Annual Report & Accounts 2009
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- Financial Statements
- Notes to the Consolidated Financial Statements
- 18 Financial instruments
The Group is exposed to a number of different market risks in the normal course of business including liquidity, credit, interest rate and foreign currency risks.
Liquidity risk
Established procedures are in place to ensure that the operational and working capital requirements of the Group can be met at all times. These include:
- Weekly review, monitoring and forecasting of working capital requirements across Group companies
- Use of short term, local bank facilities
- Operation of short term money market dealing lines
- The implementation and ongoing review of committed multi-currency bank facilities, which are available at short notice. At the year-end the Group had £212.1 million of available bilateral banking facilities, which carried a LIBOR based floating rate of interest. The facilities were due to expire mid-2010, and at 1 February 2009 £99.1 million of these facilities were unused. On 27 January 2009 the Group entered into a new multi-currency revolving credit facility of £150 million, which carries a LIBOR based floating rate of interest, and expires in January 2013. The first drawdown on this facility occurred in February 2009, at which point the previous facility terminated.
Credit risk
The Group has a customer credit policy in place and the exposure to credit risk is monitored on an ongoing basis through the use of customer credit limits. Investments are allowed only in short term instruments and only with counterparties that have sound credit ratings. The Group’s treasury policy stipulates the minimum credit rating that a banking institution must have before deposits can be made. Given the high credit quality of counterparties with whom the Group has investments, the Directors do not expect any counterparty to fail to meet its expectations.
At 1 February 2009 and 3 February 2008 there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset included in the balance sheet.
Hedging interest rate risk
The Group adopts a policy of ensuring that it has an appropriate mix of fixed and floating rates in managing its exposure to changes in interest rates on borrowings. Interest rate swaps are entered into, where necessary, to achieve this appropriate mix. At 1 February 2009 the Group was not party to any interest rate swaps (3 February 2008: nil).
At 1 February 2009, if interest rates on foreign currency denominated borrowings had been 50 basis points higher / lower with all other variables held constant, pre tax profit for the year would have been £0.2 million lower / higher (2008: £0.2 million). At 1 February 2009, if interest rates on pound sterling denominated borrowings had been 50 basis points higher / lower with all other variables held constant, pre tax profit for the year would have been £0.4 million lower / higher (2008: £0.2 million).
Foreign currency risk
The Group is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in currencies other than pounds sterling. The currencies giving rise to this risk are primarily the Euro and US dollar.
The Group hedges significant foreign currency exposures in respect of forecast sales and purchases of inventory through foreign exchange contracts. All such foreign exchange contracts have maturities of less than one year.
The Group does not hedge profit translation exposure, unless there is a corresponding cash flow, since such hedges provide only a temporary deferral of the effects of movement in foreign exchange rates. Similarly, whilst a significant proportion of the Group’s borrowings are denominated in US dollars, the Group does not specifically hedge all of its long term investments in overseas assets.
At 1 February 2009, if the US dollar had weakened/strengthened against the pound sterling by one cent, with all other variables held constant, operating profit for the year would have been £0.2 million lower/higher, mainly due to the translation of overseas results. Net assets would not have been significantly different as a result of a similar one cent movement.
At 1 February 2009, if the Euro had weakened/strengthened against the pound sterling by one cent, with all other variables held constant, operating profit for the year would have been £0.2 million lower/higher, mainly due to the translation of overseas results. Net assets would have been £0.7 million lower/higher as a result of a similar one cent movement.
Estimation of fair values
The main methods and assumptions used in estimating the fair values of financial instruments are as follows:
- Derivatives: forward exchange contracts are marked to market using listed market prices.
- Interest-bearing loans and borrowings: fair value is calculated based on discounted expected future principal and interest cash flows.
- Convertible redeemable preference shares: fair value is based on quoted market prices.
- Trade and other receivables/payables: the notional amount for trade receivables/payables with a remaining life of less than one year are deemed to reflect their fair value.
Net fair value of derivative financial instruments
The Group classifies its forward exchange contracts hedging forecast trading transactions as cash flow hedges and states them at fair value. The net fair value of forward exchange contracts used as hedges of forecasted trading transactions at 3 February 2009 was £4.4 million (3 February 2008: £2.9 million), which was reflected in a hedging reserve at that date.
Hedge of net investment in foreign subsidiaries
The Group’s US dollar denominated private placement notes totalling $225 million and unsecured loans of $10 million partially hedge the Group’s investment in its US subsidiaries. The Group’s Euro denominated unsecured loans of Euro 17 million partially hedge the Group’s investment in its European Union member subsidiaries. The fair value of the US dollar borrowings at 1 February 2009 was £180.7 million (3 February 2008: £142.1 million) and the fair value of the Euro borrowings was £15.0 million (3 February 2008: £7.5 million). A foreign exchange loss of £48.0 million (3 February 2008: loss of £0.6 million) was recognised in equity during the year on translation of these loans to pounds sterling.
