Cash flow Operations In 2008, cash generated from operations was $628.7 million (2007: $638.7 million).
Operating cash flow, which excludes net capital expenditure, was $442.8 million (2007: $441.8 million). During 2008, improved working capital management resulted in cash inflows of $69.8 million (2007: outflow of $37.8 million).
Cash costs associated with restructuring projects were $16.3 million (2007: $1.2 million).
Cash conversion was 113.8% (2007: 82.9%).
Supplier payment policy Our businesses determine terms and conditions of payment with their suppliers. Suppliers are made aware of the agreed terms and how any disputes are to be settled and payment is made in accordance with those terms.
The number of days’ credit taken by the Company and the Group for trade purchases was as follows:
2008
Days
2007
Days
Company
37
30
Group (range of days)
12-166
16-132
Group (average days)
60
59
Capital expenditure Capital expenditure on property, plant and equipment and non-integral computer software was $193.8 million (2007: $236.5 million) and the Group realised $7.9 million in cash (2007: $39.6 million) on the disposal of property, plant and equipment.
In 2008, net capital expenditure was 0.9 times depreciation (2007: 0.9 times). Capital expenditure represented 3.5% of sales within the Group’s continuing operations (2007: 3.9%).
Management continues to maintain strict control on capital expenditure commensurate with the expected levels of demand for the Group’s products. In 2009, capital expenditure is expected to be approximately $150 million, however this would be revisited should there be a further deterioration in trading conditions.
Free cash flow Free cash flow generated in 2008 was $300.9 million, compared with $290.0 million in 2007.
Dividends Dividends paid on the Company’s ordinary shares amounted to $246.2 million (2007: $247.3 million). Based on management’s targeted level of dividends, dividend payments are expected to amount to $48.5 million in 2009.
Acquisitions and disposals During 2008, the cash inflow on the disposal of non-core businesses (net of cash disposed with those businesses) was $124.6 million, principally from the sale of Stant and Standard-Thomson. During 2007, the Group realised $216.3 million in cash on the disposal of businesses, principally from the sale of Trico, Lasco Fittings and Dearborn Mid-West.
In 2008, the cash outflow in relation to the acquisition of interests in subsidiaries was $65.8 million (2007: $17.0 million). In addition, $10.4 million (2007: $3.8 million) was spent on the acquisition of interests in associates. Acquisitions during the period are analysed in note 44 to the consolidated financial statements.
After taking into account cash and debt acquired and disposed with subsidiaries, the Group’s acquisitions and disposals activity during 2008 had the effect of reducing net debt by $49.9 million (2007: $202.0 million).
Net debt
As shown in the following table, net debt decreased by $115.1 million to $476.4 million during 2008.
Treasury management The Group’s central treasury function is responsible for procuring the Group’s capital resources and maintaining an efficient capital structure, together with managing the Group’s liquidity, foreign exchange and interest rate exposures.
All treasury operations are conducted within strict guidelines and policies that are approved by the Board. Compliance with those guidelines and policies is monitored by the regular reporting of treasury activities to the Board.
A key element of the Group’s treasury philosophy is that funding, interest rate and currency decisions and the location of cash and debt balances are determined independently of each other. The Group’s borrowing requirements are met by raising funds in the most favourable markets. Management aims to retain net debt in proportion to the currencies in which the net assets of the Group’s businesses are denominated. The desired currency profile of net debt is achieved by entering into currency derivative contracts.
Where necessary, the desired interest rate profile of net debt in each currency is achieved by entering into interest rate derivative contracts.
From time to time, the Group also enters into derivative contracts to manage currency transaction exposures.
We do not hedge the proportion of foreign operations effectively funded by shareholders’ equity. While the net income of foreign operations is not hedged, the effect of currency fluctuations on the Group’s reported net income is partly offset by interest payable on net debt denominated in foreign currencies.
An analysis of the Group’s exposure to liquidity risk, credit risk and market risk is presented in note 33 to the consolidated financial statements.
Credit ratings We have established long-term credit ratings of Baa3 Stable with Moody’s and BBB Stable with Standard & Poor’s and short-term credit ratings of P-3 with Moody’s and A-2 with Standard & Poor’s. We aim to achieve an appropriate mix of debt and equity to ensure an efficient capital structure and to preserve these ratings.
Credit ratings are subject to regular review by the credit rating agencies and may change in response to economic and commercial developments.
Capital structure We consider that the Group’s capital comprises shareholders’ equity plus net debt. At the end of 2008, the Group’s capital was $2,087.2 million (2007: $2,729.3 million).
We manage the Group’s capital structure to maximise shareholder value whilst retaining flexibility to take advantage of opportunities that arise to grow the business. Our policy is to fund new investments first from existing cash resources and then from borrowings. It is our intention to maintain surplus undrawn committed borrowing facilities sufficient to enable us to manage the Group’s liquidity through the operating and investment cycles.
We maintain a regular dialogue with the rating agencies, and the potential impact on our credit rating is taken into consideration when making capital allocation decisions.
Following approval by the Company’s shareholders at the 2008 AGM and subsequent ratification by the High Court, the Company’s ordinary shares were redenominated in US dollars on 22 May 2008. New ordinary shares of 9 cents each were attributed to holders of the Company’s existing ordinary shares of 5 pence each on a one-for-one basis.
