Interim Results
Pittards PLC
30 August 2007
Pittards plc produces technically advanced leather for many of the world's
leading brands of gloves, shoes, luxury leathergoods and sports equipment.
PITTARDS PLC
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2007
Chairman's Interim Statement
In the first half of 2007 we have concentrated on incorporating the bovine
activity formerly carried out in our Leeds factory into the Yeovil site and this
has now been successfully integrated. In Ethiopia, Ethiopia Share Tannery
Company's (ETSC) turnover has increased by 23% over their previous financial
year on a business that exports more than 80% of its sales. The subcontractor
relationship with Teh Chang in Taiwan which services the leisure footwear market
has also progressed with sales for the first half totalling over a million
square feet.
The accompanying financial statements for the six months ended 30 June 2007 have
been prepared for the first time in accordance with International Financial
Reporting Standards as now required for AIM listed companies, and a full
reconciliation of the impact of these changes (including restatement of the
prior period) is attached to these results as an appendix. However, as we do
not intend to change the way we manage our business in order to address
accounting issues I will continue to comment on a UK GAAP basis for the time
being. In our business the differences under IFRS arise almost exclusively from
the treatment of foreign exchange contracts (called derivative financial
instruments under IFRS). This is because there are timing differences between
the way we hedge account for foreign currency under UK GAAP and the requirements
of IFRS which will lead to greater volatility in results between accounting
periods.
On a UK GAAP basis the Company achieved an operating profit of £0.058m in the
first half of 2007, which compares to an operating loss of £0.402m in the first
half of 2006, and follows an operating loss of £0.056m in the second half of
2006. After bank interest of £0.3m (2006 - £0.351m) the loss on ordinary
activities before taxation was £0.242m (2006 £0.991m loss before extraordinary
items).
Under IFRS accounting rules the operating profit of £0.058m becomes a loss of
£0.419m because gains on derivative financial instruments used to hedge 2007
foreign currency exposures have been accounted for in 2006 in accordance with
IAS 39.
Turnover for the six months was £16.6m (IFRS £15.9m) which compares to £22.3m in
the first half of 2006 and £17.9m in the second half of 2006 which still
included some Leeds production. A record 91% of this was sold to customers
outside the UK (2006 - 90%). Within the Leeds turnover a significant proportion
of sales derived from the selling of wet blue hides from their tanning business,
whereas, as previously reported bovine production in Yeovil is based on hides
bought part processed (wet blue) which more closely match our finished leather
requirements.
Sales of glove leather reduced by 8% in volume in the period due to lower demand
for dress gloves following the mild winter. However other sales held up well.
Revenue was adversely impacted by the weaker dollar which reduced average prices
by over 5%, We have had some more military contracts placed in the last few
weeks and sports glove leather sales remain steady.
Sales of bovine leather represented 23% of turnover in the first half year and
reflect the superb team effort made to bring bovine production to Yeovil. Sales
of saddlery and lifestyle leathers have picked up in the second quarter whilst
sales of leather for sports footwear were particularly strong, exceeding
forecast, and are expected to remain so in the second half.
Production at Teh Chang in Taiwan totalled over 1m square feet in the first half
and we will continue to develop this strategic partnership..
Our management contract to run ETSC has almost completed its second year. The
significant capital investment programme is well under way with the majority of
the equipment now installed or on site. Following the establishment of crust
production some finished leathers are now being produced. The Government backed
scheme has now allowed early retirement for a significant proportion of the
workforce which will improve profitability as the operation becomes more
streamlined and focussed.
Our strategy continues to explore global manufacturing opportunities which would
enable the expansion of our business. This includes the evaluation of a variety
of other raw materials to support the development of new market sectors.
Net assets at 30 June 2007 were £4.238m (£4.248m under IFRS) compared to £4.819m
in 2006. On 29 June 2007 the Company exchanged contracts to sell and lease back
the Yeovil factory for a sale price of £3.1m: the transaction was completed in
July. The lease is for a term of 10 years at an annual rental of £254,000pa
initially following a six month rent free period. The proceeds of the sale,
which realised a profit over net book value of £0.49m before costs, have been
applied to repay the loan plus accrued interest due to the trustees of the
Pittards pension schemes and secured over the Yeovil property as part of the
agreement reached with the Pension Protection Fund in 2006. The sale and
leaseback transaction will improve cashflow by c.£0.5m pa over the next few
years, thus improving working capital within the business.
Total borrowings were £6.085m at 30 June however this includes £2.875m due on
the Trustees' loan which was repaid on 20 July 2007 on completion of the
transaction, which has significantly improved the Company's gearing.
During this period we have continued to settle phased closure costs for the
Leeds factory carried forward from 2006.
As we announced in May, Lindsey Blackford stepped down from the board on 1 June
2007 and was replaced by Jill Williams as Finance Director from that date.
Our order book remains steady but the dollar weakness which has further worsened
throughout the first half is impacting adversely on profitability. We continue
to reduce costs wherever we can and our strategy to move production to lower
cost manufacturing areas continues.
We remain cautious about the outlook for the second half of 2007 in the light of
the dollar's weakness.
