Unilever 2005 Annual Report Download - page 27

24 Unilever Annual Report and Accounts 2005
Financial review
(continued)
In 2005, pension liabilities less plan assets amounted to
€5 581 million (2004: €5 454 million).
In November 2001, NV entered into a forward purchase contract
with a counterparty bank to buy 10 000 000 PLC shares at 559p
per share in November 2006 to meet the obligation to employees
under share option plans. Depending on the market value of this
forward purchase contract, a cash collateral must be placed
with the counterparty bank at a minimum of €8 million. At
31 December 2005, €16 million of collateral had been placed
with the counterparty.
Off-balance sheet arrangements
IFRSs interpretation SIC 12 and US GAAP FIN 46R require that
entities with which we have relationships are considered for
consolidation in the consolidated accounts based on relative
sharing of economic risks and rewards rather than based solely
on share ownership and voting rights. We periodically review our
contractual arrangements with potential special purpose entities
(SPEs) or variable interest entities (VIEs) as defined by SIC 12 and
FIN 46R respectively. The most recent review has concluded that
there are no significant SPE or VIE relationships which are not
already appropriately reflected in the accounts. Information
concerning guarantees given by the Group is stated in note 27
on page 127.
Cash flow
Cash and cash equivalents at 31 December 2005 were at a similar
level to the end of 2004. Net cash flow from operating activities,
at €4 353 million, was €1 194 million lower than in the previous
year. This includes the effects of additional marketing investment,
a lower inflow from working capital compared with last year, and
higher cash costs of restructuring, pensions and tax.
Net cash flow from investing activities was €635 million higher
than last year, reflecting higher disposal receipts (including
€623 million from the sale of UCI) and net movements in
investments with maturity greater than three months. Net cash
flow used in financing activities fell by €1 117 million, reflecting
borrowing activity offset by increased purchases of own shares.
Share buy-back
In 2005 we completed a share buy-back program of €500 million.
This was in addition to the purchase of €776 million of shares to
partially replenish treasury stock used for the conversion of the
€0.05 NV preference shares.
Finance and liquidity
Unilever aims to be in the top third of a reference group of 21
international consumer goods companies for Total Shareholder
Return, as explained on page 25. The Group’s financial strategy
supports this objective and provides the financial flexibility to
meet its strategic and day-to-day needs. The key elements of the
financial strategy are:
• Appropriate access to equity and debt capital;
• Sufficient flexibility for tactical acquisitions;
• A1/P1 short-term credit rating;
• Sufficient resilience against economic turmoil; and
• Optimal weighted average cost of capital, given the constraints
above.
Unilever aims to concentrate cash in the parent and finance
companies in order to ensure maximum flexibility in meeting
changing business needs. Operating subsidiaries are financed
through the mix of retained earnings, third-party borrowings and
loans from parent and group financing companies that is most
appropriate to the particular country and business concerned.
Unilever maintains access to global debt markets through an
infrastructure of short-term debt programmes (principally US
domestic and euro commercial paper programmes) and long-term
debt programmes (principally a US Shelf registration and
euromarket Debt Issuance Programme). Debt in the international
markets is, in general, issued in the name of NV, PLC or Unilever
Capital Corporation. NV and PLC will normally guarantee such
debt where they are not the issuer.
Treasury
Unilever Treasury’s role is to ensure that appropriate financing is
available for all value-creating investments. Additionally, Treasury
delivers financial services to allow operating companies to
manage their financial transactions and exposures in an efficient,
timely and low-cost manner.
Unilever Treasury operates as a service centre and is governed by
policies and plans approved by the Boards. In addition to policies,
guidelines and exposure limits, a system of authorities and
extensive independent reporting covers all major areas of activity.
Performance is monitored closely. Reviews are undertaken by the
corporate internal audit function.
The key financial instruments used by Unilever are short- and
long-term borrowings, cash and cash equivalents and certain
straightforward derivative instruments, principally comprising
interest rate swaps and foreign exchange contracts. The
accounting for derivative instruments is discussed in note 1 on
page 83. The use of leveraged instruments is not permitted.
Other relevant disclosures are given in note 2 on pages 86 to 87,
and notes 17, 18 and 19 on pages 105 to 113.
Unilever Treasury manages a variety of market risks, including the
effects of changes in foreign exchange rates, interest rates and
liquidity. Further details of the management of these risks are
given in note 2 on pages 86 and 87.