Final Results

1st Mar 2007 07:05

Filtrona plc01 March 2007 Filtrona plc Preliminary results for the year ended 31 December 2006 Filtrona plc, the international, market leading, speciality plastic and fibreproducts supplier, today announces annual results for the year ended 31 December2006. Financial Highlights • Revenue up 5.9% to £544.2m (2005: £513.7m) • Operating profit before intangible amortisation up 6.6% to £61.6m (2005: £57.8m) with underlying operating profit growth up 9.0%# • Profit before tax up 9.2% to £54.6m (2005: £50.0m) • 81% increase in net cash inflow before financing activities to £28.6m (2005: £15.8m) • Diluted earnings per share up 8.3% to 15.6p • Full year dividend of 6.9p per share providing an increase of 7.8% compared with 6.4p for 2005 # after taking account of the impact of foreign currency translation and a fullyear of central service cost. Operational Highlights • Strong growth of higher margin businesses in Plastic Technologies with Protection and Finishing Products now the largest profit contributing line of business • Continued expansion of manufacturing and supply operations in lower cost regions including the Ningbo factory in China • Significant investment in geographic expansion, product innovation and intellectual property development to drive organic growth • Company remains active in the pursuit of value enhancing acquisitions in selected niche markets Commenting on today's announcement, Jeff Harris, Chairman of Filtrona, said:- "These are a strong set of results for Filtrona's first full year as anindependent listed company. The achievement of above trend organic operatingprofit growth reflects our continued investment to drive improved operationalefficiency, geographic expansion and product innovation. Filtrona'sinternational niche market positions and strong balance sheet give the Boardconfidence in the Company's continued progress." Enquiries Filtrona plcMark Harper, Chief ExecutiveSteve Dryden, Finance DirectorTel: 01908 359100 FinsburyJames LevitonGordon SimpsonTel: 020 7251 3801 Note:A webcast of today's analyst presentation will be available on www.filtrona.comno later than 3.p.m. today. Chairman's Statement Results SummaryThis is Filtrona's first full financial year as an independent listed companyfollowing the separation from Bunzl plc in June 2005. Our management has shownthe benefits of that independence by delivering revenue growth of 5.9%, profitbefore tax growth of 9.2%, and increasing diluted earnings per share by 8.3%.Underlying operating profit grew by 9.0%, after taking account of foreigncurrency translation and a full year of central service cost, which is wellahead of our historical trend of organic growth. The Company is established as an international group with strong marketpositions and manufacturing facilities in most major markets in the world. Both business segments made real progress in 2006, with Plastic Technologiesshowing particularly strong profit and margin improvement. Fibre Technologiesrecovered from the tough conditions in the first half of the year and deliveredboth revenue and profit growth for the full financial year. The Company achieved an 81% improvement in net cash inflow before financingactivities, increasing from £15.8m in 2005 to £28.6m. This was largely achievedby operational management focusing on stronger working capital control. Duringthe year interest cover increased to 10.1 times (2005: 9.6 times) and, at theyear end, the ratio of net debt to earnings before interest, tax, depreciationand amortisation had improved from 1.5 in 2005 to 1.2 in 2006. DividendThe Board is recommending a final dividend of 4.6p per share, which if approvedat the Annual General Meeting will make a total of 6.9p (2005: 6.4p) per sharefor the full year. This represents a 7.8% increase on last year. The finaldividend will be paid on 4 May 2007 to shareholders on the register at 10 April2007. EmployeesAfter the challenges presented by the demerger, Filtrona's employees renewedtheir focus on generating sustained growth of revenue and profit throughout2006. The performance of the Company demonstrates the commitment and skill ofFiltrona employees across the many regions in which the businesses operate. Onbehalf of the Board and the shareholders, I would like to thank them all fortheir continuing contribution to the strong development of Filtrona. OutlookLooking forward, Filtrona expects 2007 to be a year of further good underlyingprogress, although the headline results will be affected by an anticipated £5mrestructuring charge. As previously announced, this charge relates to therestructuring of Cigarette Filters' manufacturing facilities to match theexpected reduction in demand for conventional carbon dual filters. In Plastic Technologies, the combination of strong market positions and theexpected favourable trading conditions give the Company confidence in continuedpositive progress in 2007. Within Fibre Technologies, further progress is expected in revenue and operatingprofit from the Bonded Fibre Components business and the Company remainsconfident in the future prospects for Cigarette Filters. The Company will continue to invest in the organic growth of the business and itis anticipated that capital spend in 2007 will again be ahead of depreciation.Capital investments will reduce unit costs of production and improve bothquality and service performance. Revenue investments will drive geographicexpansion, product innovation and intellectual property development. Inaddition, the Company remains active in the pursuit of value enhancingacquisitions in selected niche markets. With a clear strategy, a committed team and a strong balance sheet, the Boardremains confident the Company will continue to achieve good underlying growthand deliver attractive returns. Jeff HarrisChairman1 March 2007 Chief Executive's Review OverviewFiltrona is an international, market leading, speciality plastic and fibreproducts supplier with activities segmented into Plastic Technologies and FibreTechnologies. Plastic Technologies produces, sources and distributes protection and finishingproducts, self-adhesive tear tape and security products as well as proprietaryand customised plastic extrusions and packaging items for consumer products. Fibre Technologies focuses on the production and supply of special filters forcigarettes and bonded fibre products such as reservoirs and wicks for writinginstruments and printers, household products and medical devices. Filtrona derives strength from serving a diverse group of customers across aselected range of niche markets. Filtrona is a supplier throughout the world tomany international, blue chip, market leading customers. In 2006, the geographic destination of the Company's revenue was: £m % of total -- ----------Europe 191.7 35.2North America 219.6 40.4Rest of World 132.9 24.4 ----- ----- 544.2 100.0 ----- ----- The Rest of World segment includes many of the lower cost manufacturing regionsand has grown from 22.5% of revenue in 2004 to 24.4% in 2006. As the Companymoves into new regions for manufacture and supply it seeks to maximise theopportunities across all of its lines of business. It is expected that theexpansion of the Ningbo, China factory, which was opened in 2004 by the BondedFibre Components business, will facilitate the introduction of both Protectionand Finishing Products and Plastic Profile and Sheet activities into the Chinesemarket during 2007. PerformanceLast year Filtrona reported that it had made a promising start as an independentlisted company. In its first full financial year since the June 2005 demerger,the Company continued to perform well with revenue up 5.9% to £544.2m (2005:£513.7m) and operating profit before intangible amortisation and demergerexpense up 6.6% to £61.6m (2005: £57.8m). Underlying operating profit growth was9.0% after taking account of the impact of foreign currency translation and afull year of central service cost. The net cash inflow from operating activitieswas strong at £61.1m (2005: £56.9m) up 7.4%. The return on average operatingcapital excluding intangibles improved from 23.7% to 23.8% in 2006 and adjustedearnings per share grew by 6.7% from 15.0p to 16.0p. StrategyFiltrona's strategy is to continue to grow profitably through investingorganically and by acquisition in selected niche international markets withinPlastic Technologies and Fibre Technologies. The Company endeavours tostrengthen its competitive position through product innovation, sourcing anddistribution expansion, supply chain improvement and cost reduction. Inaddition, investments in people, systems and infrastructure, combined with theacquisition of selected value enhancing businesses, will also drive the futureperformance of Filtrona. Plastic TechnologiesPlastic Technologies had another very successful year with revenue up 5.9% to£289.5m (2005: £273.3m) and operating profit before intangible amortisation up10.1% to £41.4m (2005: £37.6m). The operating margin improved again to 14.3%(2005: 13.8%) reflecting the stronger performance of the higher marginbusinesses. During 2006, polymer input costs rose progressively throughout theyear in Europe but showed some easing during the final quarter in the Americasafter three consecutive quarters of increases. These increases were fullyrecovered, through selective pricing action, thereby underlining the strength ofFiltrona's niche market positions. Revenue per employee increased by 2.4% to£94,763 (2005: £92,550) and operating profit before intangible amortisation peremployee increased by 6.4% to £13,552 (2005: £12,733). Protection and Finishing Products again performed particularly well. It has nowgrown to become Filtrona's largest profit contributing line of business and isexpected to continue in this position. The key strategic drivers behind itsprogress remain geographic development, product range expansion and investmentin marketing programmes. Moss, the pan-European plastic parts supplier, continued to gain market share inContinental Europe and maintained its market leading position in the UK wherethe ongoing decline of manufacturing industry is generating tough tradingconditions. The mix of proprietary and custom lines strengthened further infavour of proprietary products. The expansion of the Moss North Europeandistribution hub in Germany was completed in April 2006 and this will yieldimportant service benefits to the Continental European operations. The Companyintends to continue the development of the distribution network and the openingof the next unit in Hungary is planned for the first half of 2007. In China, theheadcount within the sourcing organisation in Ningbo was further increased andreliable, high quality sources for both finished products and tooling have nowbeen established. Production output improved as a result of investment in largermachines and tooling, and a new tool handling and storage system was completedin the second half of the year at the Oxfordshire facility. The disposal of asmall non-core plastic promotional products business was completed in March2006. Skiffy, the European specialist small nylon parts producer, achieved strongsales growth and continued to perform well ahead of the forecasts set at thetime of its acquisition in 2004. All locations benefited from further investmentin marketing programmes which, combined with improved productivity, increasedmargins. Internet ordering via the website, www.skiffy.com, is an importantcomponent of the business model and usage again increased to account for 22.0%of Skiffy's 2006 revenues. The new Skiffy distribution facility in Poland is nowfully operational. In the Americas, Alliance, the US-based plastic parts supplier, continued toprogress as planned with good growth despite the weakness in the automotivesector. During 2006 substantial internal resources were dedicated to theimplementation programme for a new computer system which will streamlineoperations and improve customer service. The new system went live successfullyover the year end period without business disruption and benefits from theimprovements to overall efficiency are already being seen. The new manufacturingoperation in Sao Paulo started up on schedule and the improved competitivenessfrom manufacturing locally is already having a positive impact on revenue growthrates in Brazil. The configuration of the Erie, Pennsylvania central warehousewas modified to improve stocking density by 35%. Unit production costs continuedto fall at the Erie facility as a result of further investment in new machineryand high cavitation tooling. Preparations were made for a new Alliance Expresslocation in Chicago, US which is now open. Performance at MSI, the oil country tubular goods thread protector business, wasagain strong resulting from favourable trading conditions, market share gainsand investment-driven productivity improvements. At the end of the year, trialorders were placed by an important new international customer and the benefitfrom this new account should feed through in 2007. Additional investments in newproduction machinery and tooling were made at Houston, Texas and Vera Cruz,Mexico and the purchase of land adjacent to the Houston facility was completedto secure space for the future growth of that operation. Protection and Finishing Products has a clear strategy and good momentum behindit. Looking ahead to 2007, it is expected to again perform well. Coated and Security Products continued to pursue its strategy of developing newsecurity technologies and applications, whilst sustaining its world leadershipposition in the self-adhesive tear tape market. A modest revenue increase wasachieved, with the good growth in security products and FractureCode partlyoffset by reductions in tear tape. The tear tape business suffered from continued weakness in demand forpromotional tapes as some important customers in the tobacco sector reducedpromotional activity. Sales into other fast-moving consumer goods ('FMCG')sectors were strong. The facility in Richmond, US was upgraded to enable theprinting of security products and, during the second half of the year, newslitting lines were installed in the UK and US to enhance both productivity andquality. In January 2007, a labour cost reduction programme was announced withinthe tear tape business. Supplies of the laminate for the new generation UK passport were strongthroughout 2006 and a new label placing line for this project was commissionedin the first half of the year. In May, the acquisition of the CORGI identitycard printing operation was announced and production was successfully relocatedto the Payne facility in North Wales where a major upgrade programme wascompleted. Machinery for the production of security labels was ordered and this,combined with the development of proprietary security technologies for useacross the business, is anticipated to stimulate sales within Payne during 2007. In August 2006, the first FractureCode licence for its patented track and tracetechnology was agreed with a major FMCG company and the roll out is progressingwell. The losses incurred in the first half of the year were substantiallyreversed in the second half and the business incurred a small deficit for theyear. Since the launch in May at the Intergraf Symposium, a major internationalindustry event, the FractureCode organisation has been strengthenedprogressively to facilitate growth as new prospects are developed. A newManaging Director has been recruited with relevant experience in the ITindustry. The increasing investment in the development of new security technologies andthe focus on reducing cost are anticipated to result in a satisfactoryperformance for the Coated and Security Products business in 2007 despite theongoing weak demand for promotional tapes. Plastic Profile and Sheet achieved strong growth in the year resulting from thecombination of good market demand and significant restructuring to reduce costand enhance organisational effectiveness. Sales in the North American facilitieswere particularly encouraging and performance was assisted by the closure of thesmall Phoenix, Arizona facility at the start of 2006 and the transfer ofproduction to the facilities at Chicago and Tacoma in the US and Monterrey inMexico. Further factory rationalisation has been announced involving theconsolidation in the US of the two Massachusetts facilities into one at Athol,where a significant redevelopment is being undertaken, including theconstruction of a new clean room for medical products. The Monterrey facilityhas been expanded to support business growth and the addition of a new cleanroom for medical products is planned for 2007. During 2006 the North American organisation has been restructured with areduction from three to two operating regions and the establishment of a centralmarketing and sales function for the key product groups. Sector specialist salesgroups have been formed to sharpen focus and to facilitate improved marketpenetration. Sales into the key aerospace and point of purchase markets in NorthAmerica have been very strong with point of purchase revenue in 2006 being morethan double the level of circa US $12m achieved in 2004. Further investment inmachinery took place across the network of facilities which, in conjunction withcontinuous improvement activities, assisted in reducing conversion costs. Goodrevenue growth continued at the Enitor business in the Netherlands and a majorfactory expansion was completed in the summer. With the benefits accruing from the strengthened management team, the newstructure and the streamlined plant configuration, it is anticipated that the USPlastic Profile and Sheet business will have another good year in 2007, subjectto underlying activity in the US economy remaining healthy. The European PlasticProfile and Sheet business should continue to experience good growth. The Globalpack Consumer Packaging business in Brazil experienced very toughtrading conditions in the first half as performance was held back by marketovercapacity, particularly in tubes, and rising raw material prices. Theimproved performance in the second half, which was consistently ahead of thecomparable period in 2005, was driven by the combination of greater demand,recovery of rising raw material costs through pricing and improvements inmanufacturing efficiencies. The third deodorant roll-on ball line came on stream successfully at the end ofthe first quarter of 2006 and ball volumes continue to grow satisfactorily. Theinvestment programme continued throughout the year and important new machineryfor tube production and decoration has been ordered for delivery in the firsthalf of 2007. A minor expansion at one of the two Globalpack locations willfacilitate a partial plant re-layout and an increase in warehouse space to drivethe programme of productivity and service improvement. Globalpack's recovery is expected to continue into 2007. Fibre Technologies Fibre Technologies achieved good revenue growth in the year of 5.9% to £254.7m(2005: £240.4m). Operating profit, before intangible amortisation, which wasflat at the half year, improved in the second half to deliver a full yearincrease of 4.5% to £28.1m (2005: £26.9m). The operating margin reduced to 11.0%(2005: 11.2%). Revenue per employee increased by 0.8% to £106,792 (2005:£105,903) whilst operating profit, before intangible amortisation, per employeedecreased by 0.6% to £11,782 (2005: £11,850). In Cigarette Filters, total volumes reduced by 1.6% or 1.1 billion filter rodswith the increase of 14.1% in special filters volumes offset by a reduction of19.0% in monoacetate filters. In response to changing customer demands, thestrategy for the business has evolved with an increased focus on the researchand development of innovative and more complex filter solutions to complementthe core manufacturing capability. Much progress was made during 2006 instrengthening the management team, including the recruitment of two senior leveloperations specialists to drive improvement in factory performance. In the Americas, overall revenue was flat as growth in North America was offsetby a decline in South America. The losses incurred by the Monterrey facility inthe first half of the year were substantially reversed in the second half due toproductivity gains. Although the full year position remained loss making, theoperation moved into profit in the fourth quarter. Revenue and operating profitgrew in Europe as performance at the UK facility improved with productivitygains derived from the development of manufacturing expertise in the productsformerly manufactured in Switzerland. An important European customer launched anew brand into the Polish market featuring Filtrona's proprietary Active PatchTMtechnology as the product differentiator. In Asia, strong revenue and profitgrowth was achieved. The transfer of the Indonesian business to a new and largerfacility was successfully completed in the early part of the year and volumesproduced in Indonesia were up 94.2% from 2005. The market conditions for the Cigarette Filters business in 2007 will remainchallenging as customers respond to mature and declining Western markets withsignificant capacity reconfiguration. Customer discussions have confirmed thatFiltrona will experience a reduction in volumes of conventional carbon dualfilters during 2007 which will impact the Company's facilities in both NorthAmerica and Europe. Significant plant restructuring is underway to reduce costsand improve productivity. These actions, together with increased volumes inAsia, will mitigate the impact from the reduction in activity. The plantrestructuring will result in an anticipated charge of £5m in 2007. Filtronaremains confident in the future prospects for the Cigarette Filters business dueto the growing demand for innovative filters for PREPs (potentially reducedexposure products) and other differentiated tobacco smoking products and forresearch and development services. To this end, increased investment is plannedin 2007 to strengthen the research and development capability and to continuethe progressive movement of production to lower cost regions. Bonded Fibre Components continued to make important progress. Fibertecstrengthened its position in its core markets through the development of newproducts and technologies and also experienced good growth in Asia. The Ningbofacility moved into profit as productivity and quality improved and ISO9000:2000accreditation was achieved during the year. Volumes in China continued to growfollowing production transfers and the development of new business won in theregion. The pace of progress at Ningbo has generated the need for a plantexpansion and construction of a factory extension began late in the year forcompletion in the third quarter of 2007. The recovery of volumes in household products continued throughout the year andwas assisted by customer requirements for multiple wicking devices in airfresheners which provide a selection of fragrances in one unit. The writinginstrument product segment progressed well and important business was won inEurope and Asia from a principal competitor. The Reinbek, Germany facilityperformed strongly due to improved activity levels and the impact of the costreduction programme which commenced in 2005. A plant upgrade programme atReinbek has now begun. The research and development centre in Richmond continued to develop potentiallyvaluable technologies for the medical device market and 11 patents were filedduring the year. A key customer in the pregnancy test kit market signed a longterm contract with Fibertec for the supply of wicks. During 2007 it is expectedthat the business will benefit from important new product introductions both inthe medical and inkjet printer reservoir product sectors. Filtrona has beenselected as the exclusive supplier of reservoirs by a major US corporation forits entry into the inkjet printer market. Mark HarperChief Executive1 March 2007 Consolidated income statementfor the year ended 31 December 2006 Note 2006 2005 £m £m-------------------------------------------------------------------------------- Revenue 1 544.2 513.7--------------------------------------------------------------------------------Operating profit before intangible amortisation anddemerger expense 61.6 57.8Intangible amortisation (0.9) (0.8)Demerger expense - (1.0)--------------------------------------------------------------------------------Operating profit 1,2 60.7 56.0Finance income 3 8.8 5.6Finance expense 3 (14.9) (11.6)--------------------------------------------------------------------------------Profit before tax 54.6 50.0Income tax expense 4 (18.6) (17.0)--------------------------------------------------------------------------------Profit for the year 36.0 33.0================================================================================ Attributable to:Equity holders of Filtrona plc 34.5 31.6Minority interests 1.5 