Financial Risk Management and Treasury Policies
The group uses financial instruments, in particular forward currency contracts and currency swaps, to manage the financial risks associated with its 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
At 31st March 2008 the group had net borrowings of £610.4 million. Some 30% of this debt was at fixed rates with an average interest rate of 5.20%. The remaining 70% of the group’s net borrowings was funded on a floating rate basis. A 1% change in all interest rates would have a 1.6% impact on profit before tax and amortisation of acquired intangibles. This is within the range the board regards as acceptable.
Liquidity
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 2008, the group had borrowings under committed bank facilities of £230.7 million. Total committed bank facilities amounted to £310.0 million of which £79.3 million was undrawn at 31st March 2008. To increase our headroom we have recently agreed a further £100 million long term loan facility from the European Investment Bank. The group also has a number of uncommitted facilities, including metal leases, and overdraft lines at its disposal.
The “credit crunch” and continued turbulence in the financial markets so far has had little direct impact on Johnson Matthey. We do not invest in risky financial instruments or financial derivatives and the group’s strong balance sheet and financial performance mean that all the normal credit markets are still open to us.
Foreign Currency Risk
Johnson Matthey’s operations are located in over 30 countries, providing global coverage. The majority of its profits are earned outside the UK. In order to protect the group’s sterling balance sheet and reduce cash flow risk the group has financed most of its investment in the USA, Europe, Japan and China by borrowing US dollars, euros, yen and renminbi respectively. Although an element of this funding is obtained by directly borrowing the relevant currency, a large part is achieved through currency swaps which can be more efficient and reduce costs and credit exposure. 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. Details of the contracts outstanding on 31st March 2008 are shown in note 26 and note 27.
Precious Metal Prices
Fluctuations in precious metal prices can have a significant impact on Johnson Matthey’s financial results. Our policy for all 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 stocks are unhedged because of the lack of liquidity in the platinum market.
