold assets |
| Net financial debt | Non-current and current financial liabilities, less cash and cash equivalents (excluding financial instruments) |
| Non-recurring items | One-off revenue and expenses not related to ordinary operations |
| Net result | Profit (loss) for the reporting period, consolidated result |
| Operational working capital | Inventories + Trade receivables - Trade payables |
| REBITDA | 'Recurring Earnings Before Interests, Taxes, Depreciations and Amortisations', Profit (loss) from operating activities plus depreciations and amortisations and adjusted for all non-recurring items |
| Recurrent net profit | Profit (loss) for the reporting period, adjusted for non-recurring items |
Forward-looking statements caution
This annual report may contain forward-looking statements. Forward-looking statements are statements that are not historical facts, containing information such as, but not limited to, communications expressing or implying beliefs, expectations, intentions, forecasts, estimates or predictions (and the assumptions on which they are based) on the part of Fagron. Forward-looking statements by definition involve risks and uncertainties. The actual future results or circumstances may therefore differ materially from those expressed or implied in forward-looking statements. Such a difference may be caused by a range of factors (such as, but not limited to, evolving statutory and regulatory frameworks within which Fagron operates, claims in the areas of product liability, currency risk, etcetera).
Any forward-looking statements contained in this annual report are based on information available to the management of Fagron at date of publication. Fagron cannot accept any obligation to publish a formal notice each time changes in said information occur or if other changes or developments occur in relation to forward-looking statements contained in this annual report.
In the event of differences between the English translation and the Dutch original of this annual report, the latter prevails.