3rd Mar 2005 07:01
Senior PLC03 March 2005 Thursday 3 March 2005Senior plcResults for the year ended 31 December 2004 HIGHLIGHTS Year ended 31 December ---------------------- 2004 2003(1)------------------------------------ -------- -------- TURNOVER FROM CONTINUING OPERATIONS £306.8m £322.9m------------------------------------ -------- -------- UNDERLYING PROFIT BEFORE TAX (2) £12.7m £11.4m UNDERLYING EARNINGS PER SHARE (2) 3.65p 3.13p ----------------------------------- -------- -------- (LOSS) ON BUSINESSES SOLD (£13.3m) £nil------------------------------------ -------- -------- (LOSS)/PROFIT BEFORE TAXATION (£5.2m) £6.4m BASIC (LOSS)/EARNINGS PER SHARE (2.25p) 1.50p------------------------------------ -------- -------- FREE CASH FLOW (2) £10.5m £20.2m ------------------------------------ -------- -------- NET BORROWINGS £50.6m £64.2m------------------------------------ -------- -------- DIVIDENDS PER SHARE 2.00p 2.00p------------------------------------ -------- -------- Note (1) : The comparative figures for 2003 have been restated to reflect the adoption of FRS 17 "Retirement Benefits" and UITF 38 "Accounting for ESOP Trusts". (2) : See Finance Director's Review for derivation of non-statutory information. Commenting on the results, James Kerr-Muir, Chairman of Senior plc, said: "Senior has delivered an encouraging set of results, achieving an increase inunderlying earnings per share and a reduction in debt despite the adverseeffects of the weakening US dollar and significant raw material price increases.The Group's recent automotive diesel programme wins, scheduled to startproduction in late 2006, combined with the ongoing recovery in the civilaerospace market, mean Senior has an excellent base for profitable growth in themedium-term." For further information please contact: Senior plcGraham Menzies, Group Chief Executive 01923 714702Mark Rollins, Group Finance Director 01923 714738 Finsbury GroupCharlotte Hepburne-Scott / Gordon Simpson 020 7251 3801 This announcement, together with other information on Senior plc may be foundat: www.seniorplc.com Note to Editors:Senior is an international engineering group with operations in 11 countries.Senior designs, manufactures and markets high technology components and systemsfor the principal original equipment producers in the worldwide aerospace,automotive and specialised industrial markets. Chairman's Statement--------------------Senior made further progress during 2004 in building the foundations for animproved future performance. The ongoing focus on better production efficiency,process improvement and enhanced product development are all targeted atdelivering profitable organic growth for the future. It is particularlyencouraging to report that, in the latter part of 2004, the Group secured anumber of automotive programmes for new products developed over the past twoyears. The year's main operating challenge was the significant rise in rawmaterial prices. Profits were also adversely impacted by the translation effectof the continued weakening of the US dollar. Against this background, the Groupreported an improvement in underlying earnings per share and a further reductionin net debt. Financial ResultsLargely because of the weaker US dollar and the disposals completed in the year,Group turnover declined by 8.2% to £325.9m (2003 : £354.9m) and operating profitbefore goodwill amortisation by 9.2% to £16.8m (2003 : £18.5m). A much reducedcharge for interest and lower net finance charges for retirement benefitsresulted in underlying profit before taxation increasing to £12.7m (2003 :£11.4m). Underlying earnings per share increased by 16.6% to 3.65p (2003 : 3.13prestated for the full implementation in 2004 of Financial Reporting Standard 17"Retirement Benefits" and Urgent Issues Task Force 38 "Accounting for ESOPTrusts"). The derivation of underlying earnings per share and othernon-statutory information is explained in the Finance Director's Review. The loss on disposal of businesses was £13.3m (2003 : £nil) such that the Groupreported a loss after tax of £6.9m (2003 : £4.6m profit). The basic loss pershare was 2.25p (2003 : 1.50p earnings per share). In the Aerospace Division, the reported turnover reduction of 2.9% to £139.6m(2003 : £143.8m) was entirely due to the weaker US dollar. Underlying demand improved and this, together with a continued focus on manufacturing efficiency and the benefit of prior year cost reductions, resulted in operating profit beforegoodwill amortisation increasing by 20.8% to £9.3m (2003 : £7.7m). The recoveryin the civil sector gained momentum throughout the year and demand in the defence and military sector remained steady. The operating margin was 6.7% (2003 : 5.4%). Sales of automotive vehicles were flat in both North America and Europe.However, turnover in the Group's Automotive Division declined by 5.2% to £122.9m(2003 : £129.6m), primarily due to adverse exchange rate movements and someNorth American product programmes coming to an end. In Europe and the Rest ofthe World the Group's automotive turnover increased. Impacted by adverseexchange rate movements, raw material price increases and supplier problems inFrance, Divisional operating profit before goodwill amortisation declined by14.3% to £6.6m (2003 : £7.7m) resulting in an operating margin of 5.4% (2003 :5.9%). In the Industrial Division, the sale of the five industrial hose businesses, fora total consideration of £8.3m, was completed in August bringing the Group'songoing disposal programme to an end. The turnover of the three remainingindustrial businesses declined by 10.2% to £44.9m (2003 : £50.0m) and theoperating profit before goodwill amortisation to £0.5m (2003 : £2.0m). Thereductions were the result of poor market conditions and the costs of the majorrationalisation exercises undertaken at two of the three operations. Net debt at the end of 2004 was £50.6m, a 21% reduction from the 2003 year-enddebt of £64.2m. DividendThe Board is recommending an unchanged final dividend of 1.35p per share