Final Results
Hornby PLC
02 June 2006
HORNBY DELIVERS SEVENTH YEAR OF PROFIT GROWTH
AS INTERNATIONAL OPERATIONS
COME ON STREAM
Hornby Plc ('Hornby'), the international hobby products group, has today
announced its preliminary results for the year ended 31 March 2006.
•Pre-tax profits up 8% to £8.2 million (2005: £7.6 million)*
*Both years reported on the basis of IFRS
•Turnover reduced by 2% to £44.1 million (2005: £45.0 million)
•Earnings per share up 4% to 15.64p (2005: 15.06p)
•Profits generated in newly acquired overseas subsidiaries
•Acquisition of French distributor MKD completed
•Hornby Digital Control System launched at London Toy Fair
•Final dividend of 5.4p recommended - Total dividend up 10% to 7.7p (2005:7.0p)
Frank Martin, Chief Executive of Hornby, said,
' We are delighted with the performance that the Group has delivered. This is
the seventh consecutive year of profits growth. Despite the challenging backdrop
of our core UK market, we have demonstrated once again the robust nature of the
hobbyist market. Our international operations are now profitable and we are
confident that they will continue to deliver encouraging progress in the future.
' The launch of the Scalextric Sport Digital System has been extremely
successful. This major advance in technology has been further developed to offer
digital control racing across a wider range of price points, thus bringing
significantly enhanced play-value into the mass market for slot racing. Advances
in technology have also enabled us to launch the Hornby Digital Control System,
which has been extremely well received. I am confident, as we roll this out in
our other model railway brands, that this will prove to be a further boost to
sales growth.
' Hornby's revenue base is now much broader. We have made a number of
acquisitions in Europe and they have all been fully integrated into the Group.
We have established a strong brand portfolio across a number of different
markets.
' Looking to the future, we remain confident that our overseas operations will
continue to drive our growth. We are now focused on building the scale of our
marketing and sales distribution, in both Model Railways and Scalextric slot car
racing so that we can take advantage of the opportunities in important markets
in Germany, Italy, France and Spain. I look forward to reporting further
progress. The Hornby Group is in excellent health.'
-ends-
Date: 2 June 2006
For further information contact:
Hornby Plc cityPROFILE
Frank Martin, Chief Executive Simon Courtenay
John Stansfield, Finance Director Andrew Harris
01843-233500 020-7448-3244
On 2 June 2006: 020-7448-3244
Web: www.hornby.com or: www.scalextric.com
High resolution images are available for the media to view and download free of
charge from www.vismedia.co.uk
Hornby Plc - Chairman's Statement
Year ended 31 March 2006
Introduction
I am delighted once again to report an encouraging performance for the year.
This has been achieved despite the background of a weaker consumer environment
in the UK, our main market.
Whilst overall sales decreased by 2% to £44.1 million, pre-tax profit at £8.2
million is 8% above last year's result (£7.6 million). Both years are reported
on the basis of IFRS. Basic earnings per share rose by 4% to 15.64p.
We highlighted on a number of occasions during the year, the difficult
conditions in the UK market. However, as a result of early action to bring costs
in line with sales expectations we were able to mitigate the worst effects of
the sales downturn in the UK. Shareholders will be aware that the management
team has also taken steps to broaden and diversify the Group's revenue streams.
We have acquired a number of overseas businesses to take advantage of the
opportunities in new markets. These businesses have been fully integrated and
are performing very well. Significantly, both the recently established Hornby
Italia and Hornby France subsidiaries were able to contribute positively to
Group profit in the year.
Dividend
Reflecting the continued progress that the Group has made, the Board is
recommending a final dividend of 5.4p per ordinary share. This will be paid to
shareholders on the register at 28 July 2006 and will be paid on 18 August 2006.
Taken together with the interim dividend, this gives a total dividend for the
year of 7.7p, an increase of 10% over the dividend of 7.0p declared in the
previous financial year. We remain committed to rewarding our shareholders with
a dividend of approximately 50% of earnings per share.
Review of the Business
Despite the backdrop of a difficult trading environment in the UK market we are
pleased with the performance of our UK business. Weaker consumer demand, first
reported at our AGM in July 2005, continued through to Christmas. However our
strong network of independent retailers and in-store concessions continued to
offer a prominent high-street presence. This, coupled with a strong new product
introduction programme in the period January-March 2006, resulted in sales in
this final quarter of the year exceeding our earlier expectations, confirming
once again the defensive nature of our hobby-based products in times of general
consumer uncertainty.
One of the most significant developments in recent years has been the launch in
2004 of the Scalextric Sport Digital System (SSD). Customer reaction has been
excellent. SSD is now gaining recognition worldwide as the system of choice for
digital slot car racing, combining easy compatibility with existing systems and
an excellent record of reliability. This year we have introduced a number of new
products within SSD, aimed at securing wider distribution around the world, at
mass-market price points. We believe that, over time, the market will move
decisively towards digital control. The patented SSD technology places Hornby in
pole position to take advantage of this shift in the market.
At the London Toy Fair in January 2006 we launched the Hornby Digital Control
System for model railways. This system uses similar technology to SSD and both
systems will benefit from the economies of scale thus derived. In this way the
Group is also able to leverage investment in Research and Development.
The price points of the Hornby system are very competitive and the system has
been designed with ease of operation in mind. We expect an increasing proportion
of our model railway products to be sold as digital-enabled over the coming
years. We plan to roll out the launch of the Hornby system, suitably branded,
through our overseas subsidiaries at the Toy Fairs in 2007.
