Final Results

Headlam Group PLC 03 April 2006 3 April 2006 Preliminary Results for the Year Ended 31 December 2005 Headlam Group plc ('Headlam'), Europe's leading floorcoverings distributor, announces its final results for the year ended 31 December 2005. Financial highlights 2005 2004 Change Revenue £486.6m £464.8m +4.7% Operating profit £41.5m £38.9m +6.7% Profit before tax £40.8m £38.5m +6.0% Basic earnings per share 33.1p 31.3p +5.8% Proposed dividend per share 18.00p 16.25p +10.8% Key points UK turnover increased by 2.4% on a like for like basis Profit before tax improved by 6.0% Substantial investment in new facilities and extended product ranges Cash flow supports investment activity Final dividend increased by 11.0% from 12.25p to 13.60p Tony Brewer, Group Chief Executive, said: 'Following a successful 2005 the group has made a positive start to 2006 with like for like sales in the UK increasing by 3.2% in the first quarter. With each of our businesses clearly focused on maximising their individual market presence, we look forward to another year of growth.' Enquiries: Headlam Group plc Tony Brewer, Group Chief Executive Tel: 01675 433000 Stephen Wilson, Group Finance Director Chairman's Statement The group has had another successful year despite more difficult market conditions in 2005. The group's revenue and profit for the year were another record, with improvements being achieved across all sections of the business. Revenues from the group's activities amounted to £486.6 million, an increase of 4.7% on last year, and profit before tax increased by 6.0% to £40.8 million. Earnings and dividend Basic earnings per share increased by 5.8% from 31.3p to 33.1p. The board is recommending a final dividend of 13.60p per share, an increase of 11.0% on last year. This increases the total dividend for the year by 10.8% from 16.25p to 18.00p. If approved, the final dividend will be paid on 3 July 2006 to shareholders on the register at 9 June 2006. Operations We have continued with our strategy of businesses operating autonomously to maximise market presence. We now have 46 businesses operating from 21 distribution centres in the UK and whilst enjoying this individuality, all the businesses operate to a defined strategy and comply with consistent reporting procedures. These businesses have clearly focused market objectives across a broad range of floorcovering products and are supported by comprehensive stockholdings. This ensures that we have strong long-term relationships with the leading floorcovering manufacturers and most importantly, offer the independent floorcovering retailer and contractor a huge breadth of product, including the latest trends and innovations. During the year, we completed the construction of the distribution facility in Tamworth at a cost of £5.2 million bringing the total amount invested on this facility to £13.9 million. Construction also commenced on the new purpose built freehold facility for our Wilkies business based in Leeds. During 2005, we invested £2.0 million and a further £ 9.4 million will be expended before the site becomes operational during the autumn of 2006. The Board I have now completed twelve years as a non-executive director of Headlam, the past six as Chairman and the time has come for me to retire from the board which I shall do at the conclusion of the forthcoming AGM. Graham Waldron, who has a wealth of experience in the floorcovering industry, will continue to guide the strategy of the group in an executive capacity and following my retirement, be appointed Chairman. I am pleased to have welcomed in recent months Dick Peters and Mike O'Leary to the board as non-executive directors, both of whom I expect will make positive contributions to the future growth and development of the group. It is with much sadness that I record the death of Roger Dickens in January 2006 and we send our sincere sympathy to Lainey Dickens and family. Roger was a highly respected member of our board and we have lost a valued colleague and friend. We shall miss him. Employees The group has great strength in its management teams across the whole business. It has been a particular pleasure to see how this has developed over the twelve years I have been a director. The group's performance reflects the commitment, dedication and efforts of our employees in providing the services given to our customers. The board wishes to record its thanks to all our employees for their hard work and continued customer service. Outlook The group's structure and strategy of autonomous sales and marketing activities with common operational and financial disciplines is firmly established. This allows the individual businesses to optimise their relationship with suppliers and customers. With the benefit of these activities, our businesses in the UK and Continental Europe have made a positive start to 2006 and we believe the group is well positioned to achieve its objectives for the year. Trevor Larman, Chairman Chief Executive's Review We are very pleased with the performance of the group in 2005. The UK businesses produced a particularly positive result following the significant growth in 2004. These businesses were able collectively to increase sales by 2.4% on a like for like