inrespect of 2004, bringing the total dividend for the year to 2.00p per share(2003 - 2.00p). Employees and the BoardGordon Campbell joined the Group as a non-executive director in July 2004 and Iwould like to welcome him to the Board. Having been appointed to the Boardduring the year he will stand for re-election by the shareholders at theforthcoming Annual General Meeting. The Group's employees have once again worked with enthusiasm and commitmentwhilst dealing with the many challenges our economies, industries and customerspresented to us. I would like to thank them for their wholehearted contributionduring 2004. OutlookThe recovery in the aerospace industry is well underway with demand for largecivil aircraft increasing and, whilst automotive market demand remains steady,new programme wins in the diesel sector, in Europe and more particularly inNorth America, augur well for the future. The new automotive products go intoproduction from mid 2006 onwards and, as previously stated, capital investmentis expected to increase significantly during 2005 as production capacity isinstalled to meet the growth in demand. The Group's disposal programme, which commenced in 2000, is at an end and mostof the planned plant rationalisations have been completed. The US dollar hasbeen relatively stable against other major currencies since the year-end but rawmaterial prices show few signs of declining. Trading in the first two months of2005 has been satisfactory. As a result, the Group can anticipate a challenging but less volatileenvironment in 2005 with encouraging prospects thereafter as the new automotiveprogrammes go into production and the aerospace market continues to grow. James Kerr-Muir Chairman Chief Executive's Review------------------------The Group remains committed to the strategy of operational improvement, costreduction and value enhancement through product and process design anddevelopment. Operational excellence, impeccable customer service and profitablepricing continue to be core Group objectives. Senior is a supplier of engineered products to OEM customers. The demands uponits factories are directly linked to the market conditions its customers areexperiencing as well as the relative success of their products in their chosenmarket sectors. Over the past two years, Senior has significantly increased itsresources in the development of new products and processes in order to increasesales to the OEM customers and, irrespective of the market conditions, grow thetop line sales of the Group. These efforts are beginning to bear fruit. In Aerospace, the civil aircraft sector continues to recover. Boeing is forecastto build 314 planes in 2005 compared to 285 in 2004. At Airbus, the expectationis for deliveries of 350 aircraft in 2005, up from 320 in 2004. Combined, this10% increase in high value products - aircraft and engines - demonstrates theongoing recovery across the industry. The regional jet builders (and theirengine suppliers) are not as ambitious because most of their main customers, thebig North American hub operators, remain in financial difficulty. Senior'sAerospace Division has around 29% of its turnover in the defence and militarysector where demand has been strong, particularly for replacement parts foraircraft serving in active military regions around the world. The Division alsocontains elements of medical and semi conductor business, both of which sawsolid demand in 2004. Across the Aerospace Division, the total anticipated shipset value for eachAirbus A380 aircraft has grown to about £190k. The substantial development costson the programme are coming to an end and it is anticipated that more than tenshipsets will be delivered in 2005 as production commences. The maiden flight ofthe A380 is targeted for the first half of 2005. The shipset value on theLockheed Martin Joint Strike Fighter has also increased (now approximately£300k). Whilst volume production is still some years off, revenue is beginningto be generated with test, prototype and pre-production parts now inmanufacture. Being incremental to current production, both these programmes willadd future sales and value to the Division. Other potential incremental programmes of note include the Eurofighter, whichhas now recommenced assembly, the Boeing 787 and Airbus 350 aircraft, for whichtenders are now being sought, and the A400M, a new European military transportaircraft. Senior's Automotive Division experienced a range of challenges and opportunitiesduring 2004. The market places in North America and Europe are mature and sawlittle growth in the period. In the USA, however, Asian car companies continuedto increase share at the expense of the "Big 3", whose market share declinedfrom 60.2% in 2003 to 58.7% in 2004. Their initiatives to retain market share,and stem the decline, led to continued pressure on the Division's productpricing. The situation was exacerbated by the steep increase in the price ofmany raw materials, including the stainless steels used in abundance by Senior.During the year, the management time absorbed in dealing with these pricingissues was considerable. The Group's automotive operation in the USA continued to reduce sales as productprogrammes came to an end as expected and, together with the raw materialissues, it was a challenge to ensure the momentum required in new productdevelopment was maintained. Pleasingly, these efforts were rewarded during 2004,with the booking of several new product programmes, mainly associated withcommercial diesel engine production. In Europe, all commercial vehicles and about fifty percent of passenger cars usediesel engines, whereas in North America the number of diesel engines producedis much lower because they are rarely installed in passenger vehicles. New USlegislation means that by 2007 all US diesel engines must conform to muchtougher emission standards and, to achieve this, all manufacturers of dieselengines are converting to what is known as "common rail" technology. Thistechnology is already widely used