International subsidiaries
The UK market for model railways represents only c.10% of the total European
market. The major manufacturers in Europe have experienced difficulties in
recent years as a result of their continued focus on manufacturing in Europe.
Hornby embarked upon a strategy some 3 years ago to acquire a series of strong
European brands that would lend themselves to relocation of manufacturing to
China and the subsequent revitalisation of their European distribution.
The first of these acquisitions, our Spanish operation Electrotren, made good
progress in expanding the distribution of the Superslot brand in Spain during
the year, supported by the exclusive rights in Spain during 2005 to use on
slot-car racing products the image and name of Formula 1 World Champion Fernando
Alonso. Consequently overall sales revenues increased significantly. However, a
reduction in the number of new Electrotren model railway introductions occurred
during the year, as a result of longer lead times associated with the latest
high specification designs now being developed. Consequently Electrotren made a
reduced contribution to Group profit during the year. New model introductions
are now on track and we are looking forward to a year of significant progress
from Electrotren.
Shareholders will recall that we acquired certain assets of Lima SpA in December
2004, and subsequently commenced trading as Hornby Italia. We have made
excellent progress in re-establishing this business. During the year, we have
relocated the operations to new premises in Brescia, Northern Italy and
commenced production in China of the first ranges. We have also improved the
sales and distribution network in Europe and this has shown through in the
financial results. This has been very much a year of transition for Hornby
Italia, and therefore the achievement of an operating profit is particularly
encouraging.
Similarly, the achievement of a positive operating profit in Hornby France is
also encouraging. We acquired the goodwill and certain assets of our French
distributor MKD in December 2005, and began trading as Hornby France from 1
January 2006. The rationale for this acquisition was based on our ownership of
the French brand leader in model railways - Jouef - acquired as part of the Lima
assets. It was clear that the opportunity to relaunch the Jouef brand in France
via a wholly owned Hornby company would deliver the best return to our
shareholders. That Hornby France has been able to make a contribution to profit
in its first 3 months of trading bodes well for the future performance of this
subsidiary. We expect both Hornby Italia and Hornby France to produce a
significantly improved performance in the new financial year.
The European subsidiaries in total contributed operating profits of £453,000 to
the Group result.
Results in Scalextric USA were much better than the previous year. Sales were up
by 9% at $5.1 million. The loss before tax of $141,000 in the previous year was
turned round to a profit before tax of $116,000 as a result of actions taken to
reduce overheads and increase sales efforts. In addition, as previously
reported, margins generated in Hornby Hobbies in the UK on sales made to
Scalextric USA have the effect of increasing significantly the overall
contribution to Group profit of our US operation. We are looking for a further
improvement in the USA during the new financial year.
In our International subsidiaries, both in Europe and the USA, we now have
committed management teams who are capable of driving further sales and profits
growth.
Product development
Our product development programme is the engine room of our business and we have
continued to focus on maintaining a full new product pipeline. During the year
we have increased our resources in this area, to cope with the additional
demands of our subsidiaries and to design new products specifically for those
markets. We are confident that as these newly designed products come on stream,
there will be a resurgence of interest in our ranges throughout Europe, in the
same way as our Hornby model railways business in the UK benefited from the
influx of new products produced in China from 2000 onwards.
Outlook
Three years ago we recognised that although the Group was performing well, the
Hornby model railway business was effectively trapped in the UK market as a
result of the scale (00) and the exclusive focus on UK subject matter. It was
clear that in order to ensure a continued pattern of sales and profits growth we
had to expand our activities outside the UK.
Our acquisitions of Electrotren in Spain, the Lima assets in Italy and the
assets of MKD in France now provide the Group with the widest brand and product
portfolio in the worldwide model railway market, together with the distribution
infrastructure to capitalise on these assets. We have proved that we have the
expertise to re-invigorate our hobby brands in the UK and we have enjoyed a
significant renaissance in the popularity of model railways and slot car racing.
We have worked hard to extend the appeal of our brands across the age ranges and
to increase sales. We now have a major opportunity to repeat this success with
our overseas businesses, both in model railways and slot racing. We own a superb
portfolio of brands which have strong potential for growth.
We expect trading in the UK market to be challenging again in the new financial
year. However, the overseas subsidiaries are all now extremely well placed to
become the main drivers of growth in the business during the coming years. The
outlook for the Group is bright and we look forward to the future with
confidence.
Neil Johnson
Chairman
2 June 2006
GROUP INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH 2006
Group
2006 2005
(unaudited) (unaudited)
£'000 £'000
REVENUE 44,113 45,006
Cost of sales (20,820) (22,613)
------------------------------------------------------------
GROSS PROFIT 23,293 22,393
Distribution costs (1,504) (1,312)
Selling and marketing costs (9,924) (9,508)
Administrative expenses (3,354) (3,910)
Other operating (expenses)/income (217) 51
------------------------------------------------------------
GROUP OPERATING PROFIT 8,294 7,714
Finance income 30 47
Finance costs (160) (176)
------------------------------------------------------------
PROFIT BEFORE TAXATION 8,164 7,585
Taxation (2,306) (1,993)
------------------------------------------------------------
PROFIT FOR THE YEAR 5,858 5,592
============================================================
EARNINGS PER ORDINARY SHARE
Basic 15.64p 15.06p
Diluted 15.08p 14.38p
All of the activities of the Group are continuing.
