4th Mar 2008 07:01
Zotefoams PLC04 March 2008 Preliminary Results for the Year Ended 31 December 2007 Strong performance Zotefoams plc, which manufactures and sells high-performance foams, todayannounces its preliminary results for the 12 months ended 31 December 2007.During 2007, Zotefoams continued investment in high-performance products underthe ZOTEK(R) brand name complementing its strengths in polyolefin foams. ZOTEK(R) foams are used in a wide range of applications due to their light weight,fire-retardancy, good chemical resistance and temperature performance. ZOTEK(R)foams can be used in highly technical and demanding applications such as withinthe aerospace, pharmaceutical, semi-conductor and chemical processing industriesthereby broadening the sales base outside of the traditional areas such as sportand leisure, premium packaging, construction, automotive and industrial goods. FINANCIAL HIGHLIGHTS • Revenue of £31.61 million (2006: £30.05 million), up 5% • Operating profit of £3.46 million (2006: £2.84 million), up 22% • Profit before tax of £3.37 million (2006: £2.67 million), up 26%* • Operating margin improved from 9% in 2006 to 11% • Strong balance sheet with gearing of 6% (2006: 6%) • Proposed final dividend of 3.0p per share making a total for 2007 of 4.5p (2006: 4.5p) *Excludes exceptional items. There were no exceptional items in 2007 but in2006 there was a £1.07million exceptional charge OPERATIONAL HIGHLIGHTS • Strong sales growth, particularly in Europe and Asia • High-performance polymers sales of £734,000, up 49% • Long-term contract signed by one of Zotefoams' customers to supply parts fabricated from ZOTEK(R) F PVDF for the 737 - Boeing's highest volume passenger aircraft • Distribution agreement signed to act as distributor in Europe and Asia for the T - Tubes (R) brand of advanced insulation made from ZOTEK(R) F foams Commenting on the results, Nigel Howard, Chairman, said: "Zotefoams' strategy is to grow our existing business in polyolefin foams whiledeveloping a portfolio of high-performance polymers. We will seek to profitablyexpand through a combination of organically growing both our polyolefin andhigh-performance polymers businesses and through partnerships or acquisitions inrelated technologies, products or markets. The polyolefin business performed well in 2007 and trading for the first twomonths in 2008 is in line with our expectations. Development of high-performancepolymers continues to progress and offers many exciting opportunities. The Boardcontinues to be positive about the future." Enquiries: Zotefoams plc Tel Today: 0207-831-3113David Stirling, Managing Director Thereafter: 0208-664-1600Clifford Hurst, Finance Director Financial Dynamics Limited 0207-831-3113Ben Brewerton/John Dineen INTRODUCTION During 2007 we grew profit before tax and exceptional items by 26% to £3.37m(2006: £2.67m) and sales increased by 5% to £31.61m (2006: £30.05m). There wereno exceptional items in 2007 (2006: a charge of £1.07m) and profit before taxafter exceptional items was therefore £3.37m (2006: £1.60m). Sales growth in thesecond six months of the year was particularly pleasing with continued progressin Europe and Asia and a recovery seen in North America. Gross margins in 2007increased to 27.1% (2006: 25.9%) and Group operating margins improved from 9% to11% of sales. Our commitment to development of our high-performance productsbusiness was reinforced with a landmark deal with UFP Technologies of USA, a keyZotefoams customer, to act as distributor for their T-Tubes (R) product line,made from our ZOTEK(R) fluoropolymer foam, in Europe and Asia. We intend to grow sales in our core polyolefin business in excess of the rate ofinflation in Europe and achieve double digit percentage growth in North Americaand Asia. Our sales growth in America is supported by our factory in Kentuckywhich opened in mid-2001 while in Asia we will consider a similar operation,either under a license or as a joint venture, as sales increase to a level wheresuch an investment becomes financially attractive. We are also committed todeveloping a portfolio of unique foam products from high-performance materialswhich will enjoy significant advantages over competitive materials. This willallow higher margins for Zotefoams and confirm our position as the pre-eminentfoam technology company. We intend to achieve this growth while continuing toimprove our operating margins and our return on capital employed. Chris Ryan, who joined Zotefoams in 1999 as a non-executive director, resignedfrom the Board effective 31 December 2007 after eight years service. On behalfof the Board I would like to thank Chris for his service and contribution overthe years. On 23 July 2007 Richard Clowes joined the Board as a non-executivedirector. Richard is a chartered engineer with wide ranging operational andgeneral management experience in supplying components to, amongst others, theaerospace and automotive markets. He was a main Board Director of GKN plc from2001 to 2005. I am delighted to welcome Richard to the Board. With Richard,David Campbell (the ex-Chief Executive of British Vita) who joined the Board inFebruary 2007 and Roger Lawson (who was a director of 3i) I believe that we havea strong and balanced team of non-executive directors to support the executivein moving the business forward. We are proposing a maintained final dividend of 3.0p per ordinary share, whichif approved, would make a total of 4.5p