by the European manufacturers to increasepower output, reduce noise and vibration, improve fuel consumption and meet themore stringent emissions legislation. Over the past three years, the product development efforts of Senior Automotivehave been increasingly focused on diesel engines both in Europe and the USA andseveral new incremental programmes were won during 2004. It is planned that themanufacturing capacity needed to put these new products into production willincrease overall Group capital expenditure to nearly twice depreciation for2005. The planned industrial disposal programme was completed in 2004 with theIndustrial Division reducing from eight operations to three, following the saleof the Division's five industrial hose businesses. The market conditionsexperienced by the remaining three proved to be mixed. Canada's economycontinued strongly, which helped, but demand from oil and gas, power generationand UK construction were well below expectation. A substantial cost reductionprogramme was initiated to improve the future performance of the Division, thebenefits of which are expected to be seen in 2005 assisted by some degree ofmarket recovery. Aerospace Division The civil aerospace market began to show signs of progressive recovery in 2004,following the market turmoil experienced in 2002 and 2003 as a result of theevents of 9/11. Further recovery is expected in 2005. Amongst the larger civil aircraft manufacturers, Airbus is expected to deliver350 planes in 2005, a 15% increase over the 305 planes delivered in 2003 and a9% increase over the 320 planes delivered in 2004. By contrast, Boeing ismoving from 281 deliveries in 2003 and 285 in 2004 to an expected 314 deliveriesin 2005 - a 12% increase over the three years. In the regional jet sector,Bombardier delivered 242 planes in 2003 but only 195 in 2004, a reduction of19%. The other major regional jet manufacturer, Embraer, increased itsdeliveries by 47% from 101 in 2003 to 148 in 2004. The engine manufacturers'demands upon our operations mirrored the changes in the mix of demand for theaircraft. Demand for military and defence products remained at around 29% of divisionalsales. This continued to help Senior Aerospace SSP, in Los Angeles, whichdesigns and fabricates high pressure ducting systems. The company moved aheadstrongly on all fronts during the year and completed its factory modernisationprogramme. It now has a manufacturing facility that truly reflects its worldleading product design capability. Senior Aerospace Metal Bellows in Sharon, Massachusetts, specialises inedge-welded bellows products. It benefited from the recovery in civil aircraftbuild rates, the demand for spares as more aircraft returned to the sky, andfrom the military and defence sector remaining strong. The cost reductionsimplemented in 2002 and 2003 also helped the company's profitability during2004. Senior Aerospace BWT, in the UK, made little progress in 2004. This company hasa technical leadership position in ultra low weight passenger cabin ducting withits biggest customer being Bombardier to whom it sells in US dollars - hence thedual challenges in 2004 of declining demand and a declining sterling sellingprice. There are a variety of initiatives and new product programmes indevelopment to help mitigate this situation in the future. Senior Aerospace Composites is located in Wichita, Kansas, and manufacturescomposite ducting, but to a different specification to BWT. This company hasborne very significant start-up costs on the Airbus A380, but these are nowdeclining as the A380 programme starts production. Recovery in demand forbusiness jets at its biggest customer, Cessna, will also help the business tomove ahead. In France, Senior Aerospace Ermeto was the main operation in the Group affectedby the pause in production of the Eurofighter. This programme is scheduled torecommence during 2005. Ermeto supplies pipework and associated components forthe hydraulic systems on the Eurofighter and other aircraft. Product developmentand production improvements are helping its recovery. At Senior AerospaceCalorstat, also in France, 2004 was a year of significant progress, helped bynew leadership of the business and demand being ahead of expectations at anumber of its customers. Senior Aerospace Bird Bellows has a leading position in the supply of flexiblehigh pressure metallic ducting components. Airbus's increasing build rate ishelping Bird to grow turnover with the business also benefiting from the offloadwork being outsourced by Airbus, as it prepares for increased volumes and theramp up in production of the much larger A380. Senior Aerospace Bosman, in Holland, made significant progress in securing newbusiness with OEMs as its traditional repair business declined. Product detailmanufacture is being outsourced to lower cost countries and the business isplanning to move to a smaller facility incorporating design, final assembly andtesting only. New business, both in aerospace and power generation, is indiscussion. In San Diego, USA, the Group has two aerospace operations. Senior Aerospace JetProducts began to see some recovery in 2004 as the build rate of the Boeing 737increased. At Senior Aerospace Ketema, an improved result was helped by higherlevels of demand on a range of programmes. However, the operation willexperience a significant mix change in 2005 as new business from Goodrich,Rolls-Royce and Pratt & Whitney goes into production to replace reduced demandfrom the regional jet engine manufacturers. This will entail further investmentin the complex machining equipment necessary to meet the stringent manufacturingdemands required by the new generation of aircraft engines. Overall, the Aerospace division made healthy progress during 2004 with improvedoperating profits and an increase in operating margin. 