GROUP BALANCE SHEET
AT 31 MARCH 2006
Group
2006 2005
(unaudited) (unaudited)
£'000 £'000
ASSETS
NON-CURRENT ASSETS
Goodwill 8,116 7,751
Intangible assets 1,608 1,418
Property, plant and equipment 5,539 5,096
Deferred tax assets 355 353
------------------------------------------------------------
15,618 14,618
------------------------------------------------------------
CURRENT ASSETS
Inventories 8,227 7,526
Trade and other receivables 9,325 7,199
Cash and cash equivalents 829 1,860
------------------------------------------------------------
18,381 16,585
------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Borrowings 119 23
Trade and other payables 6,914 7,637
Current tax liabilities 1,542 1,100
------------------------------------------------------------
8,575 8,760
------------------------------------------------------------
NET CURRENT ASSETS 9,806 7,825
------------------------------------------------------------
NON-CURRENT LIABILITIES
Borrowings 44 80
Deferred tax liabilities 217 222
Provisions for other liabilities
and charges 300 369
------------------------------------------------------------
561 671
------------------------------------------------------------
NET ASSETS 24,863 21,772
============================================================
SHAREHOLDERS' EQUITY
Share capital 376 373
Share premium 5,050 4,906
Other reserves 2,466 2,483
Retained earnings 16,971 14,010
------------------------------------------------------------
TOTAL EQUITY 24,863 21,772
============================================================
GROUP STATEMENT OF CHANGES IN EQUITY
for the years ended 31 March 2006 and 31 March 2005
Capital
Share Share Redemption Revaluation Other Retained Total
Capital Premium Reserve Reserve Reserves Earnings* Equity
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 1 April 2004 370 4,797 55 757 1,688 11,022 18,689
Profit for the period - - - - - 5,592 5,592
Amortisation of revaluation surplus - - - (17) - 17 -
Issue of shares 3 109 - - - - 112
Share based payments - - - - - (84) (84)
Exchange adjustment offset
in reserves - - - - - 26 26
Purchase of own shares - - - - - (278) (278)
Shares vested - - - - - 64 64
Dividends - - - - - (2,349) (2,349)
--------------------------------------------------------------------------------------------------------------------
Balance at 31 March 2005 373 4,906 55 740 1,688 14,010 21,772
Adoption of IAS 32 and IAS 39 - - - - - (38) (38)
--------------------------------------------------------------------------------------------------------------------
Balance at 1 April 2005 373 4,906 55 740 1,688 13,972 21,734
Profit for the period - - - - - 5,858 5,858
Amortisation of revaluation surplus - - - (17) - 17 -
Issue of shares 3 144 - - - - 147
Share based payments - - - - - 158 158
Exchange adjustment offset
in reserves - - - - - (111) (111)
Purchase of own shares - - - - - (364) (364)
Shares vested - - - - - 138 138
Dividends - - - - - (2,697) (2,697)
--------------------------------------------------------------------------------------------------------------------
Balance at 31 March 2006 376 5,050 55 723 1,688 16,971 24,863
====================================================================================================================
* Attributable to equity holders of the Company.
GROUP CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH 2006
Group
2006 2005
(unaudited) (unaudited)
£'000 £'000
CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations 7,546 9,222
Interest received 30 47
Interest paid (160) (176)
Tax paid (1,939) (2,557)
--------------------------------------------------------------------------------
Net cash generated from operating activities 5,477 6,536
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of trade assets and related costs (1,072) (5,971)
Proceeds from sale of property, plant and equipment 23 227
Purchase of property, plant and equipment (2,545) (2,220)
--------------------------------------------------------------------------------
Net cash utilised in investing activities (3,594) (7,964)
--------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of ordinary shares 147 112
Purchase of own shares by STIP (364) (278)
Finance lease capital payments (23) (30)
Dividends paid to Company's shareholders (2,697) (2,349)
--------------------------------------------------------------------------------
Net cash utilised in financing activities (2,937) (2,545)
--------------------------------------------------------------------------------
Effect of exchange rate movements (60) 27
--------------------------------------------------------------------------------
Net decrease in cash and bank overdrafts (1,114) (3,946)
Cash and bank overdrafts at beginning of the year 1,860 5,806
--------------------------------------------------------------------------------
CASH AND BANK OVERDRAFTS AT END OF YEAR 746 1,860
================================================================================
CASH AND CASH EQUIVALENTS CONSIST OF:
Cash and cash equivalents 829 1,860
Bank overdrafts (83) -
--------------------------------------------------------------------------------
CASH AND BANK OVERDRAFTS AT END OF YEAR 746 1,860
================================================================================
NOTES TO THE CASH FLOW STATEMENT
(a) CASH FLOW FROM OPERATING ACTIVITIES
Group
2006 2005
(unaudited) (unaudited)
£'000 £'000
Profit for the financial year 5,858 5,592
Taxation 2,306 1,993
Interest payable 160 176
Interest receivable (30) (47)
Amortisation of intangible assets 97 33
Depreciation 2,075 1,850
Profit on disposal of tangible fixed assets (11) (29)
Share based payments 158 (84)
Gain on financial derivatives (38) -
Decrease in provisions (69) (158)
(Increase)/decrease in inventories (219) 258
Increase in trade and other receivables (2,058) (1,171)
(Decrease)/increase in trade and other payables (683) 809
--------------------------------------------------------------------------------
CASH GENERATED FROM OPERATIONS 7,546 9,222
================================================================================
(b) ANALYSIS OF NET FUNDS
31 March Net Cash Foreign 31 March
2005 Flows Exchange 2006
(unaudited) (unaudited) (unaudited) (unaudited)
£'000 £'000 £'000 £'000
Cash and cash equivalents 1,860 (971) (60) 829
Bank borrowings - within one year - (78) - (78)
- after one year - (5) - (5)
-----------------------------------------------------------------------------------------------
1,860 (1,054) (60) 746
Due within one year:
Finances leases (23) (18) - (41)
Due after one year:
Finance leases (80) 41 - (39)
-----------------------------------------------------------------------------------------------
NET FUNDS 1,757 (1,031) (60) 666
===============================================================================================
SEGMENTAL REPORTING
The primary reporting format for segmental purposes is geographic, as this is
the basis on which the Group is organised and managed. Transactions with and
balances to the other segments have been identified above and eliminated.
