Choice Hotels International
Annual Report 2010

Plain-text annual report

China plc China plc Churchill China plc Marlborough Pottery, High Street, Tunstall, Stoke-on-Trent, ST6 5NZ www.churchillchina.com ©Churchill China plc 2011 Annual Report 2010 20494.04 13/04/2011 Proof 3 20494.04 13/04/2011 Proof 3 Financial Highlights Five Year Performance Company Profile Chairman's Statement Financial Review Operational Review People Prospects Directors’ Report Report of the Remuneration Committee Corporate Governance Independent Auditors’ Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Company Balance Sheet Consolidated Statement of Changes in Equity 1 2 3 4 6 8 12 13 14 24 32 34 36 37 38 39 40 Consolidated Cash Flow Statement 41 Reconciliation of Operating Profit to Net Cash from Operating Activities 42 Notes to the Financial Statements Five Year Financial Record 43 76 Notice of Annual General Meeting 77 Above: Disney 100 Acre Wood 20494.04 13/04/2011 Proof 3 20494.04 13/04/2011 Proof 3  Results Revenue – continuing operations Operating profit – continuing operations Share of results of associate company Net finance cost Profit before income tax Dividends paid Key Ratios Operating margin Basic earnings per share Diluted earnings per share Dividends paid per share 2010 £’000 2009 £’000 43,746 41,705 2,287 162 (135) 2,314 1,529 5.2% 15.8p 15.8p 14.0p 2,288 (18) (201) 2,069 1,526 5.5% 14.3p 14.2p 14.0p Above: Alchemy Rush page 1 20494.04 13/04/2011 Proof 3 06 07 08 09 10 06 07 08 09 10 06 07 08 09 10 45.9 46.9 42.0 41.7 43.7 Revenue (£m) 0 10 20 30 40 50 3,082 3,362 4,044 2,069 2,314 0 1 2 3 4 5 Profit before exceptional items (£’000) 20.5 22.2 26.5 14.3 15.8 Adjusted basic earnings per share (p) 0 5 10 15 20 25 30 page 2 20494.04 13/04/2011 Proof 3 CHURCHILL CHINA plc DIRECTORS, SECRETARY AND ADVISERS EXECUTIVE DIRECTORS A D Roper D J S Taylor D M O’Connor I T Hicks NON EXECUTIVE DIRECTORS J N E Sparey *• J W Morgan *• A J McWalter *• SECRETARY AND REGISTERED OFFICE D J S Taylor ACA Marlborough Pottery High Street Tunstall Stoke-on-Trent Staffordshire ST6 5NZ INDEPENDENT AUDITORS PricewaterhouseCoopers LLP Cornwall Court 19 Cornwall Street Birmingham B3 2DT BANKERS Lloyds Banking Group plc 8th Floor 40 Spring Gardens Manchester M2 1EN REGISTRARS Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6ZX SOLICITORS Addleshaw Goddard 100 Barbirolli Square Manchester M2 3AB STOCKBROKERS AND ADVISERS Brewin Dolphin Limited 34 Lisbon Street Leeds LS1 4LX * Member of audit committee • Member of remuneration committee Registered no: 2709505 page 3 20494.04 13/04/2011 Proof 3 “Churchill China made steady progress in 2010” INTRