Macfarlane Grp. Regulatory News (MACF)

6 Sep 2005 07:01

Macfarlane Group PLC06 September 2005 6 September 2005 MACFARLANE GROUP RECORDS TRADING PROFIT OF £0.2M IN FIRST HALF OF 2005 The Group trading performance improves by £2.6 million from a trading loss of£2.4 million in 2004 Sales growth of 3.7% from continuing operations in the first six months of 2005 Profit performance broadly in line with expectations for all businesses, with particularly strong improvement in International businesses Sale of Govan property for £2.7 million generated gain of £1.3 million Net debt reduced to £9.1m in the first half of 2005 Expectation to be strongly cash positive from trading activities in second halfof 2005 All businesses have the capacity to deliver further performance improvements Archie Hunter, Chairman of Macfarlane Group PLC today said :- "I am glad to report group trading results for the first half of 2005 in linewith the Board's expectations. The recovery continues. The movement in Group trading profit/(loss) is as follows: Trading result Under IFRS Under UK GAAP £000 £000 Six months to 30 June 2003 (6,982) 2004 (2,352) (2,498) 2005 246 The progress shown is in accord with the Board's plans. Earnings per share inthe first six months amounted to 1.32p. The Board is confident that the Group isheading in the right direction. The improving trading position and asset disposals have had the expectedpositive impact on our cash position. Positive cash flow, from trading plus theproceeds from disposal of the redundant Govan site and the Grantham site inFebruary 2005, reduced bank borrowings by £4.0 million in the first half of 2005and, as a consequence there is a further reduction in net debt as follows: Net debt £000 30 June 2003 24,774 2004 17,973 2005 9,063 The Board anticipates significant net cash generation from trading in the secondhalf of 2005. Trading It has been a difficult market for Packaging Distribution in 2005 so far.Reliable measures of the impact of the economic downturn in the markets in whichwe operate are not easily obtained but certainly an impact there has been. Inthese circumstances it is heartening to report growth in packaging distributionturnover of 2% over the same period last year and that the majority of our 15regional distribution centres are showing operating results improvement over thefirst half of 2004. Some of our RDCs are showing quite exceptional growth andresults improvement. They show what can be achieved and demonstrate significantfurther potential opportunity. We are determined to use our position as marketleader to generate additional profitable growth. Trading result comprises profit before tax from continuing operations and lossfor the period from discontinued operations less gain on disposal of properties. As reported last year, the Labels business has been experiencing price pressuresfrom both customers and suppliers as well as a shortening of order lead times.Against that background a trading result broadly in line with originalexpectations and, in particular, a strong order book as we exit the half-year,are encouraging. Management focus continues to be on maintenance of profitmargins and pursuit of new business opportunities, particularly in thetoiletries, household product and pharmaceutical sectors. Our International operations have performed strongly in the first half of 2005.In the United States, Macfarlane Western Foam has traded ahead of ourexpectations following a strengthening of the management team. In Hungary ourposition has been reinforced by the retention of an important customer andtrading performance has been ahead of our expectations. Both our UK Packaging Manufacturing and Plastics businesses are performing aheadof the same period last year. International Financial Reporting Statements (IFRS) This half yearly statement is the first compiled under the new IFRSrequirements. In the income statement the impact has been to benefit reportedresults by £0.4 million in the six months to 30 June 2005 and by £0.2 million inthe six months to 30 June 2004. The most significant impact is in the balance sheet through the incorporation ofthe deficit on the Group's final salary pension scheme amounting to £17.6million, offset by a deferred tax asset of £5.3 million, resulting in a netdeficit of £12.3 million. It is the incorporation of this deficit that givesrise to need for the capital restructuring, put to shareholders at the last AGM.The object of this restructuring is to prevent the pension deficit impacting onthe Group's ability to pay dividends from profits to its shareholders. The pension scheme deficit does of course represent an actual liability to theGroup. The Board has taken the view that it would be appropriate to take stepsto reduce this liability, without adversely affecting the cash needs of thebusiness or the payment of dividends. The Board has therefore agreed to makeadditional payments to the scheme of £0.7 million per annum for three yearscommencing 2005 to reduce this liability. These additional payments reduce thepension scheme creditor; they are not a charge against profits. Dividends With last year's statement, I reported