8th Jun 2006 07:01
Scapa Group PLC08 June 2006 8 June 2006 Scapa Group plc Preliminary Results Scapa Group plc, a global supplier of technical tapes and cable compounds, todayannounced its preliminary results for the 12 months ended 31 March 2006. Highlights • Trading Profit* of £5.5m - £2.2m up on last year's poor result including currency benefit of £0.9m • Cash inflow of £2.8m after £5.7m receipt from Waycross deposit - ongoing legacy costs of £4.4m for asbestos litigation and pensions top-up • Strategic review completed - future focus on speciality tapes business • Proposed sale of the Megolon compounding business for £16.75m, subject to normal due diligence and shareholder approval • Substantial cost reduction programme with cost of £2.8m in year and anticipated annual savings of £2.6m. Further stage now announced - additional cost £1.0m with expected annual savings of £1.2m in a full year Commenting on the results, Chairman Dr Keith Hopkins said: "The welcome improvement in trading performance reflects the changes made to themanagement team during the year, with specific actions on selling pricerecovery, reduction of low margin business and cost savings. "It is also pleasing to see major progress against our recently completedstrategic review with the proposed sale of our Megolon business and a furthersubstantial cost reduction programme. Much remains to be done, however, torestore performance to an acceptable level." For further information: Calvin O'Connor Chief Executive Tel: 0161 301 7430Colin White Finance Director Tel: 0161 301 7430Sarah McLeod Financial Dynamics Tel: 020 7831 3113 A full copy of this announcement can be found at www.scapa.com * Figures shown here and elsewhere as 'trading profit' in the PreliminaryAnnouncement relate to operating profit before exceptional costs of £3.4m (2004/05 £0.9m) and goodwill/asset impairments of £13.7m (2004/05 £3.6m). Chairman's Statement 2005/06 showed a welcome improvement in operating profit before impairments andexceptional costs ('trading profit'), from the poor result of the previous year.This was due to cost savings, price increases and a reduction in low marginbusiness. Sales were broadly in line with the prior year at £191.5m (2004/05£188.2m). Trading profit was £5.5m compared to £3.3m last year, with £0.9m ofthe improvement due to a stronger US Dollar. After impairments of £13.7m (2004/05 £3.6m) and exceptional costs of £3.4m (2004/05 £0.9m), the operating loss forthe year was £11.6m (2004/05 £1.2m loss). Strategic Review During the second half of the year we completed a major review of the Company.Scapa has good technology in the specialist adhesive tape market where technicalperformance and service are paramount and good margins are attained.Unfortunately a number of poorly performing acquisitions and investments in pastyears give us little room for manoeuvre and as a first step we have decided tosell a number of our peripheral operations to pay down our debt and improve ourfinancial position. We intend to keep the role of all of our businesses withinthe Group under constant review. In addition, we need to improve our existing business by significantly reducingboth overhead and fixed costs in line with the size of the Group with some ofthis already achieved. Reorganisation costs of £2.8m were incurred in the yearprimarily to reduce our cost base in the UK with annual savings of £2.6m. Thisincluded the closure of our Blackburn head office and relocation to our Ashtonfactory site. Furthermore a full review of goodwill and asset carrying valuesof previous acquisitions and investments at the end of the year identified theneed for an additional impairment of £13.7m. Finally, we are hampered by two legacy issues - asbestos litigation andpensions. Due to their significance these issues continue to absorb most of ourfree cash flow and as a consequence, their resolution will largely determine ourfuture. Negotiations with our pension fund trustees and the regulator will be akey task following the latest triennial valuation as at 1 April this year. Theoutcome needs to enable the Company as far as possible to fulfil promises madeto fund members, though on all sides compromises will need to be made. Inaddition, with our successful strategy on asbestos litigation we have commenceddiscussions with our insurers with a view to them bearing more of the financialload and we continue to look at options for closing out this liability. Given all of the above and considering the size of our Group, the Boardconsiders it appropriate for the Company to move from the main market to AIM inview of the lower costs particularly for disposals. Approval from shareholdersfor the move to AIM will be sought at the forthcoming AGM. Finance Strict cash management has remained a key objective throughout the year.Substantial cash legacy payments were needed for asbestos litigation (£1.4m) andpensions (£3.0m). Trading working capital increased by £2.6m due to thecombination of rising sales volumes in the last quarter as well as sometightening of supplier payment terms. Cash inflow from operations was £2.1m(2004/05 £1.5m) before capital investment of £2.7m (2004/05 £4.6m) and therelease of US$10m (£5.7m) from the Waycross deposit. Net debt excluding theremaining US$10m in the Waycross deposit was £13.2m (31 March 2005 £15.2m).After exceptional costs and goodwill and asset impairments, the loss before taxwas £14.5m (2004/05 loss £3.6m). No final dividend is proposed. The Group's defined benefit pension scheme deficits have increased by £17.8m to£63.4m. This was due primarily to more cautious mortality assumptions and areduced discount rate, partially offset by an increase in the value of pensionscheme assets. US Litigation We continue to defend personal injury claims in the USA from alleged exposure toasbestos that relate to a business we sold in 1999. As we reported in ourInterim Statement the award of US$3.0m made against Scapa in October 2003 wasreversed on appeal in November 2005. The appeal continues against a secondadverse verdict in Louisiana of US$162,500 in February 2005. An appeal against afavourable verdict for Scapa in May 2005 in Baltimore, was rejected by the courtin March 2006. In May 2006 we won an important case in Philadelphia in which aformer papermill worker had claimed to have mesothelioma. The Board During the year there were a number of changes to the Board. Tony Watsonresigned as Director with effect from 1 June 2005. Richard Perry, the FinanceDirector of Fenner plc, was appointed as a Non-Executive Director with effectfrom 1 June 2005 and became Chairman of the Audit Committee on that date.Calvin O'Connor, previously Managing Director of British Vita's IndustrialPolymers business, was appointed Chief Executive on 10 October 2005. At ourAGM on 25 July 2006, Michael Baughan and Sarkis Kalyandjian will retire from theBoard. Their experience has been of great value to the Group during thisdifficult period and I would like to thank them for their wise counsel andcontributions. The Board will look for a further Non-Executive Director in duecourse. Outlook As we start our new financial year there has been a weakening of the US Dollarand continuing upward pressure on raw material prices linked to the current highlevel of crude oil. This, together with some subdued demand in certain markets,means that full margin recovery remains an ongoing area of focus. Trading in April and May has been in line with expectations. The majorinitiatives now in place following our internal reviews give us confidence thatkey ongoing and legacy issues are being actively addressed with greater emphasison areas of under-performance and narrowing of our business spread. Muchremains to be done, however, to restore our performance to an acceptable level. Business Review Operations Scapa's Business Scapa is one of the leading technical adhesive tapes and specialist cablecompound manufacturers in the world with manufacturing and sales operations intwelve countries across North America, Europe and Asia. Within Scapa there is adepth of technical competence and manufacturing expertise derived from tapemanufacturing experience over many years. The business is managed and structuredaround its three principal regions: North America, Europe and Asia. Strategy During the year we completed a major review of business performance anddeveloped a series of strategic and operational initiatives to address the majorunder-performance seen in recent years. The first outcome of the review was thedecision to dispose of peripheral operations which has culminated in theproposal to sell our Megolon compounding operations for cash of £16.75m, subjectto normal due diligence and shareholder approval, as well as our loss-makingIrish distribution business for £1.0m in cash. In 2005/06 the Megolon businesshad sales of £20.3m and an EBITDA of around £2.0m. Net assets at 31 March 2006,included in the deal, amounted to approximately £7.1m. The second outcome of the review was an extension of our major operating costreduction programme. The next stage will follow the proposed disposals at anestimated cost of £1.0m with additional annual savings of £1.2m. Totalexpenditure over the three phases of the programme amounts to £3.8m, withestimated total annual savings of £3.8m. Relentless cost reduction willcontinue to be the way of life at Scapa and will take several years to fullycomplete. The final outcome from the review was the need to find a more equitable balancefor the business in relation to the cash legacy costs of the pension deficit andasbestos litigation. Detailed discussions to facilitate this will be a majorpart of the year ahead. 2005/06 Performance Overview Sales in 2005/06 rose by 2% to £191.5m (2004/05 £188.2m). Trading profitincreased by £2.2m to £5.5m, giving an operating margin of 2.9%. Thisimprovement was helped by the strengthening US Dollar which appreciated by 3% onaverage during the year against Sterling and which contributed £0.9m of theincrease. At constant exchange rates, sales reduced marginally by 0.6% (£1.1m)and trading profit increased by £1.3m. Raw material price increases, whichbegan in the second half of 2004/05, continued to be a challenge to margins in2005/06. Sales price increases were implemented throughout the year across mostmarket sectors and recovered the majority of our raw material cost increase.Reorganisation costs of £2.8m were incurred in the year primarily to reduce ourcost base in the UK with annual savings of £2.6m, resulting in a reduction by 54of the number of employees at the end of the year. This included the closure ofour Blackburn head office and relocation to our Ashton factory site. North America North American sales for 2005/06 were £66.7m compared with £64.1m last year, agrowth of 4.1%, helped by a stronger US Dollar. At constant exchange rates saleswere just under 2% lower, due to the loss of a low margin automotive contract.Trading profit was 8% ahead of 2004/05, at £7.7m, including £0.4m benefit fromthe stronger US Dollar. Trading margin increased by 0.4% to 11.5%. Industrial sales grew substantially year on year due to new product launches andwinning new customers. Automotive sales declined after the loss of a large, lowmargin, customer. Cable wrapping tape sales were also down due to lower thanexpected demand by the telecommunications industry. As a consequence, at theyear end, following a goodwill and asset carrying value review, the goodwill andsome of the assets used by the Lusa cable wrapping tape business, which wasacquired in 2001, were written down. Raw material prices continued their upward trend during the year averagingaround 7% with, in addition, substantial price hikes to utility costs. Salesprice increases helped to mitigate the impact of these increases. Operatingcosts were reduced significantly year on year, including the full year benefitfrom the closure of the Mansfield site in late 2004/05 and its consolidationonto our Renfrew facility in Canada. Other savings were achieved throughtargeted capital investment and employee productivity improvements. Trading working capital levels remained consistent with the prior year whilstcapital investment was significantly lower, with investment focused on healthand safety and short-term cost reduction projects. In the previous yearsignificant investment was directed towards the consolidation of the cablewrapping tape business. Operating cash generation continued to be strong. Excellent delivery performance and inventory control accuracy levels contributedto high levels of customer satisfaction and service. With these in place weremain confident that our underlying organic sales growth will continue, furtherleveraging the fixed cost base. Raw material and utility costs remain aconcern. Recovering these additional costs by