2004 was a typical yearfor capital expenditure with £4.1m invested (75% of depreciation). The focus onlean manufacturing remains as strong as ever and this should help furtherprogress to be made as the aerospace market continues its recovery. Automotive Division The Group's main automotive markets, the USA and Europe, were flat in 2004.Within them, however, the trend of the Asian brands winning market share fromthe regional brands continued. In the USA, the "Big 3" market share declinedagain, whilst Toyota and Nissan made further inroads. In Europe, BMW had a goodyear, Fiat a poor one and Toyota again advanced its market position. Volume was not the primary challenge in 2004 for Senior Automotive. The majorchallenge was, and still is, raw materials with some genuine shortages,suppliers demanding huge price rises and the vehicle manufacturers resistingcomponent price increases because of the impact on their own limitedprofitability. The worst impact was at Senior Automotive Bartlett, in the USA, where some ofits products were designed out of customers' vehicles and some legacy productsmoved to lower cost countries. The operation got through the year, with hugemanagement effort, and with very substantial progress made in securingincremental business with new customers for new products. These products, allfor diesel engine applications, include high pressure fuel lines, common railsand exhaust gas recycling coolers. Test facilities are being substantiallyupgraded and manufacturing capacity installed ready for production starting inlate 2006, in order that the customers' diesel engines will meet the new 2007emissions legislation. Capital expenditure at this plant will be substantiallyhigher in 2005 and 2006 as a result. The ongoing enquiry rate associated withthis legislation change still remains high. The recovery in Bartlett's financialperformance should start in 2006. Senior Automotive Crumlin has also been focused on product development whilst,like Bartlett, it has suffered migration of legacy products to lower costoperations. Diesel engines are in widespread use in passenger cars in Europe andCrumlin has designed, developed and tested a new exhaust gas recycling coolerthat is lighter and more efficient than anything else on the market. Substantialprototype and application engineering work is in progress with three high volumeEuropean diesel engine manufacturers. At Senior Automotive Blois, in France, 2004 turned out to be a year of greatchallenge. Its financial performance deteriorated as a result of unexpectedlyhigh volume increases, a key production plant supplier going into receivershipand a key supplier failing to consistently maintain supplies at the requiredlevel. However, additional raw material sources have now been commissioned withnew machine capacity, from a different equipment supplier, shortly due forinstallation. Recovery is expected in 2005. Senior Automotive Kassel, in Germany, moved ahead in 2004, helped by the costreduction actions taken in 2003 and by stronger demand from its traditionalcustomers. The company has many new product applications in discussion andfurther progress is expected. Senior Automotive Olomouc, a greenfield site in the Czech Republic, remainedprofitable throughout 2004 having moved into profit for the first time at theend of 2003. Its products had been relocated from the Group's Blois facility inFrance over the previous two years. It is anticipated that further expansionwill take place at this site in due course. Senior Automotive Sao Paulo, in Brazil, also moved ahead in 2004. A more stablelocal economy and steadier market demand helped its automotive business. Ahigher level of demand was seen for its industrial products. Senior's operation in India, Senior Automotive New Delhi, grew strongly, winningnew business for its domestic OEM automotive market as well as serving thegrowing European automotive aftermarket. As a result, plans are in place toincrease the floorspace of the factory during 2005 and to install additionalmanufacturing capacity. Further growth in this business is anticipated. Senior Automotive Cape Town, in South Africa, had a successful year, beginningwith the move into a much larger factory, the installation of new manufacturingequipment and the start of production on a series of new product lines. TheAutomotive Division's key legacy product, for which Senior has a substantialmarket position, is the exhaust flex for front wheel drive cars. Thishistorically migrated from Bartlett in the USA and Crumlin in the UK to CapeTown as customers took advantage of the weak local currency. More recently, theSouth African Rand has strengthened so stemming the flow. Nonetheless, unitvolumes on existing programmes continue to grow. Whilst 2004 was a challenging year for Senior Automotive, the Division is nowbeginning to see the fruits of the effort and resource that has gone into newproduct development over the past two years. As a consequence, the performanceof the Division is expected to improve in the coming years. Industrial Division The final planned disposal was completed during 2004, leaving turnover at theremaining three operations at £44.9m in 2004 (2003 - £50.0m). The fiveindustrial hose operations that left the Group in August 2004 had sales for theseven months prior to disposal of £19.1m (£32.0m for the full year in 2003). Thefinancial details of the disposal are contained in the Finance Director'sReview. Of the three remaining businesses, Canada did well, helped by a supportive economy,continued attention to its cost base and the development of a more cost-effective supply base. At Pathway, in the USA, the factory in Tennessee was closed and the factory inTexas expanded. All production operations are now in the Texan facility. Pathwayis a world leader in the design, fabrication and installation of large expansionjoints for process plant, oil and gas and power generation applications but,during 2004, the market demand for its products remained at a low level. Arecovery in demand has become evident at the start of 2005 and this, togetherwith the management and cost base overhaul now being implemented, should resultin the performance of Pathway improving. Senior Hargreaves is