1.4--------------------------------------------------------------------------------Profit for the year 36.0 33.0================================================================================ Earnings per share attributable to equity holders ofFiltrona plc:Basic 6 15.8p 14.4p================================================================================Diluted 6 15.6p 14.4p================================================================================ Consolidated balance sheetat 31 December 2006 Note 2006 2005 £m £m--------------------------------------------------------------------------------AssetsProperty, plant and equipment 7 178.4 180.5Intangible assets 8 59.5 63.0Deferred tax assets 15 0.3 1.6--------------------------------------------------------------------------------Total non-current assets 238.2 245.1Inventories 9 55.7 59.8Income tax receivable 1.8 1.6Trade and other receivables 10 81.1 85.6Derivative assets 14 0.2 0.1Cash and cash equivalents 11 20.7 30.7--------------------------------------------------------------------------------Total current assets 159.5 177.8--------------------------------------------------------------------------------Total assets 397.7 422.9================================================================================ EquityIssued capital 18 54.8 54.8Capital redemption reserve 19 0.1 0.1Other reserve 19 (132.8) (132.8)Translation reserve 19 1.6 5.3Retained earnings 19 219.0 197.3--------------------------------------------------------------------------------Attributable to equity holders of Filtrona plc 142.7 124.7Minority interests 19 6.0 5.6--------------------------------------------------------------------------------Total equity 148.7 130.3================================================================================ LiabilitiesInterest bearing loans and borrowings 13 117.9 145.2Retirement benefit obligations 17 30.9 35.8Other payables 13 - 2.1Provisions 16 2.7 2.5Deferred tax liabilities 15 11.6 11.4--------------------------------------------------------------------------------Total non-current liabilities 163.1 197.0Bank overdrafts 11 1.0 5.0Interest bearing loans and borrowings 13 0.6 0.7Derivative liabilities 14 0.3 0.8Income tax payable 16.0 15.2Trade and other payables 12 65.0 68.9Provisions 16 3.0 5.0--------------------------------------------------------------------------------Total current liabilities 85.9 95.6--------------------------------------------------------------------------------Total liabilities 249.0 292.6--------------------------------------------------------------------------------Total equity and liabilities 397.7 422.9================================================================================ Consolidated statement of cash flowsfor the year ended 31 December 2006 Note 2006 2005 £m £m--------------------------------------------------------------------------------Operating activitiesProfit before tax 54.6 50.0Adjustments for: Net finance expense 6.1 6.0 Intangible amortisation 0.9 0.8 Depreciation 22.9 22.1 Share option expense 1.2 1.1 Other items (0.3) 1.1Increase in inventories (0.3) (2.2)Increase in trade and other receivables (0.7) (4.7)Increase in trade and other payables 0.1 2.1Acquisition of employee trust shares (1.2) (1.0)Additional pension contribution (1.5) (0.7)Other cash movements (1.9) (3.9)--------------------------------------------------------------------------------Cash inflow from operating activities 79.9 70.7--------------------------------------------------------------------------------Income tax paid (18.8) (13.8)--------------------------------------------------------------------------------Net cash inflow from operating activities 61.1 56.9================================================================================ Investing activitiesInterest received 1.0 1.2Acquisition of property, plant and equipment (34.3) (38.2)Proceeds from sale of property, plant and equipment 1.8 0.9Acquisition of businesses net of cash acquired 22 (0.5) (4.6)Proceeds from sale of business 23 0.3 -Other investing cash flows (0.8) (0.4)--------------------------------------------------------------------------------Net cash outflow from investing activities (32.5) (41.1)================================================================================ Financing activitiesInterest paid (7.2) (6.7)Dividends paid to equity holders (14.3) (4.7)Repayments of short-term loans (0.1) (0.6)(Repayments of)/proceeds from long-term loans (11.8) 133.7Capital contributions from former parent company - 4.2Repayments to former parent company - (147.0)--------------------------------------------------------------------------------Net cash outflow from financing activities (33.4) (21.1)================================================================================ Net decrease in cash and cash equivalents (4.8) (5.3)================================================================================ Net cash and cash equivalents at the beginning of the year 25.7 29.7Net decrease in cash and cash equivalents (4.8) (5.3)Net effect of currency translation on cash and cashequivalents (1.2) 1.3--------------------------------------------------------------------------------Net cash and cash equivalents at the end of the year 11 19.7 25.7================================================================================ Consolidated statement of recognised income and expensefor the year ended 31 December 2006 2006 2005 £m £m--------------------------------------------------------------------------------Recognition of defined benefit pension schemes on demerger: Actuarial loss - (34.7) Deferred tax credit on actuarial loss - 10.5Other actuarial gains/(losses) on defined benefit pensionschemes 2.2 (2.0)Deferred tax (expense)/credit on other actuarialgains/(losses) on defined benefit pension schemes (0.7) 0.7Movement on cash flow hedge - (0.1)Foreign exchange translation differences: Attributable to equity holders of Filtrona plc (3.7) 6.9 Attributable to minority interests (0.3) 0.5--------------------------------------------------------------------------------Income and expense recognised directly in equity (2.5) (18.2)Profit for the year 36.0 33.0--------------------------------------------------------------------------------Total recognised income and expense 33.5 14.8================================================================================ Attributable to:Equity holders of Filtrona plc 32.3 12.9Minority interests 1.2 1.9--------------------------------------------------------------------------------Total recognised income and expense 33.5 14.8================================================================================ Accounting policies a Basis of preparationThe consolidated financial information has been prepared and approved by theDirectors in accordance with International Financial Reporting Standards asadopted by the EU in accordance with EU law (IAS Regulation EC 1606/2002)('adopted IFRS'). Filtrona plc's 2006 Annual Report will be despatched to shareholders at the endof March 2007. The financial information set out does not constitute theCompany's statutory accounts for the year ended 31 December 2006 but is derivedfrom those accounts. Statutory accounts for 2006 will be delivered to theRegistrar of Companies following the Company's Annual General Meeting which willbe held on 30 April 2007. The auditor has reported on those accounts; theirreports were unqualified and did not contain statements under Section 237 (2) or(3) of the Companies Act 1985. The financial information is prepared on a historical cost basis except forderivative financial instruments which are stated at fair value. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimate is revised and future periods if relevant. The preparation of financial information that conforms with adopted IFRSrequires the use of estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial information and thereported amounts of income and expense during the reporting period. Althoughthese estimates are based on management's best knowledge of the amount, event oractions, actual results may ultimately differ from those estimates. The accounting policies used in the preparation of this financial informationare detailed below. These policies have been consistently applied to all periodspresented. On 6 June 2005 the Filtrona business was demerged from Bunzl plc ('Bunzl' or'former parent company') and the ordinary shares of Filtrona plc ('the Company')were listed on the London Stock Exchange. The demerger was effected by thepayment of a dividend in specie by Bunzl and has been accounted for as if itwere a reverse acquisition. For the purposes of this financial information 'Filtrona' or 'the Group' meansFiltrona plc, its subsidiaries and joint ventures. b Basis of consolidation(i) SubsidiariesSubsidiaries are entities controlled by Filtrona. Control exists when Filtronahas the power, directly or indirectly, to govern the financial and operatingpolicies of an entity so as to obtain economic benefit from its activities. Thefinancial statements of subsidiaries are included in the financial informationfrom the date that control commences until the date that control ceases. (ii) Joint venturesJoint ventures are accounted for using the equity method of accounting. A jointventure is an entity in which Filtrona has a long-term interest and exercisesjoint control. Under the equity method, Filtrona's share of the aggregate assetsand liabilities is included in the balance sheet and Filtrona's share ofoperating profit, finance and income tax expense of the joint venture isincluded in the income statement. (iii) Transactions eliminated on consolidationIntragroup balances and any unrealised gains and losses or income and expensearising from intragroup transactions are eliminated in preparing the financialinformation. c Foreign currency(i) Foreign currency transactionsTransactions in foreign currencies are recorded at the rate of exchange at thedate of the transaction. Monetary assets and liabilities denominated in foreigncurrencies at the balance sheet date are translated into sterling at theexchange rate ruling at that date and recognised in the income statement unlesshedging criteria apply (see policy for derivative instruments). (ii) Financial statements of foreign operationsThe assets and liabilities of foreign operations, including goodwill and fairvalue adjustments arising on consolidation, are translated at the exchange rateruling at the balance sheet date. The revenues and expenses of foreignoperations are translated at average exchange rates. (iii) Net investment in foreign operationsExchange differences since 1 January 2004, the date of transition to adoptedIFRS, arising from the translation of the net investment in foreign operations,and related hedges are taken to the translation reserve and released to theincome statement upon disposal. Differences arising prior to 1 January 2004 areincluded in retained earnings. d Financial instrumentsUnder IAS 39, financial instruments are measured initially at fair value. Thesubsequent measurement depends on the classification of the financialinstrument. Interest bearing loans and borrowings and other financialliabilities (excluding derivatives) are held at amortised cost, unless they areincluded in a hedge accounting relationship. (i) Cash flow hedgesWhere a derivative is designated as a cash flow hedge the change in fair valueis recognised in equity to the extent that it is effective and any ineffectiveportion is recognised in the income statement. Where the underlying transactionresults in a financial asset, accumulated gains and losses are recognised in theincome statement in the same period as the hedged item. Where the hedged itemresults in a non-financial asset the accumulated gains and losses previouslyrecognised in equity are included in the initial carrying value of the asset. (ii) Fair value hedgesWhere a derivative financial instrument is used to hedge the foreign exchangeexposure of a monetary asset or liability, any gain or loss on the hedginginstrument is recognised in the income statement. (iii) Hedges of net investment in foreign operationsThe gain or loss on an instrument used to hedge a net investment in a foreignoperation that is deemed effective is recognised in equity. Any ineffectiveportion is recognised in the income statement. e Property, plant and equipmentProperty, plant and equipment are stated at cost less accumulated depreciationand