Final Results

Smith WH PLC 13 October 2005 WH Smith PLC Preliminary Results Announcement For the twelve months ended 31 August 2005 SUBSTANTIAL IMPROVEMENT IN PROFITABILITY; RECOVERY PLAN ON TRACK KEY POINTS â€¢ Profit before tax, goodwill amortisation and exceptional items on continuing operations, up 59% to Â£73m (2004: Â£46m); High Street Retail(1) up 87% to Â£43m â€¢ Total Group profit before tax is Â£64m (2004: loss of Â£135m) â€¢ Total sales of continuing operations down 1% to Â£2.5bn - Retail like-for-like (LFL) sales down 2% - News Distribution LFL sales flat â€¢ Target cost savings delivered faster than planned; additional cost savings of Â£18m over next 3 years identified â€¢ Strong free cash generation of Â£78m - increased from Â£12m last year â€¢ Returned Â£205m to shareholders in September 2004 following completion of the sale of Hodder for Â£224m(2) â€¢ Headline earnings per share(3) from continuing operations up 121% to 31.6p (2004: 14.3p) â€¢ Earnings per share of 26.0p (2004: loss per share 60.7p) â€¢ Final dividend up to 9.2p (2004: 8.0p) making 13.7p (2004:12.0p) for the full year - an increase of 14% (1)High Street Retail profit is stated before defined benefit pension service costs, exceptional items, goodwill amortisation, interest and taxation (2)Â£210m in cash and assumption of the Hodder Headline net pension deficit of Â£14m (3)Headline earnings per share: before exceptional items, goodwill amortisation and FRS17 pension interest - undiluted Commenting on the results, Kate Swann, Group Chief Executive said: 'This is a good performance for the Group with a substantial improvement in profitability. One year into our plan to deliver value to shareholders we are on track, despite the challenging trading environment. 'In High Street Retail we have improved profitability by 87% versus last year. Our staff have worked hard to manage costs tightly and implement initiatives to increase product availability and choice and to raise store standards. 'Travel Retail has had another strong year delivering good sales and profit growth. 'News Distribution has made steady progress over the year delivering profit growth of 6%. 'Trading conditions on the high street remain challenging. As we approach Christmas, we remain cautious about consumer spending and have planned accordingly.' Enquiries: WH Smith PLC Louise Evans Media Relations 020 7851 8850 Mark Boyle Investor Relations 020 7851 8820 Brunswick Tom Buchanan 020 7404 5959 Pam Small CURRENT TRADING In the 6 weeks to 8 October 2005, Retail LFL sales were down 2% and gross margin was up on last year. News Distribution sales were down 1%. FINANCIAL REVIEW Operating activities The Group's profitability has recovered significantly with strong performances from all businesses, despite the tough trading climate, particularly in the second half of the year. High Street Retail's profitability recovered substantially compared with the prior year. The focus in High Street Retail has been on good category mix management and tight cost control. Travel Retail delivered a strong performance through sales growth, margin growth and cost control and News Distribution delivered another solid result. The Group generated a profit before tax, exceptional items and goodwill amortisation from continuing businesses of Â£73m (2004: Â£46m), an increase of 59% on the prior year. Profit before tax, after exceptional items and goodwill amortisation, was Â£64m (2004: loss of Â£135m). During the year High Street Retail has delivered Â£18m of the 3-year cost saving programme, Â£3m more than the announced Â£15m target for this year. The business is on track to deliver the total Â£30m target over three years. We have identified a further Â£18m of cost savings, in support areas such as shared information systems, logistics and store efficiencies. We have delivered Â£2m of these new savings in 2004/05 and the remainder will be delivered over the next three years. We expect the total cost savings broadly to mitigate inflationary pressures in 2006 and 2007. Headline earnings per share(3) from continuing operations increased by 121% to 31.6p (2004: 14.3p) with earnings per share from continuing operations of 30.5p (2004: loss per share of 20.5p). Given the improvement in the Group's trading position, the Board has proposed an increased final dividend of 9.2p per share (2004: 8.0p), making a full year dividend of 13.7p (2004: 12.0p). Cash generation was strong due to the improved trading performance in the businesses and good stock and debtor control. Group free cash flow was Â£78m (2004: Â£12m). The reduction in net assets to Â£42m (2004: Â£256m) reflects the return of cash to shareholders and an increase in the pension deficit as a result of falling bond yields. Non-operating activities In September 2004, the Group completed the disposal of Hodder Headline for Â£224m (2) and returned Â£205m to shareholders. Following the disposal, the Group made a Â£120m cash contribution to the WHSmith Pension Trust. This payment was financed from the Group's own resources and new banking facilities. In September 2005, the Trustees of the WHSmith Pension Trust adopted a new investment policy in order to limit the volatility in the underlying investment performance and reduce the risk of a significant increase in the deficit in the fund. A Liability Driven Investment approach has been adopted with 94% of the assets now invested in inflation and interest rate hedged investments (which change in value in line with changes in the underlying liabilities). The balance is in equity options designed to enable the fund to continue to benefit from any potential higher returns from the equity markets. Following this change in the investment policy, the Board and the Trustees have agreed a new deficit funding agreement. This agreement provides the Company with greater predictability over the level of future pension deficit payments. The agreement replaces that reached last year and will result in pension deficit funding payments of Â£15m in 2005/06, Â£17m in 2006/07, Â£20m in 2007/08 and increasing by RPI (capped at 5%) thereafter until the deficit (as calculated under FRS17) is repaid. GROUP PROFIT AND LOSS ACCOUNT Group sales summary Â£m 2005 2004 Growth % LFL Sales Growth % ----------------------- ------- -------- -------- --------- Sales Retail 1,423 1,453 (2%) (2%) News Distribution 1,187 1,182 - - ----------------------- ------- -------- -------- --------- Sales - continuing 2,610 2,635 (1%) (1%) Internal sales (113) (115) (2%) (2%) ----------------------- ------- -------- -------- --------- Total sales 2,497 2,520 (1%) (1%) Discontinued businesses 11 314 ----------------------- ------- -------- -------- Reported sales 2,508 2,834 (12%) ----------------------- ------- -------- -------- Continuing like for like sales were down 1% year on year. Retail like for like sales were down 2% in the first half of 2004/05 and were down 1% for the second half. News distribution sales were flat for the full year, with like for like sales up 2% in the first half and down 1% in the second half. Overall total sales including discontinued businesses were down 12%. Group trading results Â£m 2005 2004 Profit Growth % ------------------------ ------- -------- -------- Operating profit(4) Retail 69 44 57% News Distribution 37 35 6% ------------------------ ------- -------- -------- Trading profit(4) 106 79 34% Central costs Support functions (16) (15) (7%) Pension service costs (10) (14) 29% Internal rents 1 1 - ------------------------ ------- -------- -------- Operating profit(4) - continuing 81 51 59% Net finance charges - continuing (8) (5) (60%) ------------------------ ------- -------- -------- Profit(4)before taxation - continuing 73 46 59% ------------------------ ------- -------- -------- Discontinued businesses - 21 - ------------------------ ------- -------- -------- Profit(4) before taxation 73 67 9% ------------------------ ------- -------- -------- (4) Stated before exceptional items and goodwill amortisation Trading profit was up 34% to Â£106m. Pension service costs were reduced by Â£4m compared to last year, as a result of the introduction of employee contributions, a reduction in certain scheme benefits such as early retirement terms and an overall reduction in pensionable salaries following the organisation review in 2004. Group operating profit from continuing operations before exceptional items and goodwill amortisation was up 59% to Â£81m. OPERATIONAL REVIEW Retail Â£m 2005 2004 Growth % LFL Sales Growth % ------------------- ------- -------- ------- ------- Sales High Street Retail 1,112 1,152 (3%) (3%) Travel Retail 311 301 3% 4% ------------------- ------- -------- ------- ------- Total divisional sales 1,423 1,453 (2%) (2%) ------------------- ------- -------- ------- ------- Divisional profit High Street Retail 43 23 87% Travel Retail 26 21 24% ------------------- ------- -------- ------- Total divisional profit 69 44 57% ------------------- ------- -------- ------- NB: All divisional profit and loss figures in this section are stated before defined benefit pension service costs, exceptional items and goodwill amortisation, interest and taxation. High Street Retail numbers incorporate the results of WHSmith Online, which has been integrated. Retail sales fell by 2% to Â£1,423m (2004: Â£1,453m) with like for like sales down 2%. Gross margin increased by 240 basis points to 40.5%. Retail divisional profit increased 57% to Â£69m (2004: Â£44m). Stationery sales were up 3% in the year, with sales up 4% in the first half and up 1% in the second half, as the anniversary of last year's initiatives was reached. Book sales for the full year fell by 2%. Book sales in the first half fell by 3% as we did not repeat the previous year's unprofitable promotions. In the second half sales were down by 1% year on year, with a strong performance from sales of Harry Potter and the Half-Blood Prince. News and Impulse sales were up 1% on last year; excluding the decline in sales of phone cards, sales grew 2%. In Entertainment, sales fell by 12% versus last year as a result of continued intense competition in the category and our focus on switching sales from low to high margin categories. Despite difficult trading conditions, profit in the year increased by Â£25m to Â£69m with gross contribution increasing by Â£23m to Â£576m. Gross margin growth of 240 basis points reflected the shift from lower margin entertainment products to higher margin stationery products and improved buying terms. High Street Retail has delivered Â£18m of the 3-year cost saving programme during the year, Â£3m more than the announced Â£15m target for this year. The business is on track to deliver the total Â£30m target over three years. During the course of the year, we identified a further Â£18m of cost savings, in support areas such as shared information systems, logistics and store efficiencies. We have delivered Â£2m of these savings in 2004/05 and the remainder will be delivered over the next three years. We expect the total cost savings broadly to mitigate inflationary pressures in 2006 and 2007. As a result of these initiatives, net margin for Retail increased by 180 basis points to 4.8 per cent. The Retail business now operates from 669 stores, which occupy 3.3m square feet (2004: 3.3m square feet). We opened five new stores in the year and closed nine stores. News Distribution Total sales of Â£1,187m (2004: Â£1,182m) were flat for the year. Newspapers sales were up 1%, with price increases and book promotions offsetting volume declines. Magazine sales were flat, with a steady weeklies market, fuelled by a number of new product launches, offsetting a slower monthly market. The number of part works and one-shots declined by 15%, following an exceptionally strong performance last year, including Euro 2004. Gross contribution reduced by Â£1m, due to a shift in relative sales from magazines to newspapers. With a clear focus on tight cost control, profit grew by Â£2m to Â£37m. Net margin improved to 3.1% (2004: 3.0%). The OFT published their draft opinion into newspaper and magazine distribution in May this year. In it, they recognised the unique nature of the news supply chain and suggested current exclusive arrangements are likely to be seen as acceptable under EC competition law. For