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 policies and guidelines that are approved by the Board. Compliance with those policies and guidelines 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 from 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 operations are denominated. The desired currency profile of net debt is achieved by entering into currency derivative contracts. The proportion of investments in foreign operations effectively funded by shareholders' equity is not hedged. 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.
From time to time, the Group also enters into currency derivative contracts to manage currency transaction exposures.
Where necessary, the desired interest rate profile of net debt in each currency is achieved by entering into interest rate derivative contracts.
The Group's portfolio of cash and cash equivalents is managed such that there is no significant concentration of credit risk in any one bank or other financial institution. Management monitors closely the credit quality of the institutions with which it holds deposits. Similar considerations are given to the Group's portfolio of derivative financial instruments.
The Group's borrowing facilities are monitored against forecast requirements and timely action is taken to put in place, renew or replace credit lines. Management's policy is to reduce liquidity risk by diversifying the Group's funding sources and by staggering the maturity of its borrowings.
The Group has established long-term credit ratings of Baa3 Stable with Moody's and BBB Stable with Standard & Poor's and shortterm credit ratings of P-3 with Moody's and A-2 with Standard & Poor's. Management aims to achieve an appropriate mix of debt and equity to ensure an efficient capital structure and to preserve these ratings.
Disclosures about the Group's capital are set out in note 40.
The following table analyses financial assets and liabilities by the categories defined in IAS 39. Financial instruments held at fair value, have been categorised into one of three levels to reflect the degree to which observable inputs are used in determining the fair values:
During 2009, there were no transfers of financial instruments between Level 1 and Level 2.
| Fair value through profit or loss |
|||||||
|---|---|---|---|---|---|---|---|
| Loans and receivables $ million |
Available- for-sale $ million |
Liabilities at amortised cost $ million |
Designated hedging relationships $ million |
Trading $ million |
Total carrying value $ million |
Fair value $ million |
|
| As at 2 January 2010 | |||||||
| Financial assets not held at fair value | |||||||
| Trade and other receivables: | |||||||
| – Non-derivative assets | 722.1 | – | – | – | – | 722.1 | 722.1 |
| Cash and cash equivalents | 445.0 | – | – | – | – | 445.0 | 445.0 |
| 1,167.1 | – | – | – | – | 1,167.1 | 1,167.1 | |
| Financial assets held at fair value | |||||||
| Level 1: | |||||||
| – Available-for-sale investments | – | 1.2 | – | – | – | 1.2 | 1.2 |
| Level 2: | |||||||
| – Trade and other receivables: | |||||||
| Derivative assets | – | – | – | 56.9 | 1.2 | 58.1 | 58.1 |
| – | 1.2 | – | 56.9 | 1.2 | 59.3 | 59.3 | |
| Total financial assets | 1,167.1 | 1.2 | – | 56.9 | 1.2 | 1,226.4 | 1,226.4 |
| Financial liabilities not held at fair value | |||||||
| Trade and other payables: | |||||||
| – Non-derivative liabilities | – | – | (506.2) | – | – | (506.2) | (506.2) |
| Bank overdrafts | – | – | (4.8) | – | – | (4.8) | (4.8) |
| Bank and other loans: | |||||||
| – Current | – | – | (11.2) | – | – | (11.2) | (10.2) |
| – Non-current | – | – | (642.3) | (45.0) | – | (687.3) | (655.3) |