that as an expression of its confidenceand recognising property gains early in 2005, the Board intended to declare aspecial interim dividend for 2005 of 0.75p per share, subject to completion ofthe capital restructuring referred to above. The restructuring obtainedshareholder approval at the AGM in May and I can now report that the necessaryCourt Process has been satisfactorily concluded. Accordingly this dividend willbe paid on Tuesday 27 September 2005 to those shareholders on the register atFriday 16 September 2005. No further dividend will be declared in respect of 2005 and as to the future,dividends will be determined by the profits we earn and the cash generated. Future prospects The Board's determination was that the Group should return to profitable growthin 2005 and that the scene should be set for further significant profitimprovement beyond that. Nothing has changed the Board's expectations in thisregard. The recovery in performance is attributable in large part to Peter Atkinson'sleadership. The response of his team, some of it quite exceptional, is very muchappreciated by the Board." Further information: Archie S. Hunter Chairman 0141 333 9666 Peter D. Atkinson Chief Executive 0141 333 9666 John Love Finance Director 0141 333 9666 The interim report will be sent to shareholders on 16 September 2005 and beavailable to members of the public at the Company's Registered Office, 21 NewtonPlace, Glasgow G3 7PY from 19 September 2005. Trading performance Packaging Distribution Macfarlane's Packaging Distribution business is the leading UK distributor ofpackaging materials, supplying a wide range of customers through 15 RegionalDistribution Centres ("RDCs"). We enable customers to cost effectively packagetheir products through the provision of a comprehensive product range, singlesource supply, just-in-time delivery and tailored stock management programmes. The results for the Packaging Distribution business in the first half of 2005have seen year-on-year sales growth of 2%, consistent levels of customer servicein excess of 90% as measured by On-Time-In-Full ("OTIF") deliveries and thestabilisation of the customer base. We have also successfully implemented afurther series of cost reduction measures, which have reduced the overhead tosales ratio by 2 percentage points in the first half of the year. Our IT systemis increasingly being used to streamline transaction processing with both ourcustomer and supplier base. Considerable duplication in the internal supply chain has been eliminated in theyear to date, supported by our key suppliers. Staff turnover levels have reducedsignificantly and are now more in line with the average for service industries.The headcount in the business has stabilised at 410. The priority in the remainder of 2005 is to accelerate the current level ofsales momentum, whilst at the same time converting additional opportunities tofurther reduce the cost base. Labels & Plastics Macfarlane Group's Labels and Plastic injection-moulding businesses operate fromlocations in the UK, Ireland and Sweden and provide high quality self-adhesivelabels and plastic closures primarily for a range of major internationalcustomers in the FMCG sector. Both businesses provide innovative solutions witha high design component and strong emphasis on quality and service delivery. The first half of 2005 has seen the Labels business produce a creditableperformance despite pressure from customers to reduce prices and delivery times.Management has taken action to reduce costs and increase capacity in order tomeet customer requirements and maintain performance. A significant new customerfor the ReSeal-It product will provide an opportunity to grow label sales on theContinent. The Plastics business achieved significantly increased volumes primarily due tosuccessfully securing a major new customer. The business reduced its lossessignificantly, helped by the reduction in raw material prices and control ofoverheads and was strongly cash generative in the first six months. Furtherprogress is expected in the second half of the year. Packaging Manufacture UK and Overseas Macfarlane's Packaging Manufacturing business currently operates from two UKsites at Grantham and Westbury. The business manufactures a range of customdesigned packaging solutions to improve product storage, protection andpresentation. Customers benefit from the ability to cost effectively source lowvolume, custom designed packaging solutions through flexible design and assemblycapability. Progress in improving the performance of this business has been achieved in thefirst half of 2005 and there are more actions planned in the second half tocontinue this improvement. Our International operations comprise packaging manufacturing and distributionoperations in the US and in Hungary, which are strategically positioned toservice key customers. The businesses provide tailored packaging solutions tokey international customers using Macfarlane design and assembly know-how. Thesebusinesses also enhance our relationships with key global strategic suppliers. Our US operations have achieved strong sales growth in the first half of