Hornby's secondary segment is business and as the Group operates on a single
business segment, further analysis is not required here.
Rest Total
of Reportable Intra
Year ended UK USA Europe Segment Group Group
31 March 2006 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
£'000 £'000 £'000 £'000 £'000 £'000
Revenue - External 34,196 2,952 6,965 44,113 - 44,113
- Other segments 3,301 - 566 3,867 (3,867) -
-----------------------------------------------------------------------------------------------------------------
Operating profit 7,747 94 453 8,294 - 8,294
Interest expense - External (151) - (9) (160) - (160)
- Other segments - (30) (551) (581) 581 -
Interest income - External 13 3 14 30 - 30
- Other segments 581 - - 581 (581) -
-----------------------------------------------------------------------------------------------------------------
Profit before tax 8,190 67 (93) 8,164 - 8,164
Taxation (2,307) (16) 17 (2,306) - (2,306)
-----------------------------------------------------------------------------------------------------------------
Profit for the year 5,883 51 (76) 5,858 - 5,858
=================================================================================================================
Segment assets 32,169 990 15,483 48,642 (14,860) 33,782
Less inter company debtors (14,403) - (457) (14,860) 14,860 -
-----------------------------------------------------------------------------------------------------------------
Total assets 17,766 990 15,026 33,782 - 33,782
=================================================================================================================
Segment liabilities 7,387 916 15,476 23,779 (14,860) 8,919
Less inter company creditors (13) (899) (13,948) (14,860) 14,860 -
-----------------------------------------------------------------------------------------------------------------
Total liabilities 7,374 17 1,528 8,919 - 8,919
=================================================================================================================
Other segment items
Capital expenditure 1,800 42 1,719 3,561 - 3,561
(including acquisitions)
Depreciation 1,779 9 287 2,075 - 2,075
Amortisation of intangible assets - - 97 97 - 97
-----------------------------------------------------------------------------------------------------------------
Rest Total
of Reportable
Year ended UK USA Europe Segment Elimination Group
31 March 2005 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
£'000 £'000 £'000 £'000 £'000 £'000
Revenue - External 39,572 2,488 2,946 45,006 - 45,006
- Other segments 2,229 - - 2,229 (2,229) -
-----------------------------------------------------------------------------------------------------------------
Operating profit 7,411 (38) 341 7,714 - 7,714
Interest expense - External (143) (15) (18) (176) - (176)
- Other segments - (21) (327) (348) 348 -
Interest income - External 41 - 6 47 - 47
- Other segments 348 - - 348 (348) -
-----------------------------------------------------------------------------------------------------------------
Profit before tax 7,657 (74) 2 7,585 - 7,585
Taxation (1,871) 20 (142) (1,993) - (1,993)
-----------------------------------------------------------------------------------------------------------------
Profit for the year 5,786 (54) (140) 5,592 - 5,592
=================================================================================================================
Segment assets 29,285 929 12,435 42,649 (11,668) 30,981
Less inter company debtors (11,631) - (37) (11,668) 11,668 -
-----------------------------------------------------------------------------------------------------------------
Total assets 17,654 929 12,398 30,981 - 30,981
=================================================================================================================
Segment liabilities 8,398 981 11,498 20,877 (11,668) 9,209
Less inter company creditors (9) (956) (10,703) (11,668) 11,668 -
-----------------------------------------------------------------------------------------------------------------
Total liabilities 8,389 25 795 9,209 - 9,209
=================================================================================================================
Other segment items
Capital expenditure 2,082 43 6,189 8,314 - 8,314
(including acquisitions)
Depreciation 1,590 9 251 1,850 - 1,850
Amortisation of intangible assets - - 33 33 - 33
-----------------------------------------------------------------------------------------------------------------
NOTES:
1. Basis of preparation
The financial information for the year ended 31 March 2006 has been prepared in
accordance with International Accounting Standards ('IAS') and International
Financial Reporting Standards ('IFRS') as adopted by the European Union ('EU')
and also as issued by the International Accounting Standards Board,
International Financial Reporting Interpretations Committee interpretations and
with those parts of the Companies Act 1985 applicable to companies reporting
under IFRS. This information does not constitute statutory accounts and has not
been audited.
References to IFRS throughout refer to the application of International
Accounting Standards and International Financial Reporting Standards.
Hornby Plc consolidated financial statements were prepared in accordance with UK
Generally Accepted Accounting Principles ('UK GAAP') until 31 March 2005. In
preparing Hornby Plc 2005 consolidated financial information, management has
amended certain accounting, valuation and consolidation methods applied in the
UK GAAP financial statements to comply with IFRS. The comparative figures in
respect of the year ended 31 March 2005 were restated to reflect these
adjustments, except as described in the accounting policies.