magazines, the draft opinion suggested that exclusive contracts would remain but would need to allow for passive sales. We believe having different arrangements for newspapers and magazines may lead to inefficiencies in the market. However, the investments we have made in recent years in service and systems leave us better placed to adapt to any changes that may occur in the market and we are carefully assessing the possible implications as we await the final opinion. Central costs Centrally controlled support costs were Â£16m (2004: Â£15m) and internal rents on freehold property owned by the Group remained at the prior year level of Â£1m. Pension service costs were reduced by Â£4m compared with the prior year, as a result of the introduction of employee contributions, a reduction in certain scheme benefits such as early retirement terms and an overall reduction in pensionable salaries following the organisation review in 2004. Exceptional items In the first half, the Group booked pre-tax exceptional charges of Â£8m, which related to discontinued businesses. Of this amount, Â£7m related to an impairment review of the loan notes received as deferred consideration in respect of the disposal of the Group's USA businesses in the prior year. The balance related to further closure and exit costs. On 25 September 2004, the Group completed the disposal of its publishing business, Hodder Headline Ltd. The business was sold to Hachette Livre S.A. for Â£210m cash and the assumption of the Hodder Headline Ltd net pension deficit of Â£14m. Net finance charges The results include net interest of Â£8m (2004: Â£5m). The increase in the net finance charges from last year is primarily due to the drawdown of the term debt. Net finance costs of the pension fund under FRS 17 were Â£2m (2004: Â£4m). This represents the difference between interest earned on pension scheme assets and interest charged on pension scheme liabilities. Taxation The tax charge for the year before tax on exceptional items and goodwill amortisation was Â£18m (2004: Â£23m). The effective tax rate on continuing activities, excluding exceptional items and goodwill amortisation, was 25% (2004: 30%). The Group made significant progress in settling prior year corporation tax liabilities with the Inland Revenue. We expect our effective tax rate to be approximately 25% for some years. Earnings / (loss) per share The Group generated Headline earnings per share(3) from continuing operations of 31.6p (2004: 14.3p) while earnings per share from continuing operations were 30.5p (2004: loss of 20.5p per share). Dividends The Board is proposing an increased final dividend of 9.2p per ordinary share (2004: 8.0p). The final dividend will be paid on 7 February 2006 to shareholders registered at the close of business on 6 January 2006. This will give a full year dividend of 13.7p (2004: 12.0p). The total cost of the dividend is Â£23m. Excluding exceptional items and goodwill amortisation, the equity dividend is covered 2.4 times by earnings. As part of the capital reorganisation in October 2004, the Group paid a special dividend of Â£143m. Fixed charges cover Fixed charges, comprising operating lease rentals, property taxes, other property costs and interest, were covered 1.4 times by profit before fixed charges, excluding exceptional items and goodwill amortisation (2004: 1.3 times cover). FREE CASH FLOW AND CASH BALANCES The operating free cash flow amounted to Â£78m compared with Â£12m in the previous year. Â£m 2005 2004 ---------------------------- ------------ ---------- Profit before tax, exceptional items and goodwill 73 67 Depreciation & amounts written off tangible fixed assets 42 46 ---------------------------- ------------ ---------- Cash profit 115 113 Working capital 4 (27) Capital expenditure (32) (49) Tax (4) (21) Net provisions (5) (4) ---------------------------- ------------ ---------- Free cash flow 78 12 ---------------------------- ------------ ---------- The movement in working capital for continuing businesses was Â£25m favourable to the previous year, principally as a result of the strong focus on stock levels and improved control of debtors. This can be further analysed as follows: Â£m 2005 2004 -------------------------- ------------ ---------- Stock 6 (16) Debtors 10 - Creditors (2) 5 -------------------------- ------------ ---------- Working capital - continuing 14 (11) Discontinued businesses (10) (16) -------------------------- ------------ ---------- Working capital movement 4 (27) -------------------------- ------------ ---------- Capital expenditure Â£m 2005 2004 -------------------------- ------------ ---------- New stores 4 8 Refurbished stores 14 16 Systems* 23 13 Other 4 6 Discontinued businesses - 6 -------------------------- ------------ ---------- Total 45 49 -------------------------- ------------ ---------- * Within systems expenditure are assets funded by finance leases of Â£13m (2004: Â£nil) which is a non-cash movement We have continued to invest in maintaining our retail properties. In High Street Retail we have invested Â£17m in upgrading our stores and our business systems infrastructure, including installing electronic point of sale (EPOS) systems in all stores. Net Funds The movement in the net funds position is as follows: Â£m --------------------------------- -------- Opening net funds 45 Free cash flow 78 Equity dividends paid (21) Cash returned to shareholders (205) Net purchase of own shares (7) Pension deficit funding (130) Net disposals 203 Finance leases (13) Financing fees (2) Premium on issue of shares 2 Sale & leaseback proceeds 2 --------------------------------- -------- Closing net debt (48) --------------------------------- -------- The amount shown for pension deficit funding of Â£130m represents the difference between the cash contributions to the defined benefit pension scheme of Â£142m and the associated profit and loss charge, which comprised Â£10m for operating costs and Â£2m for financing. The net disposals of Â£203m includes gross proceeds of Â£222m from Hodder Headline and WHSmith ASPAC disposals, less Â£10m of disposal transaction costs and Â£9m of advisory fees in respect of the bid approach received last year. GROUP BALANCE SHEET Â£m Â£m --------------------------------- --------- -------- Goodwill 14 Fixed assets 231 -------- 245 Stock 162 Creditors less debtors (192) --------- Working capital (30) Deferred tax asset 20 Corporation tax (27) Provisions (31) Dividends (16) --------------------------------- --------- -------- Operating assets employed 161 Net debt (48) --------------------------------- --------- -------- Net assets excluding pension liabilities 113 --------------------------------- --------- -------- Net pension liability (71) --------------------------------- --------- -------- Total net assets 42 --------------------------------- --------- -------- The movement of net assets over the year is as follows: Â£m Â£m --------------------------------- --------- -------- Opening net assets 256 Pre-tax profit before exceptional items and goodwill 73 Tax on above (18) --------- 55 Return of cash to shareholders (205) Money returned to ESOP Trust after capital reorganisation 5 Dividends (23) Increase in pension scheme deficit (30) Purchase of own shares for employee share schemes (12) Employee share schemes 5 --------------------------------- --------- -------- Net assets before exceptional items 51 Goodwill amortisation (1) Provision for discontinued businesses (8) (9) --------- --------------------------------- --------- -------- Closing net assets 42 --------------------------------- --------- -------- Following the return of cash to shareholders and the increase in the pension scheme deficit as a result of falling bond yields, the Group's net assets declined substantially from Â£256m at the end of 2004 to Â£42m this year. Return on Capital Employed (ROCE) Total capital employed and ROCE were as follows: Operating ROCE % ROCE % with Capital operating Employed leases Â£m capitalised ---------------------- --------- --------- ---------- High Street Retail 187 23% 13% Travel Retail 24 108% 32% ---------------------- --------- --------- ---------- Retail 211 33% 16% News Distribution (25) - - Central items and property (19) - - ---------------------- --------- --------- ---------- Operating assets employed - continuing operations 167 48% 19% ---------------------- --------- --------- ---------- For the prior year, comparable average returns were 37 per cent (14 per cent - after capitalised operating leases) Pensions During the year, the Group made significant cash contributions of Â£142m to its pension scheme. The payments have been funded from the Group's own resources and new banking facilities, now partially repaid. The gross deficit has reduced to Â£94m from Â£205m, a total reduction of Â£111m, with falling bond yields adversely impacting during the year. In September 2005, the Trustees of the WHSmith Pension Trust adopted a new investment policy in order to limit the volatility in the underlying investment performance and the risk of a significant increase in the deficit in the fund. T he assets in the investment fund were restructured in order to adopt this policy. This involved the expected liabilities of the scheme being matched by assets that will alter in value as interest and inflation rates change, matching the movements at the same rate as the pension liability changes ('a Liability Driven Investment 'LDI' policy'). The key features of this fund restructuring are as follows: - 94% of the fund's assets are invested in an LDI structure with a leading international institutional fund manager - 6% of the fund's assets have been used to purchase a portfolio of long-dated equity Call options. These represent a notional exposure to underlying equities of some Â£350m. The impact of this change in investment policy is to limit the volatility in the fund and the resultant risk of a significant increase in the overall deficit whilst enabling the fund to continue to benefit from any potential higher returns in the equity markets. The overall expected rate of return from the portfolio under the new arrangements is 5% in the 2005/06 financial year. Following this change in the investment policy the Board and the Trustees have agreed a new deficit funding agreement that gives the Company significantly greater predictability over the level of future deficit reduction payments. This agreement replaces that reached last year and, subject to certain limited conditions, will result in deficit funding payments of Â£15m in 2005/06, Â£17m in 2006/07, Â£20m in 2007/08 and increasing by RPI (capped at 5%) thereafter until the deficit (as calculated under FRS17) is repaid. Return of Cash to Shareholders On 27 September 2004 the Company undertook a capital reorganisation whereby existing ordinary shareholders received 18 new ordinary shares and 25 new non-cumulative preference shares of nominal value 85p ('C' shares) for every 25 existing ordinary shares. The new ordinary shares have a nominal value of 2 13/ 81p each. This capital reorganisation was effected by a bonus issue of approximately Â£78m, using the share premium account to pay up fully undesignated shares of 31p each, which were then allocated to shareholders on the basis of one undesignated share for every existing share held. The existing ordinary shares and undesignated shares were then consolidated and split, resulting in the issue of new ordinary shares with a nominal value of Â£4m and 'C' shares with a nominal value of Â£213m. In accordance with the terms of the capital reorganisation, shareholders could elect to sell 'C' shares to the Company at 85p per share following which all such 'C' shares would be cancelled by the Company or to receive the initial 'C' share dividend of 85p per 'C' share following which all such 'C' shares would be converted into deferred shares. On 27 October 2004, as a result of these elections, the Company repurchased 73,182,358 'C' shares for their nominal value of 85p each, a total repurchase amount of Â£62m and paid an initial 'C' share dividend of Â£143m in respect of 167,686,994 'C' shares. The remaining 10 million 'C' shares may be purchased by the Company (subject to the provisions of the Companies Act 1985) or converted into ordinary shares at