theyear, with a number of significant new business wins. The new management teamhas addressed a number of historic issues and is now achieving good levels ofprofitability at both US sites. Our operation in Hungary again traded stronglyin the first half of 2005, with profits ahead of those achieved last year and amajor customer contract retained. Reporting under International Financial Reporting Standards (IFRS) For the first time our results are reported in accordance with InternationalFinancial Reporting Standards. Previously the Group reported under UK GenerallyAccepted Accounting Principles (UK GAAP). This commentary highlights the keychanges that have arisen due to the transition from reporting under UK GAAP toreporting under IFRS. The Group's date of transition to IFRS is 1 January 2004,which is the beginning of the comparative period for the 2005 financial year.Therefore the opening balance for IFRS purposes is that reported at 31 December2003 as amended for changes due to IFRS. This interim financial report is the first to be prepared under IFRS. Thecomparative figures are presented on the same basis and are therefore restatedfrom those previously reported under UK GAAP. To help understand the impact ofthe transition, reconciliations have been produced to show the changes made tostatements previously reported under UK GAAP in arriving at the equivalentstatements under IFRS. The following five reconciliations are included in note12 to this report. (i) Balance sheet as at 1 January 2004.(ii) Income statement for the year to 31 December 2004.(iii) Balance sheet as at 31 December 2004.(iv) Income statement for the six months to 30 June 2004.(v) Balance sheet as at 30 June 2004. The income statement for the six months ended 30 June 2005 and the balance sheetat that date are reported under IFRS. As they have not previously been reportedunder UK GAAP, no reconciliation to IFRS is provided. Key accounting policy changes are included within this report. A full set ofIFRS accounting policies will be published in the Group's report and accountsfor the year to 31 December 2005. 31 December 2004 The net effect of presenting the December 2004 full year financial statementsunder IFRS rather than UK GAAP is to increase the profit before tax fromcontinuing operations previously reported from £1.9 million to £2.4 million asset out in the reconciliation in Note 12 (ii). The increase arises from addingback goodwill amortisation of £0.9 million offset by charges for share optionsand increased pension scheme charges of £0.4 million. Net assets at 31 December2004 reduced from £38.0 million to £26.6 million as set out in thereconciliation in Note 12 (iii). This reduction is a result of absorbing thepension scheme deficit of £17.4 million on to the balance sheet with offsets fordeferred tax on the pension scheme deficit, adding back goodwill and shareoption charges of £6.0 million. 30 June 2004 The comparative information for June 2004 has also been restated for IFRS,resulting in an increase in the profit before tax from continuing operationspreviously reported from £2.2 million to £2.3 million as set out in thereconciliation in Note 12 (iv). The increase arises from adding back goodwillamortisation of £0.5 million offset by charges for share options, holiday payand increased pension scheme charges of £0.4 million. Net assets at 30 June 2004reduced from £39.9 million to £28.7 million as set out in the reconciliation inNote 12 (v). This reduction is a result of absorbing the pension scheme deficitof £16.4 million on to the balance sheet with offsets for deferred tax on thepension scheme deficit, adding back goodwill and share option and holiday paycharges of £5.2 million. The changes for both periods have no impact on the cash flows previouslyreported. Bringing the pension scheme deficit on to the balance sheet eliminateddistributable reserves. As a result a capital restructuring process wasundertaken, which concluded satisfactorily in September 2005, to have the sharepremium account and capital redemption reserve cancelled and effectivelyreinstated as distributable reserves. The effect of the restructuring was tocreate distributable reserves in the parent company and to prevent anyconstraint on the Group's ability to pay dividends in future. INDEPENDENT REVIEW REPORT TO MACFARLANE GROUP PLC Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2005, which comprises the consolidated incomestatement, the consolidated statement of recognised income and expense, theconsolidated balance sheet, the consolidated cash flow statement and relatednotes 1 to 12. We have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the company in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone other thanthe company, for our review work, for this report, or for the conclusions wehave formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures are consistent withthose applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. International Financial Reporting Standards As disclosed in note 2, the next annual financial statements of the Group willbe prepared in accordance with International Financial Reporting Standards