Fair value of long-term borrowings and preference shares
The book and fair values of the Group’s long-term borrowings and preference shares are as follows:
| Book value 2009 £m |
Fair value 2009 £m |
Book value 2008 £m |
Fair value 2008 £m |
|
|---|---|---|---|---|
| Long-term borrowings | 271.0 | 283.9 | 202.8 | 208.5 |
| Preference shares | 69.8 | 49.4 | 101.1 | 78.0 |
The book value of the preference shares at 1 February 2009 comprises the equity element of £10.4 million (2008: £15.2 million) and the debt element of £59.4 million (2008: £85.9 million).
Fair value of other financial instruments
The book and fair values of the Group’s other financial instruments are as follows:
| Book value 2009 £m |
Fair value 2009 £m |
Book value 2008 £m |
Fair value 2008 £m |
|
|---|---|---|---|---|
| Assets | ||||
| Cash at bank and in hand | 39.6 | 39.6 | 37.6 | 37.6 |
| Trade and other receivables | 115.1 | 115.1 | 109.3 | 109.3 |
| Liabilities and derivatives | ||||
| Short-term borrowings | 0.6 | 0.6 | 0.1 | 0.1 |
| Derivative financial instruments | 4.4 | 4.4 | 2.9 | 2.9 |
| Trade and other payables | 65.7 | 65.7 | 52.7 | 52.7 |
Maturity of financial liabilities
The table below analyses the Group’s financial liabilities, which will be settled on a net basis, into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.
| At 1 February 2009 | Less than 1 year £m |
Between 1 and 2 years £m |
Between 2 and 5 years £m |
Over 5 years £m |
|---|---|---|---|---|
| Borrowings | 11.4 | 163.4 | 125.2 | 4.7 |
| Preference shares | 3.5 | 3.5 | 10.6 | 73.3 |
| Derivative financial instruments | 4.4 | – | – | – |
| Trade and other payables | 65.7 | – | – | – |
Following the drawdown of the new multi-currency revolving credit facility of £150 million in February 2009, £109.8 million of borrowings included within the “between 1 and 2 years” category above will be reclassified to the “between 2 and 5 years” category.
| At 3 February 2008 | Less than 1 year £m |
Between 1 and 2 years £m |
Between 2 and 5 years £m |
Over 5 years £m |
|---|---|---|---|---|
| Borrowings | 10.6 | 10.6 | 134.2 | 82.8 |
| Preference shares | 5.1 | 5.1 | 15.3 | 111.4 |
| Derivative financial instruments | 2.9 | – | – | – |
| Trade and other payables | 52.7 | – | – | – |
The table below analyses the Group’s derivative financial instruments which will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.
| At 1 February 2009 | Less than 1 year £m |
Between 1 and 2 years £m |
Between 2 and 5 years £m |
Over 5 years £m |
|---|---|---|---|---|
| Forward foreign exchange contracts – cash flow hedges | ||||
| Outflow | 55.1 | – | – | – |
| Inflow | 0.1 | – | – | – |
| At 3 February 2008 | Less than 1 year £m |
Between 1 and 2 years £m |
Between 2 and 5 years £m |
Over 5 years £m |
|---|---|---|---|---|
| Forward foreign exchange contracts – cash flow hedges | ||||
| Outflow | 56.3 | – | – | – |
| Inflow | – | – | – | – |
Effective interest rates
The effective interest rates of interest-bearing financial liabilities at the year end were as follows:
| 2009 | 2008 | |
|---|---|---|
| Short-term borrowings | 2.5% | 5.7% |
| Bilateral bank facilities | 2.2% | 5.2% |
| US dollar private placement notes | 5.7% | 5.7% |
Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an appropriate capital structure. In order to maintain or adjust the capital structure, the Group will take in to consideration the amount of dividends paid to shareholders, the level of debt and the number of shares in issue.
When monitoring capital, the Group takes into consideration its gearing ratio, both including and excluding its defined benefit pension obligations. This is calculated as the ratio of net debt to total equity (adjusted for pension obligations as appropriate). Net debt is calculated as total borrowings (including current and non-current borrowings and the debt element of preference shares as shown in the consolidated balance sheet) less cash and cash equivalents. Total equity is as shown in the consolidated balance sheet. The defined benefit obligations are shown in note 27 (a) to the Consolidated Financial Statements. At the year end the net debt to total equity ratio adjusted to exclude pension obligations was 17.8:1 (2008: -13.0:1).
The Group also monitors its consolidated adjusted net worth. Consolidated adjusted net worth is calculated as total equity plus any amount in respect of preference shares included in non-current liabilities in the consolidated balance sheet. At the year end, consolidated adjusted net worth was £53.8 million (2008: £106.0 million).
The Group is not subject to any externally imposed capital requirements.