Free cash flow (net cash flow from operating activities after interest, tax, dividends and capital expenditure) was also strongly positive at £26.0 million. Over the last two years the group has generated £54.8 million of free cash flow. Net cash flow after acquisitions and share purchases was £20.1 million. Net borrowings after taking into account the effect of exchange translation fell by £3.5 million to £221.6 million.
Johnson Matthey's balance sheet remains strong. The group's gearing (% net borrowings : shareholders' funds and minority interests) fell from 45% to 39%. Interest cover for the year (operating profit : net interest) was just over 9 times.
Financial Risk Management
In this year's accounts the group has adopted FRS 13 - 'Derivatives and other Financial Instruments: Disclosures'. The group uses financial instruments, in particular forward currency contracts and currency swaps, to manage the financial risks associated with the group's underlying business activities and the financing of those activities. The group does not undertake any trading activity in financial instruments. Our Treasury department is run as a service centre rather than a profit centre.
Interest Rate Risk
The group's net borrowings are largely in the form of foreign currency loans, primarily US dollars, to fund overseas operations (see page 59). The group occasionally uses interest rate swaps to generate the desired interest profile. The group has £62.0 million (US$100 million) of long term fixed rate borrowings in the form of an issue of US dollar bonds which carry an interest coupon of 6.36%. At 31st March 1999 28% of the group's net borrowings were at fixed rates of interest. The remaining 72% of the group's net borrowings were at floating rates.
Liquidity Risk
The group's policy on funding capacity is to ensure that we always have sufficient long term funding and committed bank facilities in place to meet foreseeable peak borrowing requirements.At 31st March 1999 we had £255 million of committed facilities from a group of high quality international banks with maturities up to 4 years, of which 61% were drawn down (see page 61).The group also has a number of uncommitted facilities and overdraft lines.
Foreign Currency Risk
Johnson Matthey's operations are global in nature with the majority of the group's profits earned outside the UK. The group has operating subsidiaries in 38 countries with the largest single investment being in the US. In order to protect the group's sterling balance sheet and reduce cash flow risk, the group finances most of its US investment by US dollar borrowings. Although most of this funding is
obtained by directly borrowing US dollars, some is achieved by using currency swaps to reduce costs and credit exposure. The group also uses local currency borrowings to fund its operations in other countries.
The group uses forward exchange contracts to hedge foreign exchange exposures arising on forecast receipts and payments in foreign currencies. Currency options are occasionally used to hedge foreign exchange exposures, usually when the forecast receipt or payment amounts are uncertain.
Precious Metals Prices
Fluctuations in precious metal prices can have a significant impact on Johnson Matthey's financial results. Our policy for all our manufacturing businesses is to limit this exposure by hedging against future price changes where such hedging can be done at acceptable cost. The group does not take material exposures on metal trading.
All the group's stocks of gold and silver are fully hedged by leasing or forward sales. Currently the majority of the group's platinum group metal stocks are unhedged because of the lack of liquidity in the platinum metal markets.
Implementation of the Euro
The impact of the introduction of the Euro for our businesses worldwide and especially in
Europe was reviewed in early 1998 and resulted in a detailed implementation plan to allow
banking and internal reporting systems to be modified and tested in advance of the
1st January 1999 introduction. The process was completed successfully and has allowed us
to meet all customer currency requirements whilst enabling some treasury and risk
management activities to be streamlined.
Year 2000 Systems Compliance
The Year 2000 Compliance programme established in September 1996 is now substantially complete. The project has met our self imposed deadline of 31st March 1999 for the upgrade, repair or replacement, as appropriate, of all critical business systems.
To ensure the effectiveness of this work we have instigated a formal programme of year 2000 audits at all our 55 operational sites. This is due to be completed by 30th June 1999. In addition to systems reviews the scope of the audits extend to supply chain issues, general preparedness and detailed business contingency planning.
Given the scale of the task, work on remaining non-critical systems including technical and some embedded applications will continue up to the end of 1999. However, with the main systems task completed, the major business focus is now directed to finalising contingency plans for the group. In the lead up to the millennium and beyond, the objective is to further develop and refine our plans so as to minimise risks due to external influences outside our direct control.
Costs are capitalised where systems are enhanced. Such projects have been included in the group's capital expenditure plans and amount to £3.5 million to completion. Modifications to existing systems which bring no additional business benefit are expensed, although there has not been significant incremental expenditure in this category.
We continue to work with suppliers and customers on compliance issues. A number of our larger customers have already undertaken successful compliance audits at JM manufacturing sites which form a critical part of their supply chain.
John Sheldrick
Group Finance Director