| Obligations under finance leases | – | – | (4.6) | – | – | (4.6) | (4.6) |
| – | – | (1,169.1) | (45.0) | – | (1,214.1) | (1,181.1) | |
| Financial liabilities held at fair value | |||||||
| Level 2: | |||||||
| – Trade and other payables: | |||||||
| Derivative liabilities | – | – | – | (3.6) | (2.6) | (6.2) | (6.2) |
| – | – | – | (3.6) | (2.6) | (6.2) | (6.2) | |
| Total financial liabilities | – | – | (1,169.1) | (48.6) | (2.6) | (1,220.3) | (1,187.3) |
| 1,167.1 | 1.2 | (1,169.1) | 8.3 | (1.4) | 6.1 | 39.1 | |
| Fair value through profit or loss |
|||||||
|---|---|---|---|---|---|---|---|
| Loans and receivables $ million |
Available- for-sale $ million |
Liabilities at amortised cost $ million |
Designated hedging relationships $ million |
Trading $ million |
Total carrying value $ million |
Fair value $ million |
|
| As at 3 January 2009 | |||||||
| Financial assets not held at fair value | |||||||
| Trade and other receivables: | |||||||
| – Non-derivative assets | 757.7 | – | – | – | – | 757.7 | 757.7 |
| Cash and cash equivalents | 291.9 | – | – | – | – | 291.9 | 291.9 |
| 1,049.6 | – | – | – | – | 1,049.6 | 1,049.6 | |
| Financial assets held at fair value | |||||||
| Level 1: | |||||||
| – Available-for-sale investments | – | 0.8 | – | – | – | 0.8 | 0.8 |
| Level 2: | |||||||
| – Trade and other receivables: | |||||||
| Derivative assets | – | – | – | 73.4 | 1.1 | 74.5 | 74.5 |
| – | 0.8 | – | 73.4 | 1.1 | 75.3 | 75.3 | |
| Total financial assets | 1,049.6 | 0.8 | – | 73.4 | 1.1 | 1,124.9 | 1,124.9 |
| Financial liabilities not held at fair value | |||||||
| Trade and other payables: | |||||||
| – Non-derivative liabilities | – | – | (452.4) | – | – | (452.4) | (452.4) |
| Bank overdrafts | – | – | (13.7) | – | – | (13.7) | (13.7) |
| Bank and other loans: | |||||||
| – Current | – | – | (29.5) | – | – | (29.5) | (29.0) |
| – Non-current | – | – | (711.0) | (51.9) | – | (762.9) | (583.4) |
| Obligations under finance leases | – | – | (6.9) | – | – | (6.9) | (6.9) |
| – | – | (1,213.5) | (51.9) | – | (1,265.4) | (1,085.4) | |
| Financial liabilities held at fair value | |||||||
| Level 2: | |||||||
| – Trade and other payables: | |||||||
| Derivative liabilities | – | – | – | (32.5) | (13.6) | (46.1) | (46.1) |
| – | – | – | (32.5) | (13.6) | (46.1) | (46.1) | |
| Total financial liabilities | – | – | (1,213.5) | (84.4) | (13.6) | (1,311.5) | (1,131.5) |
| 1,049.6 | 0.8 | (1,213.5) | (11.0) | (12.5) | (186.6) | (6.6) | |
Available-for-sale investments are listed and are valued by reference to quoted market prices.
Cash and cash equivalents and current bank and other loans largely attract floating interest rates. Accordingly, their carrying amounts are considered to approximate to fair value.
Non-current bank and other loans principally comprise any borrowings under the Group's multi-currency revolving credit facility that attract floating interest rates, the carrying amount of which is considered to approximate to fair value, and the listed bonds issued under the EMTN Programme, the fair value of which is based on their quoted market prices.
Finance lease obligations attract fixed interest rates that are implicit in the lease rentals and their fair value has been assessed by reference to prevailing market interest rates.
Derivative assets and liabilities represent the fair value of foreign currency derivatives and interest rate derivatives held by the Group at the balance sheet date. Foreign currency derivatives are valued by reference to prevailing forward exchange rates. Interest rate derivatives are valued by discounting the related cash flows using prevailing market interest rates.
Credit risk is the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.
