Treasury Profile of Glaxo Smith Kline - Essay Example

Treasury profile of Glaxo Smith Kline I have gone through this report and I need you to include the policies, objectives and control for each Treasury functions and also note that the word count starts from Introduction and ends at conclusion/recommendation which i have counted and its 1,621 words. Executive Summary Glaxo Smith Kline is a pharmaceutical and consumer health care company. Its consumer product of Horlicks is well known. Other products in pharmaceuticals range are popular in the trade circles. It has operations in over 120 countries and its products are sold in over 150 countries. The treasury profile shown in the appendix at the end of this paper gives a bird’s eye-view of the company’s treasury management framework and is considered the best suited to the present day environment the company is operating under. The major five functions reviewed in the main text shows that the company is managed conservatively and that it is not engaged in speculative activities. Table of Contents 1. Introduction Treasury function in an organisation is essential in order to maintain liquidity in funds flow. Liquidity will be affected due to various risks involved. The management must foresee unavoidable risks involved and provide for such risks by structuring the fixed capital and working capital suitably. (ACT) 2. Aim and Objectives Company Glaxo Smith Kline PLC, UK‘s case is taken up for study of its treasury management. A brief outline of the company’s treasury profile is furnished in appendix at the end of this paper. Aim and objective of this study therefore is to ascertain the risks faced by this company and how it has designed its capital structure to manage its treasury functions in order maintain its liquidity and whether the current practice of treasury management is adequate or not. 3. Treasury functions Treasury functions encompass capital markets and funding, cash and liquidity management, corporate financial management, Risk management and treasury operations and control. (ACT) The role of the treasury department is to maintain company’s liquidity. The treasurer has to monitor current and projected cash flows and make use of the information to suitably invest excess funds and also be in readiness for additional borrowings or equity in case of capital shortage that may be encountered any time. It should safeguard the existing assets by prudent investment of funds available and also guard against excessive losses arising out of interest rate and foreign exchange fluctuations. Cash forecasting, working capital management, cash management, investment management, treasury risk management, management advice, credit rating agency relationship, bank relationship, fund raising and other activities such as timely mergers and acquisitions are the main functions involved in a treasury management. Treasury control is another function in order to prevent mismanagement or abuse of the treasury. (Bragg, 2010, p 5-6) 4. Task Analysis Within the context of the above said functions, Glaxo smith Kline’s annual report for the last year ended December 2009 and it financial results for the previous years are referred for identification of how well its treasury functions are organised or rather implemented for achieving the company’s liquidity and controlled. Any set back in liquidity position of the company at any point should be directly attributable to failure on the part of the treasury management in meeting or maintaining cash flows or liquidity of the company. 5. Cash forecasting and cash management Company’s policy for cash management is to keep cash on hand including bank balance and highly liquid investments at a minimum but at the same time it should be sufficient to meet day to day needs without default. Objective of cash management is to save on interest by settling commitments at discount wherever possible and also to earn as much interest as possible by investing excess funds in the long term investments by judicious apportioning of cash from time to time. Control of this cash management is by creating bench marks on the level of balances that should be monitored on monthly basis. Review A review of cash flow statement for the period from 2004 to 2008 shows that the company has positive cash inflow from operating activities amounting to £ m 4,944, 5,958, 4,357,6,161 and 7,205 for the years from 2004 to 2008 respectively. Net income which was £ m 5.756 in 2004 has fluctuated to £ m 4,816, 5498. 