SD Boyd - Chairman
For further information, please contact:
Stephen Boyd - Chairman - Tel: 07768 443195
Jill Williams - Finance Director - Tel: 01935 474321
Blue Oar Securities Plc
Mike Coe, Director, Corporate Finance - Tel: 0117 933 0020
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
for the six months ended 30 June 2007
Year ended 31 Six months
December 2006 ended 30 June
(restated) Six months 2006
ended 30 June (restated)
2007
Note
£'000 £'000 £'000
39,444 Revenue 15,945 22,220
(34,866) Cost of sales (14,335) (19,440)
4,578 Gross profit 1,610 2,780
(2,610) Distribution costs (1,047) (1,477)
(3,523) Administrative expenses (1,346) (2,000)
1,801 Gain on derivatives 91 677
(212) Gain (loss) on foreign currency translation 72 (54)
369 Other operating income 201 185
403 (Loss) profit from trading activities (419) 111
770 Disposal of items of property, plant and - 770
equipment
Restructuring activities and reversal of
provisions
250 for any such costs - 250
26,913 Exceptional gain on write back of pension deficit - 26,913
28,336 (Loss) profit from operations (419) 28,044
(628) Bank and other interest charges (300) (351)
(238) Net interest on pension scheme liabilities - (238)
27,470 (Loss) profit on continuing operations before (719) 27,455
taxation
(13) Taxation (6) (13)
27,457 (Loss) profit on continuing operations after (725) 27,442
taxation
18.9 Earnings (loss) per share Basic 1 (0.3) 40.5
18.9 Diluted 1 (0.3) 40.5
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
for the six months ended 30 June 2007
31 December 30 June 30 June
2006 (restated)
£'000 2007 2006
(restated)
Note £'000 £'000
(24,530) Total equity at beginning of period (as 4,486 (24,530)
previously stated)
(374) Impact of transition to IFRS 3 487 (374)
(24,904) Total equity at beginning of period (restated) 4,973 (24,904)
27,457 Profit for the period (725) 27,442
2,420 Net proceeds of share issue - 2,420
4,973 Total equity at end of period 4,248 4,958
CONSOLIDATED BALANCE SHEET (UNAUDITED)
as at 30 June 2007
31 December 30 June 2006
2006 (restated) 30 June 2007 (restated)
£'000 £'000 £'000
Non-current assets
5,744 Plant, property and equipment 2,787 5,458
491 Software intangibles 442 541
6,235 3,229 5,999
Current assets
6,086 Inventories 5,960 5,991
3,509 Trade and other receivables 4,360 5,009
21 Cash and cash equivalents 24 84
438 Derivative financial instruments 91 102
- Assets held for sale 2,610 -
10,054 13,045 11,186
Current liabilities
(726) Bank overdrafts (2,020) -
(245) Bank loans (254) (236)
(3,137) Trade payables (3,087) (3,298)
(2,671) Other payables (2,686) (2,666)
(113) Obligations under finance leases and hire purchase (87) (125)
arrangements
(900) Other loans (700) (600)
(520) Provisions (143) (1,815)
(8,312) (8,977) (8,740)
1,742 Current assets less current liabilities 4,068 2,446
7,977 Total assets less current liabilities 7,297 8,445
Non-current liabilities
(412) Bank loans (280) (538)
(317) Obligations under finance leases and hire purchase (194) (374)
arrangements
(2,275) Other loans (2,575) (2,575)
(3,004) (3,049) (3,487)
4,973 Net assets 4,248 4,958
Equity
2,233 Called up share capital 2,233 2,233
4,214 Share premium account 4,214 4,214
8,158 Capital redemption reserve 8,158 8,158
2,335 Revaluation reserve 2,324 4,293
6,475 Capital reserve 6,475 6,475
(17,947) Profit and loss account (18,661) (19,920)
(495) Investment in own shares (495) (495)
4,973 4,248 4,958
CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
for the six months ended 30 June 2007
Year ended
31 December
2006 Six months Six months
ended ended 30
(restated) 30 June June 2006
2007 (restated)
£'000 Note £'000 £'000
(2,911) Net cash from operating activities 2 (1,463) (2,579)
Investing activities
6,830 Proceeds on disposal of property, plant and 344 6,412
equipment
(550) Purchases of property, plant and equipment (72) (6)
6,280 Net cash from investing activities 272 6,406
Financing activities
(230) Repayments of bank loans (123) (113)
(300) Repayments of loan from Trustees of pension - -
scheme
Repayments of obligations under finance leases
(135) and hire purchase arrangements (149) (66)
2,420 Net proceeds on issue of shares - 2,420
300 New other loans 100 -
2,055 Net cash (used in) from financing activities (172) 2,241
5,424 Net (decrease) increase in cash and cash (1,363) 6,068
equivalents
(5,967) Cash and cash equivalents at beginning of period (705) (5,967)
(162) Effect of foreign exchange rates 72 (17)
(705) Cash and cash equivalents at end of period (1,996) 84
NOTES (unaudited)
1. Earnings (loss) per ordinary share
Year
ended 31 Six months
December Six months ended 30 June
2006 ended 30 June 2006
(restated) 2007 (restated)
£'000 £'000 £'000
27,457 (Loss) profit on ordinary activities after taxation (725) 27,442
Weighted average number of ordinary share in issue
(excluding the shares owned by the Pittards employee share
ownership trust)
'000 '000 '000
145,484 Basic 222,294 67,825
The weighted average number of ordinary shares for the purpose of calculating
the diluted earns per ordinary share is identical to that used for basic
earnings per ordinary share. There is no dilution in 2007 and in 2006 the
exercise of share options and vesting of conditional shares under the Restricted
Share Plan would have the effect of reducing the loss per ordinary share and is
therefore not dilutive under the terms of FRS22.