the Company's option and carry a net non-cumulative dividend set at a rate that is the lower of 75 per cent of 6 month LIBOR and 20 per cent per annum. The 'C' shares have limited voting rights. Financing A three year Â£270m facility agreement was signed on 26 July 2004 between the Group, Lloyds TSB Bank plc, HSBC Bank plc and Royal Bank of Scotland plc under which up to Â£120m was available by way of a term loan facility and where amounts repaid or not drawn down may not be re-borrowed, and Â£150m is available by way of a multicurrency revolving credit facility. The agreement contains provisions, obligations and certain financial covenants, which are customary in such an agreement. The Group drew down Â£90m of the term loan facility and repaid Â£25m in the year, leaving a balance of Â£65m drawn down at the end of the year. Operating leases The Group's stores are held mainly under operating leases that are not capitalised and therefore are not included as a debt for accounting purposes. The High Street Retail leases are on standard 'institutional' lease terms, typically with a 15-year term subject to five-year upwards-only rent reviews. The Travel Retail stores operate mainly through turnover related leases, usually with minimum rent guarantees, and generally varying in length from five to ten years. The business has an annual minimum net rental commitment of Â£139m (net of Â£11m of external rent receivable). The total future rental commitment at the balance sheet date amounted to Â£0.9bn with the leases having an average life of seven years. The net present value of these commitments is approximately Â£0.6bn. This is considered to be a satisfactory situation for, although large, these commitments are characteristic of the retail sector and the risks associated with them depend on their liquidity, influenced mainly by the quality and location of the sites. Currency Currency exposures mainly relate to the supply of products from outside the UK. The effects of fluctuations in exchange rates on operating profit before exceptional items and goodwill amortisation were minimal in the year. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) The Group is required to prepare its financial statements for the year ended 31 August 2006 and all subsequent periods in accordance with IFRS. This will require an opening balance sheet as at 1 September 2004 together with the income statement and balance sheet for the year ended 31 August 2005 to be prepared under IFRS for comparative purposes. The principal adjustments to the Group's financial statements will arise from changes to share based remuneration accounting, leases, pension assets, goodwill, accounting for financial instruments and the recognition of dividends. The net impact of the adjustments on the restated balance sheet as at 31 August 2004 is expected to be broadly neutral. We plan to report our 2005 restated results under IFRS in late November 2005 and we will provide an analysis of accounting adjustments at that time. WH Smith PLC Group Profit and Loss Account For the 12 months to 31 August 2005 2005 2004 ------------------ ------ ------- ------- -------- ------- ------- ------- Â£m Note Before Exceptional Total Before Exceptional Total exceptional items & exceptional items & items & goodwill items & goodwill goodwill amortisation goodwill amortisation amortisation amortisation ------------------ ------ ------- ------- -------- ------- ------- ------- Turnover Continuing operations 2,497 - 2,497 2,520 - 2,520 Discontinued operations 11 - 11 314 - 314 ------------------ ------ ------- ------- -------- ------- ------- ------- Group Turnover 1 2,508 - 2,508 2,834 - 2,834 ------------------ ------ ------- ------- -------- ------- ------- ------- Operating profit / (loss) Continuing operations 81 (1) 80 51 (93) (42) Discontinued operations - - - 21 (10) 11 ------------------ ------ ------- ------- -------- ------- ------- ------- Group operating profit / (loss) 1,2,3 81 (1) 80 72 (103) (31) Net loss on sale of discontinued operations 4 - (8) (8) - (101) (101) Profit on sale of fixed assets - continuing operations 5 - - - - 2 2 ------------------ ------ ------- ------- -------- ------- ------- ------- Profit / (loss) on ordinary activities before net finance charges 81 (9) 72 72 (202) (130) Net finance charges 9 (8) - (8) (5) - (5) ------------------ ------ ------- ------- -------- ------- ------- ------- Profit / (loss) on ordinary activities before taxation 73 (9) 64 67 (202) (135) Tax on profit / (loss) on ordinary activities 10 (18) - (18) (23) 10 (13) ------------------ ------ ------- ------- -------- ------- ------- ------- Profit / (loss) on ordinary activities after taxation for the financial year 55 (9) 46 44 (192) (148) Dividends (equity and non-equity) 11 (166) - (166) (24) - (24) ------------------ ------ ------- ------- -------- ------- ------- ------- Retained (losses) / earnings (111) (9) (120) 20 (192) (172) ------------------ ------ ------- ------- -------- ------- ------- ------- Headline earnings per share(1) Basic - continuing operations 12 31.6p 14.3p Basic 12 31.6p 19.2p Diluted 12 31.3p 19.2p Earnings / (loss) per share(2) Basic - continuing operations 12 30.5p (20.5)p Basic 12 26.0p (60.7)p Diluted 12 25.7p (60.7)p Equity dividends per share 11 13.7p 12.0p Fixed charges cover - times 13 1.4x 1.3x Equity dividend cover - times 11 2.0x - Equity dividend cover before exceptional items and goodwill amortisation - times 11 2.4x 1.5x (1)Headline earnings per share excludes exceptional items, goodwill amortisation and FRS 17 pension interest (2)Earnings per share is calculated in accordance with FRS 14 (Earnings per share) WH Smith PLC Group Balance Sheet As at 31 August 2005 Â£m Note 2005 2004 -------------------- ----- ------------------ ------- Fixed assets Intangible assets - goodwill 15 14 164 Tangible fixed assets 16 231 237 -------------------- ----- ------------------ ------- Total fixed assets 245 401 -------------------- ----- ------------------ ------- Current assets Stocks 162 184 Debtors due within one year 17 111 187 Debtors due after more than one year 17 21 25 Cash at bank and in hand 18 46 64 -------------------- ----- ------------------ ------- 340 460 Creditors due within one year Debt 18 (48) (17) Other creditors 19 (346) (397) -------------------- ----- ------------------ ------- (394) (414) -------------------- ----- ------------------ ------- Net current (liabilities) / assets (54) 46 -------------------- ----- ------------------ ------- Total assets less current liabilities 191 447 -------------------- ----- ------------------ ------- Creditors due after more than one year Debt 18 (46) (2) Other creditors 20 (1) (2) -------------------- ----- ------------------ ------- (47) (4) Provisions for liabilities and charges 21 (31) (38) -------------------- ----- ------------------ ------- Net assets excluding pension liabilities 113 405 Net pension liabilities 6 (71) (149) -------------------- ----- ------------------ ------- Total net assets 42 256 -------------------- ----- ------------------ ------- Capital and reserves Called up share capital 22 4 139 Share premium account 23 17 93 Capital redemption reserve 23 218 156 Revaluation reserve 23 3 3 Other reserve 23 (34) (27) Profit and loss account 23 (319) (110) -------------------- ----- ------------------ ------- Equity shareholders' (liabilities) / funds (111) 254 Non-equity share capital 22 153 2 -------------------- ----- ------------------ ------- Total shareholders' funds 42 256 -------------------- ----- ------------------ ------- Approved by the Board of Directors on 13 October 2005. Kate Swann Alan Stewart CA (SA) Chief Executive Finance Director WH Smith PLC Group Cash Flow Statement For the 12 months to 31 August 2005 Â£m Note 2005 2004 ------------------------------------ ------- -------- -------- Net cash (outflow) / inflow from operating activities before exceptional operating items 24 (13) 61 Net cash outflow from exceptional operating items 24 (9) (13) ------------------------------------ ------- -------- -------- Net cash (outflow) / inflow from operating activities 24 (22) 48 Returns on investment and servicing of finance Interest received 4 1 Interest paid (5) (1) Net charge on pension scheme (2) (4) ------------------------------------ ------- -------- -------- Net cash outflow from returns on investment and servicing (3) (4) of finance Taxation (4) (10) Capital expenditure and financial investment Purchase of tangible fixed assets - owned (32) (49) Proceeds on disposal of tangible fixed assets 2 5 ------------------------------------ ------- -------- -------- Cash outflow from capital expenditure and financial investment (30) (44) Acquisitions and disposals Proceeds on disposal of subsidiary undertakings 222 64 Proceeds on disposal of associated undertakings - 1 Non-operating disposal costs (10) (23) Net cash in subsidiaries disposed - (11) ------------------------------------ ------- -------- -------- Cash inflow from acquisitions and disposals 212 31 Equity dividends paid (21) (42) ------------------------------------ ------- -------- -------- Cash inflow / (outflow) before financing 132 (21) ------------------------------------ ------- -------- -------- Financing Purchase of shares for employee share schemes (12) - Money returned to ESOP Trust after share capital reorganisation 5 - Issue of shares to satisfy employee share schemes 2 - Non-equity dividend (143) - Repurchase of 'C' shares (62) - Increase / (decrease) in debt (net of financing costs) 61 (3) Capital element of finance leases (1) - ------------------------------------ ------- -------- -------- Cash outflow from financing (150) (3) ------------------------------------ ------- -------- -------- Decrease in cash (18) (24) ------------------------------------ ------- -------- -------- Reconciliation of net cash flow to movement in net funds ------- -------- -------- ------------------------------------ Â£m 2005 2004 ------------------------------------ ------- -------- -------- Net funds at the start of the year 45 68 Decrease in cash in the year (18) (24) (Increase) / decrease in debt (62) 3 New finance leases (13) - Currency translation differences - (2) ------------------------------------ ------- -------- -------- Net (debt) / funds at the end of the year 18 (48) 45 ------------------------------------ ------- -------- -------- WH Smith PLC Group Statement of Total Recognised Gains and Losses For the 12 months to 31 August 2005 Â£m Note 2005 2004 Profit / (loss) for the financial year 46 (148) Actuarial loss relating to the pension scheme 6 (42) (15) UK deferred tax attributable to the pension scheme liabilities (27) (3) UK current tax attributable to the additional pension scheme contributions 39 7 Currency translation differences - (7) Total recognised gains / (losses) for the financial year 16 (166) WH Smith PLC Group Note of Historical Cost Profits and Losses For the 12 months to 31 August 2005 Â£m 2005 2004 Reported profit / (loss) on ordinary activities before taxation 64 (135) Realisation of property revaluation gains of the previous year - 1 Historical costs profit / (loss) on ordinary activities before taxation 64 (134) Historical cost loss for the year retained after taxation, minority interests and dividends (120) (171) Reconciliation of Movements in Group Shareholders' Funds For the 12 months to 31 August 2005 Â£m Note 2005 2004 Shareholders' funds at beginning of year 256 407 Retained losses (120) (172) Repurchase of non-equity share capital (62) - Purchase of own shares for employee share scheme (12) - Money returned to ESOP Trust after share capital reorganisation 5 - Employee share schemes 5 - Goodwill previously written off directly to reserves now transferred to profit and loss account for the year on sale of USA Travel Retail business 4 - 39 Net gains and losses relating to pension scheme (30) (11) Currency translation differences - (7) Net reduction to shareholders' funds (214) (151) Shareholders' funds at end of year 42 256 1 Segmental analysis of results (a) Segmental analysis of group turnover Â£m 2005 2004 -------------------------------- -------- ------- Continuing operations: Retailing High Street Retail 1,112 1,152 Travel Retail 311 301 -------------------------------- -------- ------- Total 1,423 1,453 -------------------------------- -------- ------- News Distribution Total turnover 1,187 1,182 Internal turnover (113) (115) -------------------------------- -------- ------- Total 1,074 1,067 -------------------------------- -------- ------- -------------------------------- -------- ------- Turnover - continuing operations 2,497 2,520 -------------------------------- -------- ------- Discontinued operations: Retailing USA Travel Retail - 49 Aspac Retail - 132 -------------------------------- -------- ------- Total - 181 -------------------------------- -------- ------- Publishing Business Total turnover 14 155 Internal turnover (3) (22) -------------------------------- -------- ------- Total 11 133 -------------------------------- -------- ------- -------------------------------- -------- ------- Turnover - discontinued operations 11 314 -------------------------------- -------- ------- -------------------------------- -------- ------- Group turnover 2,508 2,834 -------------------------------- -------- ------- 1 Segmental analysis of results (continued) (b) Segmental analysis of group operating profits 2005 2004 ------------------- -------- -------- ------- -------- -------- ------- Â£m Before Exceptional Total Before Exceptional Total goodwill operating exceptional operating items amortisation items and items and and goodwill goodwill goodwill amortisation amortisation amortisation ------------------- -------- -------- ------- -------- -------- ------- Continuing operations: Retailing High Street Retail 43 (1) 42 23 (77) (54) Travel Retail (note a) 26 - 26 21 (5) 16 ------------------- -------- -------- ------- -------- -------- ------- Total 69 (1) 68 44 (82) (38) News Distribution 37 - 37 35 - 35 ------------------- -------- -------- ------- -------- -------- ------- Trading profit 106 (1) 105 79 (82) (3) Support functions (16) - (16) (15) (11) (26) Pension service costs (note b) (10) - (10) (14) - (14) Internal rents (note c) 1 - 1 1 - 1 ------------------- -------- -------- ------- -------- -------- ------- Operating profit / (loss) - continuing operations 81 (1) 80 51 (93) (42) ------------------- -------- -------- ------- -------- -------- ------- Discontinued operations: Retailing USA Travel Retail - - - (5) - (5) Aspac Retail - - - 7 (1) 6 ------------------- -------- -------- ------- -------- -------- ------- Total - - - 2 (1) 1 Publishing Business - - - 20 (9) 11 Pension service costs (note b) - - - (1) - (1) ------------------- -------- -------- ------- -------- -------- ------- Operating profit / (loss) - discontinued operations - - - 21 (10) 11 ------------------- -------- -------- ------- -------- -------- ------- ------------------- -------- -------- ------- -------- -------- ------- Group operating profit / (loss) 81 (1) 80 72 (103) (31) ------------------- -------- -------- ------- -------- -------- ------- a)Travel Retail includes profits of Â£1m (2004: Â£1m) generated in Continental Europe. b)The annual pension service costs in respect of the defined benefit scheme, if allocated between the businesses based on pensionable salaries, would be as follows: High Street Retail Â£5m (2004: Â£8m), Travel Retail Â£1m (2004: Â£1m), Publishing Â£Nil (2004: Â£1m), News Distribution Â£3m (2004: Â£4m) and Support functions Â£1m (2004: Â£1m). In addition to these pension costs, Â£3m of contributions has been charged to the individual businesses in respect of the defined contribution pension scheme (see Note 6). c)The results for the Retailing Businesses are reported after charging an internal arm's length market rent on freehold and long-leasehold properties owned by the Group. The internal net income generated of Â£1m (2004: Â£1m) is shown as a separate credit to the profit and loss account. d)Exceptional operating items and goodwill amortisation includes goodwill amortisation for the following businesses: High Street Retail Â£1m (2004: Â£1m) and Aspac Retail Â£Nil (2004: Â£1m). e)On 1 September 2004 WHSmith Online was integrated into the WHSmith High Street Retail business, the comparable results for the year ended 31 August 2004 were turnover: Â£7m, operating loss before exceptional items and goodwill amortisation: Â£2m, exceptional items and goodwill amortisation: Â£10m, operating loss after exceptional items and goodwill amortisation: Â£12m. Exceptional operating items incurred during the prior year are analysed in Notes 2 and 3. 1 Segmental analysis of results (continued) (c) Geographical split ----------------------- --------------- ------------------------- ---------------- Turnover Profit / (loss) before taxation Net assets ----------------------- --------------- ------------------------- ---------------- Â£m 2005 2004 2005 2004 2005 2004 ----------------------- ------- ------- ------- -------- ------- -------- Continuing operations before exceptional items 2,497 2,520 73 46 167 139 and goodwill amortisation - UK / Europe Exceptional items and goodwill amortisation (1) (91) ----------------------- ------- ------- ------- -------- ------- -------- Continuing operations - UK / Europe 2,497 2,520 72 (45) 167 139 ----------------------- ------- ------- ------- -------- ------- -------- Discontinued operations before exceptional items and goodwill amortisation: UK / Europe 9 110 - 16 - 205 USA - 49 - (5) (6) 11 Asia / Pacific 2 155 - 10 - 5 ----------------------- ------- ------- ------- -------- ------- -------- 11 314 - 21 (6) 221 Exceptional items and goodwill amortisation (8) (111) ----------------------- ------- ------- ------- -------- ------- -------- Discontinued operations 11 314 (8) (90) (6) 221 ----------------------- ------- ------- ------- -------- ------- -------- Net (debt) / funds (48) 45 Net pension liabilities: Continuing operations (71) (132) Discontinued operations - (17) ----------------------- ------- ------- ------- -------- ------- -------- Total Group 2,508 2,834 64 (135) 42 256 ----------------------- ------- ------- ------- -------- ------- -------- Turnover is disclosed by origin. There is no material difference in turnover by destination. Net operating assets by division are analysed in Note 14. 2 Group operating profit ------------------------------------ --------------------------------------- 2005 2004 ------------------------------------ --------------------------------------- Â£m Continuing Discontinued Total Continuing Discontinued Total --------------------- -------- -------- -------- -------- -------- -------- Turnover 2,497 11 2,508 2,520 314 2,834 Cost of sales (1,790) (4) (1,794) (1,882) (146) (2,028) --------------------- -------- -------- -------- -------- -------- -------- - Pre-exceptional operating items (1,790) (4) (1,794) (1,836) (146) (1,982) - Exceptional operating items - - - (46) - (46) --------------------- -------- -------- -------- -------- -------- -------- Gross profit 707 7 714 638 168 806 Distribution costs (501) (4) (505) (531) (99) (630) --------------------- -------- -------- -------- -------- -------- -------- - Pre-exceptional operating items (501) (4) (505) (517) (90) (607) - Exceptional operating items - - - (14) (9) (23) --------------------- -------- -------- -------- -------- -------- -------- Administrative expenses (126) (3) (129) (149) (58) (207) --------------------- -------- -------- -------- -------- -------- -------- - Pre-exceptional operating items and goodwill amortisation (125) (3) (128) (116) (57) (173) - Exceptional operating items - - - (32) - (32) - Goodwill amortisation (1) - (1) (1) (1) (2) --------------------- -------- -------- -------- -------- -------- -------- --------------------- -------- -------- -------- --- -------- -------- -------- Group operating profit / (loss) 80 - 80 (42) 11 (31) --------------------- -------- -------- -------- --- -------- -------- -------- The exceptional operating items are detailed in Note 3. 2 Group operating profit (continued) Group operating profit before exceptional items and goodwill amortisation is stated after charging: --------------------- 2005 2004 -------- -------- -------- -------- -------- -------- Â£m Continuing Discontinued Total Continuing Discontinued Total --------------------- -------- -------- -------- -------- -------- -------- Depreciation and amounts written off tangible 42 - 42 41 5 46 fixed assets Net operating lease charges - land and buildings 145 - 145 139 25 164 - equipment and vehicles 10 - 10 13 7 20 Other occupancy costs 47 - 47 49 3 52 Staff costs (Note 7) 273 2 275 278 58 336 --------------------- -------- -------- -------- -------- -------- -------- Fees payable to Deloitte & Touche LLP, the Group's auditors, included in the profit and loss account relating to audit fees amount to Â£0.3m (2004: Â£0.4m), and non-audit fees of Â£0.2m (2004: Â£2.0m) which comprise audit related regulatory work Â£nil (2004: Â£0.1m), further assurance services Â£nil (2004: Â£1.2m), tax compliance services Â£0.1m (2004: Â£0.3m), tax advisory services Â£nil (2004: Â£0.4m) and IFRS preparation work Â£0.1m (2004: Â£nil). In addition, The Pension Trust and WHSmith Retirement Savings Plan incurred another Â£0.1m in respect of audit and other fees (2004: Â£0.1m). 3 Exceptional operating items Current year No exceptional operating charges have been made in the year ended 31 August 2005. Prior year In the prior year, the following exceptional charges were made: a) UK Retailing An exceptional operating charge of Â£81m was made relating to UK Retailing. Of this amount, Â£45m related to the carrying value of stock to reflect redundant and slow moving items. A fixed asset impairment charge of Â£20m was made in respect of costs of research work on our concept store, systems development for Travel Retail, and an impairment charge covering goodwill and assets in relation to WHSmith Online. A charge of Â£12m related to the redundancy and associated costs relating to the internal restructuring of UK Retailing, which led to a material reduction in the number of staff at the London and Swindon locations. A further Â£4m was written off relating to other items. b) Corporate advisory costs In responding to the Permira approach and implementing the consequent change to the Group's structure, the Group incurred exceptional operating costs of Â£11m. c) Publishing unearned author advances provision An exceptional provision of Â£9m was charged relating to unearned author advances in the Publishing business, to ensure that the balance sheet correctly reflected an up-to-date view of the future sales prospects of backlist titles published in previous years. The tax effect of the operating exceptional items is disclosed in Note 10 to the accounts. 4 Net loss on sale of discontinued operations Â£m 2005 2004 ----------------------------------------------- ------ ------- Loss on sale of USA Travel Retail (note a, note d) (8) (62) Provision for loss on disposal on sale of Publishing Business (note b, note e) - (48) Profit on sale of Aspac Retail (note c, note d) - 10 Other - (1) ----------------------------------------------- ------ ------- Net loss on sale of discontinued operations (8) (101) ----------------------------------------------- ------ ------- 4 Net loss on sale of discontinued operations (continued) Current Year a) Provisions for discontinued businesses An amount of Â£8m has been charged in the current year to the profit and loss account relating to the disposal of discontinued businesses. Of this amount, Â£7m relates to an impairment review of the loan notes received as deferred consideration in respect of the disposal of the Group's USA businesses. The balance relates to closure and exit provisions. b) Publishing Business disposal On 25 September 2004, the Group completed the disposal of its Publishing Business, Hodder Headline Limited. A financial summary of the disposal is shown below: Â£m Total ------------------------------------------------ ---------- Fixed assets 156 Stock 17 Debtors 80 Creditors (30) Net pension liabilities (14) ------------------------------------------------ ---------- Net assets disposed 209 ------------------------------------------------ ---------- Cash consideration 210 Cash received in respect of working capital adjustments 5 Net assets disposed (209) Transaction costs and other charges (6) ------------------------------------------------ ---------- Net result on sale of the Publishing Business recognised in the - financial year ---------- ------------------------------------------------ The Group incurred a Â£5m cash outflow in respect of transaction costs and other charges relating to the Publishing Business disposal. c) Aspac Retail During the year ended 31 August 2005, Â£7m was received for the Aspac Retail disposal, which related to deferred consideration and working capital adjustments. The tax effect of the non-operating exceptional items has been disclosed in Note 10 to the accounts. 