Reconciliations and descriptions of the effect of the transition from UK GAAP to
IFRS on the Group's equity and its net income and cash flows are provided in
note 6.
2. Non statutory accounts
These statements do not constitute statutory financial statements within the
meaning of Section 240 of the Companies Act 1985. The financial statements for
the year ended 31 March 2005 were prepared in accordance with UK GAAP and have
been delivered to the Registrar of Companies and on which the auditors made an
unqualified report. The comparative figures for the year ended 31 March 2005
have been prepared as set out above and are an abridged statement of the full
financial statements (as restated for IFRS) for that period.
3. Earnings per share
The calculation of earnings per ordinary share is based on the profits after
taxation for the period of £5,858,000 (year ended 31 March 2005 - £5,592,000)
and the weighted average number of ordinary shares in issue during the period of
37,447,229 (year ended 31 March 2005 - 37,141,538).
The calculation of diluted earnings per ordinary share is based on the weighted
average number of ordinary shares in issue as adjusted to assume conversion of
all dilutive potential ordinary shares, 38,842,053 (year ended 31 March 2005 -
38,888,321).
4. Short Term Incentive Plan
164,861 ordinary shares to the value of £364,397 were acquired by the Employee
Benefit Trust in June 2005 in accordance with the incentive plan, details of
which were included in the 2005 Annual Report and Accounts.
The Trust waives its right to dividends.
5. Principal Accounting Policies
The principal accounting policies that the Group has adopted in its 31 March
2006 financial statements being prepared under IFRS, and which have been
consistently applied in the preparation of this financial information, are set
out below.
Basis of consolidation
The Group financial statements consolidate the financial statements of the
Company and all its subsidiaries as at 31 March each year prepared under IFRS
using consistent accounting policies. The results of subsidiaries acquired are
included in the consolidated profit and loss account from the date control
passes. Intra group sales are eliminated on consolidation.
Foreign currency translation
Transactions in foreign currencies are translated at the exchange rate ruling at
the date of the transaction. Monetary assets and liabilities denominated in
foreign currencies are translated at the exchange rates ruling at the balance
sheet date and any exchange differences are taken to the income statement.
On consolidation, income statements and cash flows of foreign subsidiaries are
translated into pounds sterling using average rates that existed during the
accounting period. The balance sheets of foreign subsidiaries are translated
into pounds sterling at the rates of exchange ruling at the balance sheet date.
Gains or losses arising on the translation of opening and closing net assets are
recognised in the statement of changes in equity.
Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value
of the Group's share of the net identifiable assets of the acquired subsidiary
at the date of acquisition. Goodwill recognised under UK GAAP prior to 1 April
2004, the date of transition to IFRS, is stated at net book value as at this
date. Goodwill on business combinations recognised subsequent to 1 April 2004 is
tested annually for impairment and carried at cost less accumulated impairment
losses.
(b) Trade names
Trade names are capitalised at fair value as at the date of acquisition. They
are carried at their fair value less accumulated amortisation and any
accumulated impairment losses. Amortisation is calculated using the
straight-line method to allocate the fair value of trade names over their
estimated economic life of 20 years.
(c) Existing customer relationships
Existing customer relationships are capitalised at fair value as at the date of
acquisition. They are carried at their fair value less accumulated amortisation
and any accumulated impairment losses. Amortisation is calculated using the
straight-line method to allocate the fair value of customer relationships over
their estimated economic life of 10 years.
(d) Research and development
Research expenditure is recognised as an expense as incurred. Costs incurred on
development projects (relating to the design and testing of new products) are
recognised as intangible assets when it is probable that the project will be a
success, considering its commercial and technological feasibility, and costs can
be measured reliably. Other development expenditures are recognised as an
expense as incurred.
Tangible fixed assets
Land and buildings are shown at cost or valuation less accumulated depreciation.
Assets revalued prior to the transition to IFRS use this valuation as deemed
cost at this date.
Depreciation is provided at rates calculated to write off the cost or valuation
of each asset, on a straight-line basis (with the exception of tools and moulds)
over its expected useful life, as follows:
Freehold buildings - 30 to 50 years
Plant and equipment - 5 to 10 years
Motor vehicles - 4 years
Tools and moulds are depreciated at varying rates in line with the related
estimated product sales on an item-by-item basis up to a maximum of 4 years.
Investments in subsidiaries
Investments in subsidiaries included as non-current assets are stated at cost
less any provision for impairment.
Impairment of assets
Assets that have an indefinite useful life are not subject to amortisation and
are tested annually for impairment. Assets that are subject to amortisation are
reviewed for impairment when events or changes in circumstances indicate that
the carrying value may not be recoverable. An impairment loss is recognised for
the amount by which the asset's carrying value exceeds its recoverable amount,
which is considered to be the higher of its value in use and fair value less
costs to sell. In order to assess impairment, assets are grouped into the lowest
levels for which there are separately identifiable cash flows (cash-generating
units). Cash flows used to assess impairment are discounted using appropriate
rates taking into account the cost of equity and any risks relevant to those
assets.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is
determined using the first-in, first-out (FIFO) method. The cost of finished
goods and work in progress comprises raw materials, direct labour, other direct
costs and related production overheads (based on normal operating capacity).
Net realisable value is based on the anticipated selling price less further
costs expected to be incurred to completion and disposal. Provisions are made
against those inventories considered to be obsolete or excess to requirements on
an item-by-item basis.