increased selling prices andfurther cost reduction measures is essential to maintaining margins. Europe Following Steve Lennon's appointment as Chief Operating Officer in 2004/05 theEuropean management team was re-structured. Under Steve's direction theEuropean and North American management teams have since fostered closer workingrelationships, thereby sharing their respective strengths. This has been ofparticular benefit to Europe. The transfer of a North American commercialmanager to head both the European sales and product development teams has led toimprovement in sales and a more focused commercial approach to new productdevelopment. Over the last year the European business has replaced a matrix managementstructure with an emphasis on business units to site based profitaccountability. During this period operational management has beenstrengthened, particularly in the UK. As a consequence of these actions there isnow a fresh focus on individual site performance and clearer accountability withdetailed improvement plans in place. The effect of implementing these changes, together with the promotion of theregion's 'Customer Now' initiative, has brought about a step change in deliveryperformance and enhanced customer service levels throughout 2005/06. As adirect result sales have begun to recover during the year with overall salesgrowth of 1.6%. This recovery was most evident in the second half where salesimproved by 4.4% over the first half of the year and were 5.3% higher than inthe second half of 2004/05 (at constant currency). Trading profit improved by£1.1m, moving from a loss of £0.4m in 2004/05 to a profit of £0.7m in 2005/06.The most significant improvements were achieved at the loss-making Italian andAshton (UK) sites. All market sectors experienced sales growth apart from medical. The mostsignificant improvements were in the cable and automotive sectors, benefitingfrom new cable tape contracts and new automotive products as well from salesprice rises. A shortage of new medical development projects over recent yearshas lead to a downturn in medical sales. Targeted sales price increases wereachieved across all market sectors, effectively offsetting increases in rawmaterial prices in the year of over 3%, driven up by rising oil and gas costs.Utility costs were also significantly higher with a £0.5m increase over theprior year, mostly in the second half. Following a review of European operations in the first half, cost reductionswere implemented that generate annualised savings of around £1.5m. Additionalcost savings initiatives were also taken in the second half of the year with aprojected annualised saving of £0.5m and at a cost of £0.3m. In a review of goodwill and asset carrying values for European loss-makingbusinesses residual goodwill associated with the Medifix medical businessacquisition in 2001 and that associated with the CCL cable tapes acquisition in2001 was written down following a deterioration in performance of thesebusinesses. Working capital was higher at March 2006 due largely to the higher sales volumesin the last quarter, which were 5% ahead of the prior year. In addition tradecreditors moderated a little in line with payment terms. Capital investment wasfocused primarily on automatic conversion equipment. European sales will beincreasingly focused on exploiting niche geographic and end-user opportunities.New product development is being restructured and managed to support theseobjectives, following a number of years of under-performance. The continuedpressure of raw material price increases and resulting impact on margins remainsan area of emphasis with the business committed to passing on raw material priceincreases. Asia The performance in Asia was disappointing with sales falling by £1.1m to £7.7m(2004/05 £8.8m). On a constant exchange basis sales fell by £1.8m. As aconsequence of the lower sales, operating profit fell from £0.5m in 2004/05 to aloss of £0.1m. The loss of a key high margin contract was a significantcontributor to this shortfall. The appreciation of the Korean Won and higherinvestment in new product development were also factors in reducing Asia'sprofits. In view of our poor ongoing performance in Korea asset carrying valueshave been reviewed and written down accordingly. During the last 18 months wehave built up a strong distribution network and now look to leverage this withthe opportunities available to us in the region. Our focus however is nowdirected towards profitable growth rather than higher volume. Corporate Corporate costs in the year reduced by £1.1m, the result of the closure of thecorporate headquarters in Blackburn and consolidation of the corporate team intothe Ashton site, together with a favourable £0.5m benefit arising from changesin the value of certain financial instruments. The associated costs of closureof the headquarters totalled £0.7m with annual savings of £0.4m. Asbestos litigation The Group continues to be involved in a number of cases in the USA arising fromthe alleged exposure of paper mill workers to asbestos in a product that waspart of a business sold to J M Voith AG in July 1999. Prior to 2003 the Companyhad won all cases, or had been dismissed, or the case had been abandoned beforegoing to court. In October 2003, a jury in Baltimore, Maryland, USA, returnedan award of US$3.0m against Scapa Dryer Fabrics Inc. We are pleased to reportthat this wholly unexpected judgement was subsequently reversed on appeal on 17November 2005 and the plaintiff's further appeal has been denied. The plaintiffhas applied for a retrial but it is unlikely that any court hearing will takeplace before 2007. Another adverse verdict was entered in Louisiana in February2005 awarding in total US$162,500 plus costs and interests to seven plaintiffs.The Company has appealed against the judgement but the judicial process inLouisiana has been severely disrupted by the effects of Hurricane Katrina and itis not yet known when the appeal will be heard. During May 2006 a jury trial took place in Philadelphia, Pennsylvania, of aclaim by a retired paper mill worker who alleged he has mesothelioma. The courtrejected the plaintiff's claim and dismissed the case. Business Risk There are a variety of business risks that can affect internationalmanufacturing companies like Scapa. International businesses routinely managerisks associated with foreign currency fluctuations and can