Other financial matters

Financial risk management

The Group is exposed to market risks arising from its international operations. The Group has well defined and consistently applied policies for the management of foreign exchange and interest rate exposures. There has been no change since the year end in the major financial risks faced by the Group. The main risks arising from the Group's financial instruments are interest rate risk, liquidity risk and foreign currency risk.

The treasury committee of the Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies are regularly reviewed. The Group's financial instruments, other than derivatives, comprise borrowings, cash and liquid resources and various items, such as trade receivables and trade payables that arise directly from its operations. The Group also enters into derivative transactions (principally interest rate swaps and forward foreign currency contracts). The purpose of such transactions is to hedge certain interest rate and currency risks arising from the Group's operations and its sources of finance.

Details of financial instruments are shown in note 20 to the accounts.

Derivatives are also used to a limited extent to hedge movements in the price paid for lumber. These options and futures hedging contracts mature within one year and all are with organised exchanges. The Group's policy is to control credit risk by only entering into financial instruments with authorised counterparties after taking account of their credit rating.

It is and has been throughout the period under review, the Group's policy that no trading in financial instruments or speculative transactions be undertaken.

Interest rate risk

The Group finances its operations through a mixture of retained profits and bank and other borrowings. The Group borrows in the desired currencies principally at floating rates of interest and then uses interest rate swaps to generate the desired interest rate profile, so managing the Group's exposure to interest rate fluctuations.

At the year end approximately £1,023 million of the Group's net debt were at fixed rates for one year or more, after taking account of swaps.

The Group reviews deposits and borrowings by currency at treasury committee and Board meetings. The treasury committee gives prior approval to any variations from floating rate arrangements.

Liquidity risk

The Group seeks a balance between certainty of funding and a flexible, cost-effective borrowings structure. The Group's policy is to ensure that, as a minimum, all projected net borrowing needs are covered by committed facilities arranged and provided by the corporate office, supplemented where appropriate by local facilities.

The Group's strong earnings and low gearing are such that the ratio of net debt to EBITDA (earnings before interest, taxes, depreciation and amortisation) for the year was 1.91:1 (2005: 1.42:1). This increase on the prior year is principally due to the high level of acquisitions in the year. In the absence of significant acquisitions or exceptional organic growth, the Group would anticipate having surplus funds within the medium term. The Group does, however, actively seek opportunities to secure long-term funding at attractive rates.

In September 2005, the Group diversified its core funding by launching a US Private Placement. The issue was a great success raising US$1,200 million (£643 million) consisting of 8 tranches ranging in maturity from 3 to 15 years. This is the largest Private Placement ever by a foreign issuer. The Group took advantage of favourable market conditions to obtain long-term debt funding at rates comparable to the 5 year bank syndicated debt market. This diversification of funding marks another step in the growth of the Group and reduces its reliance solely on the bank market for debt funding.

In May 2006, the Group refinanced the great majority of its bank debt with a highly successful bank syndication, which raised a2,800 million with a maturity of just over 5 years. The syndicate reaffirmed the Group's core banks which provide financial services to subsidiaries in all the countries in which the Group operates.

The year-end maturity profile of the Group's centrally managed facilities was as follows:

At 31 July 2006, the Group had committed undrawn loan facilities of £780 million available to fund working capital, investments and general corporate purposes, as follows:

Foreign currency risk

The Group has significant overseas businesses whose revenues are mainly denominated in the currencies of the countries in which the operations are located. Approximately 59.1% of the Group's revenue is in US dollars. The Group does not have significant transactional foreign currency cash flow exposure. However, those that do arise are generally hedged with either forward contracts or currency options. The Group does not normally hedge profit translation exposure since such hedges have only temporary effect. Most of the foreign currency earnings generated by the Group's overseas operations are reinvested in the business to fund growth in those territories. The Group's policy is to maintain the majority of its debt in the currencies of its operating companies as this hedges both the net assets and cash flows of the Group.

Details of average exchange rates used in the translation of overseas earnings and of year-end exchange rates used in the translation of overseas balance sheets, for the principal currencies used by the Group are shown in the Five year summary on page 144 to the accounts. The net effect of currency translation was to increase revenue by £274 million (2.4%) and to increase trading profit by £18 million (2.5%).

These currency effects reflect a movement of the average sterling exchange rate against each of the major currencies with which the Group is involved as follows:

Commodity risk

The Group's operating performance is affected by price fluctuations in stainless steel, nickel alloy, copper, aluminium, plastic, lumber and other commodities. The Group seeks to minimise the effects of changing prices through economies of purchasing and inventory management, resulting in cost reductions and productivity improvements as well as price increases to maintain reasonable profit margins. With the exception of lumber futures held to hedge future sales commitments, no trading instruments are held in respect of these commodities. At 31 July 2006, the Group held no lumber futures contracts.

Market price risk

The Group regularly monitors its interest rate and currency risk by reviewing the effect on profit before tax over various periods of a range of possible changes in interest rates and exchange rates. On the basis of the Group's analysis it is estimated that the maximum effect of a rise of one percentage point in the principal interest rates on the Group's continuing businesses would result in an increase. In the interest charge of approximately £9 million. Similarly, it is estimated that a strengthening of sterling by 10% against all the currencies in which the Group does business would reduce operating profit before amortisation of acquired intangibles by approximately £75 million (8.5%) due to currency translation.

Financial reporting

These financial statements are the Group's first prepared under IFRS. Note 45 to the accounts sets out the restatement of the results for the year ended 31 July 2005 from UK GAAP to IFRS.

The Group's accounting policies have been updated to reflect the requirements of IFRS. There have been no other amendments or changes to the Group's selected accounting policies.

Insurance

The insurance arrangements of the Group are reviewed annually. The Group has a captive insurance company which is registered and operational in the Isle of Man. No policies are written for third parties. The administration is undertaken by a specialist management company.

Going concern

The Directors are confident, on the basis of current financial projections and facilities available, that the Company and the Group have adequate resources to continue in operation for the foreseeable future. Accordingly the Directors continue to adopt the going concern basis in preparing the financial statements.