Reuters Group PLC Annual Report and Form 20 ... - Thomson Reuters

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32 Reuters Group PLC Annual Report and Form 20-F 2002Operating and financial reviewcontinuedSterling trade-weighted exchangerate index2002 2001 2000115In addition, Reuters has short-term uncommitted bank borrowingfacilities denominated in various currencies, the sterling equivalentof which was approximately £185 million. Drawings under theselines was £10 million at 31 December 2002. Instinet has access tothe equivalent of US$717 million short-term uncommitted bankfacilities of which US$31 million was drawn at 31 December 2002.JFM AM JJASO N110105100DThe following table summarises the Group’s principal contractualfinancial obligations at 31 December 2002, certain of which aredescribed in the consolidated financial statements and notes. TheGroup expects to be able to fund such obligations from ongoingoperations and its external facilities.Payments due by periodLessthan 1-3 4-5 After 5Contractual obligations Total 1 year years years yearsShort-term debt 440 440 – – –Long-term debt 352 – 352 – –Operating leases 735 91 149 119 376Unconditional purchase obligations 152 63 89 – –Total contractual obligations 1,679 594 590 119 3766. Treasury managementThe key objectives of Reuters Group treasury management are toensure sufficient liquidity exists to meet funding needs and to managethe interest rate and currency risks arising from the Group’s operationsand its sources of finance.Reuters borrows in many currencies, at both fixed and floating ratesand uses derivative contracts to create the desired currency andinterest rate basis. Historically, most funding was converted intosterling. However some debt may be left in, or converted to, othercurrencies to match asset exposures that arise from time to time.Derivatives used are principally interest rate swaps, forward rateagreements, interest rate caps and collars, currency swaps, forwardforeign exchange contracts and currency options.The main risks managed by the Group Treasurer, under policiesapproved by the Board are foreign currency risk, interest rate risk,liquidity and refinancing risk and counterparty credit risk. A TreasuryCommittee of the Board periodically reviews Reuters treasury activities,policies and procedures. All treasury activity takes place within aformal control framework. A separate treasury department existswithin Instinet.Almost 90% of Group revenue is denominated in non-sterlingcurrencies. The Group also has significant costs denominated inforeign currencies with a different mix from revenue. Group profitsare, therefore, exposed to currency fluctuations. The approximateproportions of operating profit excluding goodwill amortisation andcurrency gains attributable to each key currency group was as follows:Year to 31 December2002 2001 2000Operating profit by currency % % %Continental EuropeEuro and legacy currencies 296 133 107Other 54 25 18US dollar (71) 66 57Japanese yen 53 26 22SterlingDepreciation (140) (63) (58)Other (143) (97) (66)Other 51 10 20Total 100 100 100
Reuters Group PLC Annual Report and Form 20-F 2002 33Sterling costs exceeded sterling revenue due to the level ofrestructuring costs, UK-based marketing, development, operationaland central management costs and depreciation which was largelyaccounted for in sterling once an asset has been acquired.In broad terms, using the 2002 mix of profits, the impact of anadditional unilateral 1% strengthening of sterling would have beena reduction of approximately £7 million in operating profits beforehedging (2001: £10 million, 2000: £10 million).Exchange rate movements in 2002 had an adverse impact beforehedging on reported revenue offset by a favourable impact on costs,mainly due to the weaker US dollar in 2002 compared with 2001.The net impact on operating profit was not significant.The Group holds cash and short-term investment balances of£728 million, of which £537 million is held by the Instinet groupof companies. Reuters currency exposure with respect to Instinetis not currently hedged.The priority in Reuters currency management policy is to reduce therisk of volatility in the Group’s profit and loss account to acceptablelevels while allowing a degree of flexibility to take advantage ofmarket movements.The main principles underlying currency hedging policies are as follows:• committed hedging cannot exceed the underlying cash flowexposure; and• levels of currency hedging cannot exceed 90% of underlying exposurefor the first 12 months and 70% for the following 12 months.The results of currency and interest rate hedging activities for thethree years to December 2002 are summarised below:Year to 31 December2002 2001 2000Recognised gains/(losses) £m £m £mCurrency hedging 10 (4) 5Interest rate hedging (2) (1) (3)Recognised currency hedging gains in 2002 were favourable comparedwith 2001 due mainly to the lower level of US dollar hedging whichgave rise to losses in 2001 when the currency weakened after hedgeswere placed.Gains and losses on instruments