impairment losses. Previously revalued properties were treated as being heldat deemed cost upon transition to adopted IFRS. Where parts of an item of property, plant and equipment or other assets havedifferent useful lives, they are accounted for as separate items. The carryingvalues of property, plant and equipment and other assets are periodicallyreviewed for impairment when events or changes in circumstances indicate thatthe carrying values may not be recoverable. f DepreciationProperty, plant and equipment are depreciated over their estimated remaininguseful lives on a straight line basis at the following annual rates: Freehold land Not depreciatedBuildings 2% or life of lease if shorterPlant and machinery 7 - 20%Fixtures, fittings and equipment 10 - 33% The assets' useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. g LeasesWhere Filtrona has substantially all the risks and rewards of ownership of anasset subject to a lease, the lease is treated as a finance lease. All otherleases are treated as operating leases and the rentals expensed to the incomestatement on a straight line basis. Lease incentives are amortised in the incomestatement over the life of the lease. h Intangible assets(i) GoodwillGoodwill is stated at cost less any impairment losses. Acquisitions are accounted for using the purchase method. For acquisitions thathave occurred since 1 January 2004 goodwill represents the difference betweenthe cost and fair value of identifiable assets acquired. For acquisitions madebefore 1 January 2004, goodwill is included on the basis of its deemed cost,which represents the amount previously recorded under UK GAAP. (ii) Research and developmentResearch costs are expensed to the income statement in the year in which theyare incurred. Development costs relating to new products are capitalised if the new product istechnically and commercially feasible. Other development costs are recognised inthe income statement and expensed as incurred. (iii) Customer relationshipsCustomer relationships are identified on acquisition of businesses and valuedusing discounted cash flows based on historical customer attrition rates.Amortisation is expensed in the income statement on a straight line basis overthe estimated useful economic life, being a period of up to 25 years. i ImpairmentAll assets, except intangible assets, deferred tax assets and inventories, arereviewed annually to determine whether there is any indication of impairment.Intangible assets are tested annually. If an indication of impairment exists theasset's recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or itscash generating unit exceeds its recoverable amount, being the greater of valuein use and net selling price, and is recognised in the income statement. Valuein use is estimated based on future cash flows discounted using a pre-taxdiscount rate. j InventoriesInventories are valued at the lower of cost (on a first in, first out basis) andnet realisable value. For work-in-progress and finished goods, cost includes anappropriate proportion of labour cost and overheads. k Cash and cash equivalentsCash and cash equivalents comprise cash balances and fixed term investmentswhose maturities are three months or less from the date of acquisition. Bankoverdrafts repayable on demand which form an integral part of Filtrona's cashmanagement are included as part of cash and cash equivalents in the statement ofcash flows. l Trade and other receivablesTrade and other receivables are stated at cost less impairment losses. m Income taxIncome tax in the income statement comprises current and deferred tax. Incometax is recognised in the income statement except to the extent that it relatesto items recognised in equity. Current tax is the expected tax payable on the taxable income for the year usingtax rates enacted or substantively enacted at the balance sheet date and anyadjustment to tax payable in prior years. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences arising between the tax bases and the carrying amounts ofassets and liabilities in the financial information. The following temporarydifferences are not provided for: goodwill not deductible for tax purposes, theinitial recognition of assets or liabilities that affect neither accounting nortaxable profit, and differences relating to investments in subsidiaries to theextent that they will not reverse in the foreseeable future. Deferred tax isdetermined using tax rates that are expected to apply when the related deferredtax asset/liability is settled. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profit will be available against which the asset can be utilised.Deferred tax assets are reduced to the extent that it is no longer probable thatthe related tax benefit will be realised. n RevenueRevenue from the sale of goods is recognised in the income statement when thesignificant risks and rewards of ownership have been transferred to the buyer.No revenue is recognised if there are significant uncertainties regardingrecovery of the consideration due, associated expenses or the possible return ofgoods. o Finance income and expenseFinance income and expense is recognised in the income statement as it accrues. The finance expense prior to demerger includes interest payable to Bunzl.Following demerger the net reported finance expense only reflects the cost ofexternal borrowing. p Segment reportingA segment is a distinguishable component of Filtrona that is engaged inproviding products (business segment), or in providing products within aparticular economic environment (geographic segment), which is subject to risksand rewards that are different from those of other segments. For operational and financial reporting purposes, Filtrona identifies twobusiness segments which are characterised by shared technology and raw materialinputs. q Pensions(i) Defined contribution schemesObligations for contributions to defined contribution pension schemes areexpensed to the income statement as incurred. (ii) Defined benefit schemesThe significant pension schemes in Europe and the US have been accounted for ona defined benefit basis under IAS 19 (revised): Employee benefits ('IAS 19(revised)'). Under IAS 19 (revised) Filtrona had to account for defined benefitpension charges up to the period of demerger on a defined contribution basis andon a defined benefit basis thereafter. Accordingly Filtrona recognised theretirement benefit obligation of £34.7m at demerger in the consolidatedstatement of recognised income and expense. Actuarial gains and losses that have arisen subsequently are recognised in fullin the statement of recognised income and expense. The net obligations in respect of defined benefit pension schemes are calculatedseparately for each scheme by estimating the amount of future benefit thatemployees have earned in return for their service in the current and priorperiods; that benefit is discounted to determine its present value, and the fairvalue of any scheme assets is deducted. The discount rate is the yield at thebalance sheet date on AA credit-rated bonds that have maturity datesapproximating to the terms of Filtrona's obligations. The calculation isperformed by a qualified independent actuary using the projected unit creditmethod. The amounts charged to operating profit are the current service cost, pastservice cost and gains and losses on settlement and curtailments. The expectedincrease in the present value of scheme liabilities is included within financeexpense and the expected return on scheme assets is included within financeincome. r Share-based paymentsFiltrona operates equity-settled, share-based incentive plans. A charge is madein the income statement based on the fair value of options using theBlack-Scholes model with a corresponding increase in equity. The fair value ismeasured at grant date and spread over the period between grant and vesting dateof the options. The amount recognised as an expense will be adjusted to reflectthe actual number of share options that vest. The expense for share-based payments prior to demerger was the charge allocatedby Filtrona's former parent company based on the participation of Filtronaemployees in schemes that it operated. The shares held indirectly in the Filtrona Employee Benefit Trust for thepurpose of fulfilling obligations in respect of share option plans are treatedas belonging to the Company and are deducted from its retained earnings. s ProvisionsA provision is recognised when there is a probable legal or constructiveobligation as a result of a past event and a reliable estimate can be made ofthe outflow of economic resources that will be required to settle theobligation. t Net debtNet debt is defined as cash and cash equivalents, net of interest bearing loansand borrowings. u DividendsDividends are recognised as a liability in the period in which they aredeclared. Notes 1. Segment analysis Filtrona comprises the following business segments: Plastic Technologies produces, sources and distributes protection and finishingproducts, self-adhesive tear tape and certain security products as well asproprietary and customised plastic extrusions and packaging items for consumerproducts. Fibre Technologies focuses on the production and supply of special filters forcigarettes and bonded fibre products such as reservoirs and wicks for writinginstruments and printers, household products and medical devices. Business segments 2006-------------------------------------------------------------------------------------------- Plastic Fibre Central Filtrona Technologies Technologies Services+ £m £m £m £m--------------------------------------------------------------------------------------------Revenue 289.5 254.7 - 544.2--------------------------------------------------------------------------------------------Operatingprofit/(loss) beforeintangibleamortisation 41.4 28.1 (7.9) 61.6Intangible amortisation (0.8) (0.1) - (0.9)--------------------------------------------------------------------------------------------Operatingprofit/(loss) 40.6 28.0 (7.9) 60.7============================================================================================Segment assets 175.0 139.1 1.2 315.3Intangible assets 56.3 3.2 - 59.5Unallocated items 22.9 22.9--------------------------------------------------------------------------------------------Total assets 231.3 142.3 24.1 397.7============================================================================================Segment liabilities 35.7 29.1 6.7 71.5Unallocated items 177.5 177.5--------------------------------------------------------------------------------------------Total liabilities 35.7 29.1 184.2 249.0============================================================================================ Other segment itemsCapital expenditure 21.2 12.9 0.2 34.3Depreciation 13.6 9.0 0.3 22.9Closing number of employees 3,159 2,413 33 5,605Average number of employees 3,055 2,385 33 5,473 2005-------------------------------------------------------------------------------------------- £m £m £m £m--------------------------------------------------------------------------------------------Revenue 273.3 240.4 - 513.7--------------------------------------------------------------------------------------------Operating profit/(loss)before intangible amortisation and demerger expense 37.6 26.9 (6.7) 57.8Intangible amortisation (0.7) (0.1) - (0.8)Demerger expense - - (1.0) (1.0)--------------------------------------------------------------------------------------------Operating profit/(loss) 36.9 26.8 (7.7) 56.0============================================================================================Segment assets 180.1 143.1 4.5 327.7Intangible assets 59.7 3.3 - 63.0Unallocated items 32.2 32.2--------------------------------------------------------------------------------------------Total assets 239.8 146.4 36.7 422.9============================================================================================Segment liabilities 35.4 32.7 9.1 77.2Unallocated items 215.4 215.4--------------------------------------------------------------------------------------------Total liabilities 35.4 32.7 224.5 292.6============================================================================================ Other segment itemsCapital expenditure 21.6 16.4 0.2 38.2Depreciation 13.3 8.5 0.3 22.1Closing number of employees 2,873 2,340 33 5,246Average number of employees 2,953 2,270 30 5,253 + Central Services includes group