per ordinary share for the year (2006:4.5p). At this level the dividend would be covered 1.5 times by post-taxearnings excluding one-off tax items. The Board's priority is to retain thecapability to support the growth opportunities within the business whileconsidering an improved dividend policy as dividend cover increases. OUTLOOK The polyolefin business performed well in 2007 and trading for the first twomonths in 2008 is in line with our expectations. Development of high-performancepolymers continues to progress and offers many exciting opportunities. The Boardcontinues to be positive about the future. BUSINESS REVIEW Zotefoams is the world's leading manufacturer of cross-linked block foams. Itsproducts are used in a wide range of markets including sports and leisure,packaging, automotive, aerospace, healthcare, construction, marine and themilitary. Through a unique production process, the Company produces foams whichhave controlled properties and are of a strength, consistency, quality andpurity superior to foams produced by other methods. BUSINESS OVERVIEW Zotefoams considers its business to fall into two distinct categories:polyolefin foams and high-performance polymers. Both businesses rely on ourunique production process which uses nitrogen gas at high temperature andpressure to foam solid plastics. Polyolefin foams are mainly made frompolyethylene which, when foamed, produces a versatile material used in a widevariety of applications. Typically our products are sold to foam converters whoprocess the foam by a variety of techniques such as cutting, welding, mouldingand routing into finished or semi-finished parts based on end-user requirements.The benefits of Zotefoams' products are evident at both foam processors andend-users and include purity, consistency of processing, good performance toweight ratio and aesthetics. Key to growing our business successfully isdeveloping and maintaining close relationships with the converters combined withbusiness development activities at end-users to highlight the benefits of ourmaterials and track industry trends for future development. High-performance polymers use the processing technology developed for polyolefinfoams and applies it to other materials. This is an emerging business whichoffers an improved return on capital in new business segments. We havedeveloped, patented and launched world leading products made from fluoropolymerand nylon which are branded "ZOTEK(R) " - our high-performance foams' trademark.These foams are targeted at highly technical and demanding applications inmarkets such as aerospace, pharmaceutical, semi-conductor, chemical processingand automotive where market development lead times are long. The timing ofrevenue generation is therefore difficult to predict. STRATEGY AND OBJECTIVES Zotefoams' strategy is to grow our existing business in polyolefin foams whiledeveloping a portfolio of high-performance polymers. Our stated objectives are to: 1. Grow sales in our polyolefin business in excess of the rate of inflation in Europe and achieve double digit percentage growth in North America and Asia. 2. Develop a high-performance polymers portfolio to deliver enhanced margins. 3. Improve our operating margins. 4. Improve our return on capital employed. Performance in 2007 against these objectives was as follows: 1. Sales: a. Polyolefin sales in the UK and Europe grew by 7% which was significantly above the average inflation rate. b. Polyolefin sales in North America fell by 1% in constant currency. Polyolefin sales growth of 19% in the second half of 2007 compared to the second half of 2006 almost entirely reversed the decline seen in the first six months of the year. c. Polyolefin sales in Asia grew by 96%. We stated that 2006 would be a year of transition, exiting a regional distribution agreement and forming more direct relationships with foam converters and end-users. The results for 2007 vindicate this approach and we believe that Asia offers significant potential for growth in niche, higher added-value products. We are therefore focusing our resources on these products and have recently recruited additional sales resource for this territory. 2. Sales of high-performance polymers grew by 49%. (59% after adjusting for movements in exchange rates). 3. Group operating margins, pre-exceptional items, improved from 9% to 11% of sales revenue. 4. Pre-tax return on capital employed, pre-exceptional items, increased from 11% to 13% FINANCIAL RESULTS The 5% increase in Group sales was mainly due to a 4% volume increase inpolyolefin foams. Growth in high-performance polymer foams increased Group salesby 1%. Movements in foreign currency exchange rates reduced sales by 2% althoughthese were offset by price rises and changes in product mix. Gross marginincreased to 27.1% from 25.9% with savings in sales commissions andmanufacturing costs more than offsetting increases in raw material and energyprices. Distribution costs (which include selling expenses) rose by 11% as we continuedto increase our sales resources in both polyolefins and high-performancepolymers. Administrative expenses are net of a foreign exchange gain of £0.23m(2006: loss of £0.15m). Profit before tax increased by 26% to £3.37m (2006:£2.67m before exceptional items). Profit before tax after exceptional items was£3.37m (2006: £1.60m). The overall effective tax rate is 13% (2006: 26% before exceptional items). Thedecline was due to a £0.20m reduction in