Financial Review
Revenue increased by £27.4 million to £222.3 million, or 14.1% in the year. Of this, £23.3 million (12.1%) was like-forlike, £2.1 million (1.2%) was due to adverse foreign exchange and £6.2 million (3.2%) due to acquisitions (including £1.2 million due to the Kata acquisition part way through 2005). Revenue growth was particularly strong in the UK and the rest of Europe.
Operating profit The table below sets out an analysis of the causes of movements in operating profit before significant items* between 2005 and 2006 and helps to explain the underlying changes in the business during the year. The variances are based on management's best estimates and are not a statutory presentation.
Operating profit before significant items*
2005-06 Variance Analysis (£m)
Operating profit before significant items* was £25.2 million, £5.2 million or 26.0% greater than 2005. The Group's operating profit* margin increased from 10.3% to 11.3%. Despite hedging its foreign exchange transaction exposure, the Group suffered from the weaker US Dollar in the second half of the year. Before adverse foreign currency effects of £0.7 million, the increase in profit was £5.9 million or 29.8%.
Restructuring costs of £1.5 million (2005: £0.9 million) are included in significant items*. This is the last part of the previously announced restructuring plans within the Broadcast Systems division. No further costs will be charged and the cumulative total cost is £4.5 million, within the £4.0-5.0 million originally forecast. There was an operating profit on the sale of a building of £0.4 million (2005: £0.3 million).
Amortisation of acquired intangibles increased to £0.6 million (2005: £0.2 million) due to the recent acquisitions and has been included in significant items*.
Net financial expense before significant items* totalled £1.1 million (2005: £1.6 million) and reduced principally because of an increase in the IAS 19 pension credit to £0.5 million (2005: £0.2 million). Finance expenses included in significant items* consisted of a £0.2 million gain (2005: £0.2 million loss) due to currency movements on loans not accounted for as net investment hedges and £nil (2005: £0.3 million loss) arising from a reduction in the value of foreign exchange options due to foreign exchange market volatility.
Taxation The effective taxation rate on operating profit after net finance expense but before significant items* was 40% (2005: 42%). The reduction in the tax rate is due principally to progress made in rationalising the Group's legal structure. The Group's tax charge is relatively high because the significant majority of its profits arise in overseas high tax jurisdictions. We are targeting a rate of 38% in 2007.
Acquisitions totalled £15.8 million (2005: £4.6 million). The Group completed four acquisitions in 2006: Petrol, a manufacturer of high-end broadcast camera bags; ALC Broadcast Ltd (Autoscript), a leading provider of prompting hardware and software to the broadcast industry; Tomcat Global Corporation, a leading US manufacturer of aluminium trusses for live events; and Bogen Imaging KK, which acquired the businesses of Imaging's two Japanese distributors.
| Business |
Division |
Acq date |
Acq(1) consideration £m
|
Max potential earnout £m
|
Max potential consideration £m
|
Earnout period
|
| 2006 acquisitions |
| Petrol |
Broadcast Systems |
16/01/06 |
1.8
|
1.8
|
3.6
|
06
|
| Bogen Imaging KK |
Image & Staging |
01/06/06 |
0.9
|
-
|
0.9
|
-
|
| ALC Broadcast Ltd |
Broadcast Systems |
31/10/06 |
5.0
|
2.0
|
7.0
|
07-09
|
| Tomcat Global Corp |
Imaging & Staging |
07/11/06 |
7.1
|
3.6
|
10.7
|
07-08
|
| Earnout payments for previous acquisitions |
| Kata (re 2005) |
Imaging & Staging |
31/05/05 |
1.0
|
n/a
|
n/a
|
05-07
|
| Total acquisition cost in 2006 |
15.8
|
n/a
|
n/a
|
|
In addition, in May a minority stake was acquired in Media Numerics Ltd, a company that has developed a digital network product targeted at the live entertainment industry. The planned investment is £1.0 million, with £0.7 million invested in 2006.
Cash flow and net debt
(2) Free cash flow is the cash generated from operations less interest, tax and capital expenditure on property, plant & equipment and capitalised IT costs.
Net debt increased to £18.9 million (2005: £5.4 million) mainly because of the two acquisitions we made towards the end of the year.
Despite higher profits, free cash flow reduced to £10.5 million (2005: £17.3 million) as a result of higher capital expenditure, increased working capital and higher tax payments.
Cash generated from operations was £28.7 million (2005: £29.8 million). Capital expenditure and financial investments totalled £13.9 million (2005: £11.7 million), of which £4.1 million (2005: £5.4 million) related to rental assets, partly financed by the proceeds from rental asset disposals of £1.4 million (2005: £1.2 million).
Whilst working capital increased, as a percentage of revenue (before acquisitions) it was 22.0% (2005: 23.1%) at the year end and averaged 23.1% in 2006 (2005: 25.9%). Inventory increased by £9.8 million to £41.1 million, reflecting higher revenue, the new acquisitions and deliberately increased inventory levels in Imaging and Camera Dynamics in order to reduce delivery lead times. As a result, inventory days increased to 116 (2005: 99 days). Trade receivables were only slightly higher than 2005 at £31.2 million (2005: £30.5 million), despite higher revenue, which lowered debtor days to 51 (2005: 57 days).