accounts, tax, treasury, legal, internalaudit, corporate development, human resources, information technology and otherservices provided centrally to support the business segments Inter-segment sales are not significant in either year. Net finance expense of£6.1m (2005: £6.0m) and income tax expense of £18.6m (2005: £17.0m) cannot bemeaningfully allocated by segment. The majority of unallocated assets relate tocash and cash equivalents and the majority of unallocated liabilities relate tointerest bearing loans and borrowings, retirement benefit obligations, deferredtax liabilities, bank overdrafts and income tax payable. Geographic segments 2006------------------------------------------------------------------------------------------- Revenue by Segment assets Intangible Capital destination assets expenditure £m £m £m £m-------------------------------------------------------------------------------------------Europe 191.7 128.3 40.0 14.7North America 219.6 115.6 19.2 11.6Rest of World 132.9 71.4 0.3 8.0------------------------------------------------------------------------------------------- 544.2 315.3 59.5 34.3Unallocated items - 22.9 - -------------------------------------------------------------------------------------------- 544.2 338.2 59.5 34.3=========================================================================================== 2005 £m £m £m £m-------------------------------------------------------------------------------------------Europe 183.7 124.5 40.7 16.7North America 215.5 133.1 21.9 14.2Rest of World 114.5 70.1 0.4 7.3------------------------------------------------------------------------------------------- 513.7 327.7 63.0 38.2Unallocated items - 32.2 - -------------------------------------------------------------------------------------------- 513.7 359.9 63.0 38.2=========================================================================================== All segments are continuing operations. 2. Net operating expense 2006 2005 £m £m-------------------------------------------------------------------------------------------Changes in inventories of finished goods and work-in-progress 0.2 (0.1)Raw materials and consumables 250.0 232.0Personnel expenses (note 5) 129.9 124.8Depreciation and other amounts written off property, plant and equipment 22.9 22.1Amortisation and other amounts written off intangible assets 0.9 0.8Demerger expense - 1.0Hire of plant and machinery - rentals payable underoperating leases 0.6 0.5Other operating expenses 79.0 76.6-------------------------------------------------------------------------------------------Net operating expense 483.5 457.7=========================================================================================== Auditor's remuneration Note 2006 2005 £m £m------------------------------------------------------------------------------------------- Audit of this financial information i 0.2 0.2Audit of financial statements of subsidiaries pursuant to legislation 0.6 0.6 -------------------------------------------------------------------------------------------Total audit fees 0.8 0.8 Other services pursuant to such legislation ii 0.1 0.1 Other services relating to tax iii 0.1 0.2 Services relating to corporate finance transactions entered into or proposed to be entered into by or on behalf of the Company or the Group iv 0.3 --------------------------------------------------------------------------------------------Total non-audit fees 0.5 0.3-------------------------------------------------------------------------------------------Total fees 1.3 1.1=========================================================================================== Notesi Includes remuneration and expenses for the audit of the Company for the year of £4,115 (2005: £4,000)ii Fees for other services pursuant to such legislation related principally to the review of the interim financial statementsiii Other services relating to tax are fees paid for tax compliance services and tax adviceiv The Company believes that, given their detailed knowledge of Filtrona's operations, its structure and accounting policies and the importance of carrying out detailed due diligence as part of the acquisition process, it is appropriate for certain audit-related work to be carried out by the Company's auditor rather than another firm of accountants. The Audit Committee, which consists of independent Non-executive Directors, reviews and approves the level and nature of non-audit work which the auditor performs, including the fees paid for such work, thus ensuring that their objectivity and independence is not compromised. £0.4m (2005: £0.3m) of the total fees for non-audit services were charged in the UKv Fees of £23,000 (2005: £22,000) were paid in relation to the audit of the Filtrona pension schemes 3. Net finance expense 2006 2005 £m £m--------------------------------------------------------------------------------Finance incomeBank deposits 1.0 1.1Other finance income 0.1 0.1Expected return on pension scheme assets 7.7 4.4-------------------------------------------------------------------------------- 8.8 5.6-------------------------------------------------------------------------------- Finance expenseLoans and overdrafts (7.4) (5.4)Former parent company financing - (1.7)Other finance expense - (0.1)Interest on pension scheme liabilities (7.5) (4.4)-------------------------------------------------------------------------------- (14.9) (11.6)--------------------------------------------------------------------------------Net finance expense (6.1) (6.0)================================================================================ 4. Income tax expense 2006 2005 £m £m--------------------------------------------------------------------------------Components of tax expense:Current tax 22.0 17.3Prior years' tax (1.7) (1.2)Double tax relief (2.4) (0.2)Deferred tax (note 15) 0.7 1.1--------------------------------------------------------------------------------Income tax expense 18.6 17.0================================================================================ Income tax expense in the UK is £2.4m (2005: £1.1m). Factors affecting income tax expense for the year Filtrona operates across the world and is subject to income tax in manydifferent jurisdictions. Filtrona calculates its average expected tax rate as aweighted average of the national corporate income tax rates in the taxjurisdictions in which it operates. 2006 2005 £m £m--------------------------------------------------------------------------------Profit before income tax 54.6 50.0Tax at weighted average 18.0 16.0Effects of:Permanent disallowables 0.8 0.2Overseas state and local tax 0.8 0.5Unrelieved tax losses 0.2 1.8Prior year adjustments (1.7) (1.2)Other items 0.5 (0.3)--------------------------------------------------------------------------------Income tax expense 18.6 17.0================================================================================ 5. Personnel expense 2006 2005 £m £m-------------------------------------------------------------------------------- Wages and salaries 110.2 105.2Social security expense 13.1 13.1Pension expense (note 17) 5.4 5.4Share option expense 1.2 1.1-------------------------------------------------------------------------------- 129.9 124.8================================================================================ 6. Earnings per share 2006 2005 £m £m--------------------------------------------------------------------------------Earnings attributable to equity holders of Filtrona plc 34.5 31.6Adjustment* 0.6 1.2--------------------------------------------------------------------------------Adjusted earnings 35.1 32.8================================================================================ Basic weighted average ordinary shares in issue (million) 218.8 219.1#Dilutive effect of employee share option plans (million) 1.8 0.8--------------------------------------------------------------------------------Diluted weighted average ordinary shares (million) 220.6 219.9================================================================================ Basic earnings per share 15.8p 14.4pAdjustment* 0.2p 0.6p--------------------------------------------------------------------------------Adjusted earnings per share 16.0p 15.0p================================================================================Diluted basic earnings per share 15.6p 14.4p================================================================================ Adjusted earnings per share is provided to reflect the underlying earningsperformance of Filtrona. * The adjustment relates to intangible amortisation (2005: intangibleamortisation and demerger expense) less tax relief thereon# The number of ordinary shares issued on demerger was used as the weightedaverage number for the period prior to demerger 7. Property, plant and equipment 2006-------------------------------------------------------------------------------- Land and Plant and Fixtures, buildings machinery fittings and equipment Total £m £m £m £m--------------------------------------------------------------------------------CostBeginning of year 59.2 267.1 40.9 367.2Acquisition - 0.1 - 0.1Divestment - (0.7) (0.2) (0.9)Additions 3.9 27.0 3.4 34.3Disposals (1.5) (4.8) (1.5) (7.8)Currency translation (3.5) (17.3) (2.1) (22.9)--------------------------------------------------------------------------------End of year 58.1 271.4 40.5 370.0================================================================================ DepreciationBeginning of year 12.7 147.3 26.7 186.7Expense in year 1.5 17.6 3.8 22.9Divestment - (0.7) (0.2) (0.9)Disposals (0.4) (4.4) (1.5) (6.3)Currency translation (0.8) (9.0) (1.0) (10.8)--------------------------------------------------------------------------------End of year 13.0 150.8 27.8 191.6----------------------------------------------------------------------------------------------------------------------------------------------------------------Net book valueat end of year 45.1 120.6 12.7 178.4================================================================================ 2005-------------------------------------------------------------------------------- Land and Plant and Fixtures, buildings machinery fittings and equipment Total £m £m £m £m--------------------------------------------------------------------------------CostBeginning of year 46.5 230.5 36.0 313.0Additions 8.8 25.2 4.2 38.2Disposals (0.4) (5.9) (0.8) (7.1)Currency translation 4.3 17.3 1.5 23.1--------------------------------------------------------------------------------End of year 59.2 267.1 40.9 367.2-------------------------------------------------------------------------------- DepreciationBeginning of year 10.8 126.6 23.1 160.5Expense in year 1.3 17.4 3.4 22.1Disposals (0.2) (5.6) (0.7) (6.5)Currency translation 0.8 8.9 0.9 10.6--------------------------------------------------------------------------------End of year 12.7 147.3 26.7 186.7----------------------------------------------------------------------------------------------------------------------------------------------------------------Net book value at end of year 46.5 119.8 14.2 180.5================================================================================Net book value at beginning of year 35.7 103.9 12.9 152.5-------------------------------------------------------------------------------- 8. Intangible assets 2006-------------------------------------------------------------------------------- Customer Goodwill relationships Total £m £m £m--------------------------------------------------------------------------------CostBeginning of year 54.5 21.0 75.5Acquisition (note 22) - 0.6 0.6Currency translation (3.7) (0.2) (3.9)--------------------------------------------------------------------------------End of year 50.8 21.4 72.2-------------------------------------------------------------------------------- AmortisationBeginning of year 11.2 1.3 12.5Expense in year - 0.9 0.9Currency translation (0.7) - (0.7)--------------------------------------------------------------------------------End of year 10.5 2.2 12.7----------------------------------------------------------------------------------------------------------------------------------------------------------------Net book value at end of year 40.3 19.2 59.5================================================================================ 2005-------------------------------------------------------------------------------- Customer Goodwill relationships Total £m £m £m--------------------------------------------------------------------------------CostBeginning of year 46.9 21.9 68.8Acquisition (note 22) 5.1 - 5.1Currency translation 2.5 (0.9) 1.6--------------------------------------------------------------------------------End of year 54.5 21.0 75.5-------------------------------------------------------------------------------- AmortisationBeginning of year 10.7 0.5 11.2Expense in year - 0.8 0.8Currency translation 0.5 - 0.5--------------------------------------------------------------------------------End of year 11.2 1.3 12.5----------------------------------------------------------------------------------------------------------------------------------------------------------------Net book value at end of year 43.3 19.7 63.0================================================================================Net book value at beginning of year 36.2 21.4 57.6-------------------------------------------------------------------------------- Filtrona tests intangible assets annually for impairment, or more frequently ifthere are indications that they are impaired. Intangible assets are allocated tocash generating units and a discounted cash flow analysis is computed to comparediscounted estimated future operating cash flows to the net carrying value ofeach business. The analysis is based on forecast cash flows, with zero growthused to determine terminal values. The estimated cash flows are discounted usingFiltrona's weighted average cost of capital and any impairment write-downsidentified are charged to the income statement. The test is dependent onmanagement estimates and judgements, in particular in relation to theforecasting of future cash flows, and the discount rate applied to these cashflows. 