the Group's deferred tax liabilityfollowing a change in the rate at which the Group's future corporation taxliabilities are provided for and a £0.23m favourable adjustment to the taxcharge in respect of prior periods. Excluding these two items, the effectivetax rate is 26%. Earnings per share and Dividend Group earnings per share after exceptional items were 8.0p (2006: 5.5p excludingexceptional items). The Directors are recommending that the final dividend ismaintained at 3.0p per share payable on 22 May 2008 to shareholders on theCompany register at 25 April 2008. This would bring the total dividend to 4.5pper ordinary share for the year (2006: 4.5p). Cash Flow Cash generated from operations was £4.78m (2006: £4.72m) after a £1.29m increasein working capital. The working capital increase reflected the higher salesactivity in the second half of 2007 and the final instalment payment of £0.48mto terminate a distribution agreement (the termination cost was taken as anexceptional item in 2006). Capital expenditure of £2.69m was similar to lastyear. During the year the Company paid £0.24m to purchase 196,330 of its ownshares. After the dividend payment of £1.64m the net cash outflow amounted to£0.25m, increasing net debt to £1.68m (2006: £1.43m). Gearing remains low at 6%(2006: 6%). MARKETS AND OPERATIONS In 2007 overall sales grew by 5% to £31.61m (2006: £30.05m). The polyolefin foams business grew to £30.87m (2006: £29.56m). Overall thepolyolefin foams market is relatively mature and growth comes from focuseddevelopment in more specialist areas. Our sales and marketing approachrecognises this and our sales teams work closely with customers to identifyareas of opportunity and support them in their approach to these areas. Thisstructure, with a direct sales organisation to service all customers, is showinggood progress particularly in continental Europe where sales grew by 6% and Asiawhere sales grew by 96%. These areas, until March 2006, were managed by anagent and a distributor respectively and the cost of exiting these relationshipswas shown as an exceptional item in 2006. In the UK sales increased by 8% witha combination of volume growth and a stronger product mix. In North America,where our business has been affected by a weaker economy, sales declined by 1%in US dollars as sales growth of 19% in the second six months of the year offsetthe poor result in the first six months of 2007. Our high-performance polymers ("HPP") are unique foams produced for technicallydemanding applications. They offer properties such as improved chemicalresistance, fire-retardancy or temperature performance compared to other foammaterials. The applications for these products are often much larger in valuethan a typical polyolefin foam application, however the performance requirementsand test conditions are very demanding and evaluation can take many months orsometimes years. Therefore the inherent uncertainty of such projects,particularly their timing and the unique requirements of specific applicationswhich will vary from project to project makes projecting revenues and successrates extremely difficult, especially at this early stage of their development. In 2007, HPP sales were £734,000, an increase of 49% over the previous year.The majority of these sales were ZOTEK (R) F fluoropolymer grades of foam inaerospace and clean-room insulation applications, although other projects areunder development which use their unique combination of fire-retardancy, purityand chemical resistance. Particularly pleasing was a contract awarded inFebruary 2008 to Technifab Inc., a long-standing customer based in Ohio USA, forsupply of fabricated foam gaskets for the Boeing 737 programme. As our HPPbusiness develops, we are investing significantly in both technical andmarketing resource. During 2007 we increased sales and marketing expenditure toinvestigate and develop markets for our ZOTEK(R) N B50 polyamide (nylon) foam, ahigh temperature material with the capability to be heat moulded. Developmentof a second product in the ZOTEK(R) N range, with a softer feel for specificapplication requirements, is close to completion with launch anticipated in thenext few months. In August 2007, we signed a distribution agreement with UFPTechnologies Inc. under which Zotefoams will act as distributor in Europe andAsia for the T-Tubes (R) brand of advanced insulation made from a specific gradeof ZOTEK(R) F foam which in October 2007 received an industry standard approvalfor clean room insulation use. This is significant partnership approach todevelopment of a new market with a key customer where Zotefoams will act as thedirect sales contact for an end-user market for the first time. Zotefoams operates from two sites: Croydon UK and Northern Kentucky, USA. Oursite in Kentucky receives intermediate materials from the UK and processes theminto Azote (R) polyolefin foams for the North American market. From our Croydonsite we supply Azote (R) foams to all locations outside North America,intermediate Azote (R) products to our "satellite foaming plant" in Kentucky andZOTEK (R) foams for worldwide sale. With sufficient capacity in Kentucky forthe foreseeable future our capital program for capacity increases and processcapability enhancement is focused on our Croydon plant. During 2007 we spent£2.69m on capital expenditure which included the completion of the refurbishmentand upgrade of another of our large high-pressure vessels. This reduces