Merck uses derivative financial instruments to minimize currency risks and financing costs caused by exchange rate or interest rate fluctuations. Finance transactions in foreign currencies are generally hedged. In certain cases, the company also hedges anticipated sales and future costs for a period of up to three years. More details are available in the consolidated financial statements.
Material financial transactions involving credit risk are only entered into with banks that have a good credit rating and a minimum rating of A- from Standard & Poor’s. The rating of the commercial banks is constantly observed in order to quickly respond to deterioration. We have access to a € 2 billion syndicated multicurrency credit facility with 17 banks, which expires in 2014. The banks all have good credit ratings; however, a default risk of individual banks cannot be excluded. We have not arranged any financial covenants in our loan contracts, so the loans would still be available even if Merck’s credit rating were to deteriorate. Our long-term liquidity is ensured by our positive operating cash flow, centralized liquidity management within the Group and the available credit facility. In addition, Merck set up a debt issuance program in 2009 with a volume of € 5 billion. It forms the contractual basis for the issue of bonds. Due to its broad customer base, Merck is only exposed to a comparably low credit risk in its sales markets.
The carrying values of individual items in the balance sheet are exposed to the risk of changing market and business circumstances and thus also to changes in fair values. The need for write-downs could significantly impact profit and lead to changes in balance sheet ratios. This applies in particular to the high level of intangible assets including goodwill, which have taken on increasing significance in the consolidated financial statements due to the acquisition of Serono in 2007 and the related purchase price allocation. For more information, see Note [21] Intangible assets.
Merck has obligations in connection with pension plans. The majority of these obligations is covered by the provisions disclosed in the balance sheet, while the smaller remainder is externally funded or covered by long-term monetary investments for this purpose and disclosed in the balance sheet. The latter, which began in 2009, amounted to € 210 million. The obligations are regularly evaluated by preparing annual actuarial valuations. Changes in the valuation parameters, for example in the interest rate, salary increase rate or death probabilities, can influence the value of pension obligations. As far as pension obligations are covered by plan assets consisting of interest-bearing securities, shares, real estate and other financial assets, decreasing or negative returns on these assets can adversely impact the value of the plan assets and thus result in further funding requirements.
back