During 2008, the Board announced that it would consider utilising the authority it has from shareholders to make on-market repurchases of up to 10% of the Company’s issued share capital for cancellation. Due to the subsequent deterioration in economic conditions, no repurchases were made during 2008, but renewal of the relevant authority will be sought at the 2009 AGM.
Borrowings Borrowing facilities Borrowing facilities are monitored against forecast requirements and timely action is taken to put in place, renew or replace credit lines. Our policy is to reduce financing risk by diversifying our funding sources and by staggering the maturity of our borrowings. We aim to retain sufficient liquidity to maintain our financial flexibility and to preserve our investment grade credit ratings.
The Group has committed borrowing facilities amounting to $1,175.7 million, of which $720.6 million was drawn at the end of 2008.
We have two bonds outstanding under our EMTN Programme: £150 million repayable in December 2011 and £250 million repayable in September 2015.
We also have a £400 million multi-currency revolving credit facility that expires in August 2010. At the end of 2008, we had drawn down $129.3 million under this facility (the maximum amount drawn down during 2008 was $210.1 million).
We include within committed facilities our borrowings under finance leases, which amounted to $6.9 million at the end of 2008.
In addition to our committed facilities, we have uncommitted facilities of $495.4 million (of which we had drawn down $34.7 million at the end of 2008) and we have outstanding performance bonds, letters of credit and bank guarantees amounting to $164.5 million.
Overall, at the end of 2008, we had committed borrowing headroom of $420.4 million (in addition to cash and cash equivalents of $291.9 million).
Facility
$m
Drawings
$m
Total
$m
Committed facilities
- Bonds
584.4
(584.4)
-
- Credit facility
584.4
(129.3)
455.1
- Finance leases
6.9
(6.9)
-
1,175.7
(720.6)
455.1
Uncommitted facilities
- Credit facilities
495.4
(34.7)
460.7
Total headroom
1,671.1
(755.3)
915.8
Less: Uncommitted facilities
(495.4)
Committed (minimum) headroom
420.4
Cash and cash equivalents
291.9
In the event of a change of control over the Company, the bonds may have to be redeemed and the credit facility may be withdrawn.
Level of borrowing and seasonality We operate in a wide range of markets and geographic locations and, as a result, there is little seasonality of our borrowing requirements. Fluctuations in the Group’s borrowing level are caused principally by the timing of capital expenditure and dividend and interest payments.
During 2008, the principal amount of the Group’s borrowings decreased from $878.1 million to $749.0 million and peaked, in May, at $1,072.9 million.
Interest rate profile The majority of the Group’s borrowings are denominated in sterling and bear interest at fixed rates.
We use interest rate swaps to swap the Group’s sterling fixed rate borrowings to floating rates. At the end of 2008, the weighted average interest rate on the floating legs of these swaps was 4.6% (2007: 7.7%).
We use foreign currency derivatives in effect to re-denominate the majority of the Group’s sterling borrowings into a number of other currencies (principally the US dollar).
We use interest rate swaps to swap a portion of the Group’s effective US dollar borrowings from floating rates to fixed rates. At the end of 2008, $65.0 million of these borrowings had been swapped to a fixed interest rate of 4.6% until December 2009. The effective interest maturity of the remainder of the Group’s borrowings was less than three months.
The weighted average cost of the Group’s outstanding borrowings at the end of 2008 was 4.5% (2007: 7.6%).
Borrowing covenants We are subject to covenants, representations and warranties commonly associated with investment grade borrowings on our issued bonds and on our multi-currency revolving credit facility.
We are subject to two financial covenants under our multi-currency revolving credit facility that are calculated by applying UK GAAP extant as at 31 December 2002 and are therefore unaffected by the transition to IFRS. The ratio of net debt to earnings before interest, tax, depreciation and amortisation must not exceed 2.5 times (at the end of 2008, the ratio was 0.8 times) and the ratio of operating profit to the net interest charge must not be less than 3.0 times (for 2008, the ratio was 7.5 times).
Cash balances We manage our cash balances such that there is no significant concentration of credit risk in any one bank or other financial institution. We monitor closely the credit quality of the institutions that hold our deposits. Similar considerations are given to the Group’s portfolio of derivative financial instruments.
At the end of 2008, 92% of the Group’s cash balances were held with institutions rated at least A-1 by Standard & Poor’s and P-1 by Moody’s.
Our central treasury function is responsible for maximising the return on surplus cash balances within the constraints of our liquidity and credit policy. We achieve this, where possible, by controlling directly all surplus cash balances and pooling arrangements on an ongoing basis and by reviewing the efficiency of all other cash balances across the Group on a weekly basis.
Our policy is to apply funds from one part of the Group to meet the obligations of another, wherever possible, in order to ensure maximum efficiency in the use of the Group’s funds. No material restrictions apply that limit the application of this policy.
At the end of 2008, cash balances (including collateralised cash) were $295.7 million, of which $255.8 million was interest-bearing. All interest-bearing deposits attract interest at floating rates.
The weighted average interest rate on cash deposits at the end of 2008 was 1.8% (2007: 3.6%).
Currency profile of net debt At the end of 2008, the notional principal amount of the foreign currency derivative contracts that we use to manage the currency profile of the Group’s net debt was $888.7 million (2007: $1,167.4 million). We show below the effect of currency translation hedges on the currency profile of the Group’s net debt at the end of 2008.