toapproximately 20% the proportion of our high-pressure capacity which operates ona water-cooling mechanism where corrosion accelerates the need forrefurbishment. There remains one large high-pressure vessel which has not beenrefurbished and, as part of an ongoing programme to minimise the risksassociated with corrosion, this vessel will be removed from production andinspected within the next few months. Our major raw materials are commodity polymers and therefore are subject torapid and sometimes large price movements. However in 2007 the price of lowdensity polyethylene, by far our largest raw material cost, remained relativelystable during the year with Euro prices averaging a 2.6% increase over 2006. Purchasing bulk raw materials in Euros helps to offset the natural currencyexposure of the business where we typically sell in the currency of thecustomer. As approximately 75% of our sales are to non-UK customers,denominated mainly in Euro and US Dollars, we are exposed to foreign exchangemovements. The Group experienced adverse movements in average exchange ratesbefore currency hedging during 2007. At the average rates effective in 2006,sales would have been approximately £0.5m higher and operating profitapproximately £0.4m higher. This was partly offset by a £0.2m foreign exchangegain in administrative costs which includes the effects of the Group's hedgingpolicy. Energy costs have a significant impact on our business with energy costsamounting to 7% of Group sales. In March 2007 we renewed our UK energy contractfixing prices for two years from 1 December 2007 to 30 November 2009 allowingcertainty of input prices on which to base our relationship with customers. ZOTEK(R) and Azote(R) are registered trademarks of Zotefoams plc T-Tubes(R) is a registered trademark of UFP Technologies Inc. Seewww.t-tubes.com Consolidated Income Statementfor the year ended 31 December 2007 2007 2006 Pre- Exceptional Post- exceptional items exceptional items (see note 4) items Note £000 £000 £000 £000 ______ ______ ______ ______Revenue 2 31,606 30,052 - 30,052Cost of sales (23,035) (22,257) - (22,257) ______ ______ ______ ______Gross profit 8,571 7,795 - 7,795Distribution costs (2,344) (2,117) - (2,117)Administrative expenses (2,766) (2,842) (1,074) (3,916) ______ ______ ______ ______Operating profit 3,461 2,836 (1,074) 1,762Financial income 5 1,063 884 - 884Finance costs 5 (1,152) (1,047) - (1,047) ______ ______ ______ ______Profit before tax 3,372 2,673 (1,074) 1,599Taxation 6 (454) (682) 322 (360) ______ ______ ______ ______Profit for the year 3 2,918 1,991 (752) 1,239 ______ ______ ______ ______Attributable to:Equity holders ofthe parent 2,918 1,991 (752) 1,239 ______ ______ ______ ______Earnings per shareBasic (p) 7 8.0 3.4 ______ ______Diluted (p) 7 7.9 3.4 ______ ______ Consolidated statement of recognised income and expensefor the year ended 31 December 2007 2007 2006 £000 £000 ______ ______Foreign exchange translation differences on investment in foreign subsidiary (117) (905)Effective portion of changes in fair value of cash flow hedges net of recycling (269) 163Actuarial gains on defined benefit schemes 1,141 426Tax on items taken directly to equity (271) (159) ______ ______Net income/(expense) recognised directly in equity 484 (475)Profit for the year 2,918 1,239 ______ ______Total recognised income and expense for the year 3,402 764 ______ ______Attributable to equity holders of the parent 3,402 764 ______ ______ Consolidated balance sheetas at 31 December 2007 2007 2006 Note £000 £000 ______ ______Non-current assetsProperty, plant and equipment 26,436 27,018Deferred tax assets 138 99 ______ ______Total non-current assets 26,574 27,117Current assetsInventories 4,280 3,785Trade and other receivables 7,351 6,163Cash and cash equivalents 258 82 ______ ______Total current assets 11,889 10,030 ______ ______Total assets 38,463 37,147 ______ ______EquityIssued share capital (1,820) (1,816)Share premium (13,941) (13,753)Capital redemption reserve (15) (5)Translation reserve 752 635Hedging reserve 185 (84)Retained earnings (11,827) (9,815) ______ ______Total equity attributable to the equity holders of the Company (26,666) (24,838) ______ ______Non-current liabilitiesInterest-bearing loans and borrowings (300) (700)Employee benefits 9 (2,465) (4,240)Deferred tax liabilities (2,699) (2,764) ______ ______Total non-current liabilities (5,464) (7,704)Current liabilitiesInterest-bearing loans and borrowings (400) (400)Bank overdraft (1,242) (411)Tax payable (561) (307)Trade and other payables (4,130) (3,487) ______ ______Total current liabilities (6,333) (4,605) ______ ______Total liabilities (11,797) (12,309) ______ ______Total equity and liabilities (38,463) (37,147) ______ ______ Consolidated cash flow statementfor the year ended 31 December 2007 £000 £000 ______ ______Cash flows from operating activitiesProfit for the year 2,918 1,239Adjustments for:Depreciation, amortisation and impairment 3,129 3,251Gain on sale of plant and equipment (9) -Financial income (1,063) (884)Financial expense 1,152 1,047Equity-settled share-based payments 91 64Taxation 454 360 ______ ______Operating profit before changes in working capital and provisions 6,672 5,077Increase in trade and other receivables (1,287) (107)(Increase)/ decrease in inventories (504) 51Increase in trade and other payables 498 314Decrease in provisions and employee benefits (600) (619) ______ ______Cash generated from the operations 4,779 