the market leader in the design, fabrication andinstallation of ventilation ductwork but new construction in the UK has recentlybeen in the doldrums. The business underwent a strategic review in 2004 with theresult that, in future, a greater emphasis will be placed on higherspecification applications and the retail side of the business. Hargreaves isexpected to start to make progress in 2005 with the new strategy in place andthe completion of the ongoing Wembley Stadium contract. The three industrial businesses are all in shape to improve their performance in2005 and continue to progress thereafter. Graham Menzies Chief Executive FINANCE DIRECTOR'S REVIEW------------------------- Financial PerformanceThe Group fully implemented Financial Reporting Standard 17 "RetirementBenefits" and Urgent Issues Task Force 38 "Accounting for ESOP Trusts" in theperiod. The comparative figures for 2003 have been restated with underlyingearnings per share for 2003 being restated to 3.13p from the previously reported3.52p. The Chairman has commented on the Group's headline results in his statement. Fora second consecutive year, the reported results were significantly impacted byadverse currency movements with the average rate of the US dollar weakening by10.4% (US$ 1.83 : £ in 2004 compared to US$ 1.64 : £ in 2003). Overall, ontranslation, currency movements reduced turnover of continuing operations by£19.8m (6.1%) and operating profit from continuing operations before goodwillamortisation by £1.5m (8.6%) when compared to 2003. Hence, when stated on a constant currency basis, Group turnover from continuingactivities increased by 1.2% to £306.8m (2003 - £303.1m using 2004 averageexchange rates) and the Group's operating profit from continuing operationsbefore goodwill amortisation increased by 3.1% to £16.4m (2003 - £15.9m). Theoperating profit of the Aerospace Division improved by 32.9% to £9.3m (2003 -£7.0m), the Automotive Division declined by 7.0% to £6.6m (2003 - £7.1m) and theIndustrial Division, heavily impacted by the restructurings at Pathway andHargreaves, declined to £0.5m (2003 - £1.8m). The Group's operating profit is reported after £1.7m (2003 - £1.3m) ofreorganisation and restructuring costs. The main reasons for the 2004 chargewere: the consolidation of Pathway's manufacturing onto a single site (£0.4m);the outsourcing of component manufacture at Senior Aerospace Bosman (£0.4m) andthe business restructurings at Senior Automotive Blois and Senior Hargreaves(each £0.3m). Interest ChargeThe net interest charge fell by 41% to £2.9m (2003 - £4.9m) due to a £0.8minterest receipt, received in connection with the recovery of the US taxoverpaid in prior periods, as well as the combination of lower interest rates,reduced borrowings and the weaker US dollar. Interest cover, calculated onoperating profit before goodwill amortisation less the net finance cost inrespect of retirement benefits, was 5.4 times (2003 - 3.3 times). Net Finance Cost - retirement benefitsThe net finance cost in respect of retirement benefits fell to £1.2m (2003 -£2.2m). This cost, which was reported for the first time in 2004 following thefull implementation of FRS 17, arises from the difference between the expectedreturn on pension assets and the interest on pension scheme liabilities. TaxationThe overall tax charge for 2004 was £1.7m (2003 - £1.8m) with £0.2m (2003 -£nil) relating to the profit on sale of fixed assets. The Group's effective taxrate for 2004, measured on profit before goodwill amortisation and the effect ofthe disposal of operations and fixed assets, was 11.8% (2003 - 15.8%). The low2004 effective tax rate benefited from £0.9m of adjustments in respect of prioryears. During the year, cash refunds of £4.0m were received in respect of US taxoverpaid in prior periods such that, overall, the Group recovered a net £2.7m inrespect of taxes in 2004 compared to the £0.8m paid during 2003. DisposalsThe Group disposed of its five industrial hose businesses (located in the UK,France, Holland, Sweden and the USA) in August. The consideration was dischargedby way of £5.8m of cash at completion and the issue of a £2.5m convertible loannote and £2.5m in convertible preference shares. In calculating the totalanticipated consideration of £8.3m, on a debt-free/cash-free basis, fullprovision was made against the carrying value of the convertible preferenceshares. A loss on disposal of £13.3m was recorded after taking account of the£0.6m of disposal costs, £1.3m of goodwill held on the Group's balance sheet and£8.7m of goodwill previously written-off directly to reserves. Earnings and Dividends per ShareAs a result of the loss on disposal of the industrial hose businesses, the Groupreported a basic loss per share of 2.25p (2003 - earnings per share of 1.50p).Underlying earnings per share, before goodwill amortisation and the effect ofthe disposal of operations and fixed assets, was 3.65p (2003 - 3.13p). An unchanged final dividend of 1.35p per share is proposed to be paid on 27 May2005 to shareholders on the register on 29 April 2005. This will bring the totaldividends paid in respect of 2004 to 2.00p (2003- 2.00p). Cash Flow 2004 2003 £m £m ------- -------Operating profit 11.7 13.1Goodwill amortisation 5.1 5.4Depreciation 13.3 16.1Net capital expenditure (1) (9.7) (6.9)Pension payments above service cost (4.0) (1.3)Working capital movement (5.7) (0.4)Net interest paid (2.9) (5.0)Tax recovered / (paid) 2.7 (0.8) ------- -------Free cash flow 10.5 20.2Net disposals and acquisitions 4.5 0.4Dividends paid (6.1) (6.1)Effect of exchange rates 4.7 8.7 ------- -------Reduction in net borrowings 13.6 23.2 ------- -------Net borrowings 50.6 64.2 ======= ======= (1) Includes finance leased capital expenditure of £0.4m (2003 - £nil). Free cash flow was £10.5m (2003 - £20.2m). The year-on-year reduction waslargely due to £4.0m (2003 - £1.3m) of pension payments in excess of servicecost and an adverse working capital movement of £5.7m (2003 - £0.4m). This wasprimarily due to changes in customer