9. Inventories 2006 2005 £m £m--------------------------------------------------------------------------------Raw materials and consumables 23.9 25.7Work-in-progress 3.1 3.0Finished goods and goods for resale 28.7 31.1-------------------------------------------------------------------------------- 55.7 59.8================================================================================ Inventories held at net realisable value and amounts recognised as income fromthe reversal of write-downs were not significant. 10. Trade and other receivables 2006 2005 £m £m--------------------------------------------------------------------------------Trade receivables 68.2 71.3Other receivables 6.6 7.1Prepayments and accrued income 6.3 7.2-------------------------------------------------------------------------------- 81.1 85.6================================================================================ 11. Cash and cash equivalents 2006 2005 £m £m--------------------------------------------------------------------------------Bank balances 18.3 29.7Short-term bank deposits not repayable on demand 2.4 1.0--------------------------------------------------------------------------------Cash and cash equivalents 20.7 30.7Bank overdrafts (1.0) (5.0)--------------------------------------------------------------------------------Cash and cash equivalents in the statement of cash flows 19.7 25.7================================================================================ 12. Trade and other payables 2006 2005 £m £m--------------------------------------------------------------------------------Trade payables 38.1 39.5Other tax and social security contributions 3.2 2.8Other payables 6.7 7.2Accruals and deferred income 17.0 19.4-------------------------------------------------------------------------------- 65.0 68.9================================================================================ 13. Interest bearing loans and borrowings 2006 2005 £m £m--------------------------------------------------------------------------------Non-current liabilitiesUnsecured bank loans 117.9 145.2================================================================================ Current liabilitiesUnsecured bank loans 0.1 0.1Unsecured non-bank loan 0.5 0.6-------------------------------------------------------------------------------- 0.6 0.7================================================================================ Terms and debt repayment schedule 2006 2005--------------------------------------------------------------------------------------------------------------- < 1 yr 1 - 2 yrs 2 - 5 yrs Total < 1 yr 1 - 2 yrs 2 - 5 yrs Total £m £m £m £m £m £m £m £m---------------------------------------------------------------------------------------------------------------Unsecured bank loans 0.1 0.1 117.8 118.0 0.1 0.1 145.1 145.3Unsecured non-bank loan 0.5 - - 0.5 0.6 - - 0.6--------------------------------------------------------------------------------------------------------------- 0.6 0.1 117.8 118.5 0.7 0.1 145.1 145.9=============================================================================================================== All debt due for repayment in two to five years must be repaid no later than May2010. At 31 December 2006, the majority of Filtrona's interest bearing loans andborrowings were at floating rates of interest set with reference to LIBOR forperiods ranging from seven days to three months. €30m and up to US$65m of netdebt was protected from adverse movements in interest rates with interest ratecaps for a period of 20 months. On 24 February 2006 the interest rate on US$40mof net debt was effectively fixed at 5.1775% with an interest rate swap for aperiod of two years. With effect from 24 November 2006 the interest rate on afurther US$30m of net debt was effectively fixed at 5.4313% with an interestrate swap for a period of two years. At 31 December 2005, the majority of Filtrona's interest bearing loans andborrowings were at floating rates of interest set with reference to LIBOR forperiods ranging from seven days to three months. After taking into account foreign exchange swaps, the currency and interest rateprofile of Filtrona's financial assets and liabilities is as follows: 2006 2005----------------------------------------------------------------------------------------------------------------- Impact of Impact of Non- Foreign Non- Foreign Fixed Floating Interest Exchange Floating Interest Exchange Rate Rate Bearing swaps Total Rate Bearing Swaps Total £m £m £m £m £m £m £m £m £mAssetsSterling - 3.4 11.0 - 14.4 3.5 22.3 - 25.8US dollar - 5.0 29.8 - 34.8 4.9 30.2 - 35.1Euro - 4.3 20.7 - 25.0 7.5 11.7 - 19.2Other - 8.0 21.4 - 29.4 14.8 23.1 - 37.9----------------------------------------------------------------------------------------------------------------- - 20.7 82.9 - 103.6 30.7 87.3 - 118.0================================================================================================================= LiabilitiesSterling - 31.1 18.9 (61.3) (11.3) 37.9 27.4 (78.1) (12.8)US dollar 35.7 52.5 35.2 9.5 132.9 111.7 35.7 20.2 167.6Euro - 0.2 16.5 52.1 68.8 0.3 9.1 58.6 68.0Other - - 10.4 - 10.4 1.0 14.1 - 15.1----------------------------------------------------------------------------------------------------------------- 35.7 83.8 81.0 0.3 200.8 150.9 86.3 0.7 237.9================================================================================================================= £nil (2005: £2.1m) of Filtrona's non-interest bearing financial liabilities are due for payment in one to two years. Filtrona's available undrawn committed facilities at 31 December were: 2006 2005 £m £m--------------------------------------------------------------------------------Expiring within one year - -Expiring after one but within two years - -Expiring after two years 97.2 70.0-------------------------------------------------------------------------------- 97.2 70.0================================================================================ Any loans drawn on these facilities would bear interest at floating rates withreference to LIBOR for the period of the loan. 14. Derivative instruments Filtrona uses derivative financial instruments to hedge its exposure to foreignexchange and interest rate risks arising from operational, financing andinvestment activities. In accordance with its treasury policy, Filtrona does nothold or issue derivative financial instruments for trading purposes. Assets Liabilities-------------------------------------------------------------------------------- Contractual Contractual Fair or notional Fair or notional values amounts values amounts £m £m £m £m--------------------------------------------------------------------------------At 31 December 2006Fair value hedgesForward foreign exchange contracts - 1.6 - 9.7Cash flow hedgesForward foreign exchangecontracts - 1.8 - 2.5Interest rate swaps 0.2 35.9 - -Hedges of net investmentsCross currency swaps - 4.4 (0.3) 57.2-------------------------------------------------------------------------------- 0.2 43.7 (0.3) 69.4================================================================================ Assets Liabilities-------------------------------------------------------------------------------- Contractual Contractual Fair or notional Fair or notional values amounts values amounts £m £m £m £m--------------------------------------------------------------------------------At 31 December 2005Fair value hedgesForward foreign exchangecontracts 0.1 4.9 (0.1) 9.6Cash flow hedgesForward foreign exchangecontracts - 0.8 - 0.8Hedges of net investmentsCross currency swaps - 14.6 (0.7) 64.2-------------------------------------------------------------------------------- 0.1 20.3 (0.8) 74.6-------------------------------------------------------------------------------- Fair values of forward foreign exchange contracts and cross currency swaps havebeen calculated at year end exchange rates compared to contracted rates. Fairvalues of interest rate swaps have been calculated by discounting cash flows atthe rates of interest prevailing at the year end. Fair values of other financialassets and liabilities are not significantly different from their carryingamounts in 2006 and 2005. The net fair value gains on open forward foreign exchange contracts that hedgeforeign currency risk of anticipated future sales and purchases will betransferred to the income statement when the forecast sales and purchases occurover the next 12 months. With the exception of the interest rate swaps discussedin note 13 all other derivative instruments mature within the next 12 months. Filtrona has US dollar denominated borrowings and US dollar and euro currencyswaps which it has designated as hedges of its net investments in subsidiaryundertakings. The exchange gains of £15.5m (2005: losses of £11.3m) on theseborrowings and the gains of £2.1m (2005: losses of £0.1m) on the US dollarcurrency swaps and gains of £0.8m (2005: gains of £0.3m) on euro currency swapshave been recognised in reserves. 15. Deferred tax Deferred tax assets and liabilities are attributable to the following: 2006 2005--------------------------------------------------------------------------------------- Assets Liabilities Net Assets Liabilities Net £m £m £m £m £m £m---------------------------------------------------------------------------------------Property, plant andequipment (0.6) 17.8 17.2 (0.7) 13.2 12.5Intangible assets - 7.2 7.2 - 5.1 5.1Employee benefits (10.0) - (10.0) (11.4) - (11.4)Other (3.8) 0.7 (3.1) (4.6) 8.2 3.6---------------------------------------------------------------------------------------Tax(assets)/liabilities (14.4) 25.7 11.3 (16.7) 26.5 9.8Set off of tax 14.1 (14.1) - 15.1 (15.1) ----------------------------------------------------------------------------------------Net tax(assets)/liabilities (0.3) 11.6 11.3 (1.6) 11.4 9.8======================================================================================= Movements in temporary differences in the year: 2006 2005 £m £m--------------------------------------------------------------------------------------- Beginning of year 9.8 18.4Charge to the income statement in respect of current year (note 4) 0.7 1.1Charge to the income statement in respect of prior years 0.9 1.7Recognition of defined benefit pension schemes on demerger - (10.5)Charge/(credit) to reserves on movements of defined benefit pension schemes 0.7 (0.3)Currency translation (0.8) (0.6)---------------------------------------------------------------------------------------End of year 11.3 9.8======================================================================================= No deferred tax liability is provided in respect of any future remittance ofearnings of foreign subsidiaries where Filtrona is able to control theremittance of earnings and it is probable that such earnings will not beremitted in the foreseeable future. A deferred tax asset of £0.7m (2005: £0.7m)has not been recognised in respect of capital losses as the realisation of thisdeferred tax asset is not considered probable. 