4,716Interest paid (138) (126)Tax paid (564) (823) ______ ______Net cash from operating activities 4,077 3,767Proceeds on disposal of property, plant and equipment 22 3Interest received 17 8Acquisition of property, plant and equipment (2,692) (2,641) ______ ______Net cash used in investing activities (2,653) (2,630) ______ ______Proceeds from the issue of share capital 202 -Repurchase of own shares (242) -Repayment of borrowings (400) (400)Dividends paid (1,637) (1,634) ______ ______Net cash used in financing activities (2,077) (2,034) ______ ______Net decrease in cash and cash equivalents (653) (897)Cash and cash equivalents at 1 January (329) 432Effect of exchange rate fluctuations on cash held (2) 136 ______ ______Cash and cash equivalents at 31 December (984) (329) ______ ______ Cash and cash equivalents comprise cash at bank and short-term highly liquidinvestments with a maturity date of less than three months. 1. Accounting policies Zotefoams plc (the 'Company') is a Company incorporated in Great Britain. The Group financial statements consolidate those of the Company and itssubsidiaries (together referred to as the 'Group'). The Group financial statements have been prepared and approved by the Directorsin accordance with International Financial Reporting Standards as adopted by theEU ("Adopted IFRS"). The financial information does not constitute the Company's statutory accountsfor the year ended 31 December 2007 or 2006 but is derived from those accounts.Statutory accounts for 2006 have been delivered to the Registrar of Companies,and those for 2007 will be delivered following the Company's Annual GeneralMeeting. The auditors have reported on those accounts; their reports wereunqualified and did not contain statements under Section 237 (2) of theCompanies Act. 2. Segment reporting The Group manufactures and sells high-performance foams for specialist marketsworldwide. These fall into two main business segments best categorised by theirconstituent raw materials. • Polyolefins: these foams are made from olefinic homopolymer and copolymer resin. The most common resin used is polyethylene. • High-performance polymers (HPP): these foams exhibit high-performance on certain key properties, such as improved chemical, flammability or temperature performance, due to the resins on which they are based. Turnover in the segment is currently mainly derived from our ZOTEK(R) F foams made from PVDF fluoropolymer. Other polymers either commercially launched or being assessed in development include polyamide (nylon). Due to our unique manufacturing technology Zotefoams can produce polyolefinfoams with superior performance to other manufacturers. Our strategy is to usethe capabilities of our technology to produce foams from other materials inaddition to polyolefins. The development of foams from high-performance polymersis currently in its early stages with costs (including the technical andmarketing costs to develop these materials) exceeding revenues. Polyolefins HPP Consolidated 2007 2006 2007 2006 2007 2006 Note £000 £000 £000 £000 £000 £000 ______ ______ ______ ______ ______ ______Revenue 30,872 29,558 734 494 31,606 30,052Pre-exceptional profit/ 4,001 3,369 (540) (533) 3,461 2,836(loss)Exceptional items 4 - (1,074) - - - (1,074) ______ ______ ______ ______ ______ ______Post-exceptional profit/(loss) 4,001 2,295 (540) (533) 3,461 1,762Net financing costs (89) (163)Taxation (454) (360) ______ ______Profit for the year 2,918 1,239Segment assets 36,434 35,716 1,891 1,332 38,325 37,048Unallocated assets - - - - 138 99 ______ ______ ______ ______ ______ ______Total assets 38,463 37,147Segment liabilities (8,370) (9,123) (167) (115) (8,537) (9,238)Unallocated liabilities - - - - (3,260) (3,071) ______ ______ ______ ______ ______ ______Total liabilities (11,797) (12,309)Depreciation 3,093 3,188 36 63 3,129 3,251Capital expenditure 2,600 2,287 92 354 2,692 2,641 ______ ______ ______ ______ ______ ______ Geographical segments UK and Eire Europe North Rest of the America World £000 £000 £000 £000 Total ______ ______ ______ ______ ______For the year ended 31 December 2007Revenue from external customers 8,180 15,249 7,131 1,046 31,606Segment assets 30,881 - 7,582 - 38,463Capital expenditure 2,622 - 70 - 2,692 ______ ______ ______ ______ ______For the year ended 31 December 2006Revenue from external customers 7,543 14,391 7,504 614 30,052Segment assets 29,746 - 7,401 - 37,147Capital expenditure 2,574 - 67 - 2,641 ______ ______ ______ ______ ______ 3. Expenses and auditors' remuneration 2007 2006 £000 £000 ______ ______Included in profit for the year are:Research and development costs expensed 803 924Net exchange (gains)/ losses (227) 147 ______ ______Auditors' remuneration:Group 84 80 - audit of these financial statements - fees receivable by the auditors and their associates in respect of otherservices: - other services pursuant with legislation 18 18 - other services relating to taxation 11 5 ______ ______ 113 103 ______ ______ 4. Exceptional items In 2006 the Company classified the following items as exceptional: Bid costs Relating to legal, advisory and other costs incurred in respect of a preliminaryapproach for the share capital of the Company which was announced in January2005 and terminated in November 2005. Commercial agreement termination costs Relating to the termination payment, legal, advisory and other costs to end thecommercial relationship with the Sekisui Group which was announced