asadopted for use in the EU. Accordingly, the interim report has been prepared inaccordance with the recognition and measurement criteria of IFRS and thedisclosure requirements of the Listing Rules. The accounting policies areconsistent with those that the directors intend to use in the annual financialstatements. Review work performed We conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2005. Deloitte & Touche LLPChartered AccountantsGlasgow6 September 2005 MACFARLANE GROUP PLC CONSOLIDATED INCOME STATEMENT (UNAUDITED) FOR THE SIX MONTHS ENDED 30 JUNE 2005 Six months to Six months to Year to 31 30 June 2005 30 June December 2004 2004 (As restated (As restated for IFRS) for IFRS) Note £000 £000 £000Continuing operationsRevenue 63,941 61,653 126,075Cost of sales (42,520) (40,999) (84,237) --------- -------- ---------Gross profit 21,421 20,654 41,838Distributionexpenses (3,174) (3,524) (6,927)Administrativeexpenses (17,454) (17,770) (34,758)Otheroperatingincome 47 5 73 --------- -------- ---------Profit/(loss)before gain ondisposal ofproperties 840 (635) 226Gain ondisposal ofproperties 3 1,335 3,845 3,845 --------- -------- ---------Profit fromoperations 2,175 3,210 4,071Investmentincome 22 29 94Finance costs 4 (616) (922) (1,772) --------- -------- ---------Profit beforetax 1,581 2,317 2,393Tax 5 (96) 5 26 --------- -------- ---------Profit for theperiod fromcontinuingoperations 8 1,485 2,322 2,419 Discontinuedoperations 7Loss for theperiod fromdiscontinuedoperations - (824) (1,255)Loss ondisposal ofdiscontinuedoperations - - (1,400) --------- -------- ---------Profit/(loss)for the period 8 1,485 1,498 (236) ========= ======== =========Earnings/(loss) per ordinaryshare of 25p 8From continuingoperationsBasic 1.32p 2.06p 2.15p ========= ======== =========Diluted 1.31p 2.06p 2.15p ========= ======== ========= From continuing anddiscontinued operationsBasic 1.32p 1.33p (0.21p) ========= ======== =========Diluted 1.31p 1.33p (0.21p) ========= ======== ========= MACFARLANE GROUP PLC CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE (UNAUDITED) SIX MONTHS ENDED 30 JUNE 2005 Six months to Six months to Year to 31 30 June 2005 30 June December 2004 2004 (As restated (As restated for IFRS) for IFRS) Note £000 £000 £000 Exchangedifference ontranslation offoreignoperations (341) (472) (180)Actuarial(losses)/gainson definedbenefitpensionschemes 10 (150) 1,128 222Tax on itemstaken directlyto equity 45 (338) (67) --------- -------- ---------Net(loss)/profitrecogniseddirectly inequity (446) 318 (25)Profit/(loss)for the period 1,485 1,498 (236) --------- -------- ---------Totalrecognisedincome andexpense forthe period 1,039 1,816 (261) ========= ======== ========= MACFARLANE GROUP PLC CONSOLIDATED BALANCE SHEET AT 30 JUNE 2005 (UNAUDITED) As at 31 As at As at December 30 June 30 June 2004 2005 2004 (As restated (As restated for IFRS) for IFRS)Non-current assets Note £000 £000 £000Goodwill 17,054 17,054 17,054Property, plant and equipment 15,943 18,699 17,601Investment property 1,701 1,701 1,701Other receivables 867 3,463 2,242Deferred tax assets 10 5,272 4,905 5,227 --------- --------- --------Total non-current assets 40,837 45,822 43,825 --------- --------- --------Current assetsInventories 8,407 9,850 8,689Trade and other receivables 29,205 30,433 28,611Cash and cash equivalents 1,798 1,951 2,018 --------- --------- --------Total current assets 39,410 42,234 39,318Non current assets classified asheld for sale - 3,580 3,580 --------- --------- -------- 39,410 45,814 42,898 --------- --------- -------- --------- --------- --------Total assets 80,247 91,636 86,723 ========= ========= ========Current liabilitiesTrade and other payables 23,266 26,441 26,777Tax liabilities 653 0 595Obligations under finance leases 497 446 479Bank overdrafts and loans 10,244 19,042 14,226 --------- --------- --------Total current liabilities 34,660 45,929 42,077 --------- --------- --------Net current assets/(liabilities) 4,750 (3,695) (2,759) --------- --------- --------Non current liabilitiesRetirement benefit obligations 10 17,574 16,350 17,424Deferred tax liabilities 213 203 214Obligations under finance leases 120 436 367 --------- --------- --------Total non-current liabilities 17,907 16,989 18,005 --------- --------- -------- --------- --------- --------Total liabilities 52,567 62,918 60,082 ========= ========= ======== --------- --------- --------Net assets 27,680 28,718 26,641 ========= ========= ========EquityShare capital 28,755 28,755 28,755Capital redemption reserve 2,952 2,952 2,952Share premium 7,547 7,547 7,547Revaluation reserve 274 275 274Own shares held by employee share trust (1,406) (1,406) (1,406)Translation reserve (521) (472) (180)Retained earnings (9,921) (8,933) (11,301) --------- --------- --------Total equity 11 27,680 28,718 26,641 ========= ========= ======== MACFARLANE GROUP PLC CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED) FOR THE SIX MONTHS ENDED 30 JUNE 2005 Six months to Six months to Year to 31 30 June 30 June December Note 2005 2004 2004 £000 £000 £000Net cash fromoperatingactivities 9 (1,090) (2,933) 2,170 -------- --------- ---------Investing activitiesInterestreceived 