| |
Cash generated from operations
Cash generated from operations was $532.1 million (2008: $628.7 million), a decline of $96.6 million. Operating cash flows before movements in working capital were $270.8 million lower than in 2008, principally due to the effect on cash flow of the decline in adjusted operating profit and the increased cash outflow on restructuring projects. However, this was partially offset by the effect on cash flow of the reduction of working capital, which was $174.2 million greater in 2009 than in 2008.
Management continues to exercise rigorous control over working capital, and a further reduction of working capital benefited cash flow by $244.0 million in 2009, of which $214.6 million was due to lower inventory levels.
In 2009, the net cash outflow on restructuring projects was $69.3 million (2008: $16.3 million).
Trading cash flow
Trading cash flow, which includes net capital expenditure, was $422.0 million (2008: $442.8 million). Trading cash flow before the cash outflow on restructuring projects was $491.3 million (2008: $459.1 million).
Cash conversion improved to 196.7%, compared with 113.9% in 2008, principally due to the reduction in net capital expenditure to $110.1 million (2008: $185.9 million) and the further reduction in working capital during 2009. Notwithstanding the improvement in working capital, the rapid decline in sales resulted in average operating working capital as a percentage of sales increasing to 20.0% in 2009, compared with 18.5% in 2008.
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:
| |
2009
Days |
2008
Days |
 |
|
|
| Company |
36 |
37 |
| Group (range of days) |
13–122 |
12–166 |
|
|
|
| Group (average days) |
67 |
60 |
|
|
|
Capital expenditure
Capital expenditure on property, plant and equipment and non-integral computer software was $123.0 million (2008: $193.8 million) and the Group realised $12.9 million in cash (2008: $7.9 million) on the disposal of property, plant and equipment.
Net capital expenditure was 0.6 times depreciation (2008: 0.9 times).
Management maintains strict control on capital expenditure, focusing expenditure in support of the Group’s strategic priorities and growth objectives and maintaining the Group’s high standards with respect to health, safety and the environment. In 2010, capital expenditure is expected to be approximately $175 million.
Net income taxes paid
Net income taxes paid declined substantially to $19.1million (2008: $84.5 million) because lower profits in certain of the tax jurisdictions in which the Group operates led to lower payments on account to the relevant tax authorities.
Free cash flow
Free cash flow in 2009 was $358.0 million, compared with $300.9 million in 2008.
As a result of the change in the Company’s dividend policy that came into effect in 2009, the cash outflow on dividends was reduced substantially from $246.2 million in 2008 to $48.3 million in 2009. Based on the dividend per share for 2009 and the number of ordinary shares currently in issue, annual dividend payments would amount to approximately $88 million.
Acquisitions and disposals
In July 2009, the Group acquired a 100% interest in Hydrolink, a fluid engineering services provider to the oil and gas and marine sectors in the Middle East, and the remaining 40% minority interest in Rolastar Pvt Ltd (in which it acquired a 60% interest in 2008). Goodwill of $21.1 million was recognised on these acquisitions and additional goodwill of $5.7 million was recognised on completion of the initial accounting for businesses acquired in 2008.
After taking into account cash and debt acquired, the acquisition of interests in subsidiaries increased net debt by $34.3 million (2008: $65.8 million). We also invested $2.7 million (2008: $10.4 million) in associates.
During 2009, we received $0.7 million in respect of businesses sold in previous years. During 2008, we realised $124.6 million on the disposal of interests in businesses, principally on the sale of Stant and Standard-Thomson.
Overall, the Group’s acquisitions and disposals activity increased net debt by $36.3 million (2008: reduced net debt by $49.9 million).
Net debt
As shown in the following table, net debt decreased by $268.9 million, from $476.4 million to $207.5 million, during 2009.
| |
2009
$m |
2008
$m |
|
|
|
| Opening net debt |
(476.4) |
(591.5) |
|
|
|
| |
|
|
| Cash generated from operations |
|
|
| – Before cash outflow on restructurings |
601.4 |
645.0 |
| – Cash outflow on restructurings |
(69.3) |
(16.3) |
|
|
|
| Cash generated from operations |
532.1 |
628.7 |
| Capital expenditure |
(123.0) |
(193.8) |
| Disposal of property, plant and equipment |
12.9 |
7.9 |
|
|
|
| Trading cash flow |
422.0 |
442.8 |
| Income taxes paid (net) |
(19.1) |
(84.5) |
| Interest (net) |
(34.3) |
(44.3) |
| Other movements |
(10.6) |
(13.1) |
|
|
|
| Free cash flow |
358.0 |
300.9 |
| Ordinary dividends |
(48.3) |
(246.2) |
| Acquisitions and disposals (net) |
(36.3) |
49.9 |
| Ordinary share movements |
(1.3) |
(4.5) |
| Foreign currency movements |
(3.7) |
16.1 |
|
|
|
| Cash movement in net debt |
268.4 |
116.2 |
| Non-cash movement in net debt |
0.5 |
(1.1) |
|
|
|
| Total movement in net debt |
268.9 |
115.1 |
|
|
|
| |
|
|
| Closing net debt |
(207.5) |
(476.4) |
|
|
|
An analysis of the components of the movement in net debt is presented in Explanation of key performance measures.