There are no significant differences between balance sheet and replacement cost
values. For these purposes replacement cost is based upon latest invoice prices
before the balance sheet date.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with
banks, other short-term highly liquid investments with original maturities of
three months or less and bank overdrafts. Bank overdrafts are shown within
current liabilities on the balance sheet.
Deferred tax
Deferred tax is provided on all temporary differences at the balance sheet date
between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes.
Deferred tax assets are recognised for all deductible temporary differences,
carry-forward of unused tax assets and unused tax losses, to the extent that it
is probable that taxable profit will be available against which the deductible
temporary differences, and the carry-forward of unused tax assets and unused tax
losses can be utilised. The carrying amount of deferred income tax assets is
reviewed at each balance sheet date and reduced to the extent that it is no
longer probable that sufficient taxable profit will be available to allow all or
part of the deferred income tax asset to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are
expected to apply to the year when the asset is realised or the liability is
settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted at the balance sheet date. Tax relating to items
recognised directly in equity are recognised in equity and not in the income
statement.
Pension costs
During the year the Group operated a defined contribution money purchase pension
scheme under which it pays contributions based upon a percentage of the members'
basic salary. The scheme is administered by trustees either appointed by the
Company or elected by the members (to constitute one third minimum).
Contributions to defined contribution pension schemes are charged to the income
statement according to the year in which they are payable.
Share option scheme
The Group operates an executive share scheme. For all grants of share options
and awards, the fair value as at the date of grant is calculated using an
appropriate option pricing model and the corresponding expense is recognised
over the vesting period. The Company has taken advantage of the transitional
provisions of IFRS 2 'Share Based Payments' in respect of equity-settled awards
and has applied IFRS 2 only to equity settled awards granted after 7 November
2002 that had not vested before 1 January 2005.
Short term incentive plan (STIP)
The STIP investment is carried at the cost of the shares acquired less the cost
of the shares vested. This investment in own shares is presented as a deduction
from shareholders' funds.
The matched element of the STIP which has a condition of employment attached to
it is spread over the vesting period of the shares and recognised in the income
statement over this period.
Provisions
Provisions are recognised when the Group has a present legal or constructive
obligation as a result of past events and it is more likely than not that an
outflow of resources will be required to settle the obligation and the amount
has been reliably estimated. The expense relating to any provision is presented
in the income statement net of any reimbursement.
Provisions are measured at the present value of management's best estimate of
the expenditure required to settle the present obligation at the balance sheet
date. If material, provisions are determined by discounting the expected future
cash flows of the Group at rates that reflect current market assessments of the
time value of money.
Revenue recognition
Revenue comprises the fair value of the sale of goods and services, net of value
added tax, rebates and discounts and after eliminating sales within the Group.
Revenue is recognised as follows:
(a) Sales of goods
Sales of goods are recognised when a Group entity has delivered products to the
customer; the customer has accepted the products; and collectability of the
related receivables is reasonably assured.
(b) Sales of services
Sales of services are recognised in the accounting period in which the services
are rendered, by reference to completion of the specific transaction, assessed
on the basis of the actual service provided as a proportion of the total
services to be provided.
(c) Royalty income
Royalty income is recognised on an accruals basis in accordance with the
substance of the relevant agreements.
(d) Sales returns
The Group establishes a sales returns provision at the period end that reduces
income in anticipation of customer returns of goods sold in the period.
Segmental reporting
The Group's primary reporting format is geographical segments and secondary
format is business segments. A geographical segment is a component of the Group
that operates within a particular economic environment and is subject to risks
and returns that differ from those components operating in other economic
environments. A business segment is a component of the Group that provides a
group of related products and is subject to risks and returns that are different
from those of other business segments.
Operating profit of each segment includes revenue and expenses directly
attributable to or can be allocated on a reasonably basis. Segment assets and
liabilities are those operating assets and liabilities directly attributable to
or can be allocated on a reasonable basis.
Leases
The Group enters into operating and finance leases.
Assets held under finance leases are initially reported at the fair value of the
asset with an equivalent liability categorised as appropriate under liabilities
due within or after one year. The assets are depreciated over the shorter of the
lease term and their useful economic lives. Finance charges are allocated to
accounting periods over the period of the lease to produce a constant rate of
return on the outstanding balance. Rentals are apportioned between finance
charges and the reduction of the liability, and allocated to net interest.
Assets under operating leases are charged on a straight-line basis over the
lease term.
Derivative financial instruments
From 1 April 2004 to 31 March 2005
In accordance with IFRS 1, 'First Time Adoption of International Financial
Reporting Standards', the Group has elected not to apply IAS 32, 'Financial
Instruments: Disclosure and Presentation', and IAS 39, 'Financial Instruments:
Recognition and Measurement' to the period ended 31 March 2005. The Group has
continued to adopt UK GAAP in the accounting for and disclosure of financial
instruments in that period.
The derivative instruments used by the group to manage its currency risk are
forward rate contracts. Forward currency contracts entered into with respect to
trading transactions were accounted for under UK GAAP as hedges, with the
instruments impact on profit not recognised until the underlying transaction was
recognised in the profit and loss account. The notional amounts of interest rate
swaps and forward currency contracts were not recorded on the balance sheet.
From 1 April 2005 onwards
Derivatives are initially recognised at fair value on the date a derivative
contract is entered into and are subsequently remeasured at their fair value.
The Group documents at the inception of the transaction the relationship between
hedging instruments and hedged items, as well as its risk management objective
and strategy for undertaking various hedge transactions. The Group also
documents its assessment, both at hedge inception and on an ongoing basis, of
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values of the hedged items.