basis, in more difficult market conditions and therefore established a further increase in our market share. The Continental European businesses in France, Switzerland and the Netherlands continue to improve their sales and profitability. UK operations The success of the UK businesses is established through the autonomous sales and marketing activities of 46 businesses operating from 21 distribution facilities. The experienced managers of these businesses continually work with the world's leading floorcovering manufacturers to develop and launch new products. We have 297 employed external sales people who position these new products with independent flooring retailers and contractors, ensuring that our customers are at the forefront of all product innovation. These sales people subsequently maximise the market presence of their individual businesses and the group as a whole. It is fundamental to the group strategy and culture that whilst encouraging this sales and marketing autonomy, each of the businesses operate from an identical IT platform and comply with standard operational and financial disciplines. The businesses are defined into four specific sectors. Regional multi-product: we have 25 businesses that operate regionally from their distribution facility, supplying floorcovering across all of our product categories. These businesses increased their sales by 1.9% and contribute 68% of UK turnover. National multi-product: Mercado through its six business identities and extensive product range was again able to improve its market position. Residential specialist: we enjoyed significant growth within the 12 businesses specialising in middle to high price carpet products, increasing their sales by 41% and now contributing 11% of UK turnover. Commercial specialist: our three businesses increased sales by 2.8% and are now able to take full advantage of increased capacity following their relocation to the new facility in Tamworth. Customers Our customers, principally independent floorcovering retailers and contractors, continued to prosper. The group's ongoing growth reflects the market presence of our active accounts which total 35,748. Products Total carpet sales which represent 50% of UK turnover increased by 4%. This increase was aided by the launch of 2,486 new ranges, established in our customers through 626,482 point of sale items. Residential vinyl increased by 6%, supported by 693 new products marketed through 167,360 displays and samples. Wood and laminate products saw a small decline in sales, however this performance improved during the latter part of 2005. All residential product categories including wood and laminate have seen an improving sales trend during the first three months of 2006. Sales in the contract sector which represent 26% of UK turnover, showed strong growth of 8%. During the second half of 2005 and the first quarter of 2006, we have invested in additional sales people in order to enhance our market position and subsequently accelerate our sales growth in the contract sector. Investments The new purpose built freehold distribution facility in Tamworth became fully operational during the year and also allowed us to move four businesses from Coleshill, therefore releasing capacity in the Coleshill distribution facility. As planned, our stock increased during the year with the enlarged capacity at Tamworth and Coleshill, in addition to the extension to our facilities at Thatcham and Stockport. This further demonstrates our commitment to our customers to offer a comprehensive product range with stock levels to service their demand. Construction is now underway for the 105,000 square feet purpose built freehold distribution facility for Wilkies, our regional multi-product business based in Leeds. This will be completed in the autumn of this year, enabling Wilkies to develop further its residential and commercial business in the north of England. The strong cash generation by our operations allows continued investment to strengthen further the group's position. We have other projects at various stages of the planning and development process, to ensure that the group remains the leader in European floorcovering distribution. Europe It is very encouraging to see our Continental European businesses in France, Switzerland and the Netherlands continue to improve their performance. This has been achieved consistently over the last four years. Market conditions and business development opportunities give every confidence that these businesses can continue to grow their sales and profitability over the coming years. Acquisitions During 2005 we acquired the businesses of Clarendon Carpets and Gaskell Wool Rich. We are currently investing in the sales and marketing of new products for both of these businesses along with the Gaskell Wool Rich brand of Mr Tomkinson Carpets and expect to enhance their performance during 2006. We continue to evaluate other acquisition opportunities, both in the UK and Continental Europe and with a cautious approach, we would expect to further enlarge the number of business activities. Information Technology LMS, our French business with two warehouses and 20 regional facilities, was successfully converted onto our common IT platform in