Man Group plc - Annual Report 2007

Cash flows in the year	$m
Operating profit (pre amortisation and depreciation)	1,698
Increase in working capital	(81)
Taxation paid	(202)
Net capital expenditure and financial investment	(321)
Other	(83)
Cash inflow for the year before shareholder distributions	1,011
Dividends paid	(306)
Share repurchases	(375)
Cash inflow for the year	330
Cash inflow from shares issued	42
Cash inflow from net movements in borrowings	250
Increase in cash, net of bank overdrafts, in the year	622

The increase in working capital relates principally to a $210 million increase in investments in fund products in Asset Management. This relates to seeding investments, investments to aid short-term rebalancing of the funds and to short-term redemption bridging activities. Partly offsetting this, loans to funds have decreased by $19 million. The movement in Brokerage’s working capital from the prior year is not significant.

Net capital expenditure and financial investment comprise: net additions to the capitalised amount of upfront sales commissions and other intangibles of $197 million, net payments of $41 million from purchases less disposals, of non-current investments; consideration paid to acquire USFE and another small acquisition of $38 million; and the remainder largely relating to expenditure on tangible fixed assets, mainly office refurbishment and IT systems.

In the cash flow table above, ‘Other’ includes net interest received of $69 million, which is more than offset by a net purchase cost of own shares by the Employee Trusts of $106 million and other minor net cash outflow adjustments of $46 million.

In 2007, Brokerage contributed a cash inflow of $79 million from operating activities, a cash inflow of $203 million from investing activities and a cash inflow of $48 million from financing activities. Hence Brokerage recorded a net cash inflow of $330 million in the year to 31 March 2007.

Balance sheet
The Group’s balance sheet remains strong. At 31 March 2007, shareholders’ equity was up 27% at $4,539 million. Retained earnings added $603 million to equity in the year, after deducting dividends of $306 million and the consideration paid of $375 million, plus $100 million provided for the maximum possible repurchase under the close period agreement, for the repurchase and cancellation of own shares. The partial conversion of the Group’s exchangeable bonds added a further $249 million. At 31 March 2007 the Group had a net cash position of $1,832 million (2006: net cash position of $1,301 million).

To give more transparency to the Group's balance sheet, a segmental balance sheet by business is shown below. The Group balance sheet in the financial statements shows the Brokerage assets and liabilities on two lines, being: assets of a disposal group held for sale and liabilities of a disposal group held for sale.

Prior to the sale of Brokerage, the Group intends to inject capital into Brokerage to increase its net assets to $1.2 billion, to ensure that it has an appropriate capital structure to function as a stand alone business. Applying the Group’s capital allocation model gives a capital allocation to Asset Management of $2.1 billion. In the table, the implied Group’s excess capital of approximately $0.9 billion (after allowing for the proposed Brokerage capital injection and a Group capital reserve) has been allocated in the Asset Management figures.

The growth in the futures and stock lending businesses in Brokerage has the effect of increasing both current assets and short-term creditors by $22 billion. In addition, there has been a $210 million increase in investments in fund products in Asset Management. The continued success of the loans to funds externalisation programme in the year has resulted in loans to funds decreasing by $19 million to $400 million at the year-end, despite the high level of sales in the year. The programme to externalise loans to funds is discussed in the ‘External financing initiatives’ section in the Risk Management review.

Contingent liabilities
Man Financial Inc., a US subsidiary of the Group, was served on 8 May 2006 with a Complaint by the receiver for Philadelphia Alternate Asset Fund (‘PAAF’) and associated entities. PAAF investors incurred trading losses as a result of alleged wrongdoing by a trading manager of PAAF. Man Financial acted as one of the brokers to PAAF, executing and clearing trading instructions given by PAAF, and as such does not consider that it is responsible for the losses suffered by PAAF investors. Accordingly, Man Financial will vigorously defend the proceedings brought against it.

Group balance sheet at 31 March 2007	Asset Management (Continuing operations) $m	Brokerage (Discontinued operation) $m	Group Total $m
Non-current Assets
Property and equipment	46	44	90
Goodwill	785	103	888
Other intangible assets	429	191	620
Associates/JVs	258	12	270
Other investments	189	484	673
Deferred income tax assets	72	12	84
Non-current receivables	40	264	304
Total non-current assets	1,819	1,110	2,929
Current Assets
Loans to funds	400	–	400
Trade and other receivables	442	32,097	32,539
Current tax assets	1	3	4
Derivative financial assets	15	–	15
Short-term investments	655	15,094	15,749
Cash and cash equivalents	1,571	1,858	3,429
Inter-divisional balance	1,424	(1,424)	–
Total Current Assets	4,508	47,628	52,136
Non-current Liabilities
Long-term borrowings	(1,100)	–	(1,100)
Trade and other payables	–	(518)	(518)
Deferred tax liabilities	(18)	(62)	(80)
Pension obligations	(21)	–	(21)
Derivative financial liabilities	(9)	–	(9)
Other creditors	(2)	(9)	(11)
Total non-current liabilities	(1,150)	(589)	(1,739)
Current Liabilities
Trade and other payables	(476)	(47,474)	(47,950)
Derivative financial liabilities	(6)	–	(6)
Bank loans and overdrafts	(489)	(8)	(497)
Taxation	(286)	(24)	(310)
Total current liabilities	(1,257)	(47,506)	(48,763)
Net Assets	3,920	643	4,563

In addition, the Commodity Futures Trading Commission (CFTC), the applicable US regulatory agency, is conducting an investigation into the PAAF losses and Man Financial has been cooperating with the CFTC in the provision of information and testimony about the trading activities it carried out on behalf of PAAF. This investigation has not yet been concluded. It continues to be the case that these matters are not expected to have a material financial impact on the Man Group.

Accounting standards and policies
The Board and the Audit and Risk Committee regularly review and update where appropriate the Group’s accounting policies and disclosures. The Group’s principal accounting policies are detailed in the financial statements. The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting assumptions. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas requiring a higher degree of judgement, or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are in: the classification of Brokerage as a discontinued operation; goodwill and other intangible assets; customer balances; the fund entities of which the Group is the investment manager; the exchangeable bonds issued by the Group; and taxation. These items are discussed in Section A of the Group’s principal accounting policies.

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