(a) Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair
value hedges are recorded in the income statement, together with any changes in
the fair value of the hedged asset or liability that are attributable to the
hedged risk.
(b) Derivatives that do not qualify for hedge accounting
Certain derivative instruments are not considered effective and do not qualify
for hedge accounting. Such derivatives are classified as at fair value through
the income statement, and changes in the fair value of derivative instruments
that do not qualify for hedge accounting are recognised immediately in the
income statement.
6. First time adoption of International Financial Reporting Standards
The Group has applied IFRS 1 'First Time Adoption of International Financial
Reporting Standards' for its initial implementation of IFRS. The Group's date of
transition to IFRS is 1 April 2004 and comparative information in the financial
statements has been restated to reflect the Group's adoption of IFRS except
where otherwise required or permitted by IFRS 1.
IFRS 1 requires an entity to comply with each IFRS effective at the reporting
date for its first financial statements prepared under IFRS. As a general rule,
IFRS 1 requires such standards to be applied retrospectively. However, the
standard permits several optional exemptions from full retrospective
application. The Group has elected to take advantage of the following
exemptions:-
•The Group has adopted IFRS 3 'Business Combinations' to the extent that it
applies to acquisitions after 1 April 2004. Acquisitions before that date have
been recorded under previous accounting rules as the Group has taken advantage
of the exemption permitted in IFRS 1. All goodwill has been tested for
impairment in accordance with our accounting policy.
•The Group has taken advantage of the exemption in IFRS 1 regarding cumulative
translation differences. Accordingly, the cumulative translation differences for
all foreign operations are deemed to be nil at the date of transition to IFRS.
•The Group has applied the exemptions in IAS 32 'Financial Instruments:
Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and
Measurement', and applied these standards from 1 April 2005 only.
•The Group has taken advantage of the exemptions allowed in IFRS 1 regarding
IFRS 2 'Share based payments'. The Group has applied the exemptions for share
based payments granted on or before 7 November 2002.
•The Group considers the land and buildings revaluation performed under UK GAAP
as comparable to the fair value at the date of the transition to IFRS.
Accordingly, the Group has elected to use this valuation as deemed cost at the
date of transition to IFRS, and stated the property at valuation, net of
accumulated depreciation.
Main impacts of International Financial Reporting Standards
Outlined below are those International Financial Reporting Standards which have
an impact upon the financial information of Hornby Plc. Details of adjustments
are set out in the reconciliations to UK GAAP below.
IFRS 3 - 'Business Combinations'
The standard deals with accounting for business combinations including goodwill
and intangible assets. The Group's previous policy under UK GAAP was to amortise
goodwill, which has now ceased, and to test for impairment, normally on an
annual basis, when there is an indication that the carrying value of an asset
might not be recoverable. Where appropriate, in respect of business combinations
completed after the date of transition to IFRS, separately identified intangible
assets have been valued and are subject to amortisation.
IAS 12 - 'Income Taxes'
This standard requires entities to provide for deferred taxation based on
temporary differences between the carrying amount of assets and liabilities and
their tax base. Consequently, the Group has made additional provision for
deferred taxation on tax deductible amortisation on purchased goodwill and
deferred tax adjustments in respect of share based payments.
IAS 21 - 'The Effects of Changes in Foreign Exchange Rates'
Income statements and cash flows of foreign subsidiaries are reported in
sterling using average rates of exchange that existed during the accounting
period rather than the closing rates at the end of the accounting period as was
previously permitted by UK GAAP.
IAS 10 - 'Events after the balance sheet date'
The standard does not permit dividends declared after the balance sheet date to
be recognised as a liability. Consequently, under IFRS, the Group no longer
makes provision for dividends not approved by the period end. Actual dividends
paid in the period are charged to shareholders' equity.
IFRS 2 - 'Share Based Payments'
Previously the cost of awards to employees (including conditional rights) was
charged to the income statement over the period to which the employees'
performance related. Historically, provision has been made for the cost of
awards based on the share price ruling at grant date. Under IFRS 2, share awards
are measured at fair value at grant date and recognised as an expense over the
vesting period. The impact of this standard on the financial statements of the
Group is a small reduction in the charge to the income statement for the year
ended 31 March 2005 and an equivalent increase in shareholders' funds, net of
deferred tax. Additionally there is a small reduction in the cumulative charge
to retained earnings at the date of transition to IFRS.
IAS 14 - 'Segment Reporting'
As previously, the Group presents primary segmental reporting based on its three
geographic regions being the UK, the USA and Rest of Europe. The Group operates
as a single business segment.