Tax paid in 2006 of £5.5 million was significantly greater than 2005 (£1.6 million). 2005 benefited from Italian tax credits arising from the sale of the Alu business in 2003, as well as a £0.7 million UK tax rebate, whereas 2006 payments returned to more normal levels.
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. Some cover was also taken out for the first quarter of 2008.
| Currency millions |
December 2006
|
Average Rate
|
December 2005
|
Average Rate
|
| US Dollars sold for Euros |
| Forward contracts |
$9.6
|
1.23
|
$22.9
|
1.22
|
| Options(3) |
$23.6
|
1.25
|
$17.7
|
1.24
|
| US Dollars sold for Sterling |
| Forward contracts |
$17.3
|
1.85
|
$15.5
|
1.78
|
(3) Includes cylinder options, where the mid-point of range is taken.
The Group does not hedge its foreign currency profits. A proportion of the Group's foreign currency net assets are hedged using normal Group borrowings and forward contracts.
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, £26.3 million (2005: £17.2 million) of the facility was utilised.
The average cost of borrowing for the year was 5.4% (2005: 4.6%) reflecting the worldwide upward trend in interest rates. Net interest cost (consisting of net interest payable and commitment fees) was £1.4 million (2005: £1.3 million). Net interest cover (using operating profit before significant items*) remained high at 18 times (2005: 15 times).
UK pensions At the end of 2003 the Group closed both of its UK defined benefit schemes to new members. Since 2004 a Group personal pension plan has been made available for new employees with Standard Life. In November 2005 the defined benefit schemes were merged. As at 31 December 2006 the number of active members in the merged scheme had reduced by 7% to 192 (2005: 206). Total scheme members are 662 (2005: 662).
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, employers' and employees' contributions were increased. 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.
Following the funding actions set out above, the Group's UK defined benefit pension liabilities under IAS 19 (amended) as at 31 December 2006 were estimated by the Group's actuaries to be £43.5 million (2005: £42.0 million) and the deficit £1.0 million (2005: £3.1 million). The deficit has reduced principally because of an increase in the corporate bond interest rate used to calculate the present value of future liabilities, partially offset by an increase in liabilities arising from an assumption of greater longevity for scheme members. The principal assumptions used for recent valuations are set out below.
| |
2006
|
2005
|
2004
|
| Inflation rate |
3.0%
|
2.8%
|
2.8%
|
| Expected rate of increase in: |
| Salaries |
5.0%
|
4.8%
|
4.8%
|
| Pensions and deferred pensions |
3.0%
|
2.8%
|
2.8%
|
| Discount rate |
5.2%
|
4.8%
|
5.3%
|
| Long term rates of return |
| Equities |
7.8%
|
7.8%
|
7.9%
|
| Bonds |
4.7%
|
4.3%
|
4.8%
|
| Property |
6.2%
|
6.3%
|
6.8%
|
| Longevity |
| Pensioners currently aged 65 |
86/89(4)
|
84/87(4)
|
84/87(4)
|
| Non-pensioners currently aged 45 |
88/91(4)
|
86/89(4)
|
86/89(4)
|
(4) Male/female.
Principal risks and uncertainties
US market Forty eight per cent of the Group's 2006 revenue was from the Americas, principally the USA. This percentage has reduced in recent years, mainly due to the weakness of the US Dollar, but the Group remains very susceptible to any major deterioration in demand for its products and services from US customers. It is difficult to mitigate this risk but the Group is seeking to reduce its dependence on the US by actively widening its sales and distribution activities, particularly into Asia.
Foreign exchange The great majority of the Group's profits is earned in overseas currencies and is therefore subject to translation risk if Sterling strengthens. To mitigate this, a proportion of the Group's foreign currency net assets are hedged using normal Group borrowings and forward contracts. Also, as many of the Group's businesses sell worldwide from various countries of manufacture, so the Group is subject to transaction risk, particularly that of a weaker US Dollar. The Group partially hedges its major foreign exchange receipts by selling currency 12-18 months forward on a rolling basis. In addition the Group seeks to outsource parts, where appropriate, to low-cost countries, which are frequently Dollardenominated.
Broadcast market The Group's two broadcast divisions are at risk from a reduction in the capital expenditure requirements of its broadcast customers and, in the US, their rental requirements. This dependence is changing as broadcasting moves from TV to delivery by other modes such as internet and mobile services. To mitigate this, the Group markets its products and services to all of these producers of broadcast video material, as well as to the religious, corporate and government sectors.
Low-cost competition The Group is at risk from low-cost competitors who may sell similar products at lower prices, particularly for higher volume items such as photographic tripods. While the Group also sources those cheaper products from lower-cost countries, it combats this threat by patenting its technologies wherever possible and taking action against any infringement, continuously innovating its products and employing its significant marketing and distribution capabilities.
* 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.
Alastair Hewgill
Finance Director
Information correct at 16/04/2007