mix, year-end development inventory for theJoint Strike Fighter, which was due for shipment in early 2005, and a higherlevel of contract debtors at Senior Hargreaves, a significant portion of whichhas already been recovered in 2005. Net capital expenditure increased to 73% ofdepreciation (2003 - 43%). Funding and LiquidityNet borrowings for the Group fell by £13.6m in the year to end at £50.6m, withexchange rate movements, principally the weakening US dollar (from $1.79 : £ to $1.92 : £), accounting for £4.7m of the reduction. Gross debt at the year-end was£57.3m (2003 - £79.1m) of which 92% was in US dollars as a policy hedge against the Group's US dollar assets. Gearing, at the year-end, was 67% (2003 - 81%) measured on total shareholders' funds and 43% (2003 - 52%) measured on net assets before retirement benefit liabilities. The Group primarily finances its borrowings through the US private placementmarket and two revolving credit facilities. During the year, the term of thesmaller, US$25m, revolving credit facility was extended by 12 months to May2007. At the end of 2004 the Group had total facilities of £130.4m, of which£73.1m was unused. £111.1m of the total facilities were committed for more thanone year. Financial Risk ManagementThe main financial risks faced by the Group continue to be movements in interestrates and foreign currency exchange rates as well as funding and liquidityrisks. All such risks are managed by a centralised treasury department whichreports to the Group Finance Director. It operates under the guidance of theTreasury Committee, which meets quarterly and acts according to the laid-downobjectives, policies and authority levels approved by the Board. The Group'sexternal auditors attend the Treasury Committee once a year. All activities arefocused on the management and hedging of risk and it is Group policy not toengage in speculative financial transactions. The Group is exposed to movements in exchange rates for both foreign currencytransactions and the translation of net assets and profit and loss accounts ofoverseas operations. The Group has a policy of hedging its net investment inoverseas operations through currency denominated loans and forward contracts butit does not hedge the effects of currency movements on the translation of itsoverseas earnings into sterling. Transaction exposures are, however, normallyhedged through forward exchange contracts on a rolling 12 month basis. It is Group policy to have the majority of its gross borrowings subject to fixedrates of interest. This is achieved through having a mixture of fixed andvariable rate borrowings and by entering into interest rate swaps. At theyear-end 66% (2003 - 62%) of gross borrowings were subject to fixed rates. PensionsThe Group operates a number of defined benefit pension plans, with the largestbeing the UK scheme, as well as a number of geographically based definedcontribution and government sponsored arrangements. The Group fully implementedFRS 17 "Retirement Benefits" during the year. At the end of 2004, total FRS 17 pension and post-retirement liabilities were£41.2m (2003 - £44.0m) with £33.5m (2003 - £35.5m) being in respect of the UKscheme. The triennial actuarial valuation of the UK scheme was carried outduring 2004 with the past service deficit being confirmed as £18.5m. This is tobe funded by additional Company contributions of £2.6m per annum. During 2004 anadditional contribution of £1.4m was made in respect of the UK scheme inanticipation of the outcome of the actuarial valuation and a supplementarypayment of £2.4m made in respect of the three US defined benefit schemes toimprove their funding position. The actuarial deficit for the UK scheme is lowerthan the FRS 17 deficit primarily due to the different discount rates used tovalue the liabilities. In total, £2.0m (2003 - £2.0m) was charged to the profit and loss account during2004 for defined benefit schemes, in addition to the net finance costs describedearlier. The total charge for defined contribution schemes was £2.2m (2003 -£2.7m). International Accounting StandardsSenior will be reporting its financial results in accordance with InternationalFinancial Reporting Standards (IFRS) from 1 January 2005. The conversion projectis on-going and the Auditors are due to report to the Audit Committee in May 2005. It is considered that the standards potentially having the most significant effect on the Group are: IFRS 2 Share-based Payments - IFRS 2 requires all options granted since 7November 2002 to be valued at the date of the grant and the value amortisedthrough the profit and loss account over the likely life of the option. TheGroup only granted such options on 12 March 2003. Under IFRS 2 the expense,calculated on the basis of the fair value at the date of the award using theBlack-Scholes pricing model, is estimated at less than £0.1m for each of 2004and 2005. IFRS 3 Business Combinations - Under IFRS, goodwill is no longer amortised butis instead held at its carrying value on the balance sheet and tested annuallyfor impairment. The transitional arrangements contained in IFRS do not requirethis standard to be applied to acquisitions made prior to 1 January 2004 and theGroup intends to take this option. Under UK GAAP, the goodwill amortisationcharge for 2004 was £5.1m and hence Group profit before tax would be expected tohave been a similar amount higher if 2004 results had been reported under IFRS. IAS 19 Employee Benefits - IAS 19 is similar to FRS 17, which was adopted by theGroup during 2004. The Group intends to follow the "FRS 17" option under IAS 19of immediately recognising all actuarial gains and losses through reserves.Accordingly, the introduction of IAS 19 is not expected to result in anymaterial differences to either the Group's consolidated balance sheet or profitand loss account for 2004. IAS 38 Research and Development - Under UK GAAP, research costs must bewritten-off immediately as incurred whereas development costs may either becapitalised and amortised or