in March2006. Tax adjustment to exceptional items in prior year 2007 2006 £000 £000 ______ ______Bid costs - 30Commercial agreement termination - (1,104) ______ ______Exceptional items before taxation - (1,074)Tax on above - 322 ______ ______Exceptional items after taxation - (752) ______ ______ 5. Finance income and costs Financial income 2007 2006 £000 £000 ______ ______Interest on bank deposits 17 8Expected return on assets of defined benefit pension fund 1,046 876 ______ ______ 1,063 884 ______ ______ Finance costs 2007 2006 £000 £000 ______ ______On bank loans and overdrafts 140 125Interest on defined benefit pension obligation 1,012 922 ______ ______ 1,152 1,047 ______ ______ 6. Taxation 2007 2006 £000 £000 ______ ______UK corporation tax 904 484Overseas taxation (5) 6Adjustment to prior year UK tax charge (81) (60) ______ ______Current taxation 818 430Deferred taxation (364) (70) ______ ______Total tax charge 454 360 ______ ______ Factors affecting the tax charge The tax charge for the period is lower (2006: lower) than the standard rate ofcorporation tax in the UK of 30% (2006: 30%). The differences are explainedbelow: 2007 2006 £000 £000 ______ ______Tax reconciliationProfit on ordinary activities before tax 3,372 1,599 ______ ______Tax at 30% (2006: 30%) 1,011 480Effects of:Research and development tax credits less expenses not deductible for tax (39) (53)purposesDeferred tax rate change from 30% to 28% (204) -Partial recognition of US tax losses (32) (1)Lower tax rates on overseas earnings (51) (6)Adjustments to UK corporation tax charge in respect of previous periods (81) (60)Adjustments to deferred tax charge in respect of previous periods (150) - ______ ______Total tax charge 454 360 ______ ______ In June 2007 a reduction in the UK tax rate from 30% to 28%, which will beeffective from 1 April 2008, was substantially enacted. In accordance with IAS12Income Taxes, the deferred tax liability and assets have been calculated using arate of 28% 7. Dividends and earnings per share 2007 2006 £000 £000 ______ ______Final dividend prior year of 3.0p (2006: 3.0p) net per 5.0p ordinary share 1,090 1,087Interim dividend of 1.5p (2006: 1.5p) net per 5.0p ordinary share 547 547 ______ ______Dividends paid during the year 1,637 1,634 ______ ______ The proposed final dividend for the year ended 31 December 2007 of 3.0p pershare (2006: 3.0p) is subject to approval by shareholders at the AGM and has notbeen included as a liability in these financial statements. Earnings per ordinary share Earnings per ordinary share is calculated by dividing profit after tax of£2,918,000 (2006: £1,239,000) by the weighted average number of shares in issueduring the year. Diluted earnings per ordinary share adjusts for the potentialdilutive effect of share option schemes in accordance with IAS 33. 2007 2006 ______ ______Average number of ordinary shares issued 36,375,270 36,319,924Deemed issued for no consideration 692,568 339,875 ______ ______Diluted 37,067,838 36,659,799 ______ ______ Shares deemed issued for no consideration have been calculated based on thepotential dilutive effect of the Executive Share Option Scheme, options grantedunder the HMRC Approved Share Option Scheme and Long Term Incentive Plans: Exercise Number of shares under optionDate from which exercisable price 2007 2006 ______ ______7 April 2007 72.5p 152,834 1,130,03422 December 2008 77.0p 1,026,320 1,026,32027 March 2009 80.5p - 111,80110 May 2010 Nil 306,959 - ______ ______ ______ 1,486,113 2,268,155 ______ ______ The average fair value of one ordinary share during the year was considered tobe 113.6p (2006: 88.3p). 8. Financial instruments Policy The Group's principal financial instruments include bank loans, cash and short-term deposits the main purpose of which is to raise finance for the Group'soperations. Foreign exchange derivatives are used to help manage the Group'scurrency exposure. It is and has been throughout the period under review, theGroup's policy that no trading in financial instruments shall be undertaken. The main risks arising from the Group's financial instruments are credit risk,interest rate risk, liquidity risk and foreign exchange risk. The Board reviewsand agrees policies for managing each of these risks and they are summarisedoverleaf. These policies have remained fundamentally unchanged throughout theyear. Credit risk Management has a credit policy in place and the exposure to credit risk ismonitored on an ongoing basis. Credit evaluations are performed on all customersrequiring credit over a certain amount. The Group does not require collateral inrespect of financial assets. In 2007 and 2006, the Group had credit insurance to mitigate this risk. However,not all the exposure is covered so elements of risk remain. At the balance sheet date there were no significant concentrations of creditrisk. The maximum exposure to credit risk is represented by the carrying amountof each financial asset, including derivative financial instruments, in theBalance Sheet. Interest rate risk The Group finances its operations through a mixture of retained profits and bankborrowings. The Group borrows in the desired currency generally at a variablerate of interest. The interest rate profile of the Group's borrowings at 31 December was: 2007 Effective interest Fixed rates Variable rates Total rate £000 £000 £000 ______ ______ ______Sterling 6% - 1,942 1,942 ______ ______ ______ ______ - 1,942 1,942 ______ ______ ______ The