5310 and 4721 in subsequent years. Changes in the working capital have been consistently negative at £ m 2,039, 2019, 4, 589, 2,765 and 1,373 for the years 2004,2005,2006,2007 and 2008 respectively. Negative changes in the working capital indicate insufficiency of current assets to pay current liabilities during the respective periods. Except for the year 2006 when there was a negative net change in cash of. £ m 2,218, the rest of the periods shows positive change as £ m 524, 1,617, 1,459 and 2,251 for the years 2004, 2005, 2007 and 2008 respectively. For the year 2008, the company has been benefited by positive foreign exchange effects at £ m 1,103. Overall, for the cash management for the period mentioned, the company has used long term funds of profits earned to meet its short fall in the working capital. (MSM.money) Its net cash inflow from operating activities for the year 2009 has increased to £ m 7,841 from £ m 7,205 in 2008. Its bank overdraft has increased from £ m 5,472 in 2008 to £ m 6,368 in 2009. There was a net cash outflow of £ m 4.013 primarily due to business purchases during the year 2009. Major purchase was Stiefel laboratories, Inc for £ m 1,993. Free cash flow of £ m 4,679 in 2008 and £ m 5,254 in 2009 represents amount after meeting the obligations towards interest, tax, dividends to minority, and capital expenditure on non-current tangible and intangible assets. The free cash flow of £ m 5,254 for the year 2009 is represented by an increase of 12 % over the previous year. The company uses free cash flow for planning and reporting purposes though it is not an IFRS requirement. (Annual Report, 2009, p37) 6 Working capital management Policy in this regard is to keep sufficient inventory of raw materials and finished goods at the optimal levels and also to have trade receivables within the limits of time frame agreed to with the customers. Payment to suppliers should be timely as agreed. Objective of this policy is to keep interest and carrying costs on inventory and receivable at a minimum. At the same time, payment to suppliers in time and to avail maximum discount possible so that production cost is minimised to the extent possible. Control of working capital management is by fixing raw material ordering levels, inventories stocking levels which should be reviewed from time to time. As the finished goods have limited shelf life, care should be had to ensure that much time is not lost in keeping the stocks in the warehouses and in transit. Review The group companies have their own responsibility for monitoring and managing their working capital. The company’s U.K. operations including its subsidiaries have the policy of paying their suppliers on time. As at the end of 2009, number of days for the parent company’s trade payable was nil just as in 2008. However, its U.K. subsidiaries’ payables represented 44 days for 2009 and 20days for 2008. Inventory has increased by £ m 8 in the year 2009 mainly as a result of stock builds for H1N! 1vaccine and another item Synflorix and due to acquisition of Stiefel laboratories. The company implemented a working capital reduction programme and was benefited by overseas currencies but the reduction was offset by stock builds to respond to the growth of emerging markets and market in Japan. Trade and other receivables have increased from £ m 6,265 in 2008 to £ m 6,492 in 2009. The increase has been due to high vaccine sales in the last quarter along with Stiefel acquisition. (Annual Report, 2009 p 37) Previous four year’s total receivables net are valued at £ m 3.062, 2, 437, 2,177 and 2193. It is not consistent with the growth of sales revenue for the years from 2004 to 2008 shown as £ m 19,986, 21,660, 23,225, 22,716 and 24,353 respectively. (MSM.Money) It is also the policy of the company to show trade receivables at their original invoice value reduced by debts considered doubtful. Provisions are applied depending on the ageing, previous experience and general economic conditions. If a trade debt is not collectable, it is written off adjusting to the provisions already made and if the provisions are insufficient, the shortfall is directly taken to the income statement. If recoveries are made later, they are credited to the income statement. Cash and other equivalent are cash in hand, bank balances, and highly liquid investments with a maturity period of three months or less. Inventories are valued at cost or realisable value which ever is lower. (Annual Report, 2009 p108) 7 Investment management Policy is to make investments on known and related activities so that it will enhance the company’s efficiency. Objective is to earn as much as possible on long term investments which should supplant the company’s activities. Control of this function is by the stand taken by the company that under no circumstances, speculative investments are made. Review The company has held investments worth £ m 1,349 in 2009 and 1,030 in 2008. Going by the market value of these investments at £ m 2,225 and £ m 1,883 respectively, investment policy and function of the company appear to be sound. The investments are mainly in two associates namely Quest Diagnostics Inc and Aspen Pharmacare holdings with a book values of £ 410 million and £ m 372 million as at 31st December 2009. 