be affected by costpressures associated with raw material pricing and availability, customerrelocations, developments in international tariffs and legislation and changesin the overall geo-political climate, including the development of competitorsfrom within low cost economies. Scapa is not dependent on any single customerand in 2005/06 the largest single customer represented less than 4% of totalGroup sales. The Registration, Evaluation and Authorisation of Chemicals (REACH) legislationhas still to complete its second reading in the European Parliament, withprojected enactment during 2007. It prescribes for specific hazard testing forall chemicals manufactured or imported into the EU, placing the responsibilityon the manufacturer or importer, to satisfy standardised testing protocols inrelation to any long-term health risks relating to that chemical. In our view,we believe that the REACH legislation will have a limited impact on Scapa overthe next three to five years. However the legislation will be monitoredcarefully to ensure the Group is compliant with the standards that areeventually set. As described earlier Scapa continues to be involved in cases arising fromalleged exposure to asbestos. In over ten years of successful defence in the USAno Scapa Group company, nor any of its insurance carriers, has admittedliability nor made any payment to any plaintiff under our policies.Accordingly, our insurance coverage remains intact and the Board will continueto defend vigorously the outstanding claims. However this litigation still posesa potential risk to the Group. Appropriate advice is continually being sought toensure that these risks are managed in an appropriate manner. The Group operates three defined benefit schemes with significant fundingdeficits. The three schemes are being revalued during 2006 based on the positionas at 1 April 2006, and new contribution funding levels will have to benegotiated with the trustees. The pensions regulator has provided generalguidance to trustees regarding the period over which deficits should be paiddown, and recent legislation has given additional powers to pension trustees tostrengthen their negotiating position. The Company will be aiming to negotiatea mutually satisfactory but affordable outcome with the trustees and theregulator. At this stage however it is not possible to predict the outcome ofthese negotiations. We have continued to adopt a detailed review process at all levels of thebusiness to monitor and control business risks. Principal risks to the businessare reviewed on a regular basis by the senior management team and the GroupBoard and remedial action plans are developed as and when appropriate. Overallwe continue to consider that the policies and monitoring systems which are inplace and which have been reviewed regularly throughout the year remainsufficient to effectively manage the risks associated with our business. Finance Operating results Sales were 2% ahead at £191.5m (2004/05 £188.2m) but were broadly unchanged onconstant currency. Second half sales grew by 3% against the first half helped inpart by a favourable movement in the US Dollar. Trading operating profit was £5.5m (2004/05 £3.3m), an increase of £2.2m, ofwhich £0.9m was contributed by a stronger Dollar. Operating cost savings werethe main contributors to the improvement in profit and more than offsetsignificant increases in utility costs. The operating loss for the year was£11.6m (2004/05 £1.2m loss) after impairments of £13.7m (2004/05 £3.6m) andexceptional costs of £3.4m (2004/05 £0.9m). Reorganisation costs Reorganisation costs and exceptional provision increases totalled £3.4m (2004/05£0.9m). Of this, £2.8m was incurred in connection with redundancies across theGroup and the closure and relocation of the UK head office. A further £0.6mrelated to an increase in dilapidations provisions at certain UK leasedproperties and an increase in an onerous lease provision. Goodwill and asset impairments Arising from the IAS 36, 'Impairment of Assets' annual review the residualgoodwill on the following acquisitions was written off: Lusa cable wrapping tapes (acquired in 2001) £2.6mCCL cable tapes (acquired in 2001) £1.6mMedifix/Boldscope medical tapes (acquired in 2000) £6.7m In addition the carrying values of certain fixed assets at a number of sites hasbeen written down as estimates of prospective cash flows are considered to beinsufficient to justify the current value of the business's assets. The totalamount written down was £2.8m and related to our Korean operations, the UK sitesat Dunstable and Ashton, and to certain assets associated with the Lusa businessbased in North America. Interest Net interest payable was £1.0m, (2004/05 £0.7m). The benefit from lower averagelevels of debt was more than offset by higher average interest rates. Interestcover, being trading profit before finance costs and tax as a ratio of interestpaid on net borrowings, was 5.5 times covered. The IAS 19, 'Employee Benefits' pensions finance charge was £1.4m (2004/05£1.2m). The accounting discount on long-term provisions was £0.5m (2004/05£0.5m). Profit before tax and taxation charge Statutory loss before tax increased, by comparison with the prior year, to£14.5m (2004/05 loss of £3.6m), reflecting the impact of the impairments whichtotalled £13.7m. Trading profit before tax after all finance charges was £2.6m(2004/05 £0.9m). The tax charge of £0.8m included an underlying overseas current year tax chargeof £2.8m offset in part by deferred tax credits associated primarily with theNorth American goodwill and asset impairments, as well as the release ofprovisions no longer required. No benefit has been recognised for potentialfuture tax credits for loss-making entities (mainly in the UK), as there islittle expectation of recovery within the foreseeable future. The IAS 19pensions deficit has an associated tax asset of £17.8m which has not beenrecognised in the accounts, as there is little expectation of this beingutilised in the near term. Loss per share was 10.6 pence (2004/05 profit of 1.5 pence per share). Cash flow and Balance Sheet The Group generated a net cash inflow from operating activities (beforereorganisation and movements in exceptional provisions) of £6.3m (2004/05£3.7m). Trading working capital increased by £2.6m (before exchange movements)in the year to 31 March 2006 due primarily to an increase in sales