interest rate payable on the sterling overdraft is determined by LIBOR (orsimilar) plus a bank margin. (continued from table above) 2006 Effective interest Fixed rates Variable rates Total rate £000 £000 £000 ______ ______ ______Sterling 6% - 1,511 1,511 ______ ______ ______ ______ - 1,511 1,511 ______ ______ ______ The interest rate payable on the sterling overdraft is determined by LIBOR (orsimilar) plus a bank margin. Liquidity risk The Group's objective is to maintain a balance of continuity of funding andflexibility through the use of overdrafts, loans and finance leases asapplicable. The Group has a short-term facility of £5m which is freely transferable andconvertible into sterling. This facility expires at the end of April 2008 and is utilised by Zotefoams plcand its subsidiary undertakings under a cross-guarantee structure. On 25 August 2004 Zotefoams plc borrowed £2.0m under a five year mortgage,repayable in equal quarterly instalments. This facility is secured over specificplant assets. At 31 December 2007 £0.7m of this mortgage was outstanding and£1.3m had been repaid. Foreign currency risk The Group is exposed to foreign currency risk on sales, purchases, assets andliabilities which are denominated in a currency other than sterling. Thecurrencies giving rise to this risk are primarily the euro and the US dollar. The euro and US dollar rates used in preparing the accounts are as follows: 2007 2006 Average Closing Average Closing ______ ______ ______ ______Euro/sterling 1.46 1.36 1.47 1.48US dollar/sterling 2.00 1.99 1.85 1.96 ______ ______ ______ ______ The Group hedges a proportion of its estimated cash exposure in respect of tradeand other receivables, trade and other payables and forecast sales receipts andpurchase payments for the next nine months. The Group uses forward exchangecontracts to hedge its foreign currency risk. As at 31 December 2007 theseforward currency contracts covered approximately two-thirds of the estimated netcash foreign exchange exposure for the next nine months. Further details areshown below in the paragraph on sensitivity analysis. In respect of other monetary assets and liabilities held in currencies otherthan the euro and the US dollar, the Group ensures that the net exposure is keptto a manageable level, by buying or selling foreign currencies at spot rateswhere necessary to address short-term imbalances. Forecasted transactions The Group classifies its forward exchange contracts hedging forecastedtransactions as cash flow hedges and states them at fair value. The net fairvalue of forward exchange contracts used as hedges of forecasted transactions at31 December 2007 was a net liability of £185,000 (2006: net asset of £84,000)comprising assets of £8,000 (2006: £85,000) and liabilities of £193,000 (2006:£1,000) that were recognised in fair value derivatives in 2007. Recognised assets and liabilities Changes in the fair value of forward exchange contracts that economically hedgemonetary assets and liabilities in foreign currencies and for which no hedgeaccounting is applied are recognised in the Income Statement. Both the changesin fair value of the forward contracts and the foreign exchange gains and lossesrelating to the monetary items are recognised as part of administrative expenses(see note 3). Sensitivity analysis In managing currency risks the Group aims to reduce impact of short-termfluctuations on the Group's earnings. Over the longer-term, however, permanentchanges in foreign exchange and interest rates would have an impact onconsolidated earnings. Short-term fluctuations in interest rates are not hedged as the Group, atpresent, does not consider them material. At 31 December 2007 it is estimatedthat a general increase of one percentage point in interest rates would decreasethe Group's profit before tax by approximately £19,000 (2006: £15,000). At 31 December 2007 it is estimated that an increase of one percentage point inthe value of sterling against the euro and US dollar would decrease the Group'sprofit before tax by approximately £67,000 (2006: £64,000) before forwardexchange contracts and £33,000 (2006: £44,000) after forward exchange contractsare included for the euro and £52,000 (2006: £47,000) for the US dollar beforeforward exchange contracts and £24,000 (2006: £30,000) after forward exchangecontracts are included. Sensitivity analysis continued The Group has significant undertakings in the USA whose revenue and expenses aredenominated in US dollars. Zotefoams makes a significant proportion of its sales to European customers andthese revenues are predominantly in euros. It was the Group's policy in 2007 tohedge the foreign currency cash flows of invoiced sales net of expected foreignexpenditure. Hedging is achieved by the use of foreign currency contractsexpiring in the month of expected cash flow. Fair values The fair values together with the carrying amounts shown in the Balance Sheetare as follows: 2007 2006 Carrying amount Fair value Carrying amount Fair value £000 £000 £000 £000 ______ ______ ______ ______Trade and other receivables 7,343 7,343 6,078 6,078 ______ ______ ______ ______Cash and cash equivalents (984) (984) (329) (329)Forward exchange contracts- assets 8 8 85 85- liabilities (193) (193) (1) (1) ______ ______ ______ ______Secured bank loans (700) (700) (1,100) (1,100) ______ ______ ______ ______Trade and other payables (3,937) (3,937) (3,486) (3,486) ______ ______ ______ ______ Estimation of fair values The following summarises the major methods and assumptions used in estimatingfair values of financial instruments reflected in the table. Derivatives Forward exchange contracts are marked to market using listed market prices. Interest-bearing loans and borrowings and trade and other receivables/payablesCarrying amounts equals the fair value. 