13 39 93Proceeds ondisposal ofproperty,plant andequipment 5,122 4,870 6,563Purchases ofproperty,plant andequipment (54) (2,194) (3,925) -------- --------- ---------Net cash frominvestingactivities 5,081 2,715 2,731 -------- --------- ---------Financing activitiesDividends paid - (844) (844)Repayments ofobligationsunder financeleases (229) (233) (469)(Decrease)/increase in bankoverdrafts (3,982) 1,220 (3,596) -------- --------- ---------Net cash (usedin)/fromfinancingactivities (4,211) 143 (4,909) -------- --------- ---------Net decreasein cash andcashequivalents (220) (75) (8) Cash and cashequivalents atbeginning ofperiod 2,018 2,026 2,026 -------- --------- ---------Cash and cashequivalents atend of period 1,798 1,951 2,018 ======== ========= ========= MACFARLANE GROUP PLC SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE CONSOLIDATED ACCOUNTS (UNAUDITED) 1. General information The information for the year ended 31 December 2004 does not constitutestatutory accounts as defined in Section 240 of the Companies Act 1985. A copyof the statutory accounts for that year has been delivered to the Registrar ofCompanies. The auditors' report on those accounts was unqualified pursuant toSection 235 of the Companies Act 1985 and did not contain a statement undersub-section 237 of that Act. 2. Summary of accounting policies The following accounting policies have been applied consistently for items whichare considered to be material in relation to the financial statements. (a) Basis of preparation These interim financial statements for the six months ended 30 June 2005 havebeen prepared in accordance with International Financial Reporting Standards(IFRS) for the first time, and are covered by IFRS1, "First-time Adoption ofIFRS" as they are part of the period covered by the group's first IFRS financialstatements for the year ending 31 December 2005. These interim financialstatements have been prepared in accordance with those IFRS standards and IFRICinterpretations issued and effective, or issued and early adopted at the time ofpreparing these statements. The IFRS standards and IFRIC interpretations thatwill be applicable at 31 December 2005, including those that will be applicableon an optional basis, are not known with certainty at the time of preparingthese interim financial statements. The policies set out below have been consistently applied to all the periodspresented, and comparative figures in respect of 2004 have been restated toreflect IFRS adjustments. Disclosures required by IFRS 1 concerning thetransition from UK GAAP to IFRS for the comparative prior period are given innote 12. The Group has opted not to prepare the Interim Financial Information under IAS34, "Interim Financial Reporting". The interim financial statements have beenprepared on the historical cost basis as modified by the revaluation of certaingroup properties. (b) Application of IFRS 1 The Group's financial statements for the year ended 31 December 2005 will be thefirst financial statements to be prepared under IFRS. These interim financialstatements have been prepared as disclosed in this note including the optionsset out in IFRS 1. Under the first time adoption provisions set out in IFRS 1, the Group isrequired to establish its IFRS accounting policies as at 1 January 2005 andapply these retrospectively in the determination of prior period comparativesfrom 1 January 2004, the date of transition. There are a number of exemptionsavailable to this principle and the most significant to the group are set outbelow: IFRS 2. "Share Based Payments" The Group has elected to apply this standard to all share-based awards grantedsince 7 November 2002 but that had not vested at 1 January 2005. IFRS 3. "Business Combinations" The Group has elected not to restate business combinations prior to the date oftransition. IAS 16. "Property, Plant & Equipment" The Group has elected to retain the existing base cost of its property, plantand equipment and not to revalue to fair value. IAS 19. "Employee Benefits" The Group has elected to recognise all cumulative actuarial gains and losses inrelation to the employee benefit schemes at the date of transition. Insubsequent periods all actuarial gains and losses will be recognised in full inthe period in which they occur in the statement of recognised income andexpense. IAS 21. "The Effects of Changes in Foreign Exchange Rates" The Group has elected to deem that cumulative exchange differences are nil atthe date of transition. (c) Basis of consolidation The consolidated income statement and balance sheet include the financialstatements of the parent company and all its subsidiaries (all of which arewholly owned) made up to the end of the financial period. Transactions betweengroup companies are eliminated on consolidation. The results of subsidiariesacquired or disposed of during the period are included in the consolidatedincome statement from the effective date of acquisition or disposal, asappropriate. (d) Goodwill Goodwill, representing the excess of the cost of acquisition over the net fairvalues of the indentifiable assets and liabilities of the acquired subsidiary,was written off