Management considers the Group's maximum exposure to credit risk to be as follows:
| As at 2 January 2010 $ million |
As at 3 January 2009 $ million |
|
|---|---|---|
| Trade and other receivables: | ||
| – Derivative assets | 58.1 | 74.5 |
| – Non-derivative assets | 722.1 | 757.7 |
| 780.2 | 832.2 | |
| Cash and cash equivalents | 445.0 | 291.9 |
| 1,225.2 | 1,124.1 |
As at 2 January 2010, 94% (3 January 2009: 92%) of the Group's cash and cash equivalents were held with institutions rated at least A-1 by Standard & Poor's and P-1 by Moody's. Credit risk disclosures with respect to trade receivables are set out in note 25.
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.
As at 2 January 2010, the Group had undrawn committed borrowing facilities of $645.0 million (3 January 2009: $455.1 million) available under the multi-currency revolving credit facility that expires on 8 August 2010. Borrowings under this facility are at prevailing LIBOR rates, plus an agreed margin, dependent on the period of drawdown. During 2009, the Group entered into a $450 million forward-start facility that will commence on expiry of the existing facility and will itself expire in May 2012.
In addition, the Group had uncommitted borrowing facilities of $381.2 million (3 January 2009: $495.4 million), of which $6.0 million (3 January 2009: $34.7 million) had been drawn down for cash. Consequently, the Group's committed borrowing headroom was $639.0 million (3 January 2009: $420.4 million) in addition to cash and cash equivalents of $445.0 million (3 January 2009: $291.9 million). The Group also had outstanding performance bonds, letters of credit and bank guarantees amounting to $80.3 million (3 January 2009: $164.5 million).
The Group is subject to covenants, representations and warranties commonly associated with investment grade borrowings in respect of its committed borrowing facilities and bonds issued under the EMTN Programme.
The Group is subject to two financial covenants in respect of its committed borrowing facilities that are calculated by applying UK GAAP extant as at 31 December 2002. The ratio of net debt to consolidated earnings before interest, tax, depreciation and amortisation must not exceed 2.5 times (at the end of 2009, the ratio was 0.6 times). The ratio of consolidated operating profit to the consolidated net interest charge must not be less than 3.0 times (for 2009, the ratio was 5.5 times).
The Group complied with the borrowing covenants throughout each of the periods presented in the financial statements. Any future non-compliance with the borrowing covenants could, if not waived, constitute an event of default and may, in certain circumstances, lead to an acceleration of the maturity of borrowings drawn down and the inability to access committed facilities.
Contractual cash flows related to the Group's financial liabilities are as follows:
| Within 1 year $ million |
Between 1 and 2 years $ million |
Between 2 and 3 years $ million |
