Annual Report 2010 - Frauenthal Holding AG

In 2010 the impairment review resulted in the recognition
of EUR 1.5m in income from revaluation gains.
FinanCial riSk
The Group’s operations give rise to financial risks (including
currency, liquidity and interest rate risks) which could have
a significant impact on its assets, finances and earnings.
In order to ensure that our liquidity needs are met we
maintain adequate overdraft facilities, mainly with Austrian
banks. Additional credit facilities were arranged in 2010. In
all, nine banks have granted credit lines totalling EUR 192m
to Frauenthal Holding AG and its subsidiaries. At year end
2010 the Group had EUR 94m in open credit lines.
The liquidity requirements implied by projected business performance
can be met from cash flows, existing overdraft
facilities and other potential sources of finance. The Group’s
liquidity needs are managed by the treasury function at the
holding company, and are closely monitored.
The main currency risks attach to the Industrial Honeycombs
Division, which does a large amount of its business in the US
dollar area. Only a relatively minor part of this risk is internally
hedged by the procurement of raw and intermediate
materials priced in dollars. Currency hedges are used for
some medium and long-term contracts, on a case by case
basis. Because of this our US dollar business is not exposed
to any material currency risks. Financial derivatives are only
employed to hedge existing contracts, and their use is subject
to appropriate internal rules and controls.
The influence of volatile currencies (the Romanian leu and
the Polish zloty) on costs is limited due to the invoicing of
the main inputs in euro. We therefore refrain from hedging
these currency risks, but they are kept under constant
observation, and could be hedged if necessary.
The interest rate risk to which our current capital structure
exposes us is minimised by the fact that the EUR 70m bond
issue floated in June 2005 meets most of the Group’s financing
needs. The bond has a fixed rate of interest of 37/8 % and
a maturity of seven years. There will be significant refinancing
requirements when it matures in June 2012.
Operating Review
Preparations to refinance this debt by a possible new issue are
under way, and we are watching the capital market closely.
Most of the rest of the Group’s borrowing is at variable
rates of interest. Of this EUR 12.4m is assured by long-term
and EUR 14m by short-term loan agreements. Our treasury
function keeps a close watch on interest rate trends and
the related risk. If necessary, interest rate hedges can be
employed. The Executive Board reports to the Supervisory
Board on the opportunities for interest rate hedging on a
quarterly basis.
In the period after the bond falls due interest rate movements
could influence the Group’s assets, finances and earnings.
A rapid rise in money market rates would have a significant
impact on earnings.
Additional information on the analysis of the sensitivity of
earnings to currency and interest rate changes is contained
in the notes, under “Financial instruments”.
taX riSkS
At the time of reporting a tax inspection was in progress
at a Group company, Linnemann-Schnetzer Deutschland
GmbH, located in Elterlein, Germany. This company is entitled
to considerable tax loss carryforwards which resulted
in a reduction of EUR 6m in its tax burden for the period
covered by the inspection. In addition, deferred tax assets
of about EUR 8.5m are carried in the consolidated
statement of financial position as a result of recognition of
part of these carryforwards. In their preliminary findings,
the inspectors take the view that the carryforwards cannot
be claimed. The Executive Board takes the view that the
arguments advanced for this unsound. This assessment is
supported by thorough analyses by acknowledged experts.
Since the initial inspection was still under way, no appeal
had yet been lodged, and there no final assessment notice
had been received at the time of reporting, it was not possible
to provide for this impending risk. In the opinion of
the Executive Board the probability of these carryforwards’
being rejected at appeal is considerably less than 50 %.
However, in the event that the tax authorities’ arguments
were upheld this could result in protracted court appeal
proceedings.
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