8 Treasury risk management Policy is to have some cushioning for the anticipated and unanticipated risks on investments made in subsidiaries located overseas and ensure against loss due to fluctuations n foreign exchange rates. Objective is to avoid huge and unbearable losses due to unexpected claims in regard intellectual property violations, price control violations, antitrust violations etc besides the operations overseas as stated above. Control of treasury risk management is by being conservative in investing on derivatives and also by having sufficient reserves and provisions on reasonably expected claims on unintended patent, copy right, anti-trust violations etc. Review Corporate treasury is not treated as a profit centre for the company. The main objective is to manage the post-tax net cost or revenue from financial operations. The risks generally faced by the company have been detailed in the appendix to this paper. The company uses various financial instruments for its operations. To guard against the market risks of these operations, the company uses derivative financial instruments. They are mainly forward foreign exchange contracts, interest rate and current swaps and are used to swap borrowings and liquid assets in the relevant currencies and also to manage funding risk exposure due to changes in foreign exchange and interest rates. The company does not use derivatives for speculative purposes. (Annual Report, 2009 p 42) The annual report says that the company’s board has reviewed through the Audit and Risk Committee the framework for the risk assessment and internal control and found them to be effective. (Annual Report, 2009, P 92) The company provides for possible outflow of resources due to anticipated settlement costs for pending legal and other disputes. (Annual report, 2009, p 105) 9 Foreign exchange management Policy on foreign exchange management is to remain unaffected by fluctuations in foreign exchange rates. Objective is to avoid monetary loss due to fluctuations. Control of foreign exchange is by entering into forward rate contracts in risky areas so that any changes in the future will not affect the company. Review The company employs average of the exchange rates that prevailed during the period in order to convert the results of overseas operations. As part of the foreign exchange risk management, the transactions of internal and external trade flows are not hedged. Subsidiaries’ local operational risks are minimised by matching local currency incomes against local currency costs. However, exceptional foreign currency cash flows are hedged on case to case basis as part of corporate treasury management. Cash surpluses or borrowings of the subsidiary companies are managed through forward contracts so as to enable future repayments in the originating currency. (Annual Report, 2009, p 153) 10 Conclusions and Recommendations Treasury management of the company is the deciding factor in elimination of wasteful expenditures, provision of anticipated and unanticipated risks in operations and to maintain liquidity all the time.. The above review of treasury operations of the Glaxo Smith Kline shows that robust frame work is already in place. The company has undergone major restructuring during the last year and its positive results will be evident in the years to come. Thus, the results of it consolidation now complete will be better than the almost stagnant results of the past five years. As an improvement to the treasury profile, the company may publish its list of customers and suppliers so that more transparency is ensured eliminating possibilities of vested interests in customers and suppliers profile. It is hoped that this is not inconsistent with the policy of trade secrets a business must maintain for its own survival. Secondly, the company must explore the possibilities of outsourcing some of its operations if it would result in saving of costs. 11 References ACT, Introduction to Treasury, available at accessed 27 February 2010 ACT, The Core Elements of Treasury, available at accessed 27 February 2010 Annual Report, 2009, Glaxo Smith Kline PLC, available at accessed 27 February 2009 Bragg Steven M, 2010, Treasury Management: The Practitioner’s guide, John Wiley and Sons. MSM.Money, Cash flow, Glaxosmithkline ADR rep 2 ord shs: Financial Statement, available at < http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=GSK&lstStatement=CashFlow&stmtView=Ann > accessed 27 February 2010. 12. Appendix 1 1. Nature of Business Organisation Multinational Health Sector Group PLC with headquarters in the UK with operations in about 120 countries and products sold in about 150 countries. 2. Risk There is no guarantee that expenditure on R & D will result in commercially viable new products. The group can face patent infringement litigation especially from generic manufacturers. Changes in intellectual property laws in other countries’ markets due to political process can adversely affect the group’s financial results. Legal proceedings and governmental investigations if proven will result in civil and criminal liabilities. Provisions in this regard have significantly reduced the group’s earnings. Insurance costs and denial of insurance coverage by the insurance companies under some pretext or other, will adversely affect the group’s financial results. Product liability litigation due to unanticipated side effects on patients in spite of carefully conducted clinical trials, can result in product liability claims affecting the financial results of the group. Anti-trust litigation is another