16. Provisions 2006 2005 £m £m--------------------------------------------------------------------------------MovementsBeginning of year 7.5 5.6Expensed in the income statement - 2.5Acquisitions 0.3 -Reclassified from other payables - 3.1Utilised (2.0) (3.8)Currency translation (0.1) 0.1--------------------------------------------------------------------------------End of year 5.7 7.5================================================================================ Non-current 2.7 2.5Current 3.0 5.0-------------------------------------------------------------------------------- 5.7 7.5================================================================================ Provisions relate primarily to vacant properties, employees' compensationclaims, legal claims and environmental clean up expenses. Non-current provisionsare generally long-term in nature with the timing of utilisation uncertain. 17. Employee benefits Post retirement benefits For the period prior to demerger Filtrona employees were members of the formerparent company's defined benefit and defined contribution pension schemes. Theliabilities and assets of these schemes were transferred to successor Filtronaschemes following demerger. Liabilities were actuarially allocated betweenFiltrona and the former parent company and scheme assets were split in the sameproportion as liabilities. Under IAS 19 (revised) Filtrona has to account for defined benefit pension costsup to the period of demerger on a defined contribution basis and on a definedbenefit basis thereafter. Accordingly Filtrona recognised the retirement benefitobligation of £34.7m at demerger in the consolidated statement of recognisedincome and expense. Trustees administer the schemes and the assets are held independently fromFiltrona. Pension costs of the defined benefit schemes are assessed in accordance with theadvice of independent professionally qualified actuaries. Full triennialactuarial valuations were carried out on the principal European defined benefitschemes as at 5 April 2006 and annual actuarial valuations are performed on theprincipal US defined benefit schemes. The assets and liabilities of the definedbenefit schemes have been updated to the balance sheet date from the most recentactuarial valuations taking account of the investment returns achieved by theschemes and the level of contributions. Contributions to all schemes are determined in line with actuarial advice, localconditions and practices. Defined benefit contributions in 2007 are expected tobe £5.9m, which consists of payments to fund future service accruals andcontributions to amortise the deficit in respect of past service. The amounts included in the consolidated financial information in respect ofarrangements in Europe and the US are as follows: 2006 2005 £m £m--------------------------------------------------------------------------------Amounts charged to operating profitDefined contribution schemes 2.2 3.6Defined benefit schemes:Service cost 3.2 1.8--------------------------------------------------------------------------------Total operating expense (note 5) 5.4 5.4================================================================================ Amounts included as finance (income)/expenseExpected return on scheme assets (7.7) (4.4)Interest on scheme liabilities 7.5 4.4--------------------------------------------------------------------------------Net financial return (0.2) -================================================================================ Amounts recognised in the statement of recognised income and expenseRecognition of actuarial losses on demerger - (34.7)Actual return less expected return on scheme assets 5.5 5.7Impact of changes in assumptions relating to the present valueof scheme liabilities (3.3) (7.7)--------------------------------------------------------------------------------Actuarial gain/(loss) 2.2 (36.7)================================================================================ The principal assumptions used by the independent qualified actuaries for thepurposes of IAS 19 (revised) were: 2006 2005 ---------------------------------------------- Europe US Europe USRate of increase in salaries 3.90% 4.00% 3.75% 3.00%Rate of increase in pensions 2.90% n/a* 2.75% n/a*Discount rate 5.00% 5.75% 4.75% 5.50%Inflation rate 2.90% n/a* 2.75% n/a*Expected return on scheme assets 6.10% 8.30% 5.90% 8.30%* not applicable The assumptions used by the actuaries are the estimates chosen from a range ofpossible actuarial assumptions which, due to the timescale covered, may not beborne out in practice. The life expectancy assumptions used to estimate defined benefit obligations at31 December 2006 are: 2006 ------------------------ Europe USMale retiring today at age 65 21.8 18.1Female retiring today at age 65 24.7 20.4Male retiring in 20 years at age 65 23.0 18.1Female retiring in 20 years at age 65 25.8 20.4 The fair value of scheme assets, which are not intended to be realised in theshort-term and may be subject to significant change before they are realised,and the present value of the scheme liabilities, which are derived from cashflow projections over long periods and are therefore inherently uncertain, are: 2006-------------------------------------------------------------------------------- Long-term Long-term rate rate of return Europe £m of return US £m Total --------------------------------------------------------------------------------Equities 6.90% 73.2 9.75% 17.5 90.7Bonds 4.70% 13.3 5.75% 10.4 23.7Gilts 3.90% 19.9 - 19.9Other 4.70% 0.3 4.50% 0.2 0.5--------------------------------------------------------------------------------Fair value of scheme assets 106.7 28.1 134.8Present value of schemeliabilities (131.6) (34.1) (165.7)--------------------------------------------------------------------------------Retirement benefitobligations (24.9) (6.0) (30.9)================================================================================ 2005-------------------------------------------------------------------------------- Long-term Long-term rate rate of return Europe £m of return US £m Total --------------------------------------------------------------------------------Equities 6.80% 64.7 9.75% 18.8 83.5Bonds 4.45% 12.5 5.75% 10.2 22.7Gilts 3.80% 18.1 - 18.1Other - 4.50% 0.1 0.1--------------------------------------------------------------------------------Fair value of scheme assets 95.3 29.1 124.4Present valueof scheme liabilities (123.3) (36.9) (160.2)Retirement benefit obligations (28.0) (7.8) (35.8)================================================================================ Movement in fair value of scheme assets/(liabilities) during the year 2006 2005------------------------------------------------------------------------------------------------------ Scheme Scheme Scheme Scheme assets liabilities Total assets liabilities Total £m £m £m £m £m £m------------------------------------------------------------------------------------------------------ Beginning of year 124.4 (160.2) (35.8) - - -Recognition of defined - - - 116.2 (150.9) (34.7)benefit pensionschemes on demerger Contribution to definedbenefit pension - - - 1.4 - 1.4schemes by former parentcompany Service cost (3.2) (3.2) - (1.8) (1.8)Employer contributions 4.7 - 4.7 2.5 - 2.5Employee contributions 0.8 (0.8) - 0.7 (0.7) -Actuarialgains/(losses) 5.5 (3.3) 2.2 5.7 (7.7) (2.0)Financeincome/(expense) 7.7 (7.5) 0.2 4.4 (4.4) -Benefits paid (4.7) 4.7 - (1.7) 1.7 -Curtailment - - - (7.3) 7.5 0.2Changes in scheme coverage - - - 0.3 (1.1) (0.8)Currency translation (3.6) 4.6 1.0 2.2 (2.8) (0.6)------------------------------------------------------------------------------------------------------ End of year 134.8 (165.7) (30.9) 124.4 (160.2) (35.8)====================================================================================================== 2006 2005 -------------------------------------------------- % of scheme £m % of scheme £m assets/ assets/ liabilities liabilities--------------------------------------------------------------------------------Experience gains and lossesDifference between actual andexpected return on scheme 4.1 5.5 4.6 5.7assetsNet actuarial gains/(losses)recognised in the statementof recognised income and expense 1.3 2.2 (1.2) (2.0) SensitivityFor the significant assumptions used in determining post retirement costs andliabilities, the following sensitivity analysis gives the estimate of the impacton the income statement and balance sheet for the year ended 31 December 2006. Scheme liaibilities Annual service Europe US Total Europe US Total £m £m £m £m £m £m 0.5% decrease in the discount rate 15.0 2.6 17.6 0.4 0.1 0.51.0% increase in the rate of inflation 25.0 - 25.0 0.9 - 0.91 year increase in life expectancy 3.5 1.1 4.6 0.1 - 0.10.5% increase in the discount rate (13.0) (2.2) (15.2) (0.4) (0.1) (0.5)1.0% decrease in the rate of inflation 20.0) - (20.0) (0.8) - (0.8) Share-based incentives Filtrona operates share-based incentive plans for its Executive Directors andemployees. The total charge in respect of these plans during the year was £1.2m(2005: £1.1m). Details of these plans are set out below: Share options outstanding 2006----------------------------------------------------------------------------------------------------------------------- At 1 Weighted Granted Weighted Lapsed Weighted Exercised Jan average during average during average during 2006 exercise the exercise the exercise the price year price year price year -----------------------------------------------------------------------------------------------------------------------LTIP Part A 2,133,262 239.5p 1,987,174 257.0p (138,812) 239.5p - LTIP Part B 'Matching' 600,666 - - - - - - LTIP Part B'Performance' 515,347 - 496,810 - - - - DASB - - 128,320 - - - - SAYE 3 yearplan - - 764,823 237.0p (93,122) 237.0p (843) SAYE 5 yearplan - - 710,677 237.0p (46,191) 237.0p - ----------------------------------------------------------------------------------------------------------------------- 3,249,275 4,087,804 (278,125) (843) ======================================================================================================================= Share options outstanding (continued) 2006--------------------------------------------------------------------- Weighted Weighted average At average Exercisable exercise 31 Dec exercise at 31 price 2006 price Dec 2006---------------------------------------------------------------------LTIP Part A - 3,981,624 248.2p - LTIP Part B 'Matching' - 600,666 - - LTIP Part B'Performance' - 1,012,157 - - DASB - 128,320 - - SAYE 3 yearplan 237.0p 670,858 237.0p - SAYE 5 yearplan - 664,486 237.0p - --------------------------------------------------------------------- 7,058,111 - ====================================================================== 2005----------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Granted average Lapsed average average Exercisable during the exercise during the exercise AT 31 Dec exercise at 31 Dec At 1 Jan 2005 year price year price 2005 price 2005-----------------------------------------------------------------------------------------------------------LTIP Part A - 2,281,608 239.5p (148,346) 239.0p 2,133,262 239.5p - LTIP Part B 'Matching' - 600,666 - - - 600,666 - - LTIP Part B 'Performance' - 570,992 - (55,645) - 515,347 - ------------------------------------------------------------------------------------------------------------ - 3,453,266 (203,991) 3,249,275 ------------------------------------------------------------------------------------------------------------ Fair value model inputs for share options outstanding 2006----------------------------------------------------------------------------------------------------- LTIP Part A LTIP Part B LTIP Part B DASB SAYE 3 year SAYE 5 year 'Matching' 'Performance' plan plan-----------------------------------------------------------------------------------------------------Weighted average fair value at grant 41.1p 211.9p 237.1p 276.4p 77.6p 92.2pWeighted average share price at grant 248.2p 232.0p 262.1p 296.8p 296.3p 296.3pWeighted averageexercise price 248.2p - - - 237.0p 237.0pWeighted averagevolatility 22.7% 23.6% 24.1% 20.5% 20.3% 24.2%Weighted averagedividend yield 2.87% 3.07% 2.75% 2.40% 2.40% 2.40%Weighted riskfree rate 4.36% 4.10% 4.23% 4.35% 4.39% 4.36%Expected employeeretention rates 76.9% 85.0% 91.5% 98.0% 55.0% 55.0%Expected term 3.25 years 3.00 years 3.75 years 3.00 years 3.00 years 5.00 years------------------------------------------------------------------------------------------------------ 2005 ------------------------------------------------------ LTIP Part A LTIP Part B LTIP Part B 'Matching' 'Performance'--------------------------------------------------------------------------------Weighted average fairvalue at grant 40.6p 211.9p 207.2pWeighted average shareprice at grant 239.5p 232.0p 232.0pWeighted averageexercise price 239.5p - -Weighted averagevolatility 24.0% 23.6% 23.8%Weighted averagedividend yield 2.98% 3.07% 3.07%Weighted riskfree rate 4.12% 4.10% 4.15%Expected employeeretention rates 73.7% 85.0% 85.0%Expected term 3.25 years 3.00 years 3.75 years-------------------------------------------------------------------------------- All options have been valued using the Black-Scholes model. Volatility has been calculated over the length of the expected term, for theperiod immediately before the grant date. The volatility of the former parentcompany's shares has been used as a proxy for Filtrona plc's share pricevolatility in the period prior to demerger. 