Vesuvius plc Prospectus

4.3 Liquidity risk
Liquidity risk is the risk that Vesuvius might have difficulties in meeting its financial obligations.
Vesuvius manages this risk by ensuring that it maintains sufficient levels of committed borrowing
facilities and cash and cash equivalents to ensure that it can meet its operational cash flow
requirements and any maturing financial liabilities, while at all times operating within its financial
covenants. The level of operational headroom provided by Vesuvius’ committed borrowing facilities
is reviewed at least annually as part of Vesuvius’ three-year planning process. Where this process
indicates a need for additional finance, this is normally addressed 12 to 18 months in advance by
means of either additional committed bank facilities or raising finance in the capital markets.
As at 30 June 2012, Vesuvius had committed borrowing facilities of £759.2 million (HY 2011:
£873.9 million; FY 2011: £883.7 million; FY 2010: £855.4 million, FY 2009: £876.2 million), of
which £184.7 million (HY 2011: £339.4 million; FY 2011: £339.5 million; FY 2010: £350.0 million,
FY 2009: £350.0 million) were undrawn. Vesuvius’ borrowing requirements as at 30 June 2012 were
met by $250 million of issued US Private Placement loan notes and a multi-currency committed
syndicated bank facility of £600 million (HY 2011: £600 million; FY 2011: £600 million; FY 2010:
£573.2 million, FY 2009: £674.9 million). The US Private Placement loan notes are repayable $110
million in 2017 and $140 million in 2020. The syndicated bank facility comprises a £600 million
revolving credit facility which expires in April 2016. An amendment has been agreed to the
syndicated bank facility whereby, upon the Demerger, Vesuvius will retain the facility, but it will
reduce from £600 million to £425 million.
5 Off-balance sheet arrangements
In compliance with current reporting requirements, certain arrangements entered into by Vesuvius in its
normal course of business are not reported in Vesuvius’ balance sheet. Of such arrangements, those
considered material by the Directors include: inventory held either under precious metal consignment
arrangements or on behalf of customers for processing (note 20 to Vesuvius’ consolidated financial
statements in section B of Part IX of this document); future lease payments in relation to assets used by
Vesuvius under non-cancellable operating leases (note 28); and trade receivable balances that have been
subject to non-recourse factoring arrangements.
Under its non-recourse factoring arrangements, Vesuvius sells trade receivables balances to a third-party
factoring company in exchange for a cash payment from the factoring company, net of fees. All the risks
and rewards of the trade receivables subject to these arrangements are transferred to the factoring company
and, accordingly, the trade receivables are derecognised in the Vesuvius’ balance sheet. Such arrangements
are used from time to time by Vesuvius to manage the recovery of cash from its trade receivables. As at
30 June 2012, the balance sheet included £28.3 million (HY 2011: £27.6 million; FY 2011: £28.5 million;
FY 2010: £25.5 million; FY 2009: £22.1 million) of cash that would otherwise have been reported as trade
receivables if these arrangements were not in place. Factoring fees incurred during the six months ended
30 June 2012, which are written off to the income statement within ordinary finance costs, amounted to
£0.5 million (HY 2011: £0.7 million; FY 2011: £1.4 million; FY 2010: £1.2 million; FY 2009: £1.1
million).
6 Critical judgements in applying accounting policies and key sources of estimation uncertainty
Determining the carrying amount of some assets and liabilities requires estimation of the effect of
uncertain future events. The major sources of estimation uncertainty that have a significant risk of resulting
in a material adjustment to the carrying amounts of assets or liabilities are noted below.
6.1 Goodwill and other intangible assets
The Directors use their judgement to determine the extent to which goodwill and other capitalised
intangible assets have a value that will benefit the performance of Vesuvius over future periods. To
assist in making this judgement, the Directors undertake an assessment, at least annually, of the
carrying value of Vesuvius’ capitalised goodwill and other intangible assets. In the assessment
undertaken as at 31 December 2011, further details of which are given in note 18 to Vesuvius’
consolidated financial statements in section B of Part IX of this document, value in use was derived
from discounted five-year cash flow projections, using a growth rate of 2.5 per cent. in the years
beyond the projection period and pre-tax discount rates. The projection period is, in the opinion of
the Directors, an appropriate period over which to view the future results of Vesuvius’ businesses for
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