Financial Review

The table below sets out an analysis of the causes of movements in operating profit before significant items* between 2004 and 2005. Whilst the variances are based on management's best estimates and are not a statutory presentation, they help to explain the underlying changes in the business during the year.

Operating profit before significant items*
2004-05 Variance Analysis (£m)

Revenue increased by £9.5 million to £194.9 million, or 5.1% in the year. Of this, £6.7 million (3.6%) was like-for-like, £2.2 million (1.2%) was due to acquisitions and £0.6 million (0.3%) favourable foreign exchange. Sales growth was particularly strong in the USA and EMEA but flat in Asia. Acquisition growth came principally from Kata, the Israeli bags maker, which was acquired on 31 May, together with a full year contribution from Charter US.

Operating profit before significant items* was £20.0 million, £2.2 million or 12.4% greater than 2004. Before adverse foreign currency effects of £0.9 million, the increase in profit was £3.1 million or 17.3%. Despite hedging its foreign exchange transaction exposure, the Group suffered from the weaker US dollar against the euro, particularly in the first half year. The Group's operating profit* margin increased from 9.6% to 10.3%.

Restructuring costs were £0.9 million (2004: £2.1 million) which principally arise from the previously-announced restructuring plans within the Broadcast Systems division enabling the Camera Support and Communications businesses to operate in a more integrated manner. It is expected that the overall charge for these plans will be between £4.0 and £5.0 million, as previously announced, with £3.0 million having now been charged.

The charge for goodwill impairment was £nil (2004: £0.1 million). Amortisation of the intangibles acquired in Kata (see below) for the seven months of ownership was £0.2 million. These have been included as significant items.

Significant items totalling £1.3 million were principally the above restructuring costs of £0.9 million, amortisation of intangibles for Kata of £0.2 million and other financial expense of £0.5 million (of which £0.3 million relates to the reduction in the value of foreign exchange options due to FX market volatility, and £0.2 million relates to currency losses on loans not accounted for as net investment hedges), offset by the profit on the sale of a factory building in Italy for £0.3 million.

Taxation The effective taxation rate on operating profit after net finance expense but before significant items* was 42% (2004: 45%). The reduction in the tax rate is due principally to progress made in reducing its unrelieved UK tax losses. The Group's tax charge is relatively high because all of its profits arise overseas in high tax jurisdictions. (Note: the application of IFRS increased the effective tax rate for 2004 by some 3% compared to UK GAAP, due to changes in the accounting for deferred taxes).

Discontinued operation The £0.4 million credit relates to the release of the remaining provision for the upgrade of retail units in the ALU business, which was divested in 2003.

Acquisitions On 31 May 2005 the Group acquired the business and assets of Kata, the Israeli designer and manufacturer of premium protective carrying bags for cameras and accessories in the photographic and broadcast markets. The consideration, including acquisition expenses, amounted to £4.7 million. Based on an assessment of the fair value of assets acquired, £0.7 million was attributed to tangible assets, £1.4 million to intangible assets (before a contingent tax liability of £0.3 million) and £2.9 million to goodwill. The amortisation of intangibles for the seven months was £0.2 million. An earnout of up to US$13.0 million (£7.1 million) is payable based on sales and profit performance for 2005-07. Following the 2005 performance, the estimated earnout provision has been increased from US$3.6 million (£2.0 million) at half year to US$4.6 million (£2.5 million).

Cash flow and net debt Cash generation remained strong, with net debt reducing by half to £5.4 million (2004: £11.3 million), despite the acquisition of Kata (above) and a one-off £2.1 million contribution to the Group's two UK pension schemes which were then merged. The principal reasons were operating profit generation and tax paid of only £1.6 million compared to a tax charge of £7.7 million.

* Significant items comprise restructuring costs, goodwill impairment and negative goodwill, amortisation of acquired intangibles, profit on sale of property and fair value adjustments relating to volatile financial instruments.

Net Debt and Free Cash Flow

Cash generated from operations was £29.8 million (2004: £22.5 million) equating to 73p a share (2004: 55p). Capital expenditure and financial investments were £11.7 million (2004: £10.0 million), of which £5.4 million (2004: £5.1 million) related to rental assets, partly financed by the proceeds from rental asset disposals of £1.2 million (2004: £1.1 million).

