Vodafone 2006 Annual Report Download - page 41

Vodafone Group Plc Annual Report 2006 39
pounds sterling or, to holders of ordinary shares with a registered address in a country
which has adopted the euro as its national currency, in euro, unless shareholders wish to
elect to continue to receive dividends in sterling, are participating in the Company’s
Dividend Reinvestment Plan, or have mandated their dividend payment to be paid
directly into a bank or building society account in the United Kingdom. In accordance
with the Company’s Articles of Association, the sterling: euro exchange rate will be
determined by the Company shortly before the payment date.
The Company will pay the ADS Depositary, The Bank of New York, its dividend in US
dollars. The sterling: US dollar exchange rate for this purpose will be determined by the
Company shortly before the payment date. Cash dividends to ADS holders will be paid
by the ADS Depositary in US dollars.
Contractual Obligations
A summary of the Group’s principal contractual financial obligations is shown below.
Further details on the items included can be found in the notes to the Consolidated
Financial Statements.
Payments due by period £m
Contractual obligations(1) Total <1 year 1-3 years 3-5 years >5 years
Borrowings(2) 28,101 4,308 6,175 7,373 10,245
Operating lease commitments(3) 3,644 654 956 742 1,292
Capital commitments(4) 813813–––
Purchase commitments(5) 1,159 855 187 89 28
Telsim asset acquisition agreements 2,600 2,600–––
Total contractual cash obligations(1) 36,317 9,230 7,318 8,204 11,565
Notes:
(1) The above table of contractual obligations excludes commitments in respect of options over interests in Group
businesses held by minority shareholders (see “Option agreements and similar arrangements”) and obligations to pay
dividends to minority shareholders (see “Dividends from associated undertakings and dividends to minority interests”).
Disclosures required by Financial Accounting Standards Board (“FASB”) Interpretation No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, are provided in note
31 to the Consolidated Financial Statements. The table also excludes obligations under post employment benefit
schemes, details of which are provided in note 25 to the Consolidated Financial Statements. The table also excludes
contractual obligations relating to the Group’s discontinued operations in Japan, which were disposed of on 27 April 2006.
(2) See note 24 to the Consolidated Financial Statements.
(3) See note 30 to the Consolidated Financial Statements.
(4) Primarily related to network infrastructure.
(5) Predominantly commitments for handsets.
Contingencies
Details of the Group’s contingent liabilities are included in note 31 to the Consolidated
Financial Statements.
A number of Vodafone subsidiaries acquired 3G licences through auctions in 2000 and
2001. An appeal was filed by Vodafone Group Services Limited on behalf of Vodafone
Limited, along with appeals filed by other UK mobile network operators which were
granted a 3G licence, with the VAT and Duties Tribunal on 18 October 2003 for recovery of
VAT on the basis that the amount of the licence fee was inclusive of VAT. The amount
claimed by Vodafone Limited is approximately £888 million. In August 2004, these claims
were referred, jointly, to the ECJ and a hearing took place on 7 February 2006. A decision
by the ECJ is expected within the next 12 to 15 months. The Group has not recognised
any amounts in respect of this matter to date. In addition, the Group has made a claim for
recovery of VAT in relation to 3G licence fees in Portugal, the Netherlands, Germany and
Ireland. The Group may also pursue similar claims in certain other European jurisdictions.
Liquidity and Capital Resources
Cash flows
The major sources of Group liquidity for the 2006 financial year have been cash
generated from operations, dividends from associated undertakings, borrowings through
short term and long term issuances in the capital markets and asset disposals. For the
year ended 31 March 2005, sources of Group liquidity were from cash generated from
operations and dividends from associates. The Group does not use off-balance sheet
special purpose entities as a source of liquidity or for other financing purposes.
The Group’s key sources of liquidity for the foreseeable future are likely to be cash
generated from operations and borrowings through long term and short term issuances
in the capital markets, as well as committed bank facilities. Additionally, the Group has a
put option in relation to its interest in Verizon Wireless which, if exercised, could provide
a material cash inflow. Please see “Option agreements and similar arrangements” at the
end of this section.
The Group’s liquidity and working capital may be affected by a material decrease in cash
flow due to factors such as reduced operating cash flow resulting from further possible
business disposals, increased competition, litigation, timing of tax payments and the
resolution of outstanding tax issues, regulatory rulings, delays in development of new
services and networks, inability to receive expected revenue from the introduction of
new services, reduced dividends from associates and investments or dividend payments
to minority shareholders. Please see the section titled “Risk Factors, Trends and
Outlook”, on pages 43 to 45. The Group anticipates a significant increase in cash tax
payments and associated interest payments over the next three years due to the
resolution of long standing tax issues. The Group is also party to a number of
agreements that may result in a cash outflow in future periods. These agreements are
discussed further in “Option agreements and similar arrangements” at the end of this
section.
Wherever possible, surplus funds in the Group (except in Albania, Romania and Egypt)
are transferred to the centralised treasury department through repayment of
borrowings, deposits and dividends. These are then on-lent or contributed as equity to
fund Group operations, used to retire external debt or invested externally.
Decrease in cash in the year
During the 2006 financial year, the Group increased its net cash inflow from operating
activities by 7.9% to £11,841 million, including a 10.3% increase to £10,190 million from
continuing operations. The Group generated £6,418 million of free cash flow from
continuing operations, a reduction of 2.6% on the previous financial year, and an
additional £701 million from discontinued operations. Free cash flow from continuing
operations decreased from the prior financial year due to a reduction in the dividends
received from associated undertakings, principally Verizon Wireless, and an increase in
capital expenditure which more than offset the increase in the net cash inflow from
operating activities.
The Group holds its cash and liquid investments in accordance with the counterparty
and settlement risk limits of the Board approved treasury policy. The main forms of
liquid investments at 31 March 2006 were money market funds and bank deposits.
2006 2005
£m £m
Net cash flows from operating activities 11,841 10,979
– Continuing operations 10,190 9,240
– Discontinued operations 1,651 1,739
Taxation 1,682 1,578
Purchase of intangible fixed assets (690) (699)
Purchase of property, plant and equipment (4,481) (4,279)
Disposal of property, plant and equipment 26 68
Operating free cash flow 8,378 7,647
Taxation (1,682) (1,578)
Dividends from associated undertakings 835 1,896
Dividends paid to minority shareholders in
subsidiary undertakings (51) (32)
Dividends from investments 41 19
Interest received 319 339
Interest paid (721) (744)
Free cash flow 7,119 7,547
– Continuing operations 6,418 6,592
– Discontinued operations 701 955
Net cash outflow from acquisitions and disposals (3,587) (2,017)
Other cash flows from investing activities (56) 113
Equity dividends paid (2,749) (1,991)
Other cash flows from financing activities (1,555) (5,764)
Decrease in cash in the year (828) (2,112)
Capital expenditure
During the 2006 financial year, £4,481 million was spent on property, plant and
equipment, an increase of 4.7% from the previous financial year. From continuing
operations, the amount spent increased to £3,634 million.
The cash outflow in intangible assets reduced from £699 million in the previous
financial year to £690 million in the current financial year, with the largest element
being expenditure on computer software.
Dividends from associated undertakings and investments and dividends to
minority shareholders
Dividends from the Group’s associated undertakings and investments are generally paid
at the discretion of the board of directors or shareholders of the individual operating
Performance