to reserves in respect of acquisitions up to 31 December 1997.From 1 January 1998, goodwill is initially recognised as an non-current asset atamortised carrying value under GAAP at the transition date. Goodwill isallocated to cash generating units for the purpose of impairment testing. Thecarrying value of goodwill is tested annually for impairment and subsequentlycarried at carrying value at the transition date less any accumulated impairmentlosses. The consolidated profit or loss on disposal of a subsidiary is the differencebetween the net proceeds of sale and the Group's share of the subsidiary's netassets together with any attributable goodwill originally written off onacquisition or the carrying value of any goodwill at the date of disposal. (e) Non-current assets held for sale Non-current assets classified as held for sale are measured at the lower ofcarrying amount and fair value less costs to sell. (f) Revenue recognition Revenue is measured at the fair value of the consideration received orreceivable and represents amounts receivable for goods and services provided tothird parties in the normal course of business, net of discounts, VAT and othersales related taxes. Sales of goods are recognised when goods are delivered andtitle has passed. (g) Leasing Leases are classed as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the lessee. All otherleases are classified as operating leases. Rentals payable under operating leases are charged to profit or loss on astraight-line basis over the term of the relevant lease. The cost of assets heldunder finance leases is included in tangible assets and depreciation provided inaccordance with the Group's accounting policy for the class of asset concerned.Interest costs are charged over the lease term and future obligations includedin creditors. (h) Foreign currencies The financial statements of each subsidiary are presented in the currency of theprimary economic environment in which the business operates (its functionalcurrency). For the purpose of the Group financial statements, the results andthe financial position of each business are expressed in sterling, being theGroup's functional and presentation currency. Exchange differences arising onthe settlement and retranslation of monetary items on an ongoing basis areincluded in the profit or loss for the period. For the purposes of preparing the Group's financial statements, the assets andliabilities denominated in foreign currencies and financial statements offoreign subsidiaries are translated into sterling at the rates of exchangeprevailing on the balance sheet date. Exchange differences arising in theconsolidated accounts on the retranslation at closing rates of the Group's netinvestments in foreign subsidiary companies and on foreign currency borrowingsto the extent that they hedge the Group's investment in such operations arerecorded as movements on the Group's translation reserve and reported in thestatement of recognised income and expense. Such translation differences arerecognised in the profit or loss in the period in which the foreign business isdisposed of. (i) Retirement benefit costs Payments made to defined contribution retirement benefit schemes are charged asan expense as they fall due. For defined benefit retirement benefit schemes, thecost of providing benefits is determined using the Projected Unit Credit Method,with actuarial valuations being carried out triennially and updated at eachbalance sheet date. Actuarial gains and losses are recognised in full in theperiod in which they occur in the statement of recognised income and expense. Past service cost is recognised immediately to the extent that benefits arealready vested and otherwise is amortised on a straight-line basis over theaverage period until the benefits become vested. The retirement benefit obligation recognised in the balance sheet represents thepresent value of the defined benefit obligation as adjusted for unrecognisedpast service cost, and as reduced by the fair value of the scheme assets. Theobligations are measured on an actuarial basis and discounted at a rateequivalent to the current rate of return on a high quality corporate bond ofequivalent currency and term to the scheme liabilities.(j) Share-based payments The Group has applied the requirements of IFRS2 "Share-Based Payments" and inaccordance with the transitional provisions IFRS2 has been applied to all grantsof equity instruments after 7 November 2002. Equity settled share based payments are measured at fair value at the date ofthe grant. The fair value determined at the grant date of the equity-settledshare based payments is expensed as an employee benefits expense on astraight-line basis over the vesting period, based on the Group's estimate ofshares that will eventually vest. The fair value is determined by the use of abinomial model. (k) Taxation The tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on the taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. The carrying value of deferred tax assets is reviewed at each balance sheet dateand reduced to the extent that it is no longer probable that sufficient