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 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 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.
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.
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 2009, the Group’s capital was $1,744.1 million (2008: $2,087.2 million).
We manage the Group’s capital structure with two main objectives: to maximise shareholder value whilst retaining flexibility to take advantage of opportunities that arise to grow the business; and to maintain our investment-grade credit ratings. 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.
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 $1,294.6 million, of which $649.6 million was drawn down at the end of 2009.
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 2009, we had no amounts drawn down against this facility. During the year, the maximum amount drawn down on the facility was $136.7 million. In May 2009, the Group negotiated a $450 million forward-start facility that will commence when the existing facility expires and will itself expire in May 2012.
We include within committed facilities our borrowings under finance leases, which amounted to $4.6 million at the end of 2009.
In addition to our committed facilities, we have uncommitted facilities of $381.2 million (of which we had drawn down $6.0 million at the end of 2009) and we have outstanding performance bonds, letters of credit and bank guarantees amounting to $80.3 million.
Overall, at the end of 2009, we had committed borrowing headroom of $639.0 million (in addition to cash balances of $447.1 million).
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.
|
Facility
$m |
Drawings
$m |
Headroom
$m |
|
|
|
|
| Committed facilities: |
|
|
|
| – Bonds |
645.0 |
(645.0) |
– |
| – Credit facility |
645.0 |
– |
645.0 |
| – Finance leases |
4.6 |
(4.6) |
– |
|
|
|
|
| |
1,294.6 |
(649.6) |
645.0 |
| Uncommitted facilities: |
|
|
|
| – Credit facilities |
381.2 |
(6.0) |
375.2 |
|
|
|
|
| Total facilities |
1,675.8 |
(655.6) |
1,020.2 |
|
|
|
|
| Less: Uncommitted facilities |
|
|
(381.2) |
|
|
|
|
| Committed (minimum) headroom |
|
|
639.0 |
|
|
|
|
| |
|
|
|
| Cash and cash equivalents |
|
|
445.0 |
| Collateralised cash |
|
|
2.1 |
|
|
|
|
| Cash balances |
|
|
447.1 |
|
|
|
|
Level of borrowing and seasonality
We operate in a wide range of markets and geographic locations and, as a result, there is little seasonality in 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 2009, the principal amount of the Group’s borrowings decreased from $755.9 million to $655.5 million and peaked, in May, at $807.6 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. We then use foreign currency derivatives in effect to redenominate the majority of the Group’s sterling borrowings into a number of other currencies (principally the US dollar).
At the end of 2009, the weighted average cost of the Group’s outstanding borrowings was 2.4% (2008: 4.5%) and the effective interest maturity of the Group’s borrowings was less than three months.
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 subsequent 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 2009, the ratio was 0.6 times) and the ratio of operating profit to the net interest charge must not be less than 3.0 times (for 2009, the ratio was 5.5 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 2009, 94% 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 2009, cash balances were $447.1 million, of which $381.0 million was interest-bearing. All interest-bearing deposits attract interest at floating rates. At the end of 2009, the weighted average interest rate on cash deposits was 0.9% (2008: 1.8%).
Currency profile of net debt
At the end of 2009, 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 $796.6 million (2008: $888.7 million). We show below the effect of currency translation hedges on the currency profile of the Group’s net debt at the end of 2009.
|
Net debt
before
hedges
$m |
Effect of
hedges
$m |
Net debt
after
hedges
$m |
|
|
|
|
| Currency: |
|
|
|
| – US dollar |
169.3 |
(512.9) |
(343.6) |
| – Sterling |
(524.9) |
612.7 |
87.8 |
| – Euro |
16.1 |
(49.5) |
(33.4) |
| – Canadian dollar |
18.6 |
(61.4) |
(42.8) |
| – Other |
113.4 |
11.1 |
124.5 |
|
|
|
|
| |
(207.5) |
– |
(207.5) |
|
|
|
|
|
|
