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| 2007 Financial Review | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Profit before tax A reconciliation of adjusted profit before tax from continuing operations to total reported profit before tax is shown below. The main features are:
The results from continuing operations in 2006/07 include only two months of post-acquisition revenue, £3.0 million, and adjusted operating profit, £0.4 million, from Levolux and therefore do not yet reflect the full year run-rate of revenues and profits from the group's continuing operations. Income statement summary and reconciliation of adjusted profit before tax
Tax The underlying group tax rate remains consistent with the prior year at approximately 32%, slightly above the statutory rate of 30%, due to routine expenditure disallowable for tax purposes where Alumasc takes a prudent stance in estimating the level of disallowances in preparing the estimated tax charge in the accounts. After property disposal gains and discontinued activities, the group's overall tax rate reduced to 30.0% (2006: 30.5%), mainly due to the higher profits from property disposals in 2007, which are tax-free due to brought forward capital losses, and adjustments to the deferred tax charge partly relating to the forthcoming reduction in the UK corporation tax rate to 28%. The group's cash tax charge for 2007 is significantly lower than the overall tax rate due to capital allowances exceeding depreciation, pension payments exceeding the pension expense, and the timing of payments, which in 2007 benefited from the lower level of profitability in 2006. The benefit of the two percentage point reduction in the corporation tax rates announced in the 2007 Budget, effective in the 2008/09 tax year, is expected to be offset in cash tax terms by less favourable capital allowances. As a consequence, Alumasc anticipates that the group's underlying cash tax rate will increase marginally next year. In overall rate terms, the 2007 Budget changes are likely to result in the group's effective underlying tax rate on continuing activities reducing to around 30% from the current 32%. Earnings per share Basic earnings per share increased by almost 76% to 19.5 pence (2006:11.1 pence), a greater increase than the growth in total profit before tax because of the lower overall group tax rate. Adjusted earnings per share from continuing activities increased by 3.6% to 14.5 pence. Dividends The Board has proposed a final dividend of 6.6 pence per share (2006: 6.3 pence), an increase of 4.8%, giving a total dividend for the year of 9.7 pence per share (2006: 9.3 pence) payable on 31 October 2007 to shareholders on the register at 5 October 2007. The dividend is covered two times by earnings. Property disposals The total gain in the year arising from property disposals was a net £0.6 million (2005/06: £0.2 million), comprising the sale in April of a disused industrial property in Walsall for net proceeds of £2.3 million at a profit of £1.0 million; and a £0.4m impairment charge taken on the former Copal warehouse in Birmingham following agreement reached after the year end to sell the property for £0.7 million. Capital structure and financing The group financed the £13.5 million acquisition of Levolux (excluding cash acquired) with £12.3 million of debt and £1.2 million of new share capital. By funding the acquisition mostly with borrowings the group has achieved a more efficient overall capital structure and lowered the weighted average group cost of capital, now estimated to be in the range 8 - 9%. Net borrowings at 30 June 2007 were £12.9 million (2006: £3.4 million). Interest cover for the 2007 year was 10 times (2006 16 times), and net debt/EBITDA 1 at 30 June 2006 was 0.8 times. Gearing at 30 June 2007 was 40% (2006: 14%). In conjunction with the acquisition of Levolux, the group improved the quality and term of its debt financing by entering into a committed 5-year, £15 million revolving credit facility. The group has the option to cancel and repay elements of this facility at short notice should it wish to do so. In addition, the group retains some £19 million of overdraft facilities to cover working capital and other corporate needs and therefore has total debt financing facilities available of £34 million. The revolving credit facility is unsecured but subject to interest cover being maintained at above three times and net debt/EBITDA being below three times. As can be seen from the previous paragraph, the group operated well within these covenant limits. In order to manage the additional interest rate risk arising on the increased levels of debt, the group has entered into interest rate swap and cap transactions to hedge £10 million of group borrowings, with the objective of ensuring that between a half and two-thirds of net debt at any time is protected against rising interest rates. These