volumes inthe last quarter together with a reduction in creditor levels, which moderated alittle in line with payment terms. Payments into the pension funds in excess ofthe charge to profit totalled £3.0m (2004/05 £3.0m) and reorganisation spend was£2.4m (2004/05 £0.9m). Asbestos litigation defence payments totalled £1.4m(2004/05 £1.1m) with higher costs in the first half, a consequence of greaterlegal activity. The run rate subsequently settled back to a level consistentwith previous years. Capital investment was substantially lower than the prioryear at £2.7m (2004/05 £4.6m) and reflected strict management of expenditure.The net cash flow from operating activities, after all investing activities butbefore the release from the Waycross deposit, was an outflow of £2.9m (2004/05£1.4m outflow). In September 2005 an agreement was reached with J M Voith AG to make a releaseof US$10m (£5.7m) from the Waycross deposit. The remaining balance of US$10m(£5.7m) will now be held for an additional two years until 31 December 2011.With the benefit of this release the Group's net cash movement was an inflow of£2.8m (2004/05 £1.4m outflow), which after adjusting for the effects of foreignexchange translation, resulted in a reduction in net debt (excluding theremaining Waycross deposit of £5.7m) of £2.0m to £13.2m. The IAS 19 pensions deficit as at 31 March 2006 was £63.4m (31 March 2005£45.6m). This increase was a consequence of a lower discount rate and moreconservative mortality assumptions, offset in part by improvements in the valueof assets. The next triennial revaluation of the UK pension schemes is beingcarried out based on the position at 1 April 2006. The impact of the impairments together with the increase in the pension deficitreduced shareholder funds at 31 March 2006 to £8.2m (31 March 2005 £40.2m).Currency translation at the year end had a £2.3m favourable impact onshareholder funds (2004/05 £1.3m favourable). Change in International Financial Reporting The Group adopted International Financial Reporting Standards (IFRS) as from 1April 2004. Consequently prior year comparatives have been restated inaccordance with these standards. The impact of these adjustments on prior yearfinancial information was disclosed in the Group's IFRS restatement announcementissued on 31 October 2005 and posted on our website. Treasury policies Treasury operations are managed as part of the worldwide finance function andare subject to policies and procedures approved by the Group Board. CorporateTreasury co-ordinates Group treasury activities and seeks to reduce financialrisk, ensure sufficient liquidity is available to the Group operations andinvest surplus cash. Corporate Treasury does not operate as a profit centre anddoes not take speculative financial positions. Very limited use is made ofderivative financial instruments. Corporate Treasury advises operationalmanagement on financial risks and executes all major transactions in financialinstruments, except for forward exchange contracts to hedge transactionalexposures on overseas operations, which are locally arranged. Funding requirements At 31 March 2006 the Group had committed facilities of £25.0m, of which £13.5mwere utilised. The Group also had uncommitted short-term and overdraftfacilities of up to £15m in the UK and overseas, of which £2.5m were utilised at31 March 2006. The term of the committed facility has been re-negotiated sothat it now extends out to 30 September 2007. This facility has been secured onsubstantially all of the Group's principal fixed and floating assets. Thesefacilities are projected to cover peak forecast borrowings for at least atwelve-month forward period. All bank covenants were complied with. Currency risk management Most of Scapa's assets and currency flows are denominated in currencies otherthan Sterling. In general terms it is Group policy to match, where costeffective and practicable, the currencies of costs to revenues and thecurrencies of liabilities to assets. The majority of borrowings taken out bythe Group are denominated in currencies other than Sterling, thus reducing thetranslation exposure on the Balance Sheet. As these borrowings are serviced bylocal cash flows reflecting local profits, so in turn the profit and lossaccount is partially and internally hedged against currency movements. TheGroup does not hedge directly the translation exposure of the profit and lossaccount, whether by use of options or other derivatives. The Group does notcreate or maintain any speculative risk exposures. Foreign currency transaction exposures are dealt with individually by theoperating businesses in accordance with Group policies and procedures usingforward foreign exchange contracts and currency overdrafts. Interest rate management Given the historically low rates that have been available in recent years,management of the Group's exposure to interest rates has been largely weightedtowards floating rate debt. In accordance with Board approved policy, thisexposure is regularly reviewed in order to maintain an appropriate mix of fixedand floating rate borrowings. In August 2004 the Group took out an interest ratecap covering a principal of US$10m for a three-year term, with US Dollarthree-month LIBOR interest cap fixed at 3.5%. Counterparty credit risk management Counterparty credit risk arises from the investment of surplus cash and the useof financial instruments. The Group restricts transactions to banks that have adefined minimum credit rating and limits the individual and aggregate exposureto each bank. Contingencies and legal proceedings risk management The Group monitors all material contingent liabilities including mattersrelating to the environment, through a process of consultation and evaluationwhich includes senior management, and internal and external advisers. Thisprocess results in an evaluation of potential exposure and provisions are madeor adjusted accordingly by reference to accounting principles. By thismethodology the Group has provided for contingencies which are anticipated to bemore likely than not to become payable in the future. Various Group companies, along with many other non-Scapa Group businesses, arenamed as defendants in claims in which damages are being sought for personalinjury arising from alleged exposure to asbestos. Based on advice from legalcounsel the Company believes that it has strong defences to the claims assertedin