2. Reconciliation of cash flows from operating activities:
£'000 £'000 £'000
27,470 Net (loss) profit before taxation (719) 27,455
Adjustments for:
741 Depreciation 443 432
969 Foreign exchange loss 366 36
(1,801) Gain on derivatives (91) (677)
628 Bank and other interest charges 300 351
238 Net interest on pension scheme liabilities - 238
(1,050) Profit on sale of property, plant and equipment (43) (773)
(29,924) Defined benefit cost less contributions paid - (29,924)
(1,820) Decrease in provision (377) (972)
(4,549) Net loss before changes in working capital (121) (3,834)
1,165 Decrease in inventories 126 1,260
2,142 (Increase) decrease in trade and other receivables (1,137) 774
(1,029) Decrease in trade and other payables (159) (441)
(2,271) Cash absorbed by operations (1,291) (2,241)
(629) Interest paid (168) (338)
(11) Income taxes paid (4) -
(2,911) Net cash from operating activities (1,463) (2,579)
3. The financial information contained in this interim statement has
not been audited or reviewed by the Company's auditors and does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. The
financial information for the full preceding year is extracted from the
statutory accounts for the financial year ended 31 December 2006 amended for the
impact of the adoption of International Financial Reporting Standards (IFRS).
Those accounts, upon which the auditors issued an unqualified opinion, have been
delivered to the Registrar of Companies. Details of the impact of the adoption
of IFRS is set out in Appendix 1 of this announcement.
4. Pittards plc is a public limited company incorporated in the United
Kingdom under the Companies Act 1985. The Company is domiciled in the United
Kingdom and its ordinary shares are traded on the Alternative Investment Market
('AIM').
This interim report is the Group's first set of financial statements prepared in
accordance with International Financial Reporting Standards (IFRS) and
International Financial Reporting Committee ('IFRC') interpretations that are
expected to be applicable to the consolidated financial statements for the year
ending 31 December 2007. These standards remain subject to ongoing amendment and
/ or interpretation and are therefore still subject to change. Accordingly,
information contained in these interim financial statements may need updating
for subsequent amendments to IFRS required for first time adoption or for new
standards issued post balance sheet date.
The basis of preparation and accounting policies followed in this interim report
differ from those set out in the Annual Report and Accounts for the year ended
31 December 2006 which were prepared in accordance with United Kingdom
accounting standards (UK GAAP). A summary of the significant accounting
policies used in the preparation of this interim report under IFRS is provided
below, however this does not include accounting policies which are not currently
expected to change on transition from UK GAAP.
As permitted this interim report has been prepared in accordance with UK AIM
listing rules and not in accordance with IAS 34 'Interim Financial Reporting'
therefore it is not fully in compliance with IFRS.
(a) Basis of preparation of the financial statements
The consolidated financial statements have been prepared in accordance with IFRS
including standards and interpretations issued by the International Accounting
Standards Board, as adopted by the European Union. They have been prepared using
the historical cost convention except for the revaluation of certain properties
and financial instruments. The principal accounting policies are set out below.
The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of revenues,
expenses, assets and liabilities, and the disclosure of contingent liabilities
at the date of the financial statements. If in the future such estimates and
assumptions which are based on management's best judgement at the date of the
financial statements, deviate from the actual circumstances, the original
estimates and assumptions will be modified as appropriate in the year in which
the circumstances change. Where necessary, the comparatives have been
reclassified or extended from the previously reported results to take into
account presentational changes.
(b) First time adoption of International Financial Reporting Standards
IFRS 1, 'First-time adoption of International Financial Reporting Standards'
sets out the procedures that the Group must follow when it adopts IFRS for the
first time as the basis for preparing its consolidated financial statements.
The Group is required to establish its IFRS accounting policies as at 31
December 2007 and, in general, apply those retrospectively to determine the IFRS
opening balance sheet at its date of transition, 1 January 2006.
Certain optional exemptions to this general principle are available under IFRS 1
and the significant first time adoption choices made by the Group are as
follows:
• Business combinations completed prior to 1 January 2006 have not been
restated under IFRS 3 'Business combinations';
• The opening fair values of fixed assets have been deemed to be their
accounting values as at 1 January 2006, after reviewing for impairment as
appropriate;
• Cumulative translation differences for all foreign operations have
been set to zero as at 1 January 2006 (rather than calculate the
cumulative translation differences for each foreign operation as if IAS
21 'The Effects of Changes in Foreign Exchange Rates' had always
applied);
• All cumulative actuarial gains and losses in relation to post employment
defined benefit schemes are recognised at the date of transition. In
addition, actuarial gains and losses are recognised in full in the period
in which they occur, through the statement of recognised gains and
losses.
(c) Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and entities controlled by the Company (its subsidiaries) made up to
31 December each year. Control is achieved where the Company has the power to
govern the financial and operating policies of an investee entity so as to
obtain benefits from its activities.
The trading results of subsidiaries acquired or disposed of during the year are
included in the consolidated income statement from the effective date of
acquisition or up to the effective date of disposal, as appropriate.
All intra-group transactions, balances, income and expenditure are eliminated on
consolidation.
(d) Non-current assets held for sale
Non-current assets (and disposal groups) classified as held for sale are
measured at the lower of carrying amount and fair value less cost to sell. They
are classified as held for sale if their carrying amount will be recovered
through a sale transaction rather than through continuing use. This condition
is regarded as met only when the sale is highly probable and the asset (or
disposal group) is available for immediate sale in its present condition.