Between 3 and 4 years $ million |
Between 4 and 5 years $ million |
After 5 years $ million |
Total $ million |
|
|---|---|---|---|---|---|---|---|
| As at 2 January 2010 | |||||||
| Bank overdrafts | (4.8) | – | – | – | – | – | (4.8) |
| Bank and other loans: | |||||||
| – Principal | (0.6) | (241.8) | (0.3) | (0.3) | – | (403.1) | (646.1) |
| – Interest payments | (44.4) | (44.0) | (24.7) | (24.7) | (24.7) | (24.7) | (187.2) |
| Finance lease obligations | (1.3) | (0.8) | (0.4) | (0.4) | (0.4) | (3.3) | (6.6) |
| Trade and other payables: | |||||||
| – Non-derivative liabilities | (491.9) | (14.3) | – | – | – | – | (506.2) |
| Cash flows on non-derivative liabilities | (543.0) | (300.9) | (25.4) | (25.4) | (25.1) | (431.1) | (1,350.9) |
| Cash flows on derivative liabilities: | |||||||
| – Payments | (255.7) | (1.8) | – | – | – | – | (257.5) |
| – Receipts | 255.6 | – | – | – | – | – | 255.6 |
| (0.1) | (1.8) | – | – | – | – | (1.9) | |
| Cash flows on financial liabilities | (543.1) | (302.7) | (25.4) | (25.4) | (25.1) | (431.1) | (1,352.8) |
| Cash flows on related derivative assets: | |||||||
| – Payments | (612.7) | (28.9) | (20.6) | (22.6) | (23.8) | (17.5) | (726.1) |
| – Receipts | 635.4 | 44.0 | 24.8 | 24.6 | 24.7 | 24.7 | 778.2 |
| 22.7 | 15.1 | 4.2 | 2.0 | 0.9 | 7.2 | 52.1 | |
| (520.4) | (287.6) | (21.2) | (23.4) | (24.2) | (423.9) | (1,300.7) | |
| Within 1 year $ million |
Between 1 and 2 years $ million |
Between 2 and 3 years $ million |
Between 3 and 4 years $ million |
Between 4 and 5 years $ million |
After 5 years $ million |
Total $ million |
|
|---|---|---|---|---|---|---|---|
| As at 3 January 2009 | |||||||
| Bank overdrafts | (13.6) | – | – | – | – | – | (13.6) |
| Bank and other loans: | |||||||
| – Principal | (20.9) | (129.3) | (219.2) | (0.3) | (0.3) | (365.4) | (735.4) |
| – Interest payments | (41.6) | (39.9) | (39.9) | (22.4) | (22.4) | (38.2) | (204.4) |
| Finance lease obligations | (1.9) | (1.5) | (1.1) | (0.8) | (0.6) | (3.6) | (9.5) |
| Trade and other payables: | |||||||
| – Non-derivative liabilities | (434.7) | (17.7) | – | – | – | – | (452.4) |
| Cash flows on non-derivative liabilities | (512.7) | (188.4) | (260.2) | (23.5) | (23.3) | (407.2) | (1,415.3) |
| Cash flows on derivative liabilities: | |||||||
| – Payments | (677.0) | (5.9) | – | – | – | – | (682.9) |
| – Receipts | 655.9 | 7.9 | – | – | – | – | 663.8 |
| (21.1) | 2.0 | – | – | – | – | (19.1) | |
| Cash flows on financial liabilities | (533.8) | (186.4) | (260.2) | (23.5) | (23.3) | (407.2) | (1,434.4) |
| Cash flows on related derivative assets: | |||||||
| – Payments | (328.8) | (27.2) | (29.2) | (17.3) | (18.2) | (31.7) | (452.4) |
| – Receipts | 353.9 | 39.8 | 39.9 | 22.4 | 22.4 | 44.5 | 522.9 |
| 25.1 | 12.6 | 10.7 | 5.1 | 4.2 | 12.8 | 70.5 | |
| (508.7) | (173.8) | (249.5) | (18.4) | (19.1) | (394.4) | (1,363.9) | |
Information on the Group's exposure to liquidity risk analysed by currency is presented below.
