Fluctuations in the price of currencies and interest rates can result in significant profit and cash flow risks for Merck. Therefore, Merck centralizes these risks as far as possible and steers them in a forward-looking manner, also by using derivative financial instruments. More information on the management of financial risks is provided in the Risk Report, which can be found in the Management Report.
Foreign currency risks
Transaction risks: Owing to its international business focus, Merck is subject to currency risks within the scope of both ordinary business and financing activities. Different strategies are used to limit or exclude these risks.
In principle, currency risks from financing activities are eliminated as far as possible through the use of forward exchange contracts. Currency risks arising from operating business are analyzed regularly and reduced if necessary through forward exchange contracts or currency options using hedge accounting.
The following table presents the net currency risk from expected and recognized transactions in 2011 in the key currencies:
| XLS |
|
EUR million as of Dec. 31, 2010 |
CHF |
GBP |
JPY |
TWD |
USD |
|
Foreign exchange risk from balance sheet items |
–80.9 |
74.9 |
206.6 |
70.4 |
2,804.9 |
|
Foreign exchange risk from contingent business and anticipated transactions in 2011 |
–467.9 |
114.2 |
291.3 |
421.5 |
1,147.1 |
|
Transaction-related foreign exchange position |
–548.8 |
189.1 |
497.9 |
491.9 |
3,952.0 |
|
Position hedged by derivates |
130.0 |
–75.0 |
–386.5 |
–346.6 |
–3,294.2 |
|
Open-end foreign exchange risk position |
–418.8 |
114.1 |
111.4 |
145.3 |
657.8 |
|
Change in foreign exchange position due to a 10% appreciation of the euro |
41.9 |
–11.4 |
–11.1 |
–14.5 |
–65.8 |
|
included in profit/loss |
–4.9 |
– |
3.5 |
4.5 |
8.4 |
|
recognized in equity |
– |
– |
14.5 |
23.1 |
40.5 |
Furthermore, derivatives exist to hedge expected cash flows beyond the year 2011. These would lead to a change in equity amounting to EUR 20.0 million in Japanese yen. Due to the hedging of expected cash flows beyond the year 2010, this would have caused in 2009 a change in equity of EUR 11.5 million in the Japanese yen, EUR 4.1 million in the Taiwanese dollar, and EUR 18.5 million in U.S. dollars. The following table presents the corresponding net currency risk from expected and recognized transactions for 2010:
| XLS |
|
EUR million as of Dec. 31, 2009 |
CHF |
GBP |
JPY |
TWD |
USD |
|
Foreign exchange risk from balance sheet items |
–167.8 |
154.7 |
156.9 |
57.9 |
–345.9 |
|
Foreign exchange risk from contingent business and anticipated transactions in 2010 |
–281.3 |
78.2 |
158.0 |
290.1 |
672.9 |
|
Transaction-related foreign exchange position |
–449.1 |
232.9 |
314.9 |
348.0 |
327.0 |
|
Position hedged by derivatives |
176.0 |
–172.1 |
–262.4 |
–136.1 |
–7.5 |
|
Open-end foreign exchange risk position |
–273.1 |
60.8 |
52.5 |
211.9 |
319.5 |
|
Change in foreign exchange position due to a 10% appreciation of the euro |
27.3 |
–6.1 |
–5.2 |
–21.2 |
–31.9 |
|
included in profit/loss |
–0.8 |
–0.3 |
–0.9 |
2.4 |
12.6 |
|
recognized in equity |
– |
2.0 |
11.4 |
5.4 |
22.8 |
Translation risks: Many Merck companies are located outside the euro zone. The financial statements of these companies are translated into euros. Exchange differences in the assets of these companies resulting from currency fluctuations are recognized in equity.
Interest rate risks
Interest rate risks relate mainly to financial liabilities of EUR 5,483.5 million (2009: EUR 2,307.3 million) and monetary deposits of EUR 1,346.5 million (2009: EUR 2,372.6 million). If necessary, derivative financial instruments are used to change fixed interest payments into variable interest payments. The aim is to optimize the interest result and to minimize interest rate risks. Relative to net interest liabilities on the balance sheet date, a parallel shift in interest rates by +100 basis points would affect profits by EUR 6.3 million (2009: EUR 10.3 million). This corresponds to an increase in interest income of EUR 9.1 million (2009: EUR 17.3 million) on financial assets and additional interest expense of EUR 2.8 million (2009: EUR 7.0 million) on financial liabilities. The resulting change in the market value of assets recognized at fair value would lower equity by EUR 6.8 million (2009: EUR 5.1 million).
