Intangible assets Goodwill At the end of 2008, the carrying amount of goodwill was $415.9 million (2007: $660.0 million). During 2008, the carrying amount of goodwill was reduced by $228.6 million due to the impairment of Stackpole, Gates Mectrol and Selkirk. We recognised additional goodwill on acquisitions of $8.4 million during 2008.
Other intangible assets At the end of 2008, the carrying amount of other intangibles was $108.8 million (2007: $93.1 million).
During 2008, identifiable intangibles recognised on acquisitions amounted to $37.4 million, principally in relation to customer relationships and additions to non-integral computer software amounted to $10.4 million.
Applied research and development is important to the Group’s manufacturing businesses and there are development centres in the US, Europe and Japan that focus on the introduction of new and improved products, the application of technology to reduce unit and operating costs and to improve services to customers. During 2008, research and development expenditure was $92.7 million (2007: $99.2 million), of which $0.6 million (2007: $0.4 million) was capitalised.
Amortisation of other intangibles was $26.0 million (2007: $20.6 million).
Property, plant and equipment Property, plant and equipment amounted to $1,167.3 million at the end of 2008 (2007: $1,414.4 million), including $9.9 million (2007: $12.6 million) held under finance leases. Additions during 2008 were $180.6 million and the depreciation charge for the period was $203.1 million (2007: $215.9 million). Also during 2008, the carrying amount of property, plant and equipment was reduced by $113.8 million due to impairments.
With the exception of the assets held under finance leases, which are secured by a lessor’s charge over the leased assets, the Group’s property, plant and equipment was not subject to any encumbrances.
The Group’s manufacturing facilities, distribution centres and offices are located in various countries throughout the world, with a large proportion in North America. The Group owns the vast majority of these facilities and continues to improve and replace them to meet the needs of its individual operations. At the end of 2008, the Industrial & Automotive business group operated 95 manufacturing facilities and 41 distribution centres in 23 countries. The Building Products business group operated 70 manufacturing facilities and 15 distribution centres, predominantly in North America. The following table shows the geographic analysis of the Group’s property, plant and equipment at the end of 2008.
Property, plant and equipment
Carrying amount
$m
%
US
533.2
45.7%
UK
56.9
4.9%
Rest of Europe
169.3
14.5%
Rest of the world
- Canada
157.0
13.5%
- China
87.8
7.5%
- Mexico
50.6
4.3%
- Other countries
112.5
9.6%
407.9
34.9%
Total
1,167.3
100.0%
Due to the diverse nature of the business, at the end of 2008, there was no individual facility, the loss of which would have a material adverse impact on the Group’s operations. Equally, there are no plans to construct, expand or improve facilities that would, on completion or cancellation, significantly affect the Group’s operations.
During 2008, management continued to take prompt action to rationalise any under-utilised manufacturing facilities.
Post-employment benefits Pensions The Group operates a number of defined benefit pension plans, principally in the UK and the US. All of the plans are closed to new entrants and certain of them are also closed to future service accrual by current employees. The majority of the plans are funded by contributions by the Group and current employees at rates determined by independent actuaries taking into account any funding objectives prescribed by local legislation.
In 2008, the charge to operating profit in respect of defined benefit pension plans was $6.3 million (2007: $8.0 million).
At the end of 2008, the net pension liability was $180.6 million (2007: $120.9 million). During the year, the US dollar appreciated against sterling such that the US dollar value of the assets and benefit obligations of the UK pension plans both fell by approximately 27% due to the effect of currency translation. Overall, the net pension liability increased by $8.5 million due to currency translation effects.
Excluding currency translation effects, the fair value of the plan assets fell by $119.9 million during 2008, largely due to the fall in equity prices, although this was mitigated by the effect of lower market interest rates on the value of the fixed interest rate bonds held by the plans. Benefit payments, net of employer contributions, amounted to $30.3 million in 2008.
Excluding currency translation effects, the present value of the benefit obligation decreased by $43.9 million, due principally to the decline in market interest rates.
Movement in plan liabilities $ million
Movement in plan assets $ million
2008
$m
2007
$m
Fair value of the plan assets
862.1
1,125.0
Present value of the benefit obligation
1,018.1
1,196.5
Deficit in the plans
156.0
71.5
Effect of the asset ceiling
24.6
49.4
Net pension liability
180.6
120.9
Changes in the net pension liability are analysed in note 34 to the consolidated financial statements.
The Group considers the net pension liability to be similar to debt. Management of the risks associated with the Group’s defined benefit pension plans is the responsibility of the Group’s treasury function. Our primary objective is to identify and manage the risks associated with both the assets and liabilities of the defined benefit pension plans and we continue to work with the trustees of our pension plans to improve the management of our defined benefit pension risks.
The principal risks affecting the present value of the benefit obligation are: interest rate risk, inflation risk and mortality risk.