4 Net loss on sale of discontinued operations (continued) Prior Year d) Sale of USA Travel Retail and Aspac Retail businesses During the prior year, the Group disposed of its USA Travel Retail businesses and the Aspac Retail business. A financial summary of the disposals is detailed below: Â£m USA Travel Aspac Retail Total Retail --------------------------------- ---------- ---------- --------- Fixed assets 5 23 28 Stock 15 28 43 Debtors 10 2 12 Cash - 11 11 Creditors (1) (27) (28) --------------------------------- ---------- ---------- --------- Total assets 29 37 66 Minority interest (1) - (1) --------------------------------- ---------- ---------- --------- Net assets disposed 28 37 65 --------------------------------- ---------- ---------- --------- Consideration: Cash 20 44 64 Deferred consideration 19 6 25 --------------------------------- ---------- ---------- --------- Total consideration 39 50 89 Net assets disposed (28) (37) (65) Net liabilities retained (28) - (28) Transaction costs (6) (3) (9) --------------------------------- ---------- ---------- --------- (Loss) / profit before goodwill previously written off directly to reserves (23) 10 (13) Goodwill previously written off directly to reserves (39) - (39) --------------------------------- ---------- ---------- --------- (Loss) / profit on sale of discontinued operations (62) 10 (52) --------------------------------- ---------- ---------- --------- Deferred Consideration USA Travel Retail Deferred consideration of Â£7m in respect of the Hotel business sale to Travel Traders LLC consists of a loan note, which is interest-bearing, with a 5 per cent coupon conditional on the trading cash flows of that company. Deferred consideration of Â£12m in respect of the Airport business sale to Hudson Group consists of an interest bearing loan note with a 5 per cent coupon, with interest accruing from the second year. Aspac Retail The profit on the disposal of Aspac Retail was calculated with reference to the draft completion accounts. The deferred consideration of Â£6m, which was subject to the finalisation of the completion accounts has been received during the year ended 31 August 2005. e) Provision for loss on sale of Publishing Business The Group completed the sale of its Publishing Business on 25 September 2004. A provision of Â£48m was made for the loss on disposal of this business, of which Â£45m was shown as an impairment of goodwill, and Â£3m was included in accruals for associated disposal costs. f) Other The Group also disposed of associate undertakings Books and More NZ Limited, University Bookshop (Otago) Ltd and University Bookshop Canterbury Limited for a total consideration of Â£1.3m. The total investments disposed and associated costs were Â£1.0m and there was a Â£0.3m profit on disposal. On 30 June 2004, the Group completed a trade and assets sale of its Singapore business which resulted in a Â£nil profit on disposal. 5 Profit on sale of fixed assets In the current year, no profit or loss was recorded on sale of fixed assets. In the prior year, High Street Retail completed the sale and leaseback of seven freehold properties and sold a further six freehold properties. The profit on the sale of these properties was Â£2m. 6 Pensions arrangements The Group's pension arrangements for employees are operated through a defined benefit scheme (the WHSmith Pension Trust) and a defined contribution scheme (WHSmith Pensionbuilder). The most significant scheme is the defined benefit WHSmith Pension Trust. The assets of the pension plans are held in separate funds administered by Trustees, who are independent of the Group's finances. The trustees have extensive powers over the pension plans' arrangements, including the ability to determine the levels of contribution. The WHSmith Pension Trust The latest full actuarial valuation of the Scheme was carried out as at 31 March 2003 by independent actuaries, Mercer Human Resource Consulting, using the market value basis. A full actuarial valuation of the Scheme is carried out every three years with interim reviews in the intervening years. This scheme was closed in September 1995 and under the projected unit method the current service cost would be expected to increase as members approach retirement and the aged profile of members increases. Pension valuations The valuation of the Group's defined benefit pension scheme used for the FRS 17 disclosures is based upon the most recent actuarial valuation, which, has been updated by professionally qualified actuaries (Mercer Human Resource Consulting) to take into account the requirements of FRS 17, and to assess the liabilities of the scheme at 31 August 2005. Scheme assets are stated at their market value at 31 August 2005. The weighted average principal long-term assumptions used in the actuarial valuation were: % 2005 2004 2003 --------------------------------- ---------- ---------- ---------- Rate of increase in salaries 3.7% 4.5% 4.4% Rate of increase in pensions payments and deferred 2.7% 2.8% 2.7% pensions Discount rate 4.9% 5.6% 5.5% Inflation assumptions 2.7% 2.8% 2.7% --------------------------------- ---------- ---------- ---------- The aggregate fair values of the assets in the Group's defined benefit scheme, the aggregate net pension liabilities and their expected weighted average long-term rates of return at 31 August 2005 were: ----------------------- ------------- ------------- ------------- 2005 2004 2003 Â£m % Â£m % Â£m % ----------------------- ------- ------- ------- ------- ------- ------- Equities 388 7.0 368 7.8 408 7.6 Bonds 485 4.0 308 4.8 219 4.6 Cash - 3.8 - 4.3 4 4.6 Other - - 2 5.5 - - ----------------------- ------- ------- ------- ------- ------- ------- Total fair value of assets 873 678 631 Present value of schemes (967) (883) (846) liabilities ------- ------- ------- ------- ------- ------- ----------------------- Deficit in the schemes (94) (205) (215) Related deferred tax asset 28 61 64 ----------------------- ------- ------- ------- ------- ------- ------- Net defined benefit schemes (66) (144) (151) liabilities Net retirement medical benefits (5) (5) (5) ----------------------- ------- ------- ------- ------- ------- ------- Net pension liabilities (71) (149) (156) ----------------------- ------- ------- ------- ------- ------- ------- a) Defined benefit pension schemes Analysis of the amount charged to operating profit Â£m 2005 2004 ----------------------------------- ------------- -------- Current service cost (10) (15) ----------------------------------- ------------- -------- 6 Pensions arrangements (continued) Analysis of the amount (charged) / credited to net finance charges Â£m 2005 2004 ----------------------------------- ------------- -------- Expected return on pension scheme assets 44 42 Interest on pension scheme liabilities (46) (46) ----------------------------------- ------------- -------- (2) (4) ----------------------------------- ------------- -------- Analysis of the actuarial loss in the statement of total recognised gains and losses Â£m 2005 2004 ----------------------------------- ------------- -------- Actual return less expected return on pension scheme assets 71 (9) Experience gains and losses arising on the scheme liabilities (2) (8) Changes in assumptions underlying the present value of the scheme liabilities (111) 2 ----------------------------------- ------------- -------- (42) (15) ----------------------------------- ------------- -------- Movement in scheme deficit during the year Â£m 2005 2004 ----------------------------------- ------------- -------- At beginning of year (205) (215) Current service cost (10) (15) Contributions 142 44 Net finance charge (2) (4) Settlement 3 - Disposal of subsidiary pension fund 20 - Actuarial loss (42) (15) ----------------------------------- ------------- -------- Deficit in scheme at end of year (94) (205) ----------------------------------- ------------- -------- History of the weighted average experience gains and losses 2005 2004 2003 2002 2001 -------------------------------- ------ -------- ------- ------- ------- Difference between actual and expected returns on assets: Amount (Â£m) 71 (9) 6 (117) (180) % of scheme assets 8% (1%) 1% (20%) (26%) Experience gains and losses on scheme liabilities: Amount (Â£m) (2) (8) 3 (19) - % of present value of the scheme liabilities 0% (1%) 1% (3%) - Total amount recognised in Statement of Total Recognised Gains and Losses Amount (Â£m) (42) (15) (77) (142) (215) % of present value of the scheme liabilities (4%) (2%) (9%) (20%) (31%) -------------------------------- ------ -------- ------- ------- ------- 6 Pensions arrangements (continued) In September 2005, the Trustees of the WHSmith Pension Trust adopted a new investment policy in order to limit the volatility in the underlying investment performance and reduce the risk of a significant increase in the deficit in the fund. The assets in the investment fund were restructured in order to adopt this policy. This involved the expected liabilities of the scheme being matched by assets that will alter in value as interest and inflation rates change, matching the movements at the same rate as the pension liability changes ('a Liability Driven Investment 'LDI' policy'). The key features of this fund restructuring are as follows: - 94% of the fund's assets are invested in an LDI structure with a leading international institutional fund manager. - 6% of the fund's assets have been used to purchase a portfolio of long-dated equity Call options. These represent a notional exposure to underlying equities of some Â£350m. The impact of this change in investment policy is to limit the volatility in the fund and the resultant risk of a significant increase in the overall deficit whilst enabling the fund to continue to benefit from any potential higher returns in the equity markets. The overall expected rate of return from the portfolio under the new arrangements is 5.0% in the 2005/06 financial year. Following this change in the investment policy the Board and the Trustees have agreed a new deficit funding agreement that gives the Company significantly greater predictability over the level of future deficit reduction payments. This agreement replaces that reached last year and, subject to certain limited conditions, will result in deficit funding payments of Â£15m in 2005/06, Â£17m in 2006/07, Â£20m in 2007/08 and increasing by RPI (capped at 5%) thereafter until the deficit (as calculated under FRS17) is repaid. Post retirement medical benefits WH Smith PLC provides retirement medical benefits to certain pensioners. Total premiums paid during the year in respect of those benefits were Â£0.4m (2004: Â£0.4m). The present value of the future liabilities under this arrangement have been assessed by independent actuaries (Buck Consultants (Healthcare) Limited) and this amount is included on the balance sheet, net of deferred taxation under pension and other post retirement liabilities, as follows: Â£m 2005 2004 ----------------------------------- --------- --------- Post retirement medical benefits (5) (5) ----------------------------------- --------- --------- During September 2005, the members were offered the option to be bought out of this scheme. The financial effect of the proposed settlement of this scheme will be included in the accounts for the financial year ending 31 August 2006. b) Defined contribution pension scheme The Group's pension cost charge to its defined contribution scheme, WHSmith Pensionbuilder, for the year amounted to Â£3m (2004: Â£2m). 