transactions become effective when LIBOR is above 6%. The group's overall pre-tax cost of debt finance at current interest rates is just over 7%. The net interest charge on borrowings for the year was £811,000 (2006: £546,000), with the increase explained mainly by the increased levels of debt for the final two months of the year following the acquisition of Levolux and steadily increasing interest rates during the year as a whole. Capital invested and return on investment The group's average capital invested in the year increased to £51.1 million largely due to the acquisition of Levolux. Post-tax return on average capital invested improved from 13.0% in 2006 to 13.9% in 2007 2 . Shareholders' funds and return on shareholders' funds Shareholders' funds grew from £24.3 million at 30 June 2006 to £32.2 million at 30 June 2007, due to the retained profit for the year of £3.6 million, post-tax actuarial gains on defined benefit pension schemes of £2.9 million, new shares issued with the acquisition of Levolux, £1.2 million and other movements of £0.2 million. Post-tax return on average shareholders' funds improved from 22.8% in 2006 to 25.0% in 2007 2 . Summarised cash flow statement
Cash flow, working capital and capital expenditure A summary of the group cash flow statement is given above. EBITDA grew from £10.3 million in the prior year to £15.3 million, but conversion of these earnings into cash was restricted due to a £3.7 million increase in working capital requirements from continuing operations. A number of factors explain this increase, such as the introduction of new projects for industrial customers at Alumasc Precision (including investment in tooling not yet fully recovered), longer working capital cycles caused by increased levels of international business (imports and exports), and acceptance of settlement discounts offered by suppliers where economically attractive. Efficient use of working capital and conversion of profit into cash is a key management focus throughout the group. The increase in working capital, some of which is expected to reverse in the 2008 financial year, restricted the overall free cash inflow for the year to £0.1 million (2006: outflow of £3.7 million), after lower capital expenditure of £3.0 million (2006: £5.3 million). The lower level of capital expenditure in 2007 was largely attributable to the timing of capital projects. All major capital investment requests from operating management teams were approved. The group's principal capital investments during the year related to capacity enhancements in the Building Products division; and cost efficiency, health and safety, and general asset replacement projects in both the Building Products and Engineering Products divisions. Pensions The group's overall pre-tax pension deficit measured under IAS19 reduced from £24.3 million at 30 June 2006 to £17.6 million at 30 June 2007, due mainly to improved investment returns, contributions made by the group to fund the deficit, and the increase in bond yields which had the effect of reducing the present value of scheme liabilities. The triennial actuarial valuation as at 30 April 2007 of the Benjamin Priest Group pension scheme is currently taking place, and an actuarial valuation of the Alumasc Group pension scheme is due next year. A full review and update of actuarial assumptions will be performed in conjunction with these valuations, including an update of mortality assumptions used. Capital reduction and distributable reserves The company obtained approval from shareholders and the High Court during the year to cancel its share premium account and capital redemption reserve, together amounting to £29.2 million, in order to increase the reserves legally available for making distributions to shareholders. The reason for this action was to ensure that there remained sufficient headroom in the company's reserves to allow the group to continue its existing dividend policy. In return for agreement from the group's Pension Trustees to support the capital reduction, the company agreed that, of the new £29.2 million profit and loss account reserve arising in its balance sheet, £14.0 million would be retained as a non-distributable reserve. This will be amortised as the group's pension deficit is reduced. The remainder of the new reserve, amounting to £15.2 million, became a distributable reserve prior to the year end. 1 EBITDA: Earnings before interest, tax, depreciation and amortisation- including EBITDA of discontinued activities. 2 Return on investment and return on shareholders' funds are calculated using total group post-tax operating profit and profit for the year figures, respectively. Copal closure costs are excluded from the prior year comparative. Net debt and the post-tax pension deficit are included in the calculation of average capital invested.
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