used for hedging are not recogniseduntil the exposure that is being hedged is itself recognised. Unrecognisedgains and losses on instruments used for hedging, and the movements,are set out below:HedgingGains (Losses) Net£m £m £mUnrecognised at 1 January 2002 18 (9) 9Arising in previous years:recognised in 2002 (12) 5 (7)not recognised in 2002 6 (4) 2Arising in 2002:not recognised in 2002 7 (9) (2)Unrecognised at 31 December 2002 13 (13) –Of which:expected to be recognised in 2003 11 (8) 3expected to be recognised in 2004 or later 2 (5) (3)Net unrecognised gains on derivatives used for hedging were nil at31 December 2002 compared with unrecognised gains of £9 millionat 31 December 2001 and unrecognised losses of £3 million in 2000.The decrease is mainly due to profitable Japanese yen hedges at31 December 2001 which matured during 2002.Net cash flows are mainly converted into sterling and either appliedto reduce debt or invested in money market instruments with financialinstitutions holding strong credit ratings with pre-agreed limits setby the Board. Interest rates are managed using a mix of financialinstruments, which commence and mature at various dates throughto January 2006. Interest rate hedging relates to the use of derivativecontracts to alter the currency and interest rate profile onmedium-term fixed rate notes issued and to hedge timing mismatches.In broad terms, using the average net funds position, a 1% increase inglobal interest rates would have reduced profit before tax in the yearby approximately £1 million (2001 and 2000: £1 million) excluding theimpact of hedging.7. Accounting policies and US GAAPGroup accounting policies, which are set out on pages 63-64, conformwith UK GAAP. In accordance with the requirements of FinancialReporting Standard 18 (FRS 18), these policies and any applicableestimation techniques have been reviewed by the directors who haveconfirmed them to be the most appropriate for the preparation of the2002 financial statements.Critical accounting policiesIn preparing these financial statements, management has made its bestestimates and judgements of certain amounts included in the financialstatements. The most significant judgemental areas in 2002 related to:• the impairment of fixed assets and goodwill. Under UK accountingstandards impairment is measured by comparing the carrying valueof an asset with the higher of its net realisable value or value in use.These comparisons sometimes require subjective judgements andestimates to be made by management with regard to projectedfuture cash flows of income generating units or the amounts thatcould be obtained from the sale of investments. As a result somefixed asset investments have been written down to net realisablevalue. In 2002 the following impairment charges were recorded inthe consolidated profit and loss account:£mImpairment of Instinet goodwill 208Impairment of the carrying value of Reuters shares held bythe ESOTs 147Other fixed asset investments 81The impairment of both Instinet goodwill and Reuters shares heldby the ESOTs have been impacted by market values falling belowcarrying values;• accounting for LTIP. The costs of shares acquired to cover LTIPawards are charged in the profit and loss account over the period towhich the performance criteria relate. Adjustments are made duringthe three- and five-year vesting period of each plan to reflectchanges in the possibility of performance criteria being met. Theseadjustments are to some extent subjective as performance is basedon Reuters Total Shareholder Return (TSR) relative to the TSR of theother 99 companies in the FTSE 100 at the start of the measurementperiod. The adoption of more pessimistic assumptions would resultin a lower charge being recognised at the start of each plan and thepossibility of higher charges in later years;• property provisions. As part of the 2002 restructuring chargesa number of leasehold properties have been identified as beingsurplus to requirements. Although efforts are being made to sub-letthis vacant space, management recognises that this may not bepossible immediately given the current economic climate. Estimateshave been made to cover the cost of vacant possession togetherwith any shortfall arising from sub-leased rental income being lowerthan lease costs being borne by Reuters. The actual outcome maydiffer from the estimates;• allowances for doubtful accounts. For all trade debtors, we mustmake a judgement regarding the ability of our customers to payand accordingly, we establish an allowance for estimated lossesarising from non-payment. In evaluating this allowance we considercustomer credit worthiness, current economic conditions and ourown experience. If future collections differ from our estimates, thiswill affect future profit.
Page 1 and 2: The 2002 Results.Be informed.Reuter
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Reuters Group PLC Annual Report and
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Financial diary for 2003Where to fi
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