7 Staff costs -------------------- 2005 2004 ---------------------------------- ---------------------------------- Â£m Continuing Discontinued Total Continuing Discontinued Total -------------------- -------- -------- -------- -------- --------- -------- Wages and salaries 240 2 242 243 52 295 Social security 17 - 17 18 4 22 Net pension cost 13 - 13 17 2 19 Employee share schemes 3 - 3 - - - -------------------- -------- -------- -------- -------- --------- -------- 273 2 275 278 58 336 -------------------- -------- -------- -------- -------- --------- -------- 8 Operating lease commitments At the year end the Group had the following future commitments in respect of operating leases for the following year: 2005 2004 ------------------------------- ----------------------------------- Â£m Land and Equipment Total Land and Equipment Total buildings and buildings and vehicles vehicles ----------------- -------- -------- -------- -------- --------- -------- Annual net lease commitments expiring: Within one year 10 2 12 8 1 9 Within two to five years 50 4 54 49 8 57 In more than five years 73 - 73 76 - 76 ----------------- -------- -------- -------- -------- --------- -------- 133 6 139 133 9 142 ----------------- -------- -------- -------- -------- --------- -------- 9 Net finance charges ------------------------------------------ -------- -------- Â£m 2005 2004 ------------------------------------------ -------- -------- Interest payable on bank loans and overdrafts (8) (1) Net charge on pension schemes (Note 6) (2) (4) Unwinding of discount on provisions (1) (1) Interest receivable 3 1 ------------------------------------------ -------- -------- (8) (5) ------------------------------------------ -------- -------- 10 Taxation ------------------------------------------ -------- -------- Â£m 2005 2004 ------------------------------------------ -------- -------- Tax on profit before exceptional items and goodwill 24 20 amortisation - Standard rate of UK corporation tax 30% (2004: 30%) Adjustment in respect of prior year UK (5) (3) corporation tax Foreign tax - 3 ------------------------------------------ -------- -------- Total current tax charge before exceptional items and goodwill 19 20 amortisation -------- -------- ------------------------------------------ Deferred tax - current year (1) - Deferred tax - prior years - 3 ------------------------------------------ -------- -------- Tax on profit on ordinary activities before exceptional items 18 23 and goodwill amortisation Tax on exceptional items and goodwill - (10) amortisation -------- -------- ------------------------------------------ Tax on profit on ordinary activities after exceptional items 18 13 and goodwill amortisation -------- -------- ------------------------------------------ Effective tax rate on continuing activities before exceptional 25% 30% items and goodwill amortisation Reconciliation of the taxation charge Â£m 2005 2004 ------------------------------------------ -------- -------- Tax on profit on ordinary activities before exceptional items and goodwill amortisation at standard rate of UK corporation tax 22 20 30% (2004: 30%) Permanent differences 1 1 Depreciation for which no tax relief is available 1 1 Losses not available for Group relief - 2 Adjustment in respect of prior years (5) (3) Other - (1) ------------------------------------------ -------- -------- Current tax charge before exceptional items and goodwill amortisation 19 20 Tax on exceptional items and goodwill amortisation at standard rate of UK corporation tax of 30% (2004: 30%) (2) (62) Goodwill - 28 Disposal of subsidiary undertaking - 7 Other disallowable expenses - 7 Write-off of tangible and intangible assets - 3 Non-allowable provisions 2 7 ------------------------------------------ -------- -------- Current tax charge after exceptional items and goodwill amortisation 19 10 ------------------------------------------ -------- -------- Deferred tax (1) 3 ------------------------------------------ -------- -------- Tax on profit on ordinary activities after exceptional items and 18 13 goodwill amortisation -------- -------- ------------------------------------------ 11 Dividends ----------------------------------------- ---------- --------- Equity dividend per ordinary share 2005 2004 ----------------------------------------- ---------- --------- Interim 4.5p 4.0p Final - proposed 9.2p 8.0p ----------------------------------------- ---------- --------- Total dividend per ordinary share 13.7p 12.0p ----------------------------------------- ---------- --------- Non-equity dividend per share 'C' share dividend paid on capital reorganisation (Note 85.0p - 22) ----------------------------------------- ---------- --------- ----------------------------------------- ---------- --------- Â£m 2005 2004 ----------------------------------------- ---------- --------- Equity dividends Interim 7 10 Final - proposed 16 14 ----------------------------------------- ---------- --------- Total equity dividends 23 24 ----------------------------------------- ---------- --------- Non-equity dividends 'C' share dividend paid on capital reorganisation (Note 143 - 22) ---------- --------- ----------------------------------------- Total non-equity dividends 143 - ----------------------------------------- ---------- --------- Total 166 24 ----------------------------------------- ---------- --------- ----------------------------------------- ---------- --------- 2005 2004 ----------------------------------------- ---------- --------- Equity dividend cover - times 2.0x - Equity dividend cover before exceptional items and goodwill 2.4x 1.5x amortisation - times ---------- --------- ----------------------------------------- The final dividend will be paid on 7 February 2006 to shareholders registered at the close of business on 6 January 2006. As at 31 August 2005, the Group had 180,887,036 (2004: 250,559,907) ordinary shares in issue. On 27 October 2004, the Group paid a 'C' share dividend of Â£142,533,945 to the holders of 167,686,994 'C' shares who had elected under the terms of the capital reorganisation to receive the initial 'C' share dividend. On payment of this dividend, these 'C' shares were converted to deferred shares. The Group paid dividends in respect of those 'C' shares not repurchased or converted to deferred shares on 28 February 2005 and 31 August 2005, at a rate of 75 per cent of six month LIBOR, totalling Â£104,441 and Â£156,647 respectively. In addition, the Group paid dividends on the 'B' shares on 28 February 2005 and 31 August 2005, at a rate of 75 per cent of six month LIBOR, totalling Â£44,914 and Â£45,192 respectively. 12 Earnings / (loss) per share a) Earnings 2005 2004 --------------------- ---------------------------------- ---------------------------------- Â£m Continuing Discontinued Total Continuing Discontinued Total --------------------- -------- -------- ------- -------- -------- ------ Headline earnings attributable to shareholders 56 - 56 35 12 47 Pension interest net of related taxation (1) - (1) (3) - (3) Exceptional items net of related taxation - (8) (8) (81) (109) (190) Goodwill amortisation (1) - (1) (1) (1) (2) --------------------- -------- -------- ------- -------- -------- ------ Profit / (loss) attributable to shareholders 54 (8) 46 (50) (98) (148) --------------------- -------- -------- ------- -------- -------- ------ 12 Earnings / (loss) per share (continued) b) Basic earnings / (loss) per share 2005 2004 --------------------- ---------------------------------- ---------------------------------- Continuing Discontinued Total Continuing Discontinued Total --------------------- -------- -------- ------- -------- -------- ------ Headline earnings per share (note a) 31.6p - 31.6p 14.3p 4.9p 19.2p Pension interest net of related taxation (0.6)p - (0.6)p (1.2)p - (1.2)p Exceptional items net of related taxation - (4.5)p (4.5)p (33.2)p (44.7)p (77.9)p Goodwill amortisation (0.5)p - (0.5)p (0.4)p (0.4)p (0.8)p --------------------- -------- -------- -------- -------- -------- -------- Earnings /(loss) per share (note b) 30.5p (4.5)p 26.0p (20.5)p (40.2)p (60.7)p --------------------- -------- -------- -------- -------- -------- -------- a) Headline earnings per share has been calculated using profit after tax but before exceptional items, goodwill amortisation, and FRS 17 net interest charges on the defined benefit pension scheme. b) Basic earnings per share has been calculated using profit after tax, exceptional items and goodwill amortisation c) Diluted earnings / (loss) per share 2005 2004 --------------------- ---------------------------------- ---------------------------------- Continuing Discontinued Total Continuing Discontinued Total --------------------- -------- -------- -------- -------- -------- -------- Headline earnings per share 31.3p - 31.3p 14.3p 4.9p 19.2p Pension interest net of related taxation (0.6)p - (0.6)p (1.2)p - (1.2)p Exceptional items net of related taxation - (4.5)p (4.5)p (33.2)p (44.7)p (77.9)p Goodwill amortisation (0.5)p - (0.5)p (0.4)p (0.4)p (0.8)p --------------------- -------- -------- -------- -------- -------- -------- Earnings /(loss) per share 30.2p (4.5)p 25.7p (20.5)p (40.2)p (60.7)p --------------------- -------- -------- -------- -------- -------- -------- Diluted earnings per share takes into account various share awards and share options, including SAYE schemes, which are expected to vest, and for which a sum below fair value at 31 August 2005 will be paid. In the prior year, as the Group recorded a loss from continuing operations, the diluted loss per share is the same as the basic, as any dilutive shares reduce the loss per share for continuing operations. d)Weighted average share capital Millions 2005 2004 ----------------------------------------- ---------- --------- Weighted average shares in issue for earnings per share 177 244 Add weighted average number of ordinary shares under option 2 - ----------------------------------------- ---------- --------- Weighted average ordinary shares for fully diluted earnings per share 179 244 ----------------------------------------- ---------- --------- The weighted average number of ordinary shares in issue is stated after excluding 8,999,860 (2004: 6,682,660) shares held solely for the purpose of satisfying obligations under employee share schemes. 13 Fixed charges cover ----------------------------- ------- --------- Â£m 2005 2004 ----------------------------- ------- --------- Interest expense 8 5 Net operating lease rentals 155 184 Property taxes 37 37 Other property costs 10 15 ----------------------------- ------- --------- Total fixed charges 210 241 Profit before tax, exceptional items and goodwill amortisation 73 67 ----------------------------- ------- --------- Profit before tax, exceptional items, goodwill 283 308 amortisation and fixed charges ----------------------------- ------- --------- Fixed charges cover - times 1.4x 1.3x ----------------------------- ------- --------- Fixed charges cover is calculated by dividing profit before exceptional items, goodwill amortisation, tax and fixed charges by total fixed charges. 14 Segmental analysis of operating assets employed ------------------ --------- -------- -------- -------- ------- -------- Operating Return on ROCE% after Operating Return on ROCE% after assets capital capitalised assets as capital capitalised as at 31 employed net operating at 31 employed net operating August leases August leases 2005 including 2004 including internal internal rent rent Â£m % % Â£m % % ------------------ --------- -------- -------- -------- ------- -------- Continuing operations: High Street Retail 187 23% 13% 187 12% 9% Travel Retail 24 108% 32% 25 83% 24% ------------------ --------- -------- -------- -------- ------- -------- UK Retailing 211 33% 16% 212 21% 12% News Distribution (25) - - (18) - - ------------------ --------- -------- -------- -------- ------- -------- Continuing trading operations 186 57% 21% 194 41% 17% Freehold property 18 21 Support functions (13) (48) Provisions for liabilities and charges (24) (28) ------------------ --------- -------- -------- -------- ------- -------- Operating assets employed continuing operations 167 48% 19% 139 37% 14% ------------------ --------- -------- -------- -------- ------- -------- Discontinued operations: USA Travel Retail 1 21 Aspac Retail - - Publishing - 210 9% 9% Provisions for liabilities and charges (7) (10) ------------------ --------- -------- -------- -------- ------- -------- Operating assets employed discontinued operations (6) 221 ------------------ --------- -------- -------- -------- ------- -------- Total operating assets employed 161 50% 19% 360 20% 19% Net (debt) / funds (48) 45 ------------------ --------- -------- -------- -------- ------- -------- Net assets excluding pension liabilities 113 405 Net pension liabilities: Continuing operations (71) (132) Discontinued operations - (17) ------------------ --------- -------- -------- -------- ------- -------- Total net assets 42 256 ------------------ --------- -------- -------- -------- ------- -------- a) Return on capital employed is calculated as the operating profit before exceptional items and goodwill amortisation as a percentage of operating capital employed. b) Return on capital employed after capitalised net operating leases including internal rent is calculated as the adjusted profit as a percentage of operating assets after capitalising operating leases. Adjusted profit is stated after adding back the annual net rent and charging depreciation on the value of capitalised leases. The value of capitalised operating leases is based on the net present value of future rent commitments. 