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BAKKAVOR ANNUAL REPORT AND ACCOUNTS 2012 notes to the consolidated financial statements continued 3 CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY CONTINUED Going concern The Directors, in their detailed consideration of going concern, have reviewed the Group’s future cash forecasts and revenue projections, which they believe are based on prudent market data and past experience, and believe, based on those forecasts and projections, that it is appropriate to prepare the financial statements of the Company and the Group on a going concern basis. In arriving at this conclusion the Directors considered the Group’s financing arrangements, which comprise £350 million of seven-year listed bonds issued in February 2011 and £350 million of bank facilities committed to June 2014. The Company is in advanced discussions with its lenders regarding the refinancing of these bank facilities. Both the Company and its lenders are committed to the refinancing of both the Term loan and Revolving Credit Facility and the Board is confident of announcing new financing arrangements in the near future. Importantly, the Group’s liquidity remains particularly strong with £83.8 million of facilities undrawn as at 29 December 2012. The existing bank facilities are subject to a series of covenants set by the lenders. Financial covenants are measured quarterly and include an assessment of leverage (the ratio of net debt to EBITDA, being earnings before interest, tax, depreciation and amortisation); cash flow cover (the ratio of finance charges to cash generated from operations); interest cover (the ratio of finance charges to EBITDA) and capital expenditure limits. The key financial covenant is leverage; this was re-set earlier in the year following the successful restructuring of the Company’s parent. Under the revised covenant, leverage must be less than 5.75 times at the 2012 financial year-end and less than 5.0 times at the 2013 financial year-end. At 29 December 2012 the leverage ratio of net debt to EBITDA was 4.9 times. At the date of this report the Group has complied in all respects with the terms of its borrowing agreements, including its financial covenants and forecasts to continue to do so. The Group believes it is adequately placed to manage covenant compliance successfully despite the challenging macroeconomic environment. In the event that conditions worsen, the Group has the flexibility to react by accessing additional working capital arrangements that we have already agreed with key stakeholders. Further actions available to management may include a reduction to our capital expenditure programme and supply chain improvements. Consequently the Directors have a reasonable expectation that the Company and the Group have adequate resources to comply with these covenants and meet their liabilities as they fall due for a period of at least 12 months from the date of approval of the financial statements. For this reason they continue to adopt the going concern basis in preparing the financial statements. Impairment of goodwill and other intangible assets The recoverable amount of CGUs are determined based on the higher of net realisable value and value-in use calculations. These calculations require the use of estimates. The Group has considered the impact of the assumptions used on the calculations and has conducted sensitivity analysis on the impairment tests of the CGUs carrying values. See notes 15 and 16 for further details. Fair value of derivatives and other financial instruments Derivative financial instruments and certain other financial assets are recorded at fair value in the statement of financial position. The fair value of the financial instruments that do not have quoted market prices requires significant judgement and estimates. The Directors use their judgement in selecting an appropriate valuation technique for these financial instruments. Valuation techniques commonly used by market practitioners are applied. For derivative financial instruments, assumptions are made based on quoted market rates adjusted for specific features of the instrument. Other financial instruments are valued using a discounted cash flow analysis based on assumptions supported, where possible, by observable market prices or rates. The estimation of fair value of unlisted shares includes some assumptions not supported by observable market prices or rates. These assumptions are based on past and expected future performance. Details of the assumptions used and of the results of sensitivity analyses regarding these assumptions are disclosed in note 29. Pensions The Group maintains a number of defined benefit pension plans for which it has recorded a pension asset or liability. The pension asset/liability is based on an actuarial valuation that requires a number of assumptions including discount rate, mortality rates and actual return on plan assets that may necessitate material adjustments to this asset/liability in the future. The