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| Financial Review
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Overview 2006 was a strong year and I am pleased to report that the Group’s results for the year show another significant improvement with revenue, profit before tax, earnings per share, dividends per share and the year end gross cash position all reaching record levels for the third successive year.Revenue of £295.08 million and profit before tax of £30.29 million and have increased 24.7% and 54.1% respectively over the figures achieved in 2005. Basic earnings per share of 102.54p increased 54.5% over 2005. Consequently, it is recommended that the total dividend for the year is increased by 54.1% to 57p per share, giving a dividend cover of 1.8 times. It is particularly pleasing that the year ended with the Group having an excellent gross cash balance of £38.30 million and net funds of £38.24 million. Net assets increased by 20.0% to £66.23 million. Revenue Group revenue increased by 24.7% to a record level of £295.08 million, helped by the first full year of trading by Atlas Ward, following its acquisition in March 2005.Operating Profit The Group's operating profit increased by 50.8% to £29.12 million with operating margins, expressed as a percentage of revenue, continuing to increase to 9.87% from the 8.15% achieved in 2005.These figures continue to incorporate the Group’s two associated companies, Kennedy Watts Partnership Limited and Fabsec Limited, of which the Group owns 25.1% and 25% respectively. The Group's operating profit for the year includes its share of these two companies' results which amounted to a net profit of £10,000 (2005: loss £1,000). Net interest receivable for the Group amounted to £1,168,000 (2005: £349,000), producing a profit before tax of £30.29 million, an increase of 54.1% over the previous year. Margins, at this level, expressed as a percentage of revenue, increased to 10.26% (2005: 8.30%). Taxation The tax charge of £9.37 million represents an effective tax rate of 30.92% compared with 31.23% in the previous year.These effective rates are higher than the prevailing rate of 30% due to the adjustments made in respect of disallowable expenditure incurred during the year. Earnings Per Share Basic earnings per share is at a record level of 102.54p, an increase of 54.5% over the previous year.This calculation is based on the profit after tax of £20.92 million and 20,401,969 shares, being the weighted average number of shares in issue during the year. As there were no share options outstanding at the year end the diluted earnings per share is the same as the basic calculation. Dividend The Board will be recommending a final dividend of 37.0p per share (2005: 24.50p) at the Company’s Annual General Meeting on 7 June 2007 bringing the total dividend for the year to 57.0p per share.This total dividend represents a 54.1% increase over the total dividend of 37.0p per share paid for 2005. This is in line with the basic earnings per share increase and maintains the total dividend cover at 1.8 times earnings, a level at which the Board remains comfortable and at which it remains confident of maintaining in the future. The final dividend will be paid on 18 June 2007 to shareholders on the register on 11 May 2007. The ex-dividend date will be 9 May 2007. Balance Sheet The Group’s balance sheet continues to strengthen with shareholders’ funds increasing by £11.02 million to £66.23 million. This equates to a net asset value per share at 31 December 2006 of 324.6p, compared with 270.6p at the end of 2005.The Group’s balance sheet now has property, plant and equipment totalling £43.60 million. Depreciation charged in the year amounted to £4.24 million. This figure is higher than in previous years due, in part, to the fact that during the year the depreciation rates applied in respect of plant and machinery changed from the reducing balance method to a straight line basis as it is considered more appropriate given the useful economic life of the assets. The effect of this change was to increase depreciation charged in the year by £828,000. We continued to invest heavily in our business with capital expenditure in the year of £13.01 million. This is a particularly high level of annual expenditure for the Group with the total cost of the investments including; production facilities at Severfield-Reeve Structures - £4.82 million, production facilities at Atlas Ward Structures - £5.19 million, mobile cranes for use on sites - £1.02 million and motor vehicles/vans - £1.28 million. Expenditure in 2007 is budgeted to be approximately £6 million. The value of Goodwill on the balance sheet of £6.73 million is primarily the result of the acquisition of the Atlas Ward group of companies in 2005. It is included as an Intangible Fixed Asset and continues to be subject to an annual impairment review under IFRS 3. Given the excellent performance of Atlas Ward in the year no impairment has been considered necessary. Other Intangible Assets on the balance sheet, amounting to £1.61 million, represents the capitalisation of the Group’s costs in the development of a pedestal mounted powered work platform for use on sites in the erection of steel, which we hope to bring into use during 2007. Unlike the rest of the Group, Atlas Ward has a defined benefit pension scheme which, although now closed to new members, had a book value deficit of £6.38 million as at 31 December 2005. At 31 December 2006, as a result of changes made to the assumptions used in calculating pension scheme assets and liabilities, the deficit increased to £7.29 million and is shown as a liability in the Group balance sheet with the movement largely going through the Statement of Recognised Income and Expense as permitted under IFRS. Associated Companies During 2001 the Company acquired a 25% shareholding in Fabsec Limited, a company involved in the development of a bespoke and fire engineered beam made out of plate. This company holds the master intellectual property rights for these and the other Fabsec family of beams the world over. It also carries out marketing promotion and provides technical support. The Group benefits from these functions whilst contributing 25% towards overheads. Fabsec Limited is not to be confused with the Group’s successful and profitable plate and intumescent paint lines at Dalton which produce the Fabsec and fire engineered beams under a perpetual no royalty licence from Fabsec Limited.Investment in Fabsec Limited continued in 2006 by way of licence fees paid of £275,000. Loans outstanding to the Group by Fabsec as at 31 December 2006 amounted to £614,000 (2005: £614,000). However, the Board is of the opinion that there may be an element of doubt over the collection of this loan in the short to medium term future and continues to hold a provision of £543,000 against this debt. Fabsec continues to be involved in technical and market development and the results for the year to 31 December 2006 showed a small loss. The Group's 25% share of this loss amounted to £10,000 (2005: £6,000). The Group also owns a 25.1% shareholding in Kennedy Watts Partnership Ltd, a company involved in CAD/CAM steelwork design. The Group's share of the profit of Kennedy Watts for the year amounted to £20,000 (2005: £5,000) resulting in a net profit arising from the associated companies of £10,000 (2005: loss £1,000). Cash Flow Management of the Group's cash has always been of prime importance to the Board and this remains the case with cash being tightly controlled. It is particularly pleasing, therefore, to report that the Group ended the year with a record positive cash balance of £38.30 million (2005: £30.13 million).During the year £35.49 million was generated from operations. Outflows of cash during the year included dividends paid of £9.08 million, corporation tax paid of £6.34 million and the purchase of property, plant and equipment, net of sale proceeds, of £12.09 million. Borrowings, representing amounts due on hire purchase contracts, will be repaid in full during 2007 and amounted to £0.06 million leaving the Group with a net funds surplus of £38.24 million and, therefore, no gearing. Treasury Group treasury activities are managed and controlled centrally. Risks to assets and potential liabilities to customers, employees and the public continue to be insured. The Group maintains its low risk financial management policy by insuring all significant trade debtors.The treasury function seeks to reduce the Group's exposure to any interest rate, foreign exchange and other financial risks, to ensure that adequate and cost effective funding arrangements are maintained to finance current and planned future activities and to invest cash assets safely and profitably. The Group remains committed to strong financial controls, cash management and appropriate accounting and treasury policies. Summary The Group had a very successful year with revenue, profit before tax, earnings per share and dividends per share once again reaching record levels.Cash generation continued to be very strong where, in spite of significant outgoings on tax, dividends and particularly capital expenditure totalling £28.43 million, the net funds of the Group increased by £8.54 million to £38.24 million. The Group has continued to improve its healthy financial position and is well placed for future growth and cash generation. Peter Davison Finance Director 03 April 2007 |
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