15 Goodwill ------------------------------ ---------- Â£m ------------------------------ ---------- Cost: At 1 September 2004 226 Disposals (195) ------------------------------ ---------- At 31 August 2005 31 ------------------------------ ---------- Accumulated amortisation: At 1 September 2004 62 Amortised in year 1 Impairment charge in the year - Disposals (46) ------------------------------ ---------- At 31 August 2005 17 ------------------------------ ---------- Net book value ------------------------------ ---------- At 31 August 2005 14 ------------------------------ ---------- At 1 September 2004 164 ------------------------------ ---------- Goodwill arising on the earlier acquisitions of John Menzies Retail and TM Retail is regarded by the Directors as having a useful life of 20 years and is therefore amortised through the profit and loss account over this period. At 30 August 2005, the balance of goodwill is Â£2m in respect of the acquisition of TM Retail and Â£12m in respect of John Menzies. The net book value of the goodwill disposed during the year of Â£149m relates to the disposal of the Publishing Business, which was completed on 25 September 2004. 16 Tangible fixed assets Land and Buildings ----------------------------------- Â£m Freehold Long-term Short-term Fixtures Equipment Total Properties Leasehold Leasehold and Fittings and Vehicles -------------------- -------- -------- -------- -------- -------- -------- Cost or valuation: At 1 September 2004 28 1 168 162 122 481 Additions - - 7 12 26 45 Disposals (1) - (1) (3) (5) (10) Disposal of subsidiary undertakings - - (4) (1) (4) (9) -------------------- -------- -------- -------- -------- -------- -------- At 31 August 2005 27 1 170 170 139 507 -------------------- -------- -------- -------- -------- -------- -------- Accumulated depreciation: At 1 September 2004 7 1 89 89 58 244 Depreciation charge 1 - 10 14 16 41 Impairment losses - - - - 1 1 Disposals - - (1) (2) (4) (7) Disposal of subsidiary undertakings - - (1) (1) (1) (3) -------------------- -------- -------- -------- -------- -------- -------- At 31 August 2005 8 1 97 100 70 276 -------------------- -------- -------- -------- -------- -------- -------- Net book value -------------------- -------- -------- -------- -------- -------- -------- At 31 August 2005 19 - 73 70 69 231 -------------------- -------- -------- -------- -------- -------- -------- At 1 September 2004 21 - 79 73 64 237 -------------------- -------- -------- -------- -------- -------- -------- a) The Group's property portfolio (of freehold and long-leasehold properties) was last revalued in 1990. Following the implementation of FRS 15 'Tangible fixed assets' the Group has adopted a policy of not revaluing tangible fixed assets. The carrying amounts of tangible fixed assets, previously revalued, have been retained at their book amount in accordance with the transitional provisions of FRS 15. b) Freehold properties include assets not depreciated at cost or valuation of Â£9m (2004: Â£10m). c) Assets held under finance leases, with a cost of Â£12.6m (2004: Â£nil) and depreciation of Â£0.4m (2004: Â£nil), are included within Equipment and Vehicles. Freehold and long-leasehold land and buildings Â£m 2005 2004 ---------------------------------- -------- -------- (i) The net book value of freehold and long-leasehold properties comprises: Properties - at cost 2 2 - at valuation 17 19 ---------------------------------- -------- -------- Net book value 19 21 ---------------------------------- -------- -------- (ii) If shown on an historical cost basis, properties would be stated at: Cost 27 28 Depreciation (11) (10) ---------------------------------- -------- -------- Net book value 16 18 ---------------------------------- -------- -------- 17 Debtors --------------------------------- ----------- ---------- Â£m 2005 2004 --------------------------------- ----------- ---------- Amounts falling due within one year: Trade debtors 37 87 Other debtors 43 74 Prepayments and accrued income 31 26 --------------------------------- ----------- ---------- 111 187 Amounts falling due after more than one year: Other debtors 21 25 --------------------------------- ----------- ---------- 132 212 --------------------------------- ----------- ---------- A deferred tax asset of Â£20m has been recognised at 31 August 2005 (2004: Â£nil), of which Â£15m has been included in other debtors falling due within one year and Â£5m in other debtors due after more than one year. This relates to tax losses resulting from the significant company contributions paid to the WHSmith Pension Trust. The directors are of the opinion, based on recent and forecast trading that the level of profits in future periods will exceed the tax losses incurred as a result of the company's contribution to the WHSmith Pension Trust. Debtors falling due after more than one year include deferred consideration in respect of the disposal of businesses. 18 Financial assets and liabilities Â£m 2005 2004 ----------------------------- ---------- ---------- Cash at bank and in hand 46 64 Debt repayable in one year or less or on demand (48) (17) Debt repayable between two to five years (44) - Debt repayable in more than five years (2) (2) ----------------------------- ---------- ---------- Net (debt) / funds (48) 45 ----------------------------- ---------- ---------- After taking into account various interest rate swaps, the net debt structure of the group was: Â£m 2005 Cashflow Non-cash 2004 ---------------------------- --------- --------- -------- ---------- Cash at bank and in hand 46 (18) - 64 Debt - Sterling floating rate (50) (33) - (17) - Sterling fixed rate (32) (30) - (2) - Obligations under finance leases (12) 1 (13) - ---------------------------- --------- --------- -------- ---------- Net (debt) / funds (48) (80) (13) 45 ---------------------------- --------- --------- -------- ---------- 19 Other creditors (amounts falling due within one year) --------------------------------- --------- ------- Â£m 2005 2004 --------------------------------- --------- ------- Trade creditors 176 209 Corporation tax 27 30 VAT, payroll taxes and social security 16 17 Other creditors 56 58 Accruals and deferred income 55 69 Proposed dividends 16 14 --------------------------------- --------- ------- 346 397 --------------------------------- --------- ------- 20 Other creditors (amounts falling due after more than one year) --------------------------------- --------- ---------- Â£m 2005 2004 --------------------------------- --------- ---------- Other creditors 1 2 --------------------------------- --------- ---------- 21 Provisions for liabilities and charges ------------------------ -------- -------- -------- -------- Â£m Disposal Deferred Non trading Total provisions taxation property provisions ------------------------ -------- -------- -------- -------- Gross Provision At 1 September 2004 10 15 18 43 Charged /(released) during the year 1 (1) 1 1 Utilised in the year (4) - (5) (9) ------------------------ -------- -------- -------- -------- 7 14 14 35 ------------------------ -------- -------- -------- -------- Discount At 1 September 2004 - - (5) (5) Unwinding of discount utilisation - - 1 1 ------------------------ -------- -------- -------- -------- At 31 August 2005 - - (4) (4) ------------------------ -------- -------- -------- -------- Net provision 3 ------------------------ -------- -------- -------- -------- At 31 August 2005 7 14 10 31 ------------------------ -------- -------- -------- -------- At 1 September 2004 10 15 13 38 ------------------------ -------- -------- -------- -------- Disposal provisions of Â£7m arise from commitments in respect of the disposal of the USA Travel Retail businesses. The provisions will be predominantly utilised over the next few years. The non-trading property provision is the estimated future cost of the Group's onerous leases based on known and estimated rental subleases. The costs include provisions for required dilapidation costs and any anticipated future rental shortfalls. This provision has been discounted at 10 per cent and this discount will be unwound over the respective lives of the leases, which range from the year 2006 through to 2016. The deferred tax balance comprises the following: Â£m 2005 2004 -------------------------- ----------- -------- Accelerated capital allowances 16 17 Short term timing differences (2) (2) -------------------------- ----------- -------- 14 15 -------------------------- ----------- -------- 22 Called up share capital (a)Authorised 2005 2004 -------------------- ---------------------------- ---------------------- Number of Nominal Number of Nominal shares value shares value (millions) Â£m (millions) Â£m -------------------- ----------- ----------- --------- --------- Equity: Ordinary shares of 2 13/81p each 2,305 50 - - Ordinary shares of 55.55p each - - 333 185 -------------------- ----------- ----------- --------- --------- 50 185 -------------------- ----------- ----------- --------- --------- Non-Equity: 'B' shares of 53.75p each 286 153 286 153 'C' shares of 83 70 - - 85p each Deferred shares of 168 143 - - 85p each -------------------- ----------- ----------- --------- --------- 366 153 -------------------- ----------- ----------- --------- --------- -------------------- ----------- ----------- --------- --------- Total 416 338 -------------------- ----------- ----------- --------- --------- (b)Allotted and fully paid 2005 2004 ------------------------ ---------------------- Number of Nominal Number of Nominal shares Value shares value (millions) Â£m (millions) Â£m -------------------- ----------- ----------- --------- --------- Equity: Ordinary shares of 2 13/81p each 181 4 - - Ordinary shares of 55.55p each - - 251 139 -------------------- ----------- ----------- --------- --------- 4 139 -------------------- ----------- ----------- --------- --------- Non-Equity: 'B' shares of 53.75p each 4 2 4 2 'C' shares of 85p each 10 8 - - Deferred shares of 85p each 168 143 - - -------------------- ----------- ----------- --------- --------- 153 2 -------------------- ----------- ----------- --------- --------- -------------------- ----------- ----------- --------- --------- Total 157 141 -------------------- ----------- ----------- --------- --------- (c)Movement in share capital Equity Non-Equity ----------------------------- ------------------------------------------ Ordinary Ordinary Deferred Â£m shares of shares of 'B' shares of 'C' shares shares Total 2 13/81p each 55.55p each 53.75p each of 85p each of 85p each ------------ --------- --------- -------- --------- --------- --------- At 1 September 2004 - 139 2 - - 141 Capital reorganisation 4 (139) - 213 - 78 Converted - - - (143) 143 - Cancelled - - - (62) - (62) ------------ --------- --------- -------- --------- --------- --------- At 31 August 2005 4 - 2 8 143 157 ------------ --------- --------- -------- --------- --------- --------- The number of ordinary shares of 55.55p issued in the year to 31 August 2005 (during the period 1 September 2004 to 26 September 2004) was 2,593 (2004: 122,477) with a nominal value of Â£0.001m (2004: Â£0.068m). Of these, nine were issued in connection with the capital reorganisation and 2,584 were issued on the exercise of share options for a cash consideration of Â£0.007m (2004: Â£0.4m). 