assumptions used by the Group are the best estimates based on historical trends and the composition of the work force. Details of the principal actuarial assumptions used in calculating the recognised asset/liability for the defined benefit plan are given in note 36. Recognition of deferred tax assets and current tax provision The recognition of deferred tax assets is based upon whether it is probable that sufficient and suitable taxable profits will be available in the future against which the reversal of temporary differences can be deducted. Where the temporary differences related to losses, the availability of the losses to offset against forecast taxable profits is also considered. Recognition therefore involves judgement regarding the future financial performance of the particular legal entity or tax group in which the deferred tax asset has been recognised. The Group had unrecognised deferred tax assets as a result of unused tax losses of £40.5 million (2011: £17.9 million), available for offset against future profits. Deferred tax assets are not recognised on the losses carried forward to the extent that it is not probable that the losses will be utilised. The Group operates in various countries and its income tax returns are subject to audit and adjustment by local tax authorities. The nature of the Group’s tax exposures is often complex and subject to change and the amounts at issue can be substantial. The Group develops an estimate of the potential tax liability based on the tax positions taken, historical experience and its internal tax expertise. These estimates are refined as additional information becomes known. Any outcome upon settlement that differs from a recorded provision may result in a materially higher or lower tax expense in future periods. PAGE 67 VIEW THE FULL REPORT AT ANNUALREPORT12.BAKKAVOR.COM
BAKKAVOR ANNUAL REPORT AND ACCOUNTS 2012 notes to the consolidated financial statements continued 4 SEGMENT INFORMATION The chief operating decision-maker has been defined as the Management Board headed by the Chief Executive Officer. They review the Group’s internal reporting in order to assess performance and allocate resources. Management has determined the segments based on these reports. As at the statement of financial position date, the Group is organised as follows: • UK: • International: The preparation and marketing of fresh prepared foods and fresh produce for distribution in the UK. The preparation and marketing of fresh prepared foods and fresh produce outside of the UK. During 2012, management reviewed its current reporting segments and has met the disclosure requirements for combining all of the non-UK segments into one category, which is represented by the International segment. The UK Prepared and UK Produce segments have also been combined into one reporting segment. This results in UK and International being presented as the Group’s two segments. The Group’s segment measure of profit represents operating profit before exceptional items, disposals of subsidiaries, associates and property, plant and equipment, impairment of assets, management charges and share of results of associates. Measures of total assets are provided to the Management Board; however, cash and cash equivalents, short term deposits and some other central assets are not allocated to individual segments. Measures of segment liabilities are not provided to the Management Board. The following table provides an analysis of the Group’s segment information for the period to 29 December 2012: £m UK International Un-allocated Group total Discontinued Continuing operations operations total Revenue 1,407.0 287.2 – 1,694.2 105.6 1,588.6 Segment profit 63.1 0.7 – 63.8 1.1 62.7 Exceptional items (2.9) (0.7) – (3.6) 0.8 (4.4) Impairment of assets (1.0) – – (1.0) – (1.0) Bakkavor Group ehf management charge (0.5) – (0.5) Profit on disposal of subsidiary 0.4 – 0.4 Loss on disposal of property, plant and equipment (1.3) – (1.3) Share of results of associates 0.9 – 0.9 Operating profit 58.7 1.9 56.8 Investment revenue 0.1 – 0.1 Finance costs (61.5) (0.3) (61.2) Other gains (net) 8.4 – 8.4 Profit before tax 5.7 1.6 4.1 Tax (3.6) (0.8) (2.8) Profit for the period 2.1 0.8 1.3 Other segment information: Depreciation and amortisation (41.1) (10.2) – (51.3) (3.1) (48.2) Adjusted EBITDA 104.2 10.9 – 115.1 4.2 110.9 Capital additions 22.6 9.2 – 31.8 1.2 30.6 Total assets 1,077.9 178.4 41.3 1,297.6 35.2 1,262.4 Discontinued operations relate to the Group’s International segment. The Group manages the performance of its businesses through the use of ‘Adjusted EBITDA’. EBITDA is generally defined as operating profit/ (loss) before share of results of associates, depreciation and amortisation. In calculating Adjusted EBITDA, we further exclude restructuring costs, asset impairments and those additional charges or credits that are one-off in nature and significance. PAGE 68 VIEW THE FULL REPORT AT ANNUALREPORT12.BAKKAVOR.COM
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