these proceedings and intends to vigorously defend such claims. Thedirectors believe, having taken advice from legal counsel, that it is unlikelythat significant uninsured liabilities will arise from this litigation. Consolidated Income Statement For the year ended 31 March 2006All on continuing operations note Year ended Year ended 31 March 2006 31 March 2005 (restated) £m £m Turnover 2 191.5 188.2 Operating loss 2 (11.6) (1.2) Trading profit* 5.5 3.3Reorganisation costs and exceptional provision increases 4 (3.4) (0.9)Property, plant and equipment and goodwill impairment 4,5 (13.7) (3.6) _____ _____ Operating loss (11.6) (1.2) Interest payable (1.3) (1.3)Interest receivable 0.3 0.6 _____ _____ (1.0) (0.7)Discount on provisions (0.5) (0.5)IAS 19 finance costs (1.4) (1.2) _____ _____Net finance costs (2.9) (2.4) _____ _____ Loss on ordinary activities before taxation (14.5) (3.6) Taxation (0.8) 5.8 _____ _____ (Loss)/profit on ordinary activities after taxation (15.3) 2.2 _____ _____ Profit attributable to minority interests - 0.1(Loss)/profit attributable to equity shareholders (15.3) 2.1 _____ _____Weighted average number of shares 144.8 144.8(Loss)/earnings per share (p) (10.6) 1.5 _____ _____ Consolidated Statement of Recognised Income and ExpenseFor the year ended 31 March 2006 All on continuing operations note Year ended Year ended 31 March 2006 31 March 2005 (restated) £m £m Retained (loss)/profit for the period (15.3) 2.1Exchange differences on translating foreign operations 2.3 1.3Actuarial losses (19.3) (7.3) _____ _____Total recognised expense for the period 6 (32.3) (3.9)IFRS transition adjustment (IAS 32 and IAS 39) 0.2 - _____ _____Total recognised expense (32.1) (3.9) _____ _____ * Operating profit before exceptional costs and impairments Consolidated Balance SheetAs at 31 March 2006 note 31 March 2006 31 March 2005 (restated) £m £mAssets Non-current assetsGoodwill 5 11.2 21.0Property, plant and equipment 5 46.9 52.3Deferred tax asset 9.4 8.4Other non-current assets - 0.1 _____ _____ 67.5 81.8Current assetsInventory 21.6 19.3Trade and other receivables 46.5 43.6Tax assets - 0.4Financial assets - derivative financial instruments 0.2 -Current asset investments 5.7 10.7Cash and cash equivalents 3.4 8.1 _____ _____ 77.4 82.1Liabilities Current liabilitiesFinancial liabilities:- Borrowings and other financial liabilities (3.0) (3.1)- Derivative financial instruments (0.1) -Trade and other payables (33.6) (32.7)Tax liabilities (0.6) -Provisions (2.7) (2.1) _____ _____ (40.0) (37.9) Net current assets 37.4 44.2 Non-current liabilitiesFinancial liabilities:- Borrowings and other financial liabilities (13.6) (20.2)Other non-current liabilities (2.1) (2.0)Deferred tax liabilities (5.0) (4.9)Other tax liabilities (2.7) (3.0)Retirement benefit obligations (63.4) (45.6)Provisions (9.9) (10.1) _____ _____ (96.7) (85.8) _____ _____ Net assets 8.2 40.2 _____ _____ Shareholders' equity Ordinary shares 7.2 7.2Retained earnings (2.6) 31.7Translation reserve 3.6 1.3 _____ _____Total shareholders' equity 6 8.2 40.2 _____ _____ Consolidated Cash Flow StatementFor the year ended 31 March 2006 All on continuing operations note Year ended Year ended 31 March 2006 31 March 2005 £m (restated) £m Cash flows from operating activities Net cash flow from operations 7 2.1 1.5 Cash generated from operations before reorganisation and 6.3 3.7movements in exceptional provisionsCash outflows from reorganisation and movements in exceptional (4.2) (2.2)provisions _____ _____Net cash flow from operations 2.1 1.5 Net interest paid (1.1) (0.4)Income tax paid (1.0) - _____ _____Net cash generated from operating activities - 1.1 _____ _____ Cash flows from investing activities Acquisition of subsidiary - (0.3)Purchase of property, plant and equipment (2.7) (4.6)Proceeds from sale of property, plant and equipment 0.1 0.1Proceeds from receipt of government grant - 0.5Proceeds from release of $10m Waycross deposit 5.7 -Net (payments)/receipts in respect of forward contracts (0.3) 1.8 _____ _____Net cash generated/(used) in investing activities 2.8 (2.5) _____ _____ Cash flows from financing activities Repayment of borrowings (8.0) (1.9)Dividends paid to Company shareholders - (0.5) _____ _____Net cash used in financing activities (8.0) (2.4) _____ _____ Net decrease in cash and cash equivalents (5.2) (3.8) Cash and cash equivalents at beginning of the year 5.7 9.6Exchange gains/(losses) on cash and cash equivalents 0.4 (0.1) _____ _____ Cash and cash equivalents at end of the year 0.9 5.7 _____ _____ Notes on the Accounts 1. Basis of Preparation The consolidated financial statements of Scapa Group plc have been prepared inaccordance with International Financial Reporting Standards (IFRS) and IFRICinterpretations as adopted for use in the European Union and with those parts ofthe Companies Act 1985 applicable to companies reporting under IFRS. Theconsolidated financial statements have been prepared under the historical costconvention, as modified by the revaluation of financial assets and financialliabilities (including derivative instruments) at fair value through profit orloss. 2. Segmental reporting Primary Reporting Format - Geographical Segments The Group operates in three main geographical areas: Europe, North America andAsia. All inter-segment transactions are made on an arms-length basis. Thehome country of the Company is the United Kingdom. Segment results The segment results for the year ended 31 March 2006 are as follows: Europe N America Asia Eliminations Corporate Group £m £m £m £m £m £m External sales 117.1 66.7 7.7 - - 191.5Inter-segment sales 5.9 2.8 1.2 (9.9) - - _____ _____ _____ _____ _____ _____Total revenue 123.0 69.5 8.9 (9.9) - 191.5 Segment result (before exceptional costs) 0.7 7.7 (0.1) - (2.8) 5.5 Exceptional costs:Property, plant and equipment and goodwill (10.3) (2.7) (0.7) - - (13.7)impairmentReorganisation costs and provision (2.2) (0.1) - - (1.1) (3.4)increases _____ _____ _____ _____ _____ _____ (12.5) (2.8) (0.7) - (1.1) (17.1) Operating (loss)/profit (11.8) 4.9 (0.8) - (3.9) (11.6) _____ _____ _____ _____ _____Net finance costs (2.9) _____Loss on ordinary activities before (14.5)taxationTaxation (0.8) _____Loss on ordinary activities after taxation (15.3) Sales are allocated based on the country in which the order is received. Allrevenue relates to the sale of goods. The sales analysis based on the locationof