Reconciliation of IFRS Income Statement
Year ended Year ended
31 March 31 March
2006 2005
(unaudited) (unaudited)
£'000 £'000
Profit for the period under UK GAAP 5,326 5,156
Share-based payments (158) 84
Amortisation of goodwill reversal 593 297
Amortisation of intangible assets reversal 149 35
Amortisation of intangible assets (97) (33)
Financial derivatives 38 -
Taxation 7 53
------------------------------------------------------------------
Profit for the period under IFRS 5,858 5,592
==================================================================
Reconciliation of profit - UK GAAP to IFRS
Year ended 31 March 2005
UK GAAP Effect of IFRS
IFRS
(unaudited) (unaudited) (unaudited)
£'000 £'000 £'000
REVENUE 45,006 - 45,006
Cost of sales (22,613) - (22,613)
----------------------------------------------------------------------------------
GROSS PROFIT 22,393 - 22,393
Distribution costs (1,312) - (1,312)
Selling and marketing costs (9,508) - (9,508)
Administrative expenses (4,293) 383 (3,910)
Other operating income 51 - 51
----------------------------------------------------------------------------------
GROUP OPERATING PROFIT 7,331 383 7,714
Finance income 47 - 47
Finance costs (176) - (176)
----------------------------------------------------------------------------------
PROFIT BEFORE TAXATION 7,202 383 7,585
Taxation (2,046) 53 (1,993)
----------------------------------------------------------------------------------
PROFIT FOR THE YEAR 5,156 436 5,592
==================================================================================
Reconciliation of Balance Sheet - UK GAAP to IFRS
At 1 April 2004 At 31 March 2005
UK GAAP Effect of IFRS UK GAAP Effect of IFRS
IFRS IFRS
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
£'000 £'000 £'000 £'000 £'000 £'000
ASSETS
NON-CURRENT ASSETS
Goodwill 4,017 - 4,017 7,503 248 7,751
Intangible assets - - - 1,367 51 1,418
Property, plant and equipment 4,436 - 4,436 5,096 - 5,096
Deferred tax assets 240 (240) - 344 (213) 131
------------------------------------------------------------------------------------------------------------------------
8,693 (240) 8,453 14,310 86 14,396
------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Inventories 7,369 - 7,369 7,526 - 7,526
Trade and other receivables 5,977 - 5,977 7,199 - 7,199
Cash and cash equivalents 5,806 - 5,806 1,860 - 1,860
------------------------------------------------------------------------------------------------------------------------
19,152 - 19,152 16,585 - 16,585
------------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Borrowings - 30 30 - 23 23
Trade and other payables 8,443 (1,656) 6,787 9,525 (1,888) 7,637
Current tax liabilities 1,443 - 1,443 1,100 - 1,100
------------------------------------------------------------------------------------------------------------------------
9,886 (1,626) 8,260 10,625 (1,865) 8,760
------------------------------------------------------------------------------------------------------------------------
NET CURRENT ASSETS 9,266 1,626 10,892 5,960 1,865 7,825
========================================================================================================================
NON-CURRENT LIABILITIES
Borrowings 103 - 103 80 - 80
Deferred tax liabilities - 26 26 - - -
Provisions for other liabilities and charges 527 - 527 369 - 369
------------------------------------------------------------------------------------------------------------------------
630 26 656 449 - 449
------------------------------------------------------------------------------------------------------------------------
NET ASSETS 17,329 1,360 18,689 19,821 1,951 21,772
========================================================================================================================
SHAREHOLDERS' EQUITY
Share capital 370 - 370 373 - 373
Share premium 4,797 - 4,797 4,906 - 4,906
Other reserves 2,500 - 2,500 2,483 - 2,483
Retained earnings 9,662 1,360 11,022 12,059 1,951 14,010
------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY 17,329 1,360 18,689 19,821 1,951 21,772
========================================================================================================================
IFRS Adjustments
At At
1 April 2004 31 March 2005
(unaudited) (unaudited)
£'000 £'000
Goodwill - per UK GAAP 4,017 7,503
Amortisation written back - 297
Lima intangibles fair value adjustment - (49)
--------------------------------------------------------------------------
4,017 7,751
--------------------------------------------------------------------------
Goodwill amortisation relating to acquisitions prior to 1 April 2004 and charged
to profit since that date have been reversed.
Goodwill relating to Lima assets acquired was reduced and reallocated to
intangible assets.
Intangible assets - per UK GAAP - 1,367*
Amortisation written back - 35
Lima intangibles fair value adjustment - 49
Amortisation of fair value - (33)
--------------------------------------------------------------------------
- 1,418
--------------------------------------------------------------------------
Intangible assets amortisation relating to acquisitions prior to 1 April 2004
and charged to profit since that date have been reversed.
Intangible assets relating to Lima assets acquired increased upon fair valuing.
Intangible assets relating to acquisitions post 31 March 2004 are amortised over
their useful life.
* Shown in the 31 March 2005 Report and Accounts within goodwill.
Deferred tax assets - per UK GAAP 240 344
Accelerated capital allowances 9 63
Short term incentive plan (73) (108)
Share options - 29
Revaluations (227) (222)
Pensions 15 14
Trade discount 3 3
General provisions 7 8
--------------------------------------------------------------------------
(26) 131
--------------------------------------------------------------------------
Borrowings - per UK GAAP - -
Finance lease commitments < 1 year 30 23
--------------------------------------------------------------------------
30 23
--------------------------------------------------------------------------
Finance lease capital commitments due in less than one year.
Trade and other payables - per UK GAAP 8,443 9,525
Finance lease commitments transferred
to borrowings (30) (23)
Dividend reversal (1,626) (1,865)
--------------------------------------------------------------------------
6,787 7,637
--------------------------------------------------------------------------
Dividends accrued but not declared, proposed or approved are reversed.
Retained earnings - per UK GAAP 9,662 12,059
Dividend reversal 1,626 2,588
Dividend payment - (723)
Amortisation of goodwill reversal - 297
Amortisation of intangibles reversal - 35
Amortisation of intangibles fair value - (33)
Deferred taxation (266) (213)
--------------------------------------------------------------------------
11,022 14,010
--------------------------------------------------------------------------
There are no material differences between the cash flow statements presented
under IFRS and the cash flow statements previously presented under UK GAAP.
This information is provided by RNS
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