written-off as incurred. Historically, Senior haswritten-off development costs as incurred. IAS 38 requires developmentexpenditure meeting certain criteria to be capitalised, amortised and subjectedto an annual impairment review. Much of the Group's development expenditureresults in incremental, rather than significant, improvements to existingproducts and processes and capitalisation under such circumstances is unlikely.Where development expenditure does result in new or significantly improvedproducts or processes, it will only be capitalised where its carrying value canbe validated with reasonable certainty. Overall, the adoption of IAS 38 is notanticipated to have a significant effect on the Group's results. IAS 32 and 39 Financial Instruments - IFRS requires most financial assets andliabilities and all financial instruments, to be recognised at fair value at thebalance sheet date with changes in their value taken through the profit and lossaccount. Unless hedge accounting is used, this could introduce significantvolatility to a company's profit. Senior intends to apply the hedge accountingprovisions of IAS 39, to minimise future volatility, to the extent practicallyand economically appropriate to do so. Comparative figures for 2004 are notrequired and, whilst unlikely to have a material effect on the Group's netassets or profit before tax, it is not possible to exactly predict the impact ofIAS 32 and 39 on the future results. Non-Statutory InformationIn the commentary to the year's results reference is made to non-statutoryfinancial information. Such information includes: • Operating profit before goodwill amortisation - this is used to illustrate the underlying trading performance of the Group. The Group Profit and Loss Account provides the information to reconcile this to operating profit with segmental detail provided in Note 1. • Underlying profit before tax and underlying earnings per share - these indicate the overall performance of the Group before the effect of goodwill amortisation and the disposal of businesses and fixed assets. Note 3 reconciles these to the reported results. • Free cash flow - this highlights the total net cash generated by the Group prior to corporate activity such as acquisitions, disposals and dividend payments. A table earlier in this review explains its derivation. Mark Rollins Finance Director Group Profit and Loss Accountfor the year ended 31 December 2004 Notes 2004 2003 restated £m £m -------- --------TurnoverTotal continuing operations 306.8 322.9Discontinued operations 19.1 32.0 -------- -------- 1 325.9 354.9 -------- --------Operating profitContinuing operations beforeamortisation of goodwill 16.4 17.4Amortisation of goodwill (5.1) (5.3) -------- --------Total continuing operations 11.3 12.1Discontinued operations 0.4 1.0 -------- -------- 1 11.7 13.1Profit on sale of fixed assets - continuing operations 0.5 0.4Loss on disposal of discontinued operations (including £8.7m (13.3) -of goodwill previously written off directly to reserves) -------- --------(Loss)/profit on ordinary activitiesbefore interest and taxation (1.1) 13.5Other interest receivable and similar income 2.2 1.2Interest payable and similar charges (5.1) (6.1)Other net finance cost - retirement benefits (1.2) (2.2) -------- --------(Loss)/profit on ordinary activities before taxation (5.2) 6.4Tax on (loss)/ profit on ordinary activities (1.7) (1.8) -------- --------(Loss)/profit for the financial year (6.9) 4.6Dividends (6.1) (6.1) -------- --------Loss for the year (13.0) (1.5) -------- --------(Loss)/earnings per share 3Basic (2.25)p 1.50pDiluted (2.25)p 1.49pUnderlying 3.65p 3.13p -------- --------Dividends per share 2 2.00p 2.00p -------- -------- The comparative figures for the year ended 31 December 2003 have been restatedto reflect the adoption of Financial Reporting Standard No. 17 "RetirementBenefits" and UITF 38 "Accounting for ESOP Trusts". See Note 6 for details. Group Balance SheetAt 31 December 2004 Notes 2004 2003 restated £m £m -------- --------Fixed assetsIntangible assets - goodwill 68.0 76.7Tangible assets 70.0 79.1 -------- -------- 138.0 155.8 -------- --------Current assetsStocks 38.4 40.1Debtors: Amounts falling due after more than one year 3.8 1.0Debtors: Amounts falling due within one year 60.0 66.9Cash at bank and in hand 7.4 11.6 -------- -------- 109.6 119.6Creditors: Amounts falling due within one year (76.1) (77.8) -------- --------Net current assets 33.5 41.8 -------- --------Total assets less current liabilities 171.5 197.6Creditors: Amounts falling due after more thanone year (54.7) (73.4)Provisions for liabilities and charges (0.3) (0.7) -------- --------Net assets before retirement benefitliabilities 116.5 123.5Retirement benefit liabilities (41.2) (44.0) -------- --------Net assets 75.3 79.5 -------- --------Capital and reservesCalled-up share capital 30.7 30.7Share premium 3.5 3.5Other reserves 17.7 17.7Profit and loss account 24.7 28.9Investment in own shares (1.3) (1.3) -------- --------Equity shareholders' funds 5 75.3 79.5 -------- -------- The comparative figures for the year ended 31 December 2003 have been restatedto reflect the adoption of Financial Reporting Standard No. 17 "RetirementBenefits" and UITF 38 "Accounting for ESOP Trusts". See Note 6 for details. Group Statement of Total Recognised Gains and Lossesfor the year ended 31 December 2004 2004 2003 restated £m £m -------- ------- (Loss)/profit for the financial year (6.9) 4.6Currency translation differences on overseas net investments including goodwill (0.5) 1.1Tax benefits on foreign exchange losses 0.9 0.6Actuarial variations on post-retirement benefits (0.3) - -------- -------Total recognised gains and losses relating to the year (6.8) 6.3 -------Prior year adjustment (42.3) --------Total recognised gains and losses since previous Annual Report (49.1) -------- There is no material difference between the profits as reported and thoseprofits restated on an historical cost basis. The comparative figures for the year ended 31 