| Within 1 year $ million |
Between 1 and 2 years $ million |
Between 2 and 3 years $ million |
Between 3 and 4 years $ million |
Between 4 and 5 years $ million |
After 5 years $ million |
Total $ million |
|
|---|---|---|---|---|---|---|---|
| As at 2 January 2010 | |||||||
| Cash flows on financial liabilities: | |||||||
| – US dollar | (380.2) | (10.7) | – | – | – | – | (390.9) |
| – Sterling | 75.0 | (287.9) | (25.0) | (24.7) | (24.7) | (427.8) | (715.1) |
| – Euro | (68.2) | (1.2) | (0.4) | (0.4) | (0.4) | (3.3) | (73.9) |
| – Canadian dollar | (37.9) | – | – | – | – | – | (37.9) |
| – Other | (131.8) | (2.9) | – | (0.3) | – | – | (135.0) |
| (543.1) | (302.7) | (25.4) | (25.4) | (25.1) | (431.1) | (1,352.8) | |
| Cash flows on related financial assets: | |||||||
| – US dollar | (330.1) | – | – | – | – | – | (330.1) |
| – Sterling | 479.4 | 15.1 | 4.2 | 2.0 | 0.9 | 7.2 | 508.8 |
| – Euro | (44.2) | – | – | – | – | – | (44.2) |
| – Canadian dollar | (62.3) | – | – | – | – | – | (62.3) |
| – Other | (20.1) | – | – | – | – | – | (20.1) |
| 22.7 | 15.1 | 4.2 | 2.0 | 0.9 | 7.2 | 52.1 | |
| Within 1 year $ million |
Between 1 and 2 years $ million |
Between 2 and 3 years $ million |
Between 3 and 4 years $ million |
Between 4 and 5 years $ million |
After 5 years $ million |
Total $ million |
|
|---|---|---|---|---|---|---|---|
| As at 3 January 2009 | |||||||
| Cash flows on financial liabilities: | |||||||
| – US dollar | (771.2) | (114.6) | (0.4) | (0.4) | (0.2) | – | (886.8) |
| – Sterling | 480.0 | (75.8) | (259.1) | (22.7) | (22.4) | (403.5) | (303.5) |
| – Euro | (39.6) | 6.4 | (0.7) | (0.4) | (0.4) | (3.7) | (38.4) |
| – Canadian dollar | (37.8) | – | – | – | – | – | (37.8) |
| – Other | (165.2) | (2.4) | – | – | (0.3) | – | (167.9) |
| (533.8) | (186.4) | (260.2) | (23.5) | (23.3) | (407.2) | (1,434.4) | |
| Cash flows on related financial assets: | |||||||
| – US dollar | 289.6 | – | – | – | – | – | 289.6 |
| – Sterling | 2.0 | 12.6 | 10.7 | 5.1 | 4.2 | 12.8 | 47.4 |
| – Euro | (97.8) | – | – | – | – | – | (97.8) |
| – Canadian dollar | (105.6) | – | – | – | – | – | (105.6) |
| – Other | (63.1) | – | – | – | – | – | (63.1) |
| 25.1 | 12.6 | 10.7 | 5.1 | 4.2 | 12.8 | 70.5 | |
Maturities in all of the liquidity tables above are based on the earliest date on which the Group could be required to settle the liabilities.
Floating interest payments and payments and receipts on interest rate derivatives are estimated based on market interest rates prevailing at the balance sheet date.
Interest rate risk is the risk that the fair value of, or future cash flows associated with, a financial instrument will fluctuate because of changes in market interest rates.
The interest rate profile of the Group's financial assets and liabilities, after taking into account the effect of the Group's interest rate hedging activities, was as follows:
| As at 2 January 2010 | As at 3 January 2009 | |||||||
|---|---|---|---|---|---|---|---|---|
| Interest-bearing | Interest-bearing | |||||||
| Floating rate $ million |
Fixed rate $ million |
Non-interest bearing $ million |
Total $ million |
Floating rate $ million |
Fixed rate $ million |
Non-interest bearing $ million |
Total $ million |
|
| Financial assets | ||||||||
| Trade and other receivables | 16.0 | – | 764.2 | 780.2 | 3.8 | – | 828.4 | 832.2 |
| Available-for-sale investments | – | – | 1.2 | 1.2 | – | – | 0.8 | 0.8 |
| Cash and cash equivalents (see note 27) |
378.9 | – | 66.1 | 445.0 | 252.0 | – | 39.9 | 291.9 |
| 394.9 | – | 831.5 | 1,226.4 | 255.8 | – | 869.1 | 1,124.9 | |
| Financial liabilities | ||||||||
| Trade and other payables | – | – | (512.4) | (512.4) | – | – | (498.5) | (498.5) |
| Borrowings (see note 29) | (701.3) | (0.3) | (1.7) | (703.3) | (739.4) | (65.3) | (1.4) | (806.1) |
| Obligations under finance leases | – | (4.6) | – | (4.6) | – | (6.9) | – | (6.9) |
| (701.3) | (4.9) | (514.1) | (1,220.3) | (739.4) | (72.2) | (499.9) | (1,311.5) | |
| (306.4) | (4.9) | 317.4 | 6.1 | (483.6) | (72.2) | 369.2 | (186.6) | |
On the assumption that the change in interest rates is applied to the risk exposures in existence at the balance sheet date and that designated fair value hedges are 100% effective, an increase/decrease of 100 basis points in the interest rates applying to financial assets and liabilities would increase/decrease the Group's profit before tax by $2.7 million (3 January 2009: $4.0 million). No amounts would be taken directly to equity.