Share price risks
The share portfolio of publicly listed companies amounting to EUR 60.0 million is generally exposed to a market value risk. A 10% change in the value of the stock market would impact equity by EUR 6.0 million. These changes in value are recognized in income at the time of disposal.
Liquidity risks
The liquidity risk, meaning the risk that Merck cannot meet its financial obligations, is limited by effective cash management and by establishing the required financial flexibility. Apart from liquid assets of EUR 999.3 million (2009: EUR 2,044.6 million), Merck has at its disposal a multi-currency revolving credit line of EUR 2 billion to be used for business purposes with a remaining term of four years as well as bilateral credit facilities of EUR 324.8 million (2009: EUR 233.1 million). There are no indications that the availability of credit lines already extended will be restricted.
Moreover, a commercial paper program with a volume of EUR 2 billion exists and a debt issuance program set up in 2009 with a volume of EUR 10 billion. Liquidity risks are regularly monitored and reported to the management. Our loan agreements do not contain any financial covenants.
Trade payables amounting to EUR 1,200.1 million (2009: EUR 935.7 million) as well as operating liabilities from derivatives amounting to EUR 37.9 million (2009: EUR 1.4 million) have a remaining term of less than one year. Out of other financial liabilities amounting to EUR 486.3 million (2009: EUR 302.5 million), EUR 481.7 million (2009: EUR 300.1 million) are due within one year.
The following tables present the contractually set payments such as repayments and interest on financial liabilities and derivative financial instruments with a negative market value:
| XLS |
|
|
Book value |
Cash flows |
Cash flows |
Cash flows | |||
|
EUR million as of Dec. 31, 2010 |
Interest |
Repayment |
Interest |
Repayment |
Interest |
Repayment | |
|
Debt securities and commercial paper |
4,983.6 |
190.4 |
35.3 |
643.3 |
3,509.5 |
213.8 |
1,419.3 |
|
Bank loans and overdrafts |
115.7 |
1.7 |
81.2 |
3.1 |
29.9 |
0.1 |
4.6 |
|
Liabilities to related parties |
190.3 |
– |
190.3 |
– |
– |
– |
– |
|
Loans from third parties and other financial liabilities |
78.1 |
4.5 |
11.0 |
8.0 |
58.7 |
– |
8.5 |
|
Liabilities from derivatives (financial transactions) |
108.7 |
– |
28.7 |
– |
80.0 |
– |
– |
|
Financial leasing liabilities |
7.1 |
0.1 |
0.7 |
0.2 |
4.1 |
– |
2.3 |
|
|
5,483.5 |
196.7 |
347.2 |
654.6 |
3,682.2 |
213.9 |
1,434.7 |
|
|
|
|
|
|
|
|
|
|
|
Book value |
Cash flows |
Cash flows |
Cash flows | |||
|
EUR million as of Dec. 31, 2010 |
Interest |
Repayment |
Interest |
Repayment |
Interest |
Repayment | |
|
Debt securities and commercial paper |
1,990.3 |
83.6 |
500.0 |
170.9 |
1,350.0 |
14.1 |
130.0 |
|
Bank loans and overdrafts |
87.4 |
1.6 |
63.8 |
3.5 |
14.8 |
0.4 |
5.2 |
|
Liabilities to related parties |
118.8 |
– |
118.8 |
– |
– |
– |
– |
|
Loans from third parties and other financial liabilities |
82.9 |
4.2 |
11.9 |
8.4 |
61.2 |
0.1 |
9.7 |
|
Liabilities from derivatives (financial transactions) |
17.5 |
2.1 |
16.0 |
10.6 |
1.2 |
– |
– |
|
Financial leasing liabilities |
10.4 |
0.7 |
5.9 |
0.3 |
4.5 |
– |
– |
|
|
2,307.3 |
92.2 |
716.4 |
193.7 |
1,431.7 |
14.6 |
144.9 |
Credit risks
Merck is only subject to a very low credit risk, meaning the unexpected loss of payment funds or income. Financial contracts are only entered into with banks with good ratings and the broad-based business structure of the Merck Group means that there is no particular concentration of credit risks. The credit risk with customers is continuously monitored by analyzing the age structure of trade accounts receivable. The theoretically maximum default risk corresponds to the book values.