the customer is as follows: Europe N America Asia Group £m £m £m £m External sales 106.7 63.5 21.3 191.5 Other segment items included within the Income Statement based on location ofassets are as follows: Europe N America Asia Corporate Group £m £m £m £m £m Depreciation (5.0) (1.3) (0.1) - (6.4)Impairment of goodwill (8.3) (2.6) - - (10.9)Impairment of property, plant and equipment (2.0) (0.1) (0.7) - (2.8)Other non-cash expenses - (0.1) - (0.1) (0.2) The segment results for the year ended 31 March 2005 are as follows: Europe N America Asia Eliminations Corporate Group £m £m £m £m £m £m External sales 115.3 64.1 8.8 - - 188.2Inter-segment sales 6.6 2.3 1.4 (10.3) - - _____ _____ _____ _____ _____ _____ Total revenue 121.9 66.4 10.2 (10.3) - 188.2 Segment result (before exceptional costs) (0.4) 7.1 0.5 - (3.9) 3.3 Exceptional costs:Property, plant and equipment impairment (1.9) (1.7) - - - (3.6)Reorganisation costs (0.5) (0.4) - - - (0.9) _____ _____ _____ _____ _____ _____ (2.4) (2.1) - - - (4.5) Operating (loss)/profit (2.8) 5.0 0.5 - (3.9) (1.2) _____ _____ _____ _____ _____Net finance costs (2.4) _____Loss on ordinary activities before (3.6)taxationTaxation 5.8 _____Profit on ordinary activities after 2.2taxationMinority interests 0.1 _____Retained profit for the period 2.1 _____ Sales are allocated based on the country in which the order is received. Allrevenue relates to the sale of goods. The sales analysis based on the locationof the customer is as follows: Europe N America Asia Group £m £m £m £m External sales 104.2 61.9 22.1 188.2 Other segment items included within the Income Statement based on location ofassets are as follows: Europe N America Asia Corporate Group £m £m £m £m £m Depreciation (5.2) (1.5) (0.1) (0.1) (6.9)Impairment of property, plant and equipment (1.9) (1.7) - - (3.6) 3. Segment assets and liabilities The segment assets and liabilities at 31 March 2006 and capital expenditure forthe year then ended are as follows: Europe N America Asia Corporate Group £m £m £m £m £m Segment assets 78.4 52.9 3.8 9.8 144.9Segment liabilities (63.1) (16.0) (0.8) (56.8) (136.7)Capital expenditure (1.5) (1.0) - (0.1) (2.6) The segment assets and liabilities at 31 March 2005 and capital expenditure forthe year then ended are as follows: Europe N America Asia Corporate Group £m £m £m £m £m Segment assets 91.8 51.9 4.9 15.3 163.9Segment liabilities (47.5) (14.7) (0.7) (60.8) (123.7)Capital expenditure (1.7) (2.1) (0.1) - (3.9) The Group is organised into geographical areas and does not report to managementon any other basis. There are no secondary business segments which wouldrequire reporting under IAS 14. 4. Exceptional items In the year ended 31 March 2006 exceptional costs totalled £17.1m. Impairments of goodwill and property, plant and equipment totalling £13.7m werecharged in the year, split between: Europe (£10.3m), North America (£2.7m), andAsia (£0.7m). The impairments are discussed in more detail in note 5. Other exceptional costs totalled £3.4m of which £2.8m were reorganisation costsand a further £0.6m related to an increase in dilapidations at certain UK leasedproperties and an increase in an existing onerous lease provision. The reorganisation costs included £2.4m relating to redundancy and relocationcosts in Europe and North America. In addition, an onerous lease provision of£0.4m was created relating to the head office property in the UK which wasvacated prior to the expiry of the lease agreement. In the year ended 31 March 2005 the following exceptional costs were incurred: Impairments of property, plant and equipment balances of £3.6m were made in theyear ended 31 March 2005 and are discussed in note 5. In addition reorganisation costs of £0.9m were incurred in the period. £0.4m ofthis related to the transfer of the North America cable wrapping tapes operationfrom its site in the US to Scapa's Canadian plant. A further £0.5m related toadditional management changes in the UK (£0.4m) which were required as part ofthe European restructuring and cost reduction programme, and an increase to theEuropean onerous lease provision (£0.1m) which was reassessed in the period. 5. Impairment of assets Year ended 31 March 2006 The carrying values of the Group's goodwill and property, plant and equipmentbalances have been reassessed at 31 March 2006 for any evidence that thecarrying value may be impaired. A discount rate of 9.5% based on the Group'sweighted average cost of capital has been used in each review. Impairments in the year totalled £13.7m and were made up as follows: An impairment at the Dunstable site of £6.7m goodwill, £0.4m IT systems and£0.2m leasehold additions has been recorded in the period. The European medicalgoodwill balance has been combined into a cash generating unit (CGU) along withproperty, plant and equipment at the Dunstable site in the UK and this CGU hasbeen assessed against the value in use, using discounted future cash flows fromthe business in the European region. Due to a reduction in demand for medicalproducts manufactured at this site, the carrying value of these assets was foundto be in excess of the discounted forecast future cash flows over a ten-yearperiod and accordingly a write down of assets in the CGU has been required. An impairment at the UK North site of £1.6m goodwill, £0.8m IT systems and £0.6mleasehold additions has been recorded in the period. The European CCLacquisition goodwill balance has been combined into a CGU along with theproperty, plant and equipment at the UK North site. This CGU has been assessedagainst value in use, using discounted future cash flows for the UK North siteover a thirteen-year period. Due to the under-performance of certain productsmanufactured at the UK North site, the carrying value of these assets was alsofound to be in excess of the discounted forecast future cash flows, andaccordingly a write down of assets in the CGU has been required. An impairment of £2.6m goodwill and £0.1m plant and machinery has been recordedin the period relating to the LUSA acquisition. This North American LUSAacquisition goodwill balance has been combined into a CGU along with the cableproperty, plant and equipment in the region. This CGU has been assessed againstvalue in use, using discounted future cash flows from the North American cablebusiness. Due to the slowdown in demand for water-swellable cable wrappingtapes, the carrying value of these