Management of the plan assets is the responsibility of trustee boards, over which the Group has varying degrees of influence depending on local regulations. The Group has made the trustee boards aware of its preference that, where plan assets are invested so as to match the cash flow and risk profiles of the benefit obligations, these arrangements are effective, and that other plan assets not so invested are held in investment grade bonds or broad-based local equity indices.
During 2005, the Group’s US plans began hedging the interest rate risk implicit in their benefit obligations. At the end of 2008, the benefit obligation of the funded US plans amounted to $586.5 million and was hedged using a combination of bonds and interest rate swaps with an average duration of 10.5 years. We estimate that a 0.5% decrease in market interest rates would increase the pension liability by 5.7%, or $58.2 million.
Only 64.5% of the benefit obligation of $1,018.1 million at the end of 2008 is exposed to future salary increases. We estimate that a 0.5% increase in the salary scale would increase the net pension liability by 3.2%, or $5.8 million.
Unless the benefit obligation is subject to a buy-out or buy-in, it is not possible to mitigate the effects of mortality risk. We estimate that if the average life expectancy of plan members increased by one year at age 65, the net pension liability would increase by 11.8%, or $21.3 million.
Cash contributions made by the Group to defined benefit pension plans amounted to $45.4 million (2007: $68.0 million). The Group expects to contribute approximately $43 million to defined benefit pension plans in 2009.
Other benefits The Group provides other post-employment benefits, principally health and life-insurance cover, to certain of its employees in North America through a number of unfunded plans. In 2008, the charge to operating profit in respect of these benefits was $1.1 million (2007: $0.4 million).
At the end of 2008, the liability in respect of these benefits was $147.7 million (2007: $180.8 million). During 2008, benefits paid were $13.0 million and there was a decrease in the liability of $33.1 million. Management took action to reduce the cost of the plans that outweighed the increase in the liability caused by the effect of lower market interest rates.
Taxation The Group’s central tax function is responsible for planning and managing the tax affairs of the Group efficiently within the various local tax jurisdictions in which we operate, so as to achieve the lowest cash tax charge in compliance with local tax regulations.
At the end of 2008, the Group recognised income tax liabilities amounting to $81.4 million (2007: $96.3 million), including a provision for uncertain tax positions of $63.5 million (2007: $67.6 million). Income tax recoverable was $47.6 million (2007: $29.5 million).
At the end of 2008, the Group recognised a net deferred tax asset of $35.1 million (2007: $5.2 million) and had accumulated tax losses and tax credits amounting to $2,874 million (of which $2,382 million can be carried forward indefinitely) on which no deferred tax asset can be recognised because it is not probable that taxable profits will be available against which they can be utilised. At the end of 2008, the Group’s share of the undistributed earnings of foreign subsidiaries on which no deferred tax has been provided amounted to $3,181 million.
Contractual obligations As at 3 January 2009, the Group’s contractual obligations were as follows:
Earliest period in which payment/(receipt) due
Total
$m
Less than
1 year
$m
1 - 3 years
$m
3 - 5 years
$m
After 5 years
$m
Bank and other loans:
- Principal
735.4
20.9
348.5
0.6
365.4
- Interest payments(1) (2)
204.4
41.6
79.8
44.8
38.2
Derivative financial instruments:
- Payments(2) (3)
682.9
677.0
5.9
-
-
- Receipts(2) (3)
(663.8)
(655.9)
(7.9)
-
-
Finance leases
9.5
1.9
2.6
1.4
3.6
Operating leases
229.5
41.3
64.5
46.6
77.1
Post-employment benefits(4)
43.2
43.2
-
-
-
Purchases(5)
46.0
42.5
1.2
0.9
1.4
Total(6)
1,287.1
212.5
494.6
94.3
485.7
(1)
Future interest payments include payments on fixed and floating rate debt and are presented before the effect of interest rate derivatives.
(2)
Floating rate interest payments and payments and receipts on the floating rate legs of interest rate derivatives are estimated based on market interest rates prevailing as at 3 January 2009.
(3)
Receipts and payments on foreign currency derivatives are estimated based on market exchange rates prevailing as at 3 January 2009.
(4)
Post-employment benefit obligations represent the Group’s expected cash contributions to its defined benefit plans in 2009. It is not practicable to present expected cash contributions for subsequent years because they are determined annually on an actuarial basis to provide for current and future benefits.
(5)
A ‘purchase obligation’ is an agreement to purchase goods or services that is enforceable and legally-binding on the Group and that specifies all significant terms, including: the fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
(6)
We have not shown the Group’s provision for uncertain tax positions because it is not practicable to reliably estimate the timing of the related cash outflows in future years as these cash flows will only be determined after final audit by the tax authorities of previously filed tax returns.
Off-balance sheet arrangements The Group has not entered into any transaction, agreement or other contractual arrangement that is considered to be an off-balance sheet arrangement that is required to be disclosed under applicable regulations, other than operating lease commitments that are analysed in note 47 to the consolidated financial statements.