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Currency risk arises on financial assets and liabilities that are denominated in a currency other than the functional currency of the entity by which they are held.
The Group's exposure to currency risk was as follows:
| Net foreign currency financial assets/(liabilities) | ||||||
|---|---|---|---|---|---|---|
| US dollar $ million |
Sterling $ million |
Euro $ million |
Canadian dollar $ million |
Other $ million |
Total $ million |
|
| As at 2 January 2010 | ||||||
| Functional currency of entity: | ||||||
| – US dollar | – | (12.5) | (1.1) | – | (1.8) | (15.4) |
| – Sterling | 1.8 | – | (2.6) | – | (3.7) | (4.5) |
| – Euro | (2.7) | (0.2) | – | (0.1) | (0.1) | (3.1) |
| – Canadian dollar | (3.0) | – | – | – | (0.2) | (3.2) |
| – Other | (5.1) | (0.9) | 15.2 | (0.6) | – | 8.6 |
| (9.0) | (13.6) | 11.5 | (0.7) | (5.8) | (17.6) | |
| As at 3 January 2009 | ||||||
| Functional currency of entity: | ||||||
| – US dollar | – | (7.0) | (1.4) | – | 6.4 | (2.0) |
| – Sterling | 3.7 | – | 0.5 | – | 12.3 | 16.5 |
| – Euro | (2.3) | (0.1) | – | (0.6) | – | (3.0) |
| – Canadian dollar | (1.4) | – | – | – | (0.1) | (1.5) |
| – Other | (11.2) | (0.7) | 19.7 | 31.7 | – | 39.5 |
| (11.2) | (7.8) | 18.8 | 31.1 | 18.6 | 49.5 | |
Currency exposures shown above take into account the effect of the Group's transaction hedging activities.
On the assumption that the change in exchange rates is applied to the risk exposures in existence at the balance sheet date and that designated net investment hedges are 100% effective, an increase/decrease of 10% in the value of the functional currencies of the entities concerned against the currencies in which the financial assets and liabilities are denominated would increase/decrease the Group's profit before tax by $1.8 million (3 January 2009: $5.0 million).
Currency exposures on the Group's net assets, after taking into account the translation hedges applied to the Group's borrowings, were as follows:
| As at 2 January 2010 | As at 3 January 2009 | |||||
|---|---|---|---|---|---|---|
| Net assets excluding net (debt)/funds $ million |
Net (debt)/funds $ million |
Net assets $ million |
Net assets excluding net (debt)/funds $ million |
Net (debt)/funds $ million |
Net assets $ million |
|
| Currency: | ||||||
| – US dollar | 930.8 | (343.6) | 587.2 | 1,164.2 | (305.8) | 858.4 |
| – Sterling | 76.2 | 87.8 | 164.0 | 101.9 | (12.7) | 89.2 |
| – Euro | 150.6 | (33.4) | 117.2 | 229.9 | (94.6) | 135.3 |
| – Canadian dollar | 137.7 | (42.8) | 94.9 | 171.6 | (104.4) | 67.2 |
| – Other | 590.2 | 124.5 | 714.7 | 548.1 | 41.1 | 589.2 |
| 1,885.5 | (207.5) | 1,678.0 | 2,215.7 | (476.4) | 1,739.3 | |