source of risk resulting from class actions in the group’s second major market of USA from direct, indirect purchasers and others The group has to operate under strict regulatory environment. and any failure to comply with applicable laws may result in civil and liability. As these result keep changing and evolving and governmental interpretations can be potentially different, any unintended non-compliance is unavoidable. The Group operates under heavy competition both in domestic and international markets. The timing of competition from rival products is unpredictable for the group. Hence product innovations, technical advances or intensified price competition can affect the company’s profitability. Pharmaceutical products being subjected to price controls, government interventions in setting the prices in many jurisdictions can erode company’s profitability. Raw materials for company’s products are also under strict compliance regime and hence disruptions in their supplies due to regulatory actions can result in company’s production and consequential fall in sales. The company’s sales confined to limited number of wholesalers in the U.S. with the resultant risk of concentration of huge amount of credit risk in their hands. Many world economies where the groups is having operations, are under extreme financial difficulty and recessionary conditions which will have repercussions in groups’ sales, operational results and ability to raise capital. Due to reduced consumer spending, company’s consumer health care products will show a decline in sales. As the groups has substantial operations outside U.K., fluctuations in foreign exchange rates especially in US Dollar, Euro and Japanese Yen as against the Pound Sterling will adversely affect the group’s financial results. 3. Operations Manufacturing or processing of pharmaceutical and consumer health care formulations, R & D for new products as an ongoing activity, Distribution and delivery of pharmaceutical and health care products, 4 Output Pharmaceuticals of pandemic related products, vaccines, Respiratory medicines, Anti-virals, Central Nervous System Products (CNS), Cardiovascular and Uro-genital products, Metabolic products, Oncology and Emesis products and consumer health care products such as over the counter medicines, oral health care products and nutritional health care products such as Horlicks etc. All in the dosage forms of liquid orals, injectables, tablets, capsules etc. All Perishable; Consumer: public and private 5 Resources Raw materials such as drug intermediates and bulk drugs, commodities, packaging materials, capital equipment such as tableting, filling, capsuling, packing machinery etc, land, property and intangibles such as patents, copy rights and goodwill. 6 Customers and Sales Customer profile includes large wholesalers, government backed agencies, state hospital authorities in certain European countries. Sales Turnover for the 12 months ended 2009 is £ 28,368 m of which consumer health care products’ contribution is £ 4,654 m. 7 Suppliers and Purchases Suppliers are bulk drug producers and distributors, packaging material suppliers and suppliers of machinery and equipments. Cost of sales for the year amounting to £ 7,095 m includes raw materials and packaging materials adjusted by opening and closing inventory. 8 Working Capital Consists of inventories, receivables and cash. At the end of the year, inventories are valued at £ 4,064 m ; Trade and other receivables at £ 6,492 m.and cash and other equivalents at £ 6,545 m thus totalling at £ 17,570 m which includes current recoverable tax at £ 58 m , Derivative financial instruments at £ 129 m and assets held for sale at £ 14 m. Current liabilities at £ 12,118 m include short-term borrowings, trade and other payables, derivative financial instruments, current tax payable and short term provisions valued at £ 1,471 m, 6,772 m, 168 m, 1,451m and 2,256 m respectively. 9 Balance Sheet, Income and Cash flow statements Total Assets are valued at £ 42,862 m comprising total currents at £ 17,570 m and total non-current assets £ 25,292 m. Total Liabilities valued at £ 32,120m comprising of current liabilities £ 12,118 m and non current liabilities at £ 20,002 m.Net assets in excess over liabilities put at £ 10,742 m. Cash flow: net debt increased despite company’s acquisitions worth £ 2.8 billion during the year. Net cash inflow from operations and activities amounted to £ 7,841 m. net cash outflow from investing activities put at £ 4.013 m. net cash outflow from financing activities out at £ 2,774 m. Increase in cash and bank overdrafts at £ 1,054. 10 Interest and Exchange Rate Sensitivity 2 % increase in Sterling interest rates, 2 % increase in US dollar rates and 2 % increase in Euro interest rates resulted in a decrease of £ 2 m in sterling and increase of £ 38 m in dollar and 18 m Euro. As for exchange rate sensitivity, there were 20 % appreciation each in US Dollar, Euro and Yen amounting to an increase of £ 251 m and reduction of £ 755 for dollar and increase of £ 8 m and reduction of £ 1,779 for Euro and a reduction of £ 45 for Yen Read More