Management must be committed to the sale which should be expected to qualify for
recognition as a complete sale within one year from the date of classification.
(e) Goodwill
Goodwill arising on consolidation is recorded as an intangible asset and is the
surplus of the cost of acquisition over the Group's interest in the fair value
of identifiable net assets acquired. Goodwill is reviewed annually for
impairment. Any impairment identified as a result of the review is charged in
the income statement.
On disposal of a subsidiary, associate or jointly controlled entity, the
attributable amount of goodwill is included in the determination of the profit
or loss on disposal.
Goodwill arising on acquisitions before the date of transition to IFRS's has
been written off directly to reserves in accordance with the exemption permitted
under previous UK GAAP for acquisitions prior to 1998.
(f) Foreign currency translation
Transactions in foreign currencies are recorded at the rate ruling at the date
of the transaction. Monetary assets and liabilities denominated in foreign
currencies are retranslated at the rate of exchange ruling at the balance sheet
date. All differences are taken to income statement.
(g) Intangible assets other than goodwill
An intangible asset, which is an identifiable non-monetary asset without
physical substance, is recognised to the extent that it is probable that the
expected future economic benefits attributable to the asset will flow to the
Group and that its cost can be measured reliably. The asset is deemed to be
identifiable when it is separable or when it arises from contractual or other
legal rights.
Computer software that is not integral to an item of property, plant and
equipment is recognised separately as an intangible asset and is carried at cost
less accumulated amortisation and accumulated impairment losses. Costs include
software licences and consulting costs attributable to the development, design
and implementation of the computer software. Amortisation is calculated using
the straight-line method so as to charge the cost of the computer software to
the income statement over its estimated useful life (1-7 years).
Expenditure on research activities is recognised as an expense in the period in
which it is incurred.
Development expenditure is capitalised as an intangible asset only if the
following conditions are met:
• an asset is created that can be identified;
• it is probable that the asset created will generate future economic
benefit;
• the development cost of the asset can be measured reliably.
Development expenditure thus capitalised is amortised on a straight-line basis
over its useful life. Where the criteria are not met, development expenditure
is recognised as an expense in the income statement.
(h) Leased assets
Assets held under finance leases, which are leases where substantially all the
risks and rewards of ownership of the asset have been transferred to the Group,
are capitalised in the balance sheet and depreciated over the shorter of the
lease term or their useful lives. The asset is recorded at the lower of its
fair value and the present value of the minimum lease payments at the inception
of the lease. The capital elements of future obligations under finance leases
are included in liabilities in the balance sheet and analysed between current
and non-current amounts. The interest elements of future obligations under
finance leases are charged to the income statement over the periods of the
leases and represent a constant proportion of the balance of capital repayments
outstanding in accordance with the effective interest rate method.
Leases where the lessor retains substantially all the risks and rewards of
ownership are classified as operating leases. The cost of operating leases (net
of any incentives received from the lessor) is charged to the income statement
on a straight line basis over the periods of the leases.
(i) Impairment of long-term assets
When the recoverable amount of an asset, being the higher of its net selling
price and its value in use, is less than its carrying amount, then the carrying
amount is reduced to its recoverable value. This reduction is reported in the
income statement as an impairment loss. Value in use is calculated using
estimated cash flows. These are discounted using an appropriate long-term
pre-tax interest rate. When an impairment arises, the useful life of the asset
in question is reviewed and, if necessary, the future depreciation/amortisation
charge is accelerated.
(j) Taxes
Income taxes include all taxes based upon the taxable profits of the company.
Other taxes not based on income, such as property and capital taxes, are
included within operating expenses or financial expenses according to their
nature.
Deferred income tax is provided, using the liability method, on temporary
differences between the tax bases of assets and liabilities and their carrying
amounts, in the financial statements. Deferred income tax assets relating to
the carry-forward of unused tax losses are recognised to the extent that it is
probable that future taxable profit will be available against which the unused
tax losses can be utilised.
Current and deferred income tax assets and liabilities are offset when the
income taxes are levied by the same taxation authority and when there is a
legally enforceable right to offset them.
(k) Retirement benefit costs
The Group operated two pension schemes until closure of the schemes on 21 March
2006.
Under the defined benefit schemes the amounts charged to operating profit are
the current service costs and gains or losses on settlements and curtailments.
Past service costs are recognised immediately in the income statement if the
benefits have vested. If the benefits have not vested immediately, the costs
are recognised over the period until vesting occurs. The interest cost and the
expected return on assets are shown as a net amount of other finance costs or
credits adjacent to interest. Actuarial gains and losses are recognised outside
profit or loss and are presented in the statement of total recognised income and
expense.
Defined benefit schemes are funded, with the assets of the scheme held
separately from those of the Group, in separate trustee administered funds.
Pension scheme assets are measured at fair value and liabilities are measured on
an actuarial basis using the projected unit method and discounted at a rate
equivalent to the current rate of return on a high quality corporate bond of
equivalent currency and term to the scheme liabilities. The actuarial
valuations are obtained at least triennially and are updated at each balance
sheet date. The resulting defined benefit asset or liability is presented
separately on the face of the balance sheet.