January 2006. This completes the process that all of our businesses in the UK and Continental Europe now operate on the same IT system. This reflects the group policy of allowing sales and marketing autonomy with identical operational and financial controls. Outlook The first 12 weeks of 2006 have shown a positive sales trend throughout our businesses in both the UK and Continental Europe. Each of our businesses are clearly focused on maximising their individual market presence and with the contribution from all of these initiatives, we look forward to achieving another successful year. Tony Brewer, Group Chief Executive Financial review International Financial Reporting Standards Following a change in regulations, the group is reporting its financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. The group formerly reported its results under UK Generally Accepted Accounting Principles (UK GAAP). The results for 2005 comply with these new requirements and the accounting policies adopted under IFRS have been used to restate the comparative information for the year ended 31 December 2004. Both the group and the company are preparing their financial statements in accordance with IFRS for the first time and consequently both have applied IFRS 1. An explanation of how the transition to IFRS has affected the reported financial performance, financial position and cash flows of the group is provided in note 6. In addition to exempting companies from the requirement to restate comparatives for IAS 32 and IAS 39, IFRS 1 grants certain exemptions from the full requirements of IFRS in the transition period. The following exemptions have been taken in these financial statements: Business combinations - Business combinations that occurred prior to 1 January 2004 have not been restated. Properties - Both the group and the company have elected to restate the carrying value of freehold and long leasehold properties as at 1 January 2004 to historical cost. Previously, properties were stated at a combination of historical cost and market value. Employee benefits - All cumulative actuarial gains and losses on defined benefit plans have been recognised in equity at 1 January 2004. Cumulative translation differences - Cumulative translation differences for all foreign operations have been set to zero at 1 January 2004. Any gains and losses arising in the income statement on the subsequent disposal of an overseas subsidiary undertaking will only include those exchange gains or losses arising from the date of transition. Share based payments - IFRS 2 - Share based payments, has been applied only to grants of equity settled share based payments made after 7 November 2002 that had not vested by 1 January 2005. Following initial adoption, the group has taken the option not to comply with the hedge accounting requirements of IAS 39. Consequently, all movements in the fair value of the hedge are recognised immediately in the income statement, within net financing costs. A summary of the differences arising from the change to IFRS compared with the reporting basis used prior to the introduction of IFRS are shown below for the consolidated income statement and balance sheet. Consolidated income statement for year ended 31 December 2005 2004 £000 £000 Profit before goodwill amortisation and taxation previous reporting basis 42,279 39,259 Intangibles amortisation (836) (836) Retirement benefit obligation (463) 62 Share based payments (196) (57) Property leases (3) (3) Additional depreciation on revalued assets 59 59 ------- ------- Profit before tax - IFRS 40,840 38,484 ------- ------- Balance sheet at 31 December 2005 2004 £000 £000 Net assets - previous reporting basis 140,910 126,868 Intangibles amortisation (1,672) (836) Goodwill 1,050 918 Retirement benefit obligation (20,886) (17,853) Deferred taxation 7,828 6,322 Revaluation reserve (6,916) (6,975) Property leases (46) (42) Dividends 15,572 13,958 Cash flow hedging (13) - -------- -------- Net assets - IFRS 135,827 122,360 -------- -------- Overall, the effects of the change on profit before tax have not been significant. For 2005, profit before goodwill amortisation and taxation, derived on the basis used for previous reporting, reduced by £1,439,000 or 3.4%. The equivalent adjustment for 2004 was a reduction in profit before goodwill amortisation and taxation of £775,000 or 2.0%. As with the income statement, the overall effect on net assets arising from the adoption of IFRS, has not been particularly significant. Net assets derived from the previous reporting basis reduced by £5,083,000 in 2005 and £4,508,000 in 2004. Trading performance Group revenues increased during the year by 4.7% from £464.8 million to £486.6 million. Like for like improvement from the UK businesses amounted to 2.4% whilst the Continental European businesses achieved a collective like for like increase of 3.6% or 3.0% at constant rates of exchange. Further contributions to revenue for 2005 were made by National Carpets and Kingsmead, the two businesses acquired during 2004 but registering their first full year results during 2005 and Clarendon and Gaskell Wool Rich acquired during 2005. The group's operating profit increased by 6.7% from £38.9 million to £41.5 million with the UK