Working capital efficiency improved. Inventory decreased by £1.3 million to £31.3 million, whilst stock days decreased to 99 (2004: 109 days). Trade receivables increased by £4.3 million to £30.5 million, reflecting high sales in December which also contributed to higher debtor days of 57 (2004: 52 days).

Tax paid in 2005 of £1.6 million was similar to 2004 (£1.4 million). The current year benefited again from Italian tax credits arising from the sale of the ALU business in 2003, as well as a £0.7 million UK tax rebate. Tax payments in 2006 will equate more closely to the 2006 current tax charge.

Treasury Financing, currency hedging and tax planning are managed centrally. Hedging activities are designed to protect profits, not to speculate. Substantial changes to the financial structure of the Group or treasury practice are referred to the Board. The Group operates strict controls over all treasury transactions involving dual signatures and appropriate authorisation limits. As in previous years, a portion of the transactions of subsidiaries in foreign currencies is hedged 12 months forward, as set out below. In 2005, due to the relative strength of the US dollar, some cover was also taken out for the first half of 2007.

Currency millions December 2005 Average Rate December 2004 Average Rate
US Dollars sold for Euros
Forward contracts $22.9 1.22 - -
Options** $17.7 1.24 $16.0 1.21
US Dollars sold for Sterling
Forward contracts $15.5 1.78 $3.7 1.80
Options** - - $1.7 1.84

** Includes cylinder options, where the mid-point of range is taken

The Group does not hedge its foreign currency profits. Foreign currency net assets are not hedged other than by normal Group borrowings.

Financing activities The Group's principal financing facility is a five-year £100 million committed multicurrency revolving loan agreement involving five banks, expiring on 24 January 2010. At the end of December, £17.2 million of the facility was utilised.

The average cost of borrowing for the year was 4.6% (2004: 4.8%) with the upward trend in interest rates being partially mitigated by converting the remainder of the Group's sterling loans into euros and US dollars. Net interest cost (consisting of net interest payable and commitment fees) was £1.3 million (2004: £1.6 million). Net interest cover (using operating profit before significant items) remained high at 15 times (2004: 11 times).

UK pensions At the end of 2003 the Group closed both of its UK defined benefit schemes to new members. In November 2005 the two schemes were merged. As at 31 December 2005 the number of active members in the newly-merged scheme had reduced by 13% to 201 (2004: 232). Total scheme members are 662 (2004: 676). From the beginning of 2004 a Group personal pension plan was made available for new employees, currently with Standard Life.

A triennial actuarial valuation was undertaken as at 5 April 2004. On the basis of the assumptions adopted, the value of the schemes' assets (£28.3 million) was equal to 94% of the value placed on the benefits that had accrued to members allowing for expected future increases in salaries. As a result of the valuation regular contributions were increased by £0.2 million per annum with effect from the date of valuation. In addition, employees' contributions were increased from 1 January 2005. In November 2005 the Group contributed £2.1 million to fund the deficit highlighted by the 2004 triennial valuation and, also, to facilitate the merger of the two schemes to reduce ongoing administration costs.

Following the funding actions set out above, the Group's UK defined benefit pension liabilities under IAS 19 (amended) as at 31 December 2005 were estimated by the Group's actuaries to be £42.0 million (2004: £36.5 million) and the deficit £3.1 million (2004: £5.8 million). The principal assumptions used for the valuations are set out below.

2005 2004
Inflation rate 2.8% 2.8%
Expected rate of increase in:
Salaries 4.8% 4.8%
Pensions and deferred pensions 2.8% 2.8%
Discount rate 4.8% 5.3%
Long term rates of return
Equities 7.8% 7.9%
Bonds 4.3% 4.8%
Property 6.3% 6.8%
Longevity
Pensioners currently aged 65 84/87† 84/87†
Non-pensioners currently aged 45 86/89† 86/89†

† male/female



Cautionary statement These statements contain forward looking statements that are subject to risk factors associated with, amongst other things, the economic and business circumstances occurring from time to time in the countries and sectors in which the Group operates. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a wide range of variables which could cause actual results to differ materially from those currently anticipated.

Information correct at 02/05/2006