taxableprofits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. Deferred tax assets and liabilities are not discounted. (l) Property, plant and equipment Property, plant and equipment are stated at cost to the Group except in the caseof certain properties, which are stated at valuations by professional valuers.The Group adopted the transitional provisions of FRS 15 in 2002 and has frozenthe valuations at modified historic cost. No depreciation is provided on land.Depreciation is charged so as to write off the cost or valuation of the assets,less estimated residual values, by equal annual instalments over their estimateduseful lives. The rates of depreciation vary between 2% - 5% per annum onbuildings and 7% - 33% per annum on plant, vehicles and fittings. (m) Investment properties Investment properties, which are properties held to earn rentals and/or capitalappreciation, are stated at cost at the balance sheet date. (n) Inventories Inventories are consistently valued at the lower of cost and net realisablevalue. Such cost is determined by average cost and is stated less any provisionsrequired for obsolescence. In the case of work in progress and finished goods,cost comprises direct cost and attributable overheads. Net realisable value isbased on estimated selling price, less further costs expected to be incurred tocompletion and disposal. (o) Financial instruments (i) Trade receivables do not carry interest and are stated attheir nominal value as reduced by appropriate allowances for estimatedirrecoverable amounts.(ii) Interest-bearing bank overdrafts are recorded at theproceeds received, net of direct issue costs.(iii) Trade payables are not interest bearing and are stated attheir nominal value. 3. Trading profit/(loss) Six months to Six Months to Year to 31 30 June 30 June December 2004 2005 2004 (As restated (as restated for IFRS) for IFRS) £000 £000 £000Profit beforetax fromcontinuingoperations 1,581 2,317 2,393Loss for theperiod fromdiscontinuedoperations - (824) (2,655)Gain ondisposal ofproperties(see below) (1,335) (3,845) (3,845) -------- -------- --------Tradingprofit/(loss) 246 (2,352) (4,107) ======== ======== ======== Two properties were sold in February 2005 for a combined consideration of £4.6million. On 4 February 2005, the Group sold its vacant premises at Govan nearGlasgow for a consideration after attributable expenses of £2.7 million. Thedisposal gave rise to a gain of £1.3 million. On the same date, the Groupdisposed of a six-bay distribution site in Grantham, with the company, as partof the disposal, taking a lease for the two bays from which its GranthamDistribution business operates. Sale proceeds from the Grantham site of £1.9million after attributable expenses equated to book value. During the first halfof 2004, the Group sold its vacant premises in Braehead near Glasgow at a gainof £3.8 million. 4. Finance costs Six months to Six Months to Year to 31 30 June 30 June December 2004 2005 2004 (As restated (as restated for IFRS) for IFRS) £000 £000 £000Interest onbank loans andoverdrafts (367) (623) (1,183)Interest onobligationsunder financeleases (26) (41) (72)Interest costof pensionschemeliabilities (1,371) (1,367) (2,734) -------- -------- --------Total interestexpense (1,764) (2,031) (3,989)Expectedreturn onpension schemeassets 1,148 1,109 2,217 -------- -------- -------- (616) (922) (1,772) ======== ======== ======== 5. Taxation Six months to Six Months to Year to 31 30 June 30 June December 2004 2005 2004 (As restated (as restated for IFRS) for IFRS)Current tax £000 £000 £000UK corporation taxOverseastaxation (96) (45) (99)Prior year - - 24 -------- -------- --------Current tax (96) (45) (75)Deferred tax - 50 101 -------- -------- --------Total (96) 5 26 ======== ======== ======== Corporation tax has been provided for the period to 30 June 2005, reflecting theexpected tax rate for the full year on overseas earnings. No tax has beenprovided on the UK results, reflecting the expected tax rate for the full year. 6. Dividends Six months to Six Months to Year to 31 30 June 30 June December 2004 2005 2004 £000 £000 £000Amounts recognised as distributionsto equity holders in the period Special interim dividend in respect of the year ended 31December 2004 - 844 844 ======== ======== ======== Dividends are not payable on shares held in the employee share trust. 7. Discontinued operations The directors of the Company's subsidiary Tom Brands Electrical Services Limitedpetitioned for the appointment of a provisional liquidator on 26 October 2004 torealise the assets of the business. An exceptional cost of £1.4 million wasincurred in the second half of 2004 as a result of this exit. The tradingactivities of the Brands business have been disclosed as discontinued activitiesin these financial statements and the relevant information for the comparativeperiods is as follows:- Six Months to Year to 31 30 June December 2004 2004 £000 £000 Revenue 869 1,295Cost of sales (416) (534) -------- --------Gross profit 453 761Net expenses (1,277) (2,016) -------- --------Pre and post-tax loss from discontinuedoperations (824) (1,255) ======== ======== Cash outflows in respect of the discontinued operations for operating activitiesamounted to £nil for the six months ended 30 June 2005, £730,000 for the sixmonths ended 30 June 2004 and £1,156,000 for the year ended 31 December 2004.There were no cash flows in respect of investing and financing activities forthese respective periods. 