and Continental European businesses achieving increases before unallocated corporate expenses of 8.0% and 5.6% respectively. At constant rates of exchange, the increase for Continental Europe was 5.0%. Financial income and expense The components of financial income and expense are as follows: 2005 2004 £000 £000 Financial income Bank interest 1,329 886 Other interest received 87 141 Return on defined pension plan assets 2,477 2,273 ------- ------- 3,893 3,300 Financial expense Bank loans, overdrafts and other financial expenses (1,503) (997) Interest on defined benefit pension plan obligation (2,987) (2,654) Finance leases (61) (89) ------- ------- (4,551) (3,740) ------- ------- Net finance expense (658) (440) ------- ------- Net finance expenses excluding net expenses relating to the defined benefit pension plans increased from £59,000 to £148,000 mainly as a consequence of increased investment in inventory during 2005. Net finance expense relating to the pension plans was higher during the year, rising from £381,000 to £510,000, because of the net increase in the employee benefits liability. Taxation The effective rate of taxation reduced to 30.2% compared with 30.5% for the previous year. The rate reflects the group's current mix of business and it is anticipated that the effective tax rate should remain at around these levels for the foreseeable future. Employee benefits During the year, the net deficit relating to the defined benefit pension plans, as measured under IAS 19 - Employee benefits, increased by £2.1 million from £18.4 million to £20.5 million. The deficit relates to the following: £000 UK plan (20,226) French retirement indemnity premium (286) -------- (20,512) -------- Whilst the UK plan asset base has benefited from the recent revival in the value of equities, the plan liabilities have increased at a faster rate because of the decline in bond yields. During the year, the UK plan actuary completed the triennial actuarial valuation of the UK defined benefit pension plan. The net deficit, as at 31 March 2005, amounted to £13.1 million. The principal differences between the IAS 19 deficit and the actuarial valuation are as follows: £000 Actuarial valuation (13,100) Investment returns 4,500 Variation in assumptions relating to discount rates (11,700) Death in service liability (1,000) Other factors 1,074 -------- IAS 19 deficit (20,226) -------- Following final determination of the valuation, the company and trustees of the UK plan discussed a number of alternatives to assist with mitigating the cost of the plan. However, it was decided that these alternative arrangements would penalise the active members who currently represent 18% of total plan membership. The company has elected to maintain its commitment to the plan and in order to discharge the deficit, agreed to pay additional contributions. The additional contributions are intended to remove the deficit over 15 years, a period that equates with the average remaining working life of active plan members and will be subject to review every three years at the time the plan actuary completes the plan valuation. Additional contributions during 2005 amounted to £722,000. These additional amounts to be paid in 2006 will total £1,080,000 and contributions will increase at the rate of salary inflation thereafter. Cash flows and net funds Cash generated from operating activities Net cash generated from operating activities was £22.7 million, a decrease of £10.1 million compared with last year. The main reason for this decline was the net investment in working capital in 2005 of £10.7 million compared with a net cash release from working capital in 2004 of £2.7 million. As already commented on in the Chief Executive's Review, the additional net investment in working capital this year was due to the inventory investment required to support the additional capacity available from the new and extended facilities. This additional inventory investment amounted to £9.0 million. Cash flows from investing activities Net cash outflows from investing activities totalled £9.5 million compared with £16.8 million during 2004. The year on year reduction was attributable to lower levels of expenditure on acquisitions and investment in property, plant and equipment. For 2006, gross investment on property, plant and equipment is forecast to increase to approximately £15.3 million. Changes in net funds Group net funds remained virtually unchanged compared with 2004 at £35.5 million. The financial information detailed in the preliminary statement does not constitute the company's statutory accounts for the years ended 31 December 2005 or 2004. Statutory accounts for 2004, which were prepared under UK GAAP, have been delivered to the registrar of companies. The auditors have reported on the 2004 accounts; their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2005, which are being prepared under IFRS will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the registrar of companies in due course. Stephen Wilson, Group Finance Director Consolidated income statement for year ended 31 December 2005 Note 2005 2004 £000 £000 Revenue 1 486,635 464,789 Cost of sales (336,570) (323,924) --------- --------- Gross profit 150,065 140,865 Distribution