9. Employee benefits The Group and Company operate one defined benefit scheme in the UK which offersboth pensions in retirement and death benefits to members. Pension benefits arerelated to the members' final salary at retirement and their length of service.Since 1 October 2001 the scheme has been closed to new members. From 31 December 2005 future accrual of benefits for existing members of thescheme ceased. Contributions to the plan for the year from the Company have been agreed withthe Trustees at £50,000 per month from January 2006 to December 2010. The Company has opted to recognise all actuarial gains and losses immediatelyvia the Statement of Recognised Income and Expenditure (SORIE). An actuarialvaluation of the scheme was carried out as at 5 April 2005 and the results havebeen updated to 31 December 2007 by a qualified independent actuary. The majorassumptions used by the actuary were (in nominal terms) as follows: As at As at 31 December 31 December 2007 2006 ______ ______Discount rate 5.90% 5.10%Expected return on plan assets 6.62% 6.58%Rate of salary increase n/a n/aRate of increase to pensions in payment 3.30% 3.00%Rate of inflation 3.40% 3.10%Mortality assumption PA92 MC 90% of PA92Life expectancy from age 65 of current male pensioners: 22.5 years 20.7 years The overall expected return on assets assumption of 6.62% as at 31 December 2007has been derived by calculating the weighted average of the expected rate ofreturn for each asset class. The following approach has been used to determinethe expected rate of return for each asset class: • Equities - allowance for an additional return of 2.5% above that available on gilts; • Gilts - derived from the yield on 15-year fixed interest gilts; and • Cash - based on the Bank of England base rate. Year Ended 31 December 2007 Year Ended 31 December 2006 Present value of scheme assets Long term Market Value Long term Market Value rate of return £000 rate of return £000 expected expected ______ ______Equities 7.1% 13,458 7.1% 12,402Bonds 4.6% 2,431 4.6% 2,437Other 5.5% 1,353 5.0% 1,022 ______ ______ ______ ______ 17,242 15,861 ______ ______ Present value of defined obligation:Funded plans 19,707 (20,101) ______ ______Total 19,707 (20,101) ______ ______Deficit in the scheme (2,465) (4,240) ______ ______Related deferred tax asset 690 1,272 ______ ______Net pension liability (1,775) (2,968) ______ ______ Reconciliation of opening and closingbalances of the present value of thedefined benefit obligation:Benefit obligation at beginning of year 20,101 19,479Service cost - -Interest cost 1,012 922Actuarial (gains)/losses (875) 233Benefits paid (531) (552)Past service costs - 19 ______ ______Benefit obligation at end of year 19,707 20,101 ______ ______Reconciliation of opening and closingbalances of the fair value of plan assets:Fair value of plan assets at beginning of 15,861 14,259yearExpected return on plan assets 1,046 876Actuarial gain 266 659Contributions by employers 600 619Benefits paid (531) (552) ______ ______Fair value of plan assets at end of year 17,242 15,861 ______ ______The amounts recognised in the IncomeStatement are:Interest on obligation 1,012 922Expected return on plan assets (1,046) (876)Past service cost - 19 ______ ______Total (gain)/expense (34) 65 ______ ______ The (gain)/expense is recognised in the following line items in the IncomeStatement: Group and Company 2007 2006 £000 £000 ______ ______Cost of sales - 19Financial income (1,046) (876)Finance costs 1,012 922 ______ ______ (34) 65 ______ ______ Actuarial gains shown in SORIE since 1 January2004: 2007 2006 2005 2004 £000 £000 £000 £000 ______ ______ ______ ______Balance as at 1 January 648 222 264 -Actuarial gains/(losses) 1,141 426 (42) 264 ______ ______ ______ ______Balance as at 31 December 1,789 648 222 264 ______ ______ ______ ______ History of scheme assets, obligations and experience adjustments As at 31 As at 31 As at 31 As at 31 December December December December 2007 2006 2005 2004 ______ ______ ______ ______Present value of defined benefit obligation 19,707 20,101 19,479 18,721Fair value of scheme assets 17,242 15,861 14,259 11,529Deficit in the scheme (2,465) (4,240) (5,220) (7,192)Experience adjustments arising on scheme liabilities (875) 233 1,621 93Experience item as a percentage of scheme liabilities 4% 1% 8% 0%Experience adjustments arising on scheme assets 266 659 1,579 299Experience item as a percentage of scheme 2% 4% 11% 3%assets ______ ______ ______ ______ Other pension schemes On 1 January 2006 a separate stakeholder scheme was set up for those employeeswho were originally in the closed defined benefit scheme. The contributions paidby the Company in 2007 were £527,000 (2006: £534,000). In addition to this scheme, Zotefoams plc operates a stakeholder scheme which isopen to employees who joined after 1 October 2001. The contributions paid by theCompany in 2007 were £27,000 (2006: £20,000). For US based employees Zotefoams Inc. operates a 401(k) plan. The contributionspaid by Zotefoams Inc. in 2007 were $76,000 (2006: $86,000). This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Zotefoams