December 2003 have been restatedto reflect the adoption of Financial Reporting Standard No. 17 "RetirementBenefits" and UITF 38 "Accounting for ESOP Trusts". See Note 6 for details. Group Cash Flow Statementfor the year ended 31 December 2004 Notes 2004 2004 2003 2003 £m £m £m £m ------ ------ ------ ------Net cash inflow from operatingactivities 4a) 20.4 32.9Returns on investments and servicing of financeInterest received 2.5 1.2Interest paid (5.4) (6.2) ------ ------Net cash outflow from returns oninvestments and servicing of finance (2.9) (5.0) TaxationUK corporation tax (paid)/ recovered - -Net overseas tax recovered/(paid) 2.7 (0.8) ------ ------Net cash inflow/(outflow) from taxation 2.7 (0.8) Capital expenditure and financialinvestmentsPurchase of tangible fixed assets (10.0) (8.0)Sale of property, plant andequipment 0.7 1.1 ------ ------Net cash outflow from capitalexpenditure and financial investments (9.3) (6.9) Acquisitions and disposalsPurchase of subsidiary undertakings - deferred consideration (0.2) (0.3)Sale of subsidiary undertakings 5.2 0.7Net cash balances disposed withsubsidiaries (0.5) - ------ ------Net cash inflow from acquisitionsand disposals 4.5 0.4 Dividends paid on ordinary shares (6.1) (6.1) ------ ------Net cash inflow before financing 9.3 14.5 FinancingNew loans initiated by Group - 18.4Repayments of existing loans (19.2) (33.5)Cash inflow on forward exchange contracts 4.5 4.5 ----- ------ (14.7) (10.6) ------ ------(Decrease)/increase in cash in the period 4b) (5.4) 3.9 ------ ------ Notes: 1 Segment Information Group turnover, operating profit and net assets are analysed below. Thereconciliation of operating profit to profit before taxation is shown in theGroup Profit and Loss Account. The reconciliation of net assets to the balancesheet is shown in part c) of this note. In both cases the reconciling items areconsidered to be of a Group nature and not directly attributable to individualsegments. Discontinued operations record the results of the five industrial hoseoperations that were disposed of in August 2004. These were Senior FlexonicsLimited, Flexonics SAS, Senior Flexonics B.V., Habia Teknofluor A.B. and thetrade and assets of the US Hose Division of Senior Operations Inc. a) By class of business Turnover Turnover Operating Operating Net Net profit profit assets assets 2004 2003 2004 2003 2004 2003 restated restated £m £m £m £m £m £m ------ ------ ------ ------ ------ -----Aerospace 139.6 143.8 5.9 4.2 107.7 115.4Automotive 122.9 129.6 5.9 7.0 48.5 50.8Industrial 44.9 50.0 (0.5) 0.9 23.5 24.4 ------ ------ ------ ------ ------ ------Total 307.4 323.4 11.3 12.1 179.7 190.6Inter-segmentsales (0.6) (0.5) - - - - ------ ------ ------ ------ ------ ------Total continuing operations 306.8 322.9 11.3 12.1 179.7 190.6Discontinuedoperations 19.1 32.0 0.4 1.0 0.4 8.2 ------ ------ ------ ------ ------ ------ 325.9 354.9 11.7 13.1 180.1 198.8 ------ ------ ------ ------ ------ ------ Operating profits shown above are stated after charging £1.7m (2003 -£1.3m) of reorganisation and restructuring costs and £5.1m (2003 -£5.4m) of goodwill amortisation. These are attributed to the segments as follows: Reorganisation and Goodwill amortisation restructuring 2004 2003 2004 2003 £m £m £m £m ------ ------ ------ ------Aerospace 0.7 0.7 3.4 3.5Automotive 0.3 0.5 0.7 0.7Industrial 0.7 0.1 1.0 1.1 ------ ------ ------ ------Total continuingoperations 1.7 1.3 5.1 5.3Discontinuedoperations - - - 0.1 ------ ------ ------ ------ 1.7 1.3 5.1 5.4 ------ ------ ------ ------ b) By geographical market Turnover by Turnover by Turnover Turnover Operating Operating Net Net destination destination by origin by origin profit by profit by assets assets origin origin 2004 2003 2004 2003 2004 2003 2004 2003 restated restated £m £m £m £m £m £m £m £m ------ ------ ------ ------ ------ ------ ----- ------ North America 161.7 178.6 168.4 190.2 8.0 11.0 87.8 96.5United Kingdom 44.9 47.6 53.8 54.9 0.6 (0.3) 48.8 51.9Rest of Europe 89.2 82.6 67.1 63.1 (0.3) 0.1 35.1 34.7Rest of World 17.5 18.2 24.0 18.8 3.0 1.3 8.0 7.5 ------ ------ ------ ------ ------ ------ ------ ------Total 313.3 327.0 313.3 327.0 11.3 12.1 179.7 190.6Inter-segmentsales (6.5) (4.1) (6.5) (4.1) - - - - ------ ------ ------ ------ ------ ------ ------ ------Total continuing operations 306.8 322.9 306.8 322.9 11.3 12.1 179.7 190.6Discontinued operations 19.1 32.0 19.1 32.0 0.4 1.0 0.4 8.2 ------ ------ ------ ------ ------ ------ ------ ------ 325.9 354.9 325.9 354.9 11.7 13.1 180.1 198.8 ------ ------ ------ ------ ------ ------ ------ ------ Operating profits shown above are stated after charging £1.7m (2003 -£1.3m) of reorganisation and restructuring costs and £5.1m (2003 -£5.4m) of goodwill amortisation. These are attributed to the segmentsas follows: Reorganisation and Goodwill amortisation restructuring 2004 2003 2004 2003 £m £m £m £m ------ ------ ------ ------North America 0.5 0.7 2.4 2.7United Kingdom 0.5 0.3 2.3 2.3Rest of Europe 0.7 0.3 0.1 0.1Rest of World - - 0.3 0.2 ------ ------ ------ ------Total continuingoperations 1.7 1.3 5.1 5.3Discontinuedoperations - - - 0.1 ------ ------ ------ ------ 1.7 1.3 5.1 5.4 ------ ------ ------ ------ c) Net assets reconciliation 2004 2003 restated £m £m ------ ------ Net assets, as above 180.1 198.8Net pension deficits (41.2) (44.0)Net other unallocatedassets/(liabilities) (13.0) (11.1)Net borrowings (50.6) (64.2) ------ ------Net assets, per Balance Sheet 75.3 79.5 ------ ------ 2 Dividends The proposed final dividend is at the rate of 1.35p per share (2003 - 1.35p) making 2.00p for the year (2003 - 2.00p) and, if approved, will be payable on 27 May 2005 to shareholders on the register at the close of business on 29 April 2005. 3 Earnings per Share The calculations of basic earnings per share and underlying earnings per shareare shown below and have been based on the weighted average number of ordinaryshares in issue and ranking for dividend during the year.Related Shares:
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