expenses (77,507) (70,592) Administrative expenses (31,060) (31,349) --------- --------- Operating profit 1 41,498 38,924 Financial income 3,893 3,300 Financial expenses (4,551) (3,740) --------- --------- Net financing costs (658) (440) --------- --------- Profit before tax 40,840 38,484 Taxation (12,352) (11,738) --------- --------- Profit for the year 28,488 26,746 --------- --------- Dividend per share 3 16.25p 13.85p Earnings per share Basic 2 33.1p 31.3p --------- --------- Diluted 2 32.8p 31.0p --------- --------- Consolidated statement of recognised income and expense for year ended 31 December 2005 2005 2004 £000 £000 Foreign exchange translation differences arising on translation of overseas operations (321) (256) Recycling of cash flow hedging reserve balances 13 Actuarial gains and losses on defined benefit pension plans (2,571) (3,748) Tax recognised on income and expenses recognised directly in equity 910 1,143 -------- -------- Net expense recognised directly in equity (1,969) (2,861) Profit for the year 28,488 26,746 -------- -------- Total recognised income and expense 26,519 23,885 -------- -------- Adjustments relating to adoption of IAS 32 and IAS 39 from 1 January 2005 Cash flow hedging reserve (13) Consolidated balance sheet at 31 December 2005 Note 2005 2004 £000 £000 Non-current assets Property, plant and equipment 74,640 71,754 Intangible assets 13,210 14,046 Deferred tax assets 8,199 8,167 ------- ------- 96,049 93,967 ------- ------- Current assets Inventories 91,160 79,692 Other financial assets 17,673 19,276 Trade and other receivables 66,602 66,274 Cash and cash equivalents 36,193 37,747 ------- ------- 211,628 202,989 Non-current assets classified as held for sale 3,471 203 ------- ------- Total assets 1 311,148 297,159 ------- ------- Current liabilities Bank overdraft - (278) Other interest-bearing loans and borrowings (471) (1,125) Trade and other payables (141,529) (142,028) Employee benefits (1,080) (722) Tax payable (11,139) (11,053) --------- --------- (154,219) (155,206) --------- --------- Non-current liabilities Other interest-bearing loans and borrowings (267) (738) Employee benefits (19,432) (17,643) Deferred tax liabilities (1,403) (1,212) --------- --------- (21,102) (19,593) --------- --------- Total liabilities 1 (175,321) (174,799) --------- --------- Net assets 135,827 122,360 --------- --------- Equity attributable to equity holders of the parent Share capital 4 4,326 4,306 Share premium 4 52,280 51,731 Translation reserve 4 (577) (256) Retained earnings 4 79,798 66,579 --------- --------- Total equity 135,827 122,360 --------- --------- Consolidated cash flow statement for year ended 31 December 2005 Note 2005 2004 £000 £000 Cash flows from operating activities Profit before tax for the year 40,840 38,484 Adjustments for: Depreciation, amortisation and impairment 5,133 4,313 Financial income (3,893) (3,300) Financial expense 4,551 3,740 (Profit)/loss on sale of property, plant and equipment (228) 11 Equity settled share-based payment expenses 196 57 -------- -------- Operating profit before changes in working capital and provisions 46,599 43,305 Decrease/(increase) in trade and other receivables 1,699 (8,118) (Increase) in inventories (11,335) (3,753) (Decrease)/increase in trade and other payables (1,085) 14,588 -------- -------- Cash generated from the operations 35,878 46,022 Interest paid (1,456) (1,093) Tax paid (10,994) (12,082) Additional contributions to defined benefit pension plan (722) - -------- -------- Net cash from operating activities 22,706 32,847 -------- -------- Cash flows from investing activities Proceeds from sale of property, plant and equipment 598 282 Interest received 1,335 1,055 Acquisition of subsidiary, net of cash acquired (426) (3,779) Acquisition of property, plant and equipment (10,965) (14,374) -------- -------- Net cash from investing activities (9,458) (16,816) -------- -------- Cash flows from financing activities Proceeds from the issue of share capital 570 2,763 Repayment of borrowings (662) (1,121) Payment of finance lease liabilities (438) (498) Dividends paid (13,976) (11,795) -------- -------- Net cash from financing activities (14,506) (10,651) -------- -------- Net (decrease)/increase in cash and cash equivalents (1,258) 5,380 Cash and cash equivalents at 1 January 37,468 32,119 Effect of exchange rate fluctuations on cash held (17) (31) -------- -------- Cash and cash equivalents at 31 December 5 36,193 37,468 -------- -------- Notes 1. Segment reporting The group's activities are wholly aligned to the sales, marketing, supply and distribution of floorcovering products. These activities are carried out from business centres located in both the UK and Continental Europe. The group's internal management structure and financial reporting systems treat the UK and Continental Europe as two separate segments because of the difference in reward arising from these two markets and this forms the basis for the geographical presentation of the primary segment information given below. UK Continental Europe Total 2005 2004 2005 2004 2005 2004 £000 £000 £000 £000 £000 £000 Revenue External sales 415,038 395,696 71,597 69,093 486,635 464,789 ------- ------- ------- ------- ------- ------- Result