22 Called up share capital (continued) The number of ordinary shares of 2 13/81p issued in the year to 31 August 2005 (during the period 27 September 2004 to 31 August 2005) was 482,036 (2004: nil) with a nominal value of Â£0.01m (2004: Â£nil). These were issued on the exercise of share options for a cash consideration of Â£1.5m (2004: Â£nil). Other movements in ordinary shares in the year, due to the restructuring of share capital, are noted in further detail below. At 31 August 2005, the number of options held under employee share schemes was 17.9 million shares (2004: 16.5 million). The proceeds due to the Company upon exercise of these options would be Â£47.7m (2004: Â£59.4m). On 27 September 2004 the Company undertook a capital reorganisation whereby existing ordinary shareholders received 18 new ordinary shares and 25 new non-cumulative preference shares of nominal value 85p ('C' shares) for every 25 existing ordinary shares. The new ordinary shares have a nominal value of 2 13/ 81p each. This capital reorganisation was effected by a bonus issue of Â£78m, using the share premium account to fully pay up undesignated shares of 31p each, which were then allocated to shareholders on the basis of one undesignated share for every existing share held. The existing ordinary shares and undesignated shares were then consolidated and split, resulting in the issue of new ordinary shares with a nominal value of Â£4m and 'C' shares with a nominal value of Â£213m. In accordance with the terms of the capital reorganisation, shareholders could elect to sell 'C' shares to the Company at 85p per share following which all such 'C' shares would be cancelled by the Company or to receive the initial 'C' share dividend of 85p per 'C' share following which all such 'C' shares would be converted into deferred shares. On 27 October 2004, as a result of these elections, the Company repurchased 73,182,358 'C' shares for their nominal value of 85p each, a total repurchase amount of Â£62m and paid an initial 'C' share dividend of Â£143m in respect of 167,686,994 'C' shares. The remaining 10m 'C' shares may be purchased by the Company (subject to the provisions of the Companies Act 1985) or converted into ordinary shares at the Company's option and carry a net non-cumulative dividend set at a rate that is the lower of 75 per cent of six month LIBOR and 20 per cent per annum. The 'C' shares have limited voting rights. On a return of capital on winding up or otherwise, the holders of the 'C' shares shall be entitled in priority to any payment to the holders of the ordinary and deferred shares, and ranking pari passu with the holders of the 'B' shares, to repayment of the nominal capital paid up on the 'C' shares held, together with a sum equal to any outstanding dividend. The deferred shares may be purchased by the Company (subject to the provision of the Companies Act 1985), at the Company's option for not more than 1p for all the shares and carry no dividend or voting rights. On a return of capital on winding up or otherwise, the holders of the deferred shares shall be entitled after firstly paying to the holders of the 'B' and 'C' shares any amounts owing to them and, secondly, paying to the holders of the ordinary shares the nominal capital paid up plus Â£100,000 on each ordinary share held, to repayment of the nominal capital paid up on the deferred shares held. The 'B' shares are redeemable at their nominal value at the shareholders' option during any period declared by the Company, or at the Company's option, or at maturity on 31 August 2008. The 'B' shares carry a net non-cumulative dividend set at a rate that is the lower of 75 per cent of six month LIBOR and 20 per cent per annum and have limited voting rights. On a return of capital on winding up or otherwise, the holders of the 'B' shares shall be entitled in priority to any payment to the holders of the ordinary and deferred shares, and ranking pari passu with the holders of the 'C' shares, to repayment of the nominal capital paid up on the 'B' shares held, together with a sum equal to any outstanding dividend. On a return of capital on winding up or otherwise, the holders of the ordinary shares shall be entitled after paying to the holders of the 'B', 'C' and deferred shares any amounts owing to them, to the repayment of any further amount rateably according to the amounts paid up in respect of each ordinary share. At 31 August 2004, the Group had 169,072 authorised, allotted and fully paid 5.75 per cent cumulative preference shares in issue, on which dividends were paid half yearly. These preference shares were repurchased and cancelled in full on 20 May 2005. 23 Reserves ---------------------- -------- -------- -------- -------- -------- Â£m Share Capital Revaluation Other Profit premium redemption reserve reserve & loss account reserve account ---------------------- -------- -------- -------- -------- -------- Reserves at 1 September 2004 93 156 3 (27) (110) Loss retained for the year - - - - (120) Bonus issue (Note 22) (78) - - - - Employee share schemes 2 - - - 3 Repurchase of shares (Note 22) - 62 - - (62) Purchase of own shares for employee share schemes - - - (12) - Money returned to ESOP Trust after share capital reorganisation - - - 5 - ---------------------- -------- -------- -------- -------- -------- Reserves excluding current year pension deficit adjustment 17 218 3 (34) (289) Current year net pension deficit adjustment - - - - (30) ---------------------- -------- -------- -------- -------- -------- Reserves at 31 August 2005 17 218 3 (34) (319) ---------------------- -------- -------- -------- -------- -------- The profit and loss reserve at 31 August 2005 is stated after writing off previously acquired goodwill of Â£19m (2004: Â£19m). The opening capital redemption reserve was created from the repurchase of ordinary and 'B' shares. The addition during the year relates to the repurchase of 'C' shares after the capital reorganisation (see Note 22). The 'W H Smith Employees' Share Trust 1999 (the 'Trust') holds ordinary shares in WH Smith PLC which may be used to satisfy options and awards granted under the Company's share schemes. The Trustee, which is an independent professional trust company based in Jersey, purchases the shares in the open market with financing provided by the Group as required, on the basis of regular reviews of the anticipated share liabilities of the Group. In accordance with UITF 38, which requires shares held by the Trust to be shown as a deduction in arriving at shareholders' funds, the other reserve comprises 8,999,860 shares (2004: 6,682,660) with a nominal value of Â£194,441 (2004: Â£3,712,218) and a market value at 31 August 2005 of approximately Â£33m (2004: Â£20m). Dividends are waived for all ordinary shares held by the Trust. The reserves before and after net pension liabilities are: Â£m 2005 2004 -------------------------------------- ------------ ---------- Profit and loss reserve excluding net pension (248) 39 liabilities Amount relating to pension liabilities, net of related deferred tax (71) (149) -------------------------------------- ------------ ---------- Profit and loss reserve (319) (110) -------------------------------------- ------------ ---------- 24 Notes to the cash flow statement Reconciliation of operating profit / (loss) to net cash (outflow) / inflow from operating activities Â£m 2005 2004 ------------------------------- --------- --------- Operating profit / (loss) 80 (31) Adjustment for pension funding (note a) (130) (25) Operating exceptional items - 101 Depreciation and other amounts written off tangible fixed 42 46 assets Amortisation of goodwill 1 2 Decrease / (increase) in stock 6 (17) Decrease / (increase) in debtors 1 (1) Decrease in creditors (7) (9) Cash spend against provisions (6) (5) ------------------------------- --------- --------- Net cash (outflow) / inflow from operating activities before exceptional operating items (13) 61 Corporate advisory costs (9) - Internal restructuring of UK Retailing - (11) Other items - (2) ------------------------------- --------- --------- Cash outflow relating to exceptional operating items (9) (13) ------------------------------- --------- --------- Net cash (outflow) / inflow from operating activities after exceptional operating items (22) 48 ------------------------------- --------- --------- a) For the year ended 31 August 2005, Â£142m (2004: Â£44m) cash contributions have been made to the pension scheme. The associated profit and loss charge comprises Â£10m (2004: Â£15m) for operating costs and Â£2m charge (2004: Â£4m charge) for financing. The Group has made an additional contribution of Â£130m over and above the required profit and loss charge (2004: Â£25m additional contribution). 25 Contingent liabilities -------------------------------------- ------------ --------- Â£m 2005 2004 -------------------------------------- ------------ --------- Bank and other loans guaranteed 11 20 -------------------------------------- ------------ --------- No amount has been included above for taxation that would arise in the event of certain international subsidiaries distributing the balance of their reserves. Other potential liabilities that could crystallise are in respect of previous assignments of leases where the liability could revert to the Group if the lessee defaulted. These leases have an estimated future cumulative gross rental commitment of approximately Â£181m (2004: Â£201m). 26 Capital commitments Contracts placed for future capital expenditure approved by the directors but not provided for in these financial statements amounts to Â£4m (2004: Â£33m). 27 Analysis of Retail Stores and Selling Space ------------------------- -------- ------- ------- ------- ------- Number of stores ------------------------- -------- ------- ------- ------- ------- 1 Sept Opened Closed Disposed 31 Aug 2004 2005 ------------------------- -------- ------- ------- ------- ------- High Street Retail 544 2 (4) - 542 ------------------------- -------- ------- ------- ------- ------- Travel Retail (note a) 129 3 (5) - 127 ------------------------- -------- ------- ------- ------- ------- Total Retailing Businesses 673 5 (9) - 669 ------------------------- -------- ------- ------- ------- ------- ------------------------- -------- ------- ------- ------- ------- Retail selling square feet (000's) 1 Sept Opened Closed Disposed 31 Aug 2004 2005 ------------------------- -------- ------- ------- ------- ------- High Street Retail 3,056 10 (31) - 3,035 ------------------------- -------- ------- ------- ------- ------- Travel Retail 214 8 (6) - 216 ------------------------- -------- ------- ------- ------- ------- Total Retailing Businesses 3,270 18 (37) - 3,251 ------------------------- -------- ------- ------- ------- ------- ------------------------- -------- ------- ------- ------- ------- (a) Travel Retail store numbers have been restated to reflect the number of stores rather than the number of units. 28 Preparation of the Preliminary Announcement (a) Basis of preparation The preliminary announcement for the 12 months to 31 August 2005 has been prepared on the basis of the accounting policies set out in the Company's Annual Report for the 12 months 31 August 2004. (b) Preliminary announcement The financial information for the 12 months to 31 August 2005 and 12 months to 31 August 2004 do not comprise statutory accounts for the purpose of Section 240 of the Companies Act 1985 and have been extracted from the Company's consolidated accounts for the year to 31 August 2004 and the year to 31 August 2005. The statutory accounts for the 12 months to 31 August 2004 have been filed with the Registrar of Companies and those for the 12 months to 31 August 2005 will be filed following the Company's annual general meeting. The auditors' reports on both those accounts were unqualified and did not include a statement under Section 237 (2) or (3) of the Companies Act 1985. The Annual Report and Accounts will be posted to shareholders in November 2005. This information is provided by RNS The company news service from the London Stock Exchange

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