For defined contribution schemes the amount charged to the income statement in
respect of pension costs and other post-retirement benefits is the contribution
payable in the period. Differences between contributions payable in the year
and contributions actually paid are shown as either accruals or prepayments in
the balance sheet.
(l) Provisions
Provisions are recognised where a legal or constructive obligation has been
incurred which will probably lead to an outflow of resources that can be
reasonably estimated. Provisions are recorded for the estimated ultimate
liability that is expected to arise, taking into account the time value of
money. A contingent liability is disclosed where the existence of the
obligations will only be confirmed by future events, or where the amount of the
obligation cannot be measured with reasonable reliability.
(m) Fair values
Fair value is the amount for which a financial asset, liability or instrument
could be exchanged between knowledgeable and willing parties in an arm's length
transaction. It is determined by reference to quoted market prices adjusted for
estimated transaction costs that would be incurred in an actual transaction, or
by the use of established estimation techniques. The fair values at the balance
sheet date are approximately in line with their reported carrying values unless
specifically mentioned in the notes to the financial statements.
(n) Financial instruments
Financial assets and financial liabilities are recognised in the Group's balance
sheet when the Group becomes a party to the contractual provisions of the
instrument.
Trade receivables
Trade receivables do not carry any interest and are stated at their nominal
value as reduced by appropriate allowances for estimated irrecoverable amounts.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, and other
short-term highly liquid investments that are readily convertible to a known
amount of cash and are subject to an insignificant risk of change in value.
Investments
Investments are recognised and derecognised on a trade date where a purchase or
sale of an investment is under a contract whose terms require delivery of the
investment within the timeframe established by the market concerned, and are
initially measured at cost, including transaction costs. Investments are
classified as either held-for-trading or available-for-sale, and are measured at
subsequent reporting dates at their fair value. Where securities are held for
trading purposes, gains and losses arising from changes in fair value are
included in net profit or loss for the period. For available-for-sale
investments, gains and losses arising from changes in fair value are recognised
directly in equity, until the security is disposed of or is determined to be
impaired, at which time the cumulative gain or loss previously recognised in
equity is included in the profit or loss for the period.
Financial liability and equity
Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangements entered into. An equity instrument is
any contract that evidences a residual interest in the assets of the group after
deducting all of its liabilities.
Bank borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds
received, net of direct issue costs. Finance charges, including premiums payable
on settlement or redemption, are accounted for on an accrual basis and are added
to the carrying amount of the instrument to the extent that they are not settled
in the period in which they arise.
Derivative financial instruments
The company uses derivative financial instruments such as foreign currency
contracts to hedge its risks associated with foreign currency fluctuations.
All derivative financial instruments are initially measured at fair value on the
contract date and are also measured at fair value at subsequent reporting dates.
Derivatives are carried as assets when the fair value is positive and as
liabilities when the fair value is negative. The fair value of forward currency
contracts is calculated by reference to current forward exchange rates for
contracts with similar maturity profiles.
For those derivatives designated as hedges and for which hedge accounting is
desired, the hedging relationship is documented at its inception. This
documentation identifies the hedging instrument, the hedged item or transaction,
the nature of the risk being hedged and how effectiveness will be measured
throughout its duration. Such hedges are expected at inception to be highly
effective.
Forward currency contract hedge relationships are classified as cash flow hedges
where the derivative financial instruments hedge the currency risk of future
highly probable inventory sales. Changes in the fair value of derivative
financial instruments that are designated and effective as hedges of future cash
flows are recognised directly in equity and the ineffective portion is
recognised immediately in the income statement. Amounts taken to equity are
transferred to the income statement when the hedged transaction affects profit
or loss, such as when a forecast sale occurs.
Changes in the fair value of derivative financial instruments that do not
qualify for hedge accounting are recognised in the income statement as they
arise.
5. The report containing the interim financial information is to be sent direct
to shareholders. Copies of the report are available to the public from the
registered office of Pittards plc. The address of the registered office is:
Pittards plc, Sherborne Road, Yeovil, Somerset, BA21 5BA.
Appendix 1
Transition to International Financial Reporting Standards
Introduction
Shares in Pittards plc are quoted on the Alternative Investment Market (AIM).
It is therefore required to report its consolidated financial statements in
accordance with International Accounting Standards (IFRS) for its accounting
periods commencing on or after 1 January 2007. Individual company financial
statements will continue to be reported under UK GAAP.
In order to comply with this requirement Pittards plc has published its Interim
Report for the period to 30 June 2007 on the basis of IFRS, including the
restatement of the June 2006 and December 2006 comparative information. In so
doing it has applied the requirements of IFRS 1 'First time adoption of IFRS'.
The purpose of this report is to advise on the impact of the initial transition
balance sheet adjustments, the restatement of the 2006 published financial
information (both annual and interim) and the interim results to 30 June 2007.
Although we have discussed the identified adjustments with our auditors the
numbers in this report are unaudited and may be subject to revision when the
audited financial statements for the year ended 31 December 2007 are published.
Whilst the implementation of IFRS changes the accounting treatment of certain
items, we do not intend to change the way that we manage the risks of the
business in order to address particular accounting issues. This is particularly
relevant in the case of the management of foreign currency risks, where we will
continue to adopt a policy of hedging on our net exposure to each currency on a
macro basis, even though this does not qualify for the hedge accounting
treatment available under IAS 39 (Financial Instruments: Recognition and
measurement). As a result, there will be significant volatility in our reported
results caused by the impact of fair valuing our forward currency cover.