Segment result 41,905 38,784 1,815 1,719 43,720 40,503 ------- ------- ------- ------- Unallocated corporate expenses (2,222) (1,579) -------- -------- Operating profit 41,498 38,924 Financial income 3,893 3,300 Financial expense (4,551) (3,740) Taxation (12,352) (11,738) -------- -------- Profit for the year 28,488 26,746 -------- -------- Other information Segment assets including inter segment assets 274,303 263,171 28,769 29,229 303,072 292,400 Inter segment assets (3,229) (3,424) (365) (187) (3,594) (3,611) --------- --------- -------- -------- --------- --------- Segment assets 271,074 259,747 28,404 29,042 299,478 288,789 Unallocated assets 11,670 8,370 --------- --------- Consolidated total assets 311,148 297,159 Segment liabilities including inter segment liabilities (127,623) (127,560) (18,238) (20,219) (145,861) (147,779) Inter segment liabilities 365 187 3,229 3,424 3,594 3,611 --------- --------- -------- -------- --------- --------- Segment liabilities (127,258) (127,373) (15,009) (16,795) (142,267) (144,168) Unallocated liabilities (33,054) (30,631) --------- --------- Consolidated total liabilities (175,321) (174,799) --------- --------- Capital expenditure 10,462 13,907 503 467 10,965 14,374 Depreciation 3,451 2,937 631 599 4,082 3,536 Amortisation 836 836 - - 836 836 Asset impairment 215 - - - 215 - Each segment is a continuing operation. Unallocated assets comprise deferred tax assets and assets held for resale. Unallocated liabilities comprise income tax, deferred tax liabilities and employee benefits. Management has access to information that provides details on sales and gross margin by principal product group and across the four principal business sectors which comprise Regional multi-product, National multi-product, Residential specialist and Commercial specialist. However, this information is not provided as a secondary segment since the group's operations are not managed by reference to these sub classifications and the presentation would require an arbitrary allocation of overheads, assets and liabilities undermining the presentations validity and usefulness. 2. Earnings per share The calculation of the basic and diluted earnings per share is based on the following data: 2005 2004 £000 £000 Earnings Earnings for the purposes of basic earnings per share being profit attributable to equity holders of the parent 28,488 26,746 ------ ------ Earnings for the purposes of diluted earnings per share 28,488 26,746 ------ ------ Number Number Number of shares Issued ordinary shares at 1 January 86,111,437 84,265,339 Effect of shares issued during the period 86,272 1,087,250 ---------- ---------- Weighted average number of ordinary shares for the purposes of basic earnings per share 86,197,709 85,352,589 ---------- ---------- Effect of diluted potential ordinary shares: Weighted average number of ordinary shares at 31 December 86,197,709 85,352,589 Share options 2,407,331 1,534,175 Number of shares that would have been issued at fair value (1,813,602) (737,011) ----------- ----------- Weighted average number of ordinary shares for the purposes of diluted earnings per share 86,791,438 86,149,753 ----------- ----------- 3. Dividends 2005 2004 £000 £000 Interim dividend for 2004 of 4.0p paid 3 January 2005 3,421 - Final dividend for 2004 of 12.25p paid 4 July 2005 10,555 - Interim dividend for 2003 of 3.6p paid 5 January 2004 - 3,030 Final dividend for 2003 of 10.25p paid 1 July 2004 - 8,765 ------ ------ 13,976 11,795 ------ ------ The final proposed dividend of 13.6p per share (2004: 12.25p per share) will not be provided for until authorised by shareholders at the forthcoming AGM. The interim dividend of 4.4p per share (2004: 4.0p) is provided for when the dividend is paid. The total value of dividends proposed but not recognised at 31 December 2005 is £15,582,000 (2004: £13,976,000). 4. Capital and reserves Share Share Translation Cash flow Retained Total capital premium reserve hedging earnings equity reserve £000 £000 £000 £000 £000 £000 Balance at 1 January 2004 4,213 49,061 - - 55,024 108,298 Total recognised income and expense - - (256) - 24,141 23,885 Equity-settled share based payment transactions, net of tax - - - - 57 57 Share options exercised by employees 93 2,670 - - - 2,763 Deferred tax on Schedule 23 share options (pre Nov 2002) - - - - (848) (848) Dividends - - - - (11,795) (11,795) ------ ------ ------ ---- -------- -------- Balance at 31 December 2004 4,306 51,731 (256) - 66,579 122,360 ------ ------ ------ ---- -------- -------- Balance at 1 January 2005 4,306 51,731 (256) - 66,579 122,360 Adjustment in respect of adoption of IAS 32 and IAS 39 on 1 January, net of tax - - - (13) - (13) Total recognised income and expense - - (321) 13 26,827 26,519 Equity-settled share based payment transactions, net of tax - - - - 196 196 Share options exercised by employees 20 549 - - - 569 Deferred tax on Schedule 23 share options (pre Nov 2002) - - - - 172 172 Dividends - - - - (13,976) (13,976) ------ ------ ------ ---- -------- -------- Balance at 31 December 2005 4,326 52,280 (577) - 79,798 135,827 ------ ------ ------ ---- -------- -------- 5. Analysis of changes in net funds At At 1 January Cash Translation 31 December 2005 flows differences 2005 £000 £000 £000 £000 Cash at bank and in hand 37,747 (1,527) (27) 36,193 Bank overdraft (279) 269 10 - ------- ------- ----- ------- 37,468 (1,258) (17) 36,193 Debt due after one year (687) 662 25 - Finance leases and similar hire purchase contracts (1,176) 438 - (738) ------- ------- ----- ------- 35,605 (158) 8 35,455 ------- ------- ----- ------- 6. Explanation of transition to IFRS As stated previously, these are the group's first consolidated financial statements prepared in accordance with IFRS. In preparing its opening IFRS balance sheet, the group has adjusted amounts reported previously in financial statements prepared in accordance with its previous basis of accounting under UK GAAP. An explanation of how the transition from UK GAAP to IFRS has affected the group's financial performance and position is set out in the following tables and the notes that accompany the tables. Reconciliation of profit for year ended 31 December 2004 Effect of UK transition to GAAP IFRS IFRS £000 £000 £000 Revenue 464,789 - 464,789 Cost of sales (323,924) - (323,924) --------- ----- --------- Gross profit 140,865 - 140,865 Net operating expenses (102,465) 524 (101,941) --------- ----- --------- Operating profit 38,400 524 38,924 --------- ----- --------- Net financing costs (59) (381) (440) --------- ----- --------- Profit before tax 38,341 143 38,484 Taxation (11,975) 237 (11,738) --------- ----- --------- Profit for the year 26,366 380 26,746 --------- ----- --------- Reconciliation of equity 1 January 2004 31 December 2004 Effect of Effect of UK transition UK transition GAAP to IFRS IFRS GAAP to IFRS IFRS £000 £000 £000 £000 £000 £000 Non-current assets Property, plant and equipment 64,236 (2,612) 61,624 75,256 (3,502) 71,754 Intangible assets 13,210 - 13,210 13,964 82 14,046 Deferred tax assets 1,226 6,232 7,458 1,390 6,777 8,167 ------- ------ -------- ------- ------- -------- 78,672 3,620 82,292 90,610 3,357 93,967 ------- ------ -------- ------- ------- -------- Current assets Inventories 73,889 - 73,889 79,692 - 79,692 Other financial assets 14,202 260 14,462 19,019 257 19,276 Trade and other receivables 58,675 - 58,675 66,274 - 66,274 Cash and cash equivalents 32,336 - 32,336 37,747 - 37,747 Assets classified as held for sale 1,043 (892) 151 3,975 (3,772) 203 --------- ------- --------- --------- -------- -------- 180,145 (632) 179,513 206,707 (3,515) 203,192 --------- ------- --------- --------- -------- -------- Total assets 258,817 2,988 261,805 297,317 (158) 297,159 --------- ------- --------- --------- -------- -------- Current liabilities Short term borrowings (2,045) - (2,045) (278) - (278) Current portion of long term borrowings (499) - (499) (1,125) - (1,125) Trade and other payables (135,210) 8,627 (126,583) (156,045) 14,017 (142,028) Employee benefits - - - - (722) (722) Tax payable (9,625) - (9,625) (11,053) - (11,053) --------- ------ --------- --------- -------- --------- (147,379) 8,627 (138,752) (168,501) 13,295 (155,206) --------- ------ --------- --------- -------- --------- Non-current liabilities Other interest-bearing loans and borrowings (1,175) - (1,175) (738) - (738) Employee benefits (375) (14,166) (14,541) (451) (17,192) (17,643) Deferred tax liabilities (1,628) (442) (2,070) (758) (454) (1,212) --------- -------- --------- --------- -------- --------- (3,178) (14,608) (17,786) (1,947) (17,646) (19,593) --------- -------- --------- --------- -------- --------- Total liabilities (150,557) (5,981) (156,538) (170,448) (4,351) (174,799) --------- -------- --------- --------- -------- --------- Net assets 108,260 (2,993) 105,267) 126,869 (4,509) 122,360 --------- -------- --------- --------- -------- --------- Equity attributable to equity holders of the parent Share capital 4,213 - 4,213 4,306 - 4,306 Share premium 49,061 - 49,061 51,731 - 51,731 Revaluation reserve 2,844 (2,844) - 6,615 (6,615) - Retained earnings 52,142 (149) 51,993 64,217 2,106 66,323 -------- -------- --------- --------- -------- --------- Total equity 108,260 (2,993) 105,267 126,869 (4,509) 122,360 -------- -------- --------- --------- -------- --------- Notes Removal of property revaluation As a result of opting to restate land and buildings back to their depreciated historical cost, property reported as a non-current asset has reduced because the revaluation surplus has been eliminated and depreciation charged in the twelve month periods has also decreased. Goodwill amortisation Goodwill represents the excess of the cost of acquisition over the fair value of the identifiable net assets of the acquired subsidiary undertakings at the date of acquisition and is included on the balance sheet as a non-current asset. Under UK GAAP, goodwill was amortised on a straight line basis over a period of 20 years representing the estimated useful economic life. This changes under IFRS as goodwill is not amortised but tested at least annually for impairment. Goodwill is then held in the balance sheet at cost less any accumulated impairment losses. Goodwill amortised in the twelve month periods under UK GAAP has therefore been reversed and the amount reported under non-current assets is now subject to an annual impairment review. Non-current assets held for sale Under IFRS, a non-current asset held for sale must, at