2006----------------------------------------------------------------------------------------------- LTIP LTIP LTIP DASB SAYE SAYE Part A Part B Part B 3 year 5 year 'Matching' 'Performance' plan plan-----------------------------------------------------------------------------------------------Contractual 3 - 10 years 3 - 6 years 3 - 6 years 3 years 3 years 5 yearslife 2005----------------------------------------------------------------------------------------------- LTIP LTIP LTIP Part A Part B Part B 'Matching' 'Performance'-----------------------------------------------------------------------------------------------Contractual life 3 - 10 years 3 - 6 years 3 - 6 years All options are settled with equity. 18. Share capital 2006 2005 £m £m----------------------------------------------------------------------------------Authorised: 500 million (2005: 500 million) ordinary sharesof 25p (2005: 25p) each 125.0 125.0 ----------------------------------------------------------------------------------Issued and fully paid ordinary shares of 25p (2005: 25p) 54.8 54.8each ==================================================================================Number of shares in issue Beginning and end of year 219,326,795 219,326,795================================================================================== On 8 June 2005 a resolution was passed reducing the ordinary share capital by100p per share (total: £219.3m), and on 9 June 2005 this was confirmed by anOrder of the High Court. The amounts arising were used to create retainedearnings in the Company. 19. Movements on reserves 2006 -------------------------------------------------------------------------------------------- Capital Other Translation Retained Minority Total redemption reserve reserve earnings interests reserve £m £m £m £m £m £m -------------------------------------------------------------------------------------------- At 1 January 2006 0.1 (132.8) 5.3 197.3 5.6 75.5Total recognised income and expense for the year (3.7) 36.0 1.2 33.5Acquisition of employee trust shares (1.2) (1.2)Share option expense 1.2 1.2Dividends paid (14.3) (0.8) (15.1)--------------------------------------------------------------------------------------------- At 31 December 2006 0.1 (132.8) 1.6 219.0 6.0 93.9--------------------------------------------------------------------------------------------- 2006 --------------------------------------------------------------------------------------------------------- Capital Other Cash flow Translation Retained Minority Total redemption reserve hedging reserve earnings interests reserve reserve £m £m £m £m £m £m £m---------------------------------------------------------------------------------------------------------- At 1 January 2005 - (132.8) - (1.6) (28.7) 3.9 (159.2)Adoption of IAS 32 and IAS 39 0.1 0.1---------------------------------------------------------------------------------------------------------- At 1 January 2005 restated - (132.8) 0.1 (1.6) (28.7) 3.9 (159.1)Total recognised income andexpense for the year (0.1) 6.9 6.1 1.9 14.8Transfer to retainedearnings on reduction inshare capital 219.3 219.3Acquisition of employee trustshares (1.0) (1.0)Share option expense 1.1 1.1Dividends paid (4.7) (0.4) (5.1)Arising on acquisition 0.2 0.2Redemption of £1 preferenceshares 0.1 0.1Former parent company'scapital contribution 4.2 4.2Former parent company'scontribution to the defined benefit pension schemenet of deferred tax 1.0 1.0----------------------------------------------------------------------------------------------------------At 31 December 2005 0.1 (132.8) - 5.3 197.3 5.6 75.5========================================================================================================== Employee trust shares are ordinary shares of the Company held in an employeebenefit trust. The purpose of this trust is to hold shares in the Company forsubsequent transfer to Executive Directors and employees relating to optionsgranted and awards made in respect of market purchase shares under the Company'sshare-based incentive plans. The assets, liabilities and expenditure of thetrust have been incorporated in this financial information. At 31 December 2006,the trust held 872,166 (2005: 423,009) shares, upon which dividends have beenwaived, with an aggregate nominal value of £0.2m (2005: £0.1m) and market valueof £2.3m (2005: £1.2m). The other reserve relates to the Group reorganisation which took place as partof the demerger and represents the difference between Filtrona plc's sharecapital and Filtrona International Ltd's share capital and share premium on 6June 2005 and is not distributable. 20. Analysis of net debt Exchange 1 Jan 2006 Cash flow movements 31 Dec 2006 £m £m £m £m--------------------------------------------------------------------------------Cash at bank and in hand 22.6 (5.8) (1.0) 15.8Short-term bank depositsrepayable on demand 7.1 (4.3) (0.3) 2.5Short-term bank depositsnot repayable on demand 1.0 1.4 - 2.4--------------------------------------------------------------------------------Cash and cash equivalents 30.7 (8.7) (1.3) 20.7Overdrafts (5.0) 3.9 0.1 (1.0)--------------------------------------------------------------------------------Cash and cash equivalentsin the statement of cashflows 25.7 (4.8) (1.2) 19.7Debt due within one year (0.7) 0.1 - (0.6)Debt due after one year (145.2) 11.8 15.5 (117.9)--------------------------------------------------------------------------------Net debt (120.2) 7.1 14.3 (98.8)================================================================================ 21. Operating lease commitments At 31 December Filtrona had the following commitments under non-cancellableoperating leases: 2006 2005 £m £m--------------------------------------------------------------------------------Payable within one year 1.6 1.4Payable between one and five years 4.5 4.4Payable after five years 4.4 4.4-------------------------------------------------------------------------------- 10.5 10.2================================================================================ 22. Acquisitions In May 2006 Filtrona purchased certain assets and the business of the CSLDigital Print division of CORGI Services Limited and, concurrently, entered intoa five year agreement with CORGI Group Limited for the exclusive supply ofregistered gas installer identity cards. In December 2005 Filtrona purchased an additional 30% of FractureCodeCorporation ApS ('FractureCode'), taking Filtrona's share in FractureCode to80%. FractureCode was previously accounted for as a joint venture using equityaccounting. Following the purchase it is now fully consolidated and contributed£nil to operating profit before intangible amortisation in 2005. The remaining 20% of shares in FractureCode could be acquired between March 2009and December 2012. The consideration for the remaining 20% of shares isdependent on various profit related targets and is capped at a maximum of €40m. On acquisition the assets and liabilities of the businesses acquired wereadjusted to reflect their fair values to Filtrona. The fair value adjustmentsare provisional and subject to finalisation for up to one year from the date ofacquisition. The principal fair value adjustments are as follows: In 2006: There were no adjustments to the book value of assets and liabilities acquired. In 2005: The adjustment to intangibles represents the write-off of goodwill in the entityon acquisition in accordance with IAS 38: Intangible Assets. The adjustment to investment in associate and minority interest reflects thechange from equity accounting to full consolidation. A summary of the acquisition of CSL Digital Print in 2006 is detailed below: Book and fair value of assets acquired £m--------------------------------------------------------------------------------Property, plant and equipment 0.1Trade and other receivables 0.1Provisions (0.3)-------------------------------------------------------------------------------- (0.1)Customer relationships 0.6--------------------------------------------------------------------------------Consideration, satisfied in cash 0.5================================================================================ A summary of the effect of the acquisition of FractureCode in 2005 is detailedbelow: Book value at Consistency of Fair value of acquisition accounting assets acquired policy £m £m £m--------------------------------------------------------------------------------Intangibleassets 0.5 (0.5) -Trade andotherreceivables 0.7 - 0.7Trade andother payables (0.4) - (0.4)Cash and cashequivalents 0.1 - 0.1Investment inassociate - (0.5) (0.5)Minorityinterest - (0.2) (0.2)-------------------------------------------------------------------------------- 0.9 (1.2) (0.3)Goodwill 5.1--------------------------------------------------------------------------------Consideration 4.8Satisfied by:Accrued expenses 0.1Cash consideration 4.7================================================================================The net cash outflow in the periodin respect of the acquisition ofFractureCode comprised:Cash consideration 4.7Cash and cash equivalents acquired (0.1)--------------------------------------------------------------------------------Net cash outflow inrespect of acquisition ofFractureCode 4.6================================================================================ 23. Disposals In March 2006, Filtrona completed the sale of the High Profile business for£0.3m, which was satisfied in cash, and the control of the business passed tothe acquirer. This disposal had the following effect on Filtrona's assets and liabilities: £m--------------------------------------------------------------------------------Inventories 0.3Trade and other receivables 0.1Trade and other payables (0.1)--------------------------------------------------------------------------------Net identifiable assets and liabilities (at date of completion) 0.3--------------------------------------------------------------------------------Consideration, satisfied in cash 0.3================================================================================ 24. Dividends Per share Total -------------------------------------------- 2006 2005 2006 2005 p p £m £m-------------------------------------------------------------------------------- 2005 interim: paid 31 October 2005 2.13 4.72005 final: paid 28 April 2006 4.27 9.32006 interim: paid 27 October 2006 2.30 5.02006 proposed final: payable 4 May 2007 4.60 10.1-------------------------------------------------------------------------------- 6.90 6.40 15.1 14.0================================================================================ 25. Transactions with related parties Other than the acquisition of FractureCode in 2005, Filtrona has not enteredinto any material transactions with related parties. Furthermore, throughout2006 and 2005, no Director had a personal interest in any significanttransaction of Filtrona. This information is provided by RNS The company news service from the London Stock Exchange

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