Summary of impacts on the financial statements
Summary of impact on (loss) profit before tax
Year ended Six months ended
31.12.06 30.06.07 30.06.06
£'000's £'000's £'000's
26,609 UK GAAP (242) 26,942
(940) IAS 21 (hedge accounting) (568) (164)
1,801 IAS 39 (fair value of forward foreign exchange contracts) 91 677
27,470 IFRS (unaudited) (719) 27,455
Summary of impact on net assets
01.01.06 31.12.06 30.06.07 30.06.06
£'000's £'000's £'000's £'000's
(24,530) 4,486 UK GAAP 4,238 4,819
- (374) Opening adjustments 487 (374)
182 (133) IAS 21 (hedge accounting) (130) (145)
(556) 994 IAS 39 (fair value forward currency contracts) (347) 658
(24,904) 4,973 IFRS (unaudited) 4,248 4,958
Transitional arrangements
Under the provisions of IFRS 1 'First time adoption of IFRS', specific
exemptions are either mandatory or permitted in certain areas. Pittards has
taken advantage of the following options:
• Business combinations completed prior to 1 January 2006 have not been
restated under IFRS 3 'Business combinations'
• The opening fair values of fixed assets have been deemed to be their
accounting values as at 1 January 2006, after reviewing for impairment as
appropriate
• Cumulative translation differences for all foreign operations have been
set to zero as at 1 January 2006 (rather than calculate the cumulative
translation differences for each foreign operation as if IAS 21 'The Effects
of Changes in Foreign Exchange Rates' had always applied)
• All cumulative actuarial gains and losses in relation to post employment
defined benefit schemes are recognised at the date of transition. In
addition, actuarial gains and losses are recognised in full in the period in
which they occur, through the statement of recognised gains and losses.
Reclassification and presentational changes
The presentational formats of IFRS financial statements differ from those under
UK GAAP in a number of areas. The majority of changes relate to detailed
disclosure in the notes to the accounts and are therefore not dealt with in this
report. There are a limited number that affect the presentation of the primary
financial statements:
• The structure and descriptions on the face of the primary statements have
been changed. A restatement of the UK GAAP balance sheet and P&L account to
reflect the format changes are shown in the attached IFRS reconciliations.
• The capitalised costs of software previously shown within tangible fixed
assets are now shown in a separate line as 'Software intangibles'.
• Provisions for reorganisation are now shown within current liabilities
Detailed changes impacting on published results
IAS 19 'Employee benefits'
At 1 January 2006, Pittards operated a defined benefit pension scheme. Under UK
GAAP it had already fully adopted FRS 17 into its accounts. There is very
little difference between the provisions of IAS19 and FRS17 in respect of post
retirement benefits and as such conversion will have very little impact.
The only significant change is that IAS 19 requires the assets of the scheme to
be valued at bid price as opposed to mid-market price, as required by FRS 17.
This has the effect of slightly reducing the value of the assets within the
scheme. The Pittards scheme was closed on 21 March 2006 and responsibility for
the deficit passed to the Pension Protection Fund. This resulted in an
exceptional gain in the profit and loss account for both the 6 months to June
2006 and the year to December 2006 of £26.9m. In this context any amendment to
the opening asset value of the scheme by applying the valuation rules of IAS 19
would not be material in the context of the income statement for 2006 and would
have no impact on the balance sheet for 2006. No adjustment has therefore been
made in respect of this on conversion to IFRS.
IAS 21 'The Effect of Changes in Foreign Exchange Rates'
Under UK GAAP, the provisions of SSAP20 applicable to foreign currency
transactions provided a more relaxed regime for adoption of hedge accounting.
It allowed transactions and current assets and liabilities denominated in a
foreign currency to be translated to the reporting currency at an applicable
forward currency contract rate as an alternative to the spot rate applicable to
the day of the transaction or the balance sheet date.
Under IAS 21 all transactions and balances denominated in foreign currency must
be converted to the reporting currency at the applicable spot rate. In the year
to 31 December 2006, £728k of revenue has been reclassified as a foreign
exchange gain on retranslation of sales to the rate applicable on the day of the
transaction. In the six months to 30 June 2007 this was £640k (2006 - £110k)
In addition, foreign currency gains and losses previously carried in the balance
sheet under the less restrictive hedge accounting treatment (see IAS 39 below)
have been taken to reserves, increasing net assets at 31 December 2006 by £49k
and reducing profit and loss before taxation for the year then ended by £940k.
At 30 June 2007 this was a reduction to net assets of £81k (2006 - increase of
£37k) and a reduction to P&L of £568k (2006 - £164k)
IAS 38 'Intangible assets'
Under UK GAAP an entity may elect to capitalise development costs when certain
conditions are met. Pittards opted to write off all costs as incurred.
Under IFRS development costs must be capitalised and the asset amortised over
its estimated useful life if the criteria have been met. All material
development projects have been reviewed in line with the criteria. There were
no specific identifiable projects for which the criteria were met and
consequently no adjustment is reflected on conversion to IFRS.
IAS 39 'Financial Instruments: Recognition and Measurement'
Under UK GAAP, derivative financial instruments are not recognised on the face
of the balance sheet, although valuations and other key information are shown in
the notes to the accounts under FRS 13. IAS 39 requires that all such
instruments are recognised at fair value on the balance sheet and, unless
certain specific criteria are met, that movements in the fair values of these
instruments are recorded through the income statement.
