118
IMI plc
SECTION 4 – CAPITAL STRUCTURE AND FINANCING COSTS
Continued
4.4.4.1
Overview
The Board monitors the geographical spread of its shareholders and
employees are encouraged to hold shares in the Company. The underlying
capital base of the Group includes total equity and reserves and net debt.
Employee benefit obligations net of deferred tax form part of the extended
capital base. Management of this element of the capital base is discussed
further in section 4.5 of the financial statements. Undrawn committed funding
facilities are maintained as described in section 4.4.5.1 to provide additional
capital for growth (including acquisitions and organic investments) and liquidity
requirements as discussed above.
4.4.4.2
Capital base
2014
2013
£m
£m
Total equity
554
648
Gross debt including overdrafts
244
299
Gross cash
(44)
(100)
Capital base
754
847
Employee benefits and deferred tax assets
13
131
Extended capital base
767
978
Undrawn funding facilities
272
215
Available capital base
1,039
1,193
Part of the capital base is held in currencies to broadly match the currency base
of the assets being funded as described in the asset translation risk section.
4.4.4.3
Debt or equity
The balance between debt and equity in the capital base of the Company is
considered regularly by the Board in the light of market conditions, business
forecasts, growth opportunities and the ratio of net debt to EBITDA. Funding
covenants currently limit net debt to a maximum of three times EBITDA. The
net debt to EBITDA ratio at the end of 2014 was 0.5 times (2013: 0.5 times)
and was 0.6 times excluding disposal gains and one-off pension gains from
the continuing EBITDA. Through the life of our five year plan, the Board would
consider appropriate acquisitions which might take net debt to EBITDA to
an internal limit of up to two and half times EBITDA on acquisition, with an
expectation to fall to no more than two times EBITDA within two years of the
acquisition, as long as prevailing market conditions and the outlook for our
existing businesses supported such a move. It is expected that at these levels
our debt would still be perceived as investment grade. The potential benefits
to equity shareholders of greater leverage are offset by higher risk and the cost
and availability of funding. The Board will consider raising additional equity in
the event that it is required to support the capital base of the Group.
4.4.4.4
Dividend policy and share buybacks
As part of the capital management process, the Group ensures that adequate
reserves are available in IMI plc in order to meet proposed shareholder
dividends, the purchase of shares for employee share scheme incentives
and any on-market share buyback programme.
The Board supports a progressive dividend policy with an aim that the dividend
should be covered by at least two times underlying earnings. In the event that
the Board cannot identify sufficient investment opportunities through capital
expenditure, organic growth initiatives and acquisitions, the return of funds to
shareholders through share buybacks or special dividends will be considered.
It should be noted that a number of shares are regularly bought in the market
by an employee benefit trust in order to hedge the exposure under certain
management incentive plans. Details of these purchases are shown in section
4.6.2 to the financial statements.
4.4.4.5
Weighted average cost of capital
The Group currently uses a post-tax Weighted Average Cost of Capital
(‘WACC’) of 9% (2013: 8%) as a benchmark for investment returns. This is
reviewed regularly in the light of changes in market rates. The Board tracks
the Group’s return on invested capital and seeks to ensure that it consistently
delivers returns in excess of the WACC. Consistent with this objective the
growth in Economic Value Added (EVA) was used as a metric in the Group’s
long-term incentive programmes.
4.4.5
Debt and credit facilities
This section provides details regarding the specific borrowings that the
Group has in place to satisfy the debt elements of the capital management
policy discussed above.
4.4.5.1
Undrawn committed facilities
The Group has various undrawn committed borrowing facilities. The facilities
available at 31 December in respect of which all conditions precedent had
been met were as follows:
2014
2013
£m
£m
Expiring within one year
48
140
Expiring between one and two years
24
50
Expiring after more than two years
200
25
272
215
The weighted average life of these facilities is 2.9 years (2013: 1.1 years).