8. Earnings/(loss) per share Six months to Six Months to Year to 31 30 June 30 June December 2004 2005 2004 (As restated (as restated for IFRS) for IFRS) £000 £000 £000EarningsEarnings from continuingoperations for the purposesof earnings per share being netprofit attributable to equityholders of the parent 1,485 2,322 2,419 -------- -------- --------Earnings from continuing anddiscontinued operations forthe purposes of earnings per sharebeing net profit attributable to equityholders of the parent 1,485 1,498 (236) -------- -------- --------Weighted average number of ordinaryshares in issue '000 115,019 115,019 115,019Own shares in Employee Share OwnershipTrusts '000 (2,491) (2,491) (2,491) -------- -------- --------Weighted average number of shares inissue for the 112,528 112,528 112,528purposes of basic earnings per share'000Effect of dilutive potential ordinaryshares due to share options 620 26 69 -------- -------- --------Weighted average numberof shares in issue for the purposes of diluted earnings pershare '000 113,148 112,554 112,597 ======== ======== ======== 9. Notes to the cash flow Six months to Six Months Year to 31statement 30 June to 30 June December 2005 2004 2004 £000 £000 £000Profit from operations Continuing operations 2,175 3,210 4,071Discontinued operations - (824) (1,255) -------- -------- --------Profit from operations 2,175 2,386 2,816Adjustments for:Depreciation of property, plant andequipment 1,521 1,658 3,407Gain on disposal of property,plant and equipment (1,382) (3,968) (3,911) -------- -------- --------Operating cash flows before movements in working capital 2,314 76 2,312 Decrease in inventories 282 69 1,205Decrease/(increase) in receivables 788 (5,194) (437)(Decrease)/increase in payables (3,891) 2,985 36 -------- -------- --------Cash generated by operations (507) (2,064) 3,116Income taxes (paid)/received (38) (84) 744Interest paid (545) (785) (1,690) -------- -------- --------Net cash from operating activities (1,090) (2,933) 2,170 ======== ======== ======== Cash and cash equivalents (which are presented as a single class of assets onthe face of the balance sheet) comprise cash at bank and other short-term highlyliquid investments with a maturity of three months or less. Six months to Six Months Year to 31 30 June to 30 June December 2005 2004 2004Movement in net debt £000 £000 £000 (Decrease) in cash and cashequivalents in the period (220) (75) (8)Decrease/(increase) in bank overdrafts 3,982 (1,220) 3,596Cash flows from debt and lease financing 229 233 469Loan notes issue in the period - - (200) -------- -------- --------Movement in net debt in the year 3,991 (1,062) 3,857Opening net debt (13,054) (16,911) (16,911) -------- -------- --------Closing net debt (9,063) (17,973) (13,054) ======== ======== ======== Net debt comprises:-Cash and cash equivalents 1,798 1,951 2,018Bank overdrafts and loans (10,244) (19,042) (14,226)Obligations under finance leases (617) (882) (846) -------- -------- --------Closing net debt (9,063) (17,973) (13,054) ======== ======== ========10. Pension scheme creditor The figures below have been based on the provisional results of the triennialactuarial valuation as at 1 May 2005, updated to 30 June 2005. The figures for30 June 2004 and 31 December 2004 were based on an actuarial valuation at 1 May2002 updated to the respective period ends. The assets in the scheme, the netliability position of the scheme as calculated under IAS 19 and the principalassumptions were: 30 June 30 June 31 December 2005 2004 2004 £000 £000 £000 Fair value of assets 37,294 33,056 35,121Present value of scheme liabilities (54,868) (49,406) (52,545) -------- -------- ---------Pension scheme deficit (17,574) (16,350) (17,424)Deferred tax asset 5,272 4,905 5,227 Pension scheme deficit net of relateddeferred tax asset (12,302) (11,445) (12,197) ======== ======== ========= The scheme's liabilities were calculated on the following bases as requiredunder IAS 19: Assumptions 30 June 2005 30 June 2004 31 December 2004 Discount rate 5.00% 5.75% 5.25%Rate of increase in salaries 2.50% 4.25% 2.75%Rate of increase in pensions in payment 3% or 5% 3% or 5% 3% or 5% for fixed for fixed for fixed increases increases increases or 2.75% for or 2.75% for or 2.75% for LPI LPI LPIInflation assumption 2.50% 3.00% 2.75% Six months to Six Months to Year to 31 30 June 30 June December 2005 2004 2004 (As (As restated restated for for IFRS) IFRS)Analysis of amounts charged inadministrative expenses £000 £000 £000 Current service costs 152 219 438 ======== ======== ========Analysis of amount charged to netfinance costsExpected return on pension schemeassets 1,148 1,109 2,217Interest cost of pension schemeliabilities (1,371) (1,367) (2,734) -------- -------- --------Net cost (223) (258) (517) ======== ======== ========Analysis of the actuarial(loss)/gain shown in thestatement of recognised