the balance sheet date, be available for immediate sale in its present condition and the sale must be highly probable and expected to be completed within one year. As a result, some of the properties that were previously shown as assets held for resale within current assets under UK GAAP have been reclassified to property, plant and equipment under non-current assets. These properties had a net book value of £623,000 at 1 January 2004 and £4,302,000 at 31 December 2004. IFRS 5 has been adopted early and hence reflected at 31 December 2004. Share based payments Under UK GAAP, the expense of granting employee share options was the difference between the exercise price and market price at the date the option was granted. Under IFRS, the expense is the fair value of the option, as spread over the vesting period and adjusted for non-market conditions. The fair value of the share options granted after 7 November 2002 is calculated using an appropriate pricing model and the expense is recognised in the consolidated income statement. The charge for the group has been calculated using the Black-Scholes option pricing model. In accordance with the transitional provisions of IFRS 2, no income statement expense has been recorded in respect of grants of share options made prior to 7 November 2002. There is no impact to net assets or distributable reserves as a result of this adjustment which is credited directly to equity. Retirement benefit obligations Under UK GAAP, the cost of the group's defined benefit plans was reported by reference to SSAP 24 and further disclosures were provided in accordance with FRS 17. These two standards have now been replaced by IAS 19. The group has taken the option to early adopt the amendment to IAS 19 which allows all actuarial differences to be recognised directly in the consolidated statement of recognised gains and losses. Cumulative actuarial gains and losses have been recognised within equity as at 1 January 2004 in respect of the group's defined benefit plans as per the transitional exemption allowed by IFRS 1. This gives rise to a defined benefit plan liability of £14,541,000 at 1 January 2004 and a liability of £18,365,000 at 31 December 2004. Deferred tax Under UK GAAP, with the exception of permanent differences, deferred tax should be recognised on all timing differences that have originated but not reversed by the balance sheet date. Non-reversing permanent differences fall outside the scope of deferred tax. Under IFRS, deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying value in the financial statements. Deferred tax is recognised in the consolidated income statement except if it relates to an item that is recognised directly in equity, in which case it is dealt with in the consolidated statement of changes in equity. The group's transitional balance sheet at 1 January 2004 includes additional deferred tax assets and liabilities amounting to £6,232,000 and £442,000 respectively. The deferred tax assets principally relate to the tax provided on the defined benefit plan liability and the need to provide for the tax on the gains arising on share based payments. The additional deferred tax liabilities occur because of depreciating properties, acquired as part of a business combination, which are not eligible for tax relief. The consolidated income statement for the twelve month period ended 31 December 2004 contains an additional deferred tax credit of £237,000 because of the tax effects associated with the amortisation of intangibles assets and the recognition of additional costs relating to the defined benefit plans. Events after balance sheet date Under UK GAAP, equity dividends were recognised in the year to which they related and were an adjustable post balance sheet event. Under IFRS, final equity dividends proposed by the board are recognised only when approved by the shareholders at the AGM. Interim dividends are recognised when paid or when they are approved by the shareholders. Dividends are shown as a movement in equity and not on the face of the consolidated income statement. Property leases Under IFRS, property leases should be divided into two components with land and buildings considered as separate elements. Land is normally classified as an operating lease unless title passes to the lessee at the end of the lease term. The building is classified as an operating or finance lease by applying classification criteria in IAS 17 - Leases. At 1 January 2004, one property has been reclassified. Land amounting to £300,000 has been treated as an operating lease and has been transferred from property, plant and equipment under non-current assets and shown within other financial assets in current assets. The value attributed to the land is being amortised over the life of the lease term and recognised in the consolidated income statement and, in the twelve month period to 31 December 2004, gives rise to an additional charge of £3,000. Cash flow atatement There are no material differences between the cash flow statement presented under IFRS and the cash flow statement presented under UK GAAP. END This information is provided by RNS The company news service from the London Stock Exchange

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