Financial Review
SHAREHOLDERS’ FUNDS
Consolidated equity shareholders’ funds at the end of 2006 were negative £540.0 million, compared to negative £666.6 million at the end of 2005. The principal cause of this movement was the profit for the year attributable to shareholders of £245.1 million offset by dividends paid to ordinary shareholders of £133.3 million.
FINANCIAL RISK MANAGEMENT POLICIES
The board has approved the following financial risk management policies. These policies cover those financial risks that are material to the company’s operations and financial results. The board has set appropriate delegated authorities, treasury financing parameters and reporting procedures to ensure compliance with such policies at all times. The effect of the company’s treasury activities is reflected in the disclosures in notes 17, 22, 23 and 24.
CAPITAL STRUCTURE AND FINANCING STRATEGY (LIQUIDITY RISK)
The board has set the following policies so as to minimise the company’s exposure to liquidity risk and thus ensure that the company is able to meet its liabilities as they fall due.
The company is committed to maintaining a debt/equity capital structure that is sufficiently robust so as to ensure the continued access to a broad range of financing sources and thus be able to maintain sufficient flexibility to pursue commercial opportunities, in a timely manner as they present themselves, without the imposition of onerous financing terms and conditions.
The company will maintain a minimum financing headroom of £200 million, when measured against its latest forecast/anticipated cash flows over a rolling nine-month time horizon.
The company’s sources of finance should be structured in a manner so as to minimise potential refinancing risk particularly arising from a bunching of debt/note facility maturities.
The company’s financing sources should be diversified, across the international banking and capital markets, so as to avoid the over-reliance upon a single source, or disproportionately large source, of funds from an individual capital market note issue or bank finance provider.
In Autumn 2005, the group’s credit rating from Standard & Poor’s was reduced from BBB+ with negative outlook to its current level of BBB with stable outlook. This reflected the group’s weaker than expected business risk and financial risk profiles following weakened operating performance over the past few years.
We continue to target a stable BBB+ rating in the medium-term as we believe that this strikes an appropriate balance between an efficient capital structure (as represented by a low weighted average cost of capital), liquid access to the capital markets and reasonable pricing. The board believes that a key priority must be to retain sufficient financing flexibility to fund its business turnaround strategy. Therefore, over the short- to medium-term we do not have surplus capital that could be returned to shareholders if a minimum BBB credit rating is to be maintained with an appropriate degree of headroom to avoid further ratings pressure.
At 31 December 2006, the group had approximately £274 million of undrawn committed bank credit facilities. The company is in compliance with the financial and other covenants within its committed bank credit facilities as well as all obligations relating to the notes issued under the Euro Medium Term Note (EMTN) programme.
In 2006 the group lengthened the maturity profile of its debt. This was achieved through the successful issuance of a £300 million ten year bond in March and the establishment of new £500 million five year syndicated bank credit facilities in October. Both financing transactions were well received by the market, having been well over subscribed.
The company’s credit rating from Standard & Poor’s has remained BBB with stable outlook throughout 2006. This rating was most recently reaffirmed on 30 November 2006 following the company’s announcements that it had both acquired the Target Express parcel delivery business for £213 million and decided to undertake a strategic review of its Electronic Security business.