assets was found to be in excess of thediscounted forecast future cash flows over a six-year period, and accordingly awrite down of assets in the CGU has been required. An impairment of the Korean assets of £0.7m has been recorded in the period.Property, plant and equipment at the Korean site was also reviewed against valuein use, using the discounted future cash flows of the operation. As a result ofslower than expected growth in the trading conditions experienced by the localoperation, the carrying value of these assets was found to be in excess of thediscounted forecast future cash flows. Year ended 31 March 2005 The above CGUs were reviewed against value in use in the year ended 31 March2005 using discounted future cash flow projections. In all cases the carryingvalues of the cash generating units were found to be lower than the forecastfuture cash flows and no impairments were required. Impairments of other specific items of property, plant and equipment balanceswere made in the year ended 31 March 2005 totalling £3.6m. Of that, £1.7m was awrite down of a specialist coater in North America due to the loss of a keycontract after the overseas relocation of the customer's North Americanoperation. A further £1.9m impairment was made to European assets due to theweakened market conditions in the area of Italy and South Eastern Europe. Theimpairment was calculated with a discount rate of 9.5% using the value in usemethod for the CGU, which included plant and machinery and furniture, fittingsand equipment at the Italian facility. 6. Reserves Share capital Translation Retained Total reserve earnings equity £m £m £m £m Balance at 31 March 2005 7.2 1.3 31.7 40.2IFRS transition adjustments (IAS 39) - - 0.2 0.2 _____ _____ _____ _____Balance at 1 April 2005 7.2 1.3 31.9 40.4Currency translation differences - 2.3 - 2.3Actuarial loss on pension schemes - - (19.3) (19.3) _____ _____ _____ _____Net income recognised directly in equity - 2.3 (19.3) (17.0)Loss for the period - - (15.3) (15.3) _____ _____ _____ _____ Total recognised expense for the period - 2.3 (34.6) (32.3) _____ _____ _____ _____ Employee share option scheme - value of employee services - - 0.1 0.1 _____ _____ _____ _____ - - 0.1 0.1 _____ _____ _____ _____Balance at 31 March 2006 7.2 3.6 (2.6) 8.2 _____ _____ _____ _____ The Group has taken the exemption not to restate comparatives for IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 'FinancialInstruments: Recognition and Measurement', which came into effect for accountingperiods beginning on or after 1 January 2005. The adoption of these standards on1 April 2005 resulted in the recognition of a number of financial instruments inthe opening balance sheet on this date, increasing reserves by £0.2m. At 31 March 2006 financial assets of £0.2m and financial liabilities of £0.1mhave been recognised in the Balance Sheet relating to the fair values ofderivative financial instruments in place across the Group at this date. It is Group policy to hedge account for instruments used to hedge againstexchange differences arising from the translation of the net investment inforeign entities. These instruments include foreign currency borrowings andforward foreign exchange contracts. Accordingly gains and losses on therevaluation of these instruments at each balance sheet date are recogniseddirectly in equity. Movements in instruments used to hedge against the exposureto exchange differences due to the timing of cash flows are taken through theIncome Statement as it is not Group policy to hedge account for theseinstruments. These instruments include the contracts to swap bank borrowingsfrom US Dollars to Euros and Swiss Francs. The comparative figures for financial instruments at 31 March 2005 are statedunder UK GAAP as permitted by IFRS 1 'First Time Adoption'. Fair values at theBalance Sheet date are calculated by comparing contract rate to spot rate atthis date. Cumulative actuarial losses on pension schemes recognised in reserves total£26.6m (2005 £7.3m). 7. Reconciliation of operating profit to operating cash flow, andreconciliation of net debt All on continuing operations Year ended Year ended 31 March 2006 31 March 2005 £m £m Operating profit/(loss) (11.6) (1.2) Adjustments for:Depreciation 6.4 6.9Loss on disposal of fixed assets 0.2 0.2Impairment of tangible fixed assets 2.8 3.6Impairment of goodwill 10.9 -Pensions payments in excess of charge (3.0) (3.0)Movement in fair value of financial instruments 0.1 -Share options charge 0.1 0.1Grant income released (0.2) (0.1) _____ _____Changes in working capital:- Inventories (1.3) (1.6)- Trade debtors (0.7) (0.8)- Trade creditors (0.6) (1.5) _____ _____Changes in trading working capital (2.6) (3.9)Other debtors (0.6) 1.2Other creditors 0.4 (1.2)Net movement in other provisions (0.2) 0.2Net movement in leasehold commitment provisions 0.8 (0.2)Net movement in asbestos litigation provision (1.4) (1.1) _____ _____ Cash generated from operations 2.1 1.5 _____ _____ Cash generated from operations before reorganisation and movements 6.3 3.7in exceptional provisionsCash outflows from reorganisation and movements in exceptional (4.2) (2.2)provisions _____ _____ Cash generated from operations 2.1 1.5 _____ _____ Analysis of net debt At Cash Release of Exchange At Flow arrangement Movement 1 April 2005 fees 31 March 2006 £m £m £m £m £mCash and cash equivalents 8.1 (5.1) - 0.4 3.4Overdrafts (2.4) (0.1) - - (2.5) _____ _____ _____ _____ _____ 5.7 (5.2) - 0.4 0.9 Borrowings within one year (0.7) 0.2 - - (0.5)Borrowings after more than one year (20.2) 7.8 (0.1) (1.1) (13.6) _____ _____ _____ _____ _____ (20.9) 8.0 (0.1) (1.1) (14.1) _____ _____ _____ _____ _____ Total (15.2) 2.8 (0.1) (0.7) (13.2) _____ _____ _____ _____ _____ Reconciliation of net cash flow to movement in net debt 2006 2006 2005 2005 £m £m £m £mIncrease / decrease in cash and cash equivalents in theperiodDecrease in net cash and cash equivalents in the year (5.2) (3.8)Cash outflow from decrease in loan finance 8.0 1.9 _____ _____Change in net debt resulting from cash flows 2.8 (1.9)Release of arrangement fees (0.1) -Translation differences (0.7) 0.4 _____ _____Movement in net debt in the period 2.0 (1.5)Net debt at start of year (15.2) (13.7) _____ _____Net debt at end of year (13.2) (15.2) _____ _____ This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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