Pittards manages its net exposure to foreign currency through forward foreign
exchange contracts, which fall under the definition of derivative financial
instruments. This macro approach to managing the economic risks associated with
foreign currency fluctuations does not permit the adoption of hedge accounting.
This move away from hedge accounting on adoption of IFRS will inevitably lead to
significant volatility in the income statement. In order to provide clarity on
the underlying profitability and earnings of the Group it is planned that a
separate reconciliation to a hedge accounted result will be presented within the
annual report and accounts.
The impact of the implementation of IAS 39 is to increase profit before tax for
the year to 31 December 2006 by £1,801k and to increase net assets at 31
December 2006 by £438k. In the six months to 30 June 2007 this was £91k (2006 -
£677k) and £91k (2006 - £102k) respectively
Summary of reconciliations
Set out below are the following reconciliations of UK GAAP to IFRS:
• Consolidated balance sheet at 31 December 2005
• Consolidated income statement for the year ended 31 December 2006
• Consolidated balance sheet at 31 December 2006
• Consolidated income statement for the year ended 30 June 2006
• Consolidated balance sheet at 30 June 2006
• Consolidated income statement for the year ended 30 June 2007
• Consolidated balance sheet at 30 June 2007
Consolidated balance sheet
as at 31 December 2005
UK GAAP under
IFRS Fair value Hedge Unaudited
presentation derivatives accounting IFRS
£'000 £'000 £'000 £'000
Non-current assets
Property, plant and equipment 11,892 11,892
Software intangibles 590 590
12,482 - - 12,482
Current assets
Inventories 7,251 7,251
Trade and other receivables 5,378 5,378
Cash and cash equivalents 27 27
Derivative financial instruments - - -
12,656 - - 12,656
Current liabilities
Bank overdrafts (5,994) (5,994)
Bank loans (227) (227)
Trade payables (3,663) (3,663)
Other payables (2,392) 182 (2,210)
Obligations under finance leases (125) (125)
Other loans - -
Provisions (3,306) (3,306)
Derivative financial instruments - (556) (556)
(15,707) (556) 182 (16,081)
Current assets less current liabilities (3,051) (556) 182 (3,425)
Total assets less current liabilities 9,431 (556) 182 9,057
Non-current liabilities
Bank loans (660) (660)
Retirement benefit obligation (32,861) (32,861)
Obligations under finance leases (440) (440)
Other loans - -
(33,961) - - (33,961)
Net liabilities (24,530) (556) 182 (24,904)
Equity
Share capital 8,227 8,227
Share premium account 3,659 3,659
Capital redemption reserve 299 299
Revaluation reserve 4,348 4,348
Capital reserve 6,475 6,475
Retained earnings (47,043) (556) 182 (47,417)
Own shares (495) (495)
(24,530) (556) 182 (24,904)
Consolidated income statement
for the year ended 31 December 2006
UK GAAP under
IFRS Fair value Hedge Unaudited
presentation derivatives accounting IFRS
£'000 £'000 £'000 £'000
Revenue 40,172 (728) 39,444
Cost of sales (34,866) (34,866)
Gross profit 5,306 - (728) 4,578
Distribution costs (2,610) (2,610)
Administrative expenses (3,523) (3,523)
Gain on derivatives - 1,801 1,801
Loss on foreign currency translation - (212) (212)
Other operating income 369 369
Loss from trading activities (458) 1,801 (940) 403
Disposal of items of property, plant and equipment 770 770
Restructuring activities and reversal of provisions
for any such costs 250 250
Exceptional gain on write back of pension deficit 26,913 26,913
Profit from operations 27,475 1,801 (940) 28,336
Bank and other interest charges (628) (628)
Net interest on pension scheme liabilities (238) (238)
Profit on continuing operations before taxation 26,609 1,801 (940) 27,470
Taxation - current tax (13) (13)
Profit on continuing operations after taxation 26,596 1,801 (940) 27,457
Earnings per share - basic and diluted 18.3p 18.9p
Consolidated balance sheet
as at 31 December 2006
UK GAAP under
IFRS Fair value Hedge Unaudited
presentation derivatives accounting IFRS
£'000 £'000 £'000 £'000
Non-current assets
Property, plant and equipment 5,744 5,744
Software intangibles 491 491
6,235 - - 6,235
Current assets
Inventories 6,086 6,086
Trade and other receivables 3,509 3,509
Cash and cash equivalents 21 21
Derivative financial instruments - 438 438
9,616 438 - 10,054
Current liabilities
Bank overdrafts (726) (726)
Bank loans (245) (245)
Trade payables (3,137) (3,137)
Other payables (2,720) 49 (2,671)
Obligations under finance leases (113) (113)
Other loans (900) (900)
Provisions (520) (520)
Derivative financial instruments - -
(8,361) - 49 (8,312)
Current assets less current liabilities 1,255 438 49 1,742
Total assets less current liabilities 7,490 438 49 7,977
Non-current liabilities
Bank loans (412) (412)
Retirement benefit obligation - -
Obligations under finance leases (317) (317)
Other loans (2,275) (2,275)
(3,004) - - (3,004)
Net assets 4,486 438 49 4,973
Equity
Share capital 2,233 2,233
Share premium account 4,214 4,214
Capital redemption reserve 8,158 8,158
Revaluation reserve 2,335 2,335
Capital reserve 6,475 6,475
Retained earnings (18,434) 438 49 (17,947)
Own shares (495) (495)
4,486 438 49 4,973
Consolidated income statement
for the six months ended 30 June 2006
UK GAAP under
IFRS Fair value Hedge
presentation derivatives accounting
£'000 £'000 £'000 £'000
Revenue 22,330 (110) 22,220
Cost of sales (19,440) (19,440)
Gross profit 2,890 - (110) 2,780
Distribution costs (1,477) (1,477)
Administrative expenses (2,000) (2,000)
Gain on derivatives - 677 677
Loss on foreign currency translation - (54) (54)
Other operating income 185 185
Loss from trading activities (402) 677 (164) 111
Disposal of items of property, plant and equipment 770 770
Restructuring activities and reversal of provisions
for any such costs 250 250
Exceptional gain on write back of pension deficit 26,913 26,913
Profit from operations 27,531 677 (164) 28,044
Bank and other interest charges (351) (351)
Net interest on pension scheme liabilities (238) (238)
Profit on continuing operations before taxation 26,942 677 (164) 27,455
Taxation - current tax (13) (13)
Profit on continuing operations after taxation 26,929 677 (164) 27,442
Earnings per share - basic and diluted 39.7p 40.5p
Consolidated balance sheet
as at 30 June 2006
UK GAAP under
IFRS Fair value Hedge Unaudited
presentation derivatives accounting IFRS
£'000 £'000 £'000 £'000
Non-current assets
Property, plant and equipment 5,458 5,458
Software intangibles 541 541
5,999 - - 5,999
Current assets
Inventories 5,991 5,991
Trade and other receivables 5,009 5,009
Cash and cash equivalents 84 84
Derivative financial instruments - 102 102
11,084 102 - 11,186
Current liabilities
Bank overdrafts - -
Bank loans (236) (236)
Trade payables (3,298) (3,298)
Other payables (2,703) 37 (2,666)
Obligations under finance leases (125) (125)
Other loans (600) (600)
Provisions (1,815) (1,815)
Derivative financial instruments - -
(8,777) - 37 (8,740)
Current assets less current liabilities 2,307 102 37 2,446
Total assets less current liabilities 8,306 102 37 8,445
Non-current liabilities
Bank loans (538) (538)
Retirement benefit obligation - -
Obligations under finance leases (374) (374)
Other loans (2,575) (2,575)
(3,487) - - (3,487)
Net assets 4,819 102 37 4,958
Equity
Share capital 2,233 2,233
Share premium account 4,214 4,214
Capital redemption reserve 8,158 8,158
Revaluation reserve 4,293 4,293
Capital reserve 6,475 6,475
Retained earnings (20,059) 102 37 (19,920)
Own shares (495) (495)
4,819 102 37 4,958
Consolidated income statement
for the six months ended 30 June 2007
UK GAAP under
IFRS Fair value Hedge Unaudited
presentation derivatives accounting IFRS
£'000 £'000 £'000 £'000
Revenue 16,585 (640) 15,945
Cost of sales (14,335) (14,335)
Gross profit 2,250 - (640) 1,610
Distribution costs (1,047) (1,047)
Administrative expenses (1,346) (1,346)
Gain on derivatives - 91 91
Gain (loss) on foreign currency translation - 72 72
Other operating income 201 201
Loss from trading activities 58 91 (568) (419)
Disposal of items of property, plant and equipment - -
Restructuring activities and reversal of provisions - -
for any such costs
Exceptional gain on write back of pension deficit - -
Profit from operations 58 91 (568) (419)
Bank and other interest charges (300) (300)
Net interest on pension scheme liabilities - -
Profit on continuing operations before taxation (242) 91 (568) (719)
Taxation - current tax (6) (6)
Profit on continuing operations after taxation (248) 91 (568) (725)
Earnings per share - basic and diluted (0.1p) (0.3p)
Consolidated balance sheet
as at 30 June 2007
UK GAAP under
IFRS Fair value Hedge Unaudited
presentation derivatives accounting IFRS
£'000 £'000 £'000 £'000
Non-current assets
Property, plant and equipment 2,787 2,787
Software intangibles 442 442
3,229 - - 3,229
Current assets
Inventories 5,960 5,960
Trade and other receivables 4,441 (81) 4,360
Cash and cash equivalents 24 24
Derivative financial instruments - 91 91
Assets held for sale 2,610 2,610
13,035 91 (81) 13,045
Current liabilities
Bank overdrafts (2,020) (2,020)
Bank loans (254) (254)
Trade payables (3,087) (3,087)
Other payables (2,686) (2,686)
Obligations under finance leases (87) (87)
Other loans (700) (700)
Provisions (143) (143)
Derivative financial instruments - -
(8,977) - - (8,977)
Current assets less current liabilities 4,058 91 (81) 4,068
Total assets less current liabilities 7,287 91 (81) 7,297
Non-current liabilities
Bank loans (280) (280)
Retirement benefit obligation - -
Obligations under finance leases (194) (194)
Other loans (2,575) (2,575)
(3,049) - - (3,049)
Net assets 4,238 91 (81) 4,248
Equity
Share capital 2,233 2,233
Share premium account 4,214 4,214
Capital redemption reserve 8,158 8,158
Revaluation reserve 2,323 2,323
Capital reserve 6,475 6,475
Retained earnings (18,670) 91 (81) (18,660)
Own shares (495) (495)
4,238 91 (81) 4,248
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