G4S Annual Report and Accounts 2011

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Overview Strategic review Performance Performance Financial review continued The management operating cash flow calculation is reconciled to the net cash from operating activities as disclosed in accordance with IAS7 Cash Flow Statements as follows: 2011 £m 2010 £m Cash flow from operating activities (IAS7 definition) 372 448 Net cash flow from capital expenditure (138) (129) Discontinued operations and other items 95 17 Add-back additional retirement benefit contributions 40 33 Add-back tax paid 80 86 Operating cash flow (G4S definition) 449 455 The group’s free cash flow, as defined by management, is analysed as follows: 2011 £m 2010 £m Operating cash flow 449 455 Net interest paid (102) (94) Tax paid (80) (86) New finance leases (11) (9) Free cash flow 256 266 Free cash flow is reconciled to the total movement in net debt as follows: 2011 £m 2010 £m Free cash flow 256 266 Discontinued operations (12) (18) Additional retirement benefit contributions (40) (33) Net cash outflow on acquisitions (159) (56) Net cash flow from associates 4 3 Aborted acquisition and legal settlement costs (55) – Dividends paid to non-controlling interests (10) (12) Transactions with non-controlling interests (18) (3) Share issues less share purchases (13) (10) Dividends paid to equity holders of the parent (114) (103) Movement in net debt in the year (161) 34 Foreign exchange translation adjustments to net debt (29) (27) Net debt at 1 January (1,426) (1,433) Net debt at 31 December (1,616) (1,426) Financing and treasury activities The group’s treasury function is responsible for ensuring the availability of cost-effective finance and for managing the group’s financial risk arising from currency and interest rate volatility and counterparty credit. Treasury is not a profit centre and it is not permitted to speculate in financial instruments. The treasury department’s policies are set by the board. Treasury is subject to the controls appropriate to the risks it manages. These risks are discussed in note 33 on pages 107 to 109. Financing The group’s funding position is strong, with sufficient headroom against available committed facilities and very little drawn debt maturing before 2013. The group’s primary sources of bank finance are a £1.1bn multicurrency revolving credit facility provided by a consortium of lending banks at a margin of 0.80% over LIBOR and maturing 10 March 2016 and a €575m revolving credit facility provided by four banks at a margin of 1.20% over LIBOR and maturing 6 June 2012 with the right to extend for a further six months at the group’s option. This facility has not been drawn. The group also has US $550m in financing from the private placement of unsecured senior loan notes on 1 March 2007, maturing at various dates between 2014 and 2022 and bearing interest at rates between 5.77% and 6.06%. The fixed interest rates payable have been swapped into floating rates for the term of the notes, at an average margin of 0.60% over Libor. On 15 July 2008, the group completed a further $514m and £69m private placement of unsecured senior loan notes, maturing at various dates between 2013 and 2020 and bearing interest at rates between 6.09% and 7.56%. The proceeds of the issue were used to reduce drawings against the revolving credit facility. $265m of the US dollar receipts have been swapped into sterling for the term of the notes. On 9 March 2009, the group obtained a BBB credit rating from Standard & Poor’s. This credit rating supported the group’s inaugural transaction in the public bond market, a £350m note issued on 13 May 2009 bearing an interest rate of 7.75% and maturing in 2019. At 31 December 2011 the group had uncommitted facilities of £706m. The group’s net debt at 31 December 2011 was £1,616m. The group headroom at 31 December 2011 was £767m. The group has sufficient capacity to finance current investment plans. Net debt represents the group’s total borrowings less cash, cash equivalents and liquid investments. The components of net debt are detailed in note 39 on page 119. 40 G4S plc Annual Report and Accounts 2011
Governance Financial statements Shareholder information Interest rates The group’s investments and borrowings at 31 December 2011 were, with the exception of the issue of private placement notes in July 2008 and public notes in May 2009, at variable rates of interest linked to LIBOR and Euribor, with the group’s exposure being predominantly to interest rate risk in sterling. The group’s interest risk policy requires treasury to fix a proportion of this exposure on a sliding scale utilising interest rate swaps. The maturity of these interest rate swaps at 31 December 2010 was limited to five years. The market value of the Loan Note-related pay-variable receive-fixed swaps outstanding at 31 December 2011, accounted for as fair value hedges, was a gain of £77m. The market value of the pay-fixed receive-variable swaps and the pay-fixed receive-fixed cross-currency swaps outstanding at 31 December 2011, accounted for as cash flow hedges, was a net gain of £40m. Foreign currency The group has many overseas subsidiaries and associates denominated in various different currencies. Treasury policy is to manage significant translation risks in respect of net operating assets using foreign currency denominated loans, where possible. The group does not use foreign exchange contracts to hedge the residual portion of net assets not hedged by way of loans. The group believes cash flow should not be put at risk by these instruments in order to preserve the carrying value of net assets. At 31 December 2011, the group’s US dollar and euro net assets were approximately 75% and 50% respectively hedged by foreign currency loans. Exchange differences on the translation of foreign operations included in the consolidated statement of comprehensive income amount to a loss of £65m (2010: gain of £41m). These differences are net of a £29m loss (2010: £27m) on the retranslation of net debt. Cash management To assist the efficient management of the group’s interest costs and its short-term deposits, overdrafts and revolving credit facility drawings, the group operates a global cash management system. At 31 December 2011, more than 140 group companies participated in the pool. Debit and credit balances of £303m were held within the cash pool and were offset for reporting purposes. Retirement benefit obligations The group’s primary defined benefit retirement benefit scheme operates in the UK, but it also operates such schemes in a number of other countries, particularly in Europe and North America. The latest full actuarial assessment of the three sections of the UK scheme was carried out at 5 April 2009. The three sections of the UK scheme are the Group 4 scheme (approximately 8,000 members), the Securicor scheme (approximately 20,000 members) and the GSL scheme (approximately 2,000 members) acquired in 2008. This assessment and those of the group’s other schemes have been updated to 31 December 2011. The group’s funding shortfall on the valuation basis specified in IAS19 Employee Benefits was £295m before tax or £212m after tax (2010: £265m and £191m respectively). The net pension obligation has increased by £30m since 31 December 2010 due mainly to a net actuarial loss as a result of the decrease in the discount rate used in the UK from 5.5% to 5.0%, although this was offset partly by a decrease in inflation assumptions. Additional company contributions of £40m were paid into the schemes. The group believes that, over the very long term in which retirement benefits become payable, investment returns should eliminate the deficit reported in the schemes in respect of past service liabilities. However, in recognition of the regulatory obligations upon pension fund trustees to address reported deficits, the group’s deficit recovery plan will see additional cash contributions made to the UK scheme of approximately £35m in 2012 with modest annual increments thereafter. During the year the group has closed the UK scheme to future accrual which will limit the future growth in liabilities. Existing members retain their benefits accrued to-date and have been offered the opportunity to transfer to a new defined contribution scheme for future pension benefits. Corporate governance The group’s policies regarding risk management and corporate governance are set out in the Corporate governance statement on pages 57 to 61. Going concern The directors are confident that, after making enquiries and on the basis of current financial projections and available facilities, they have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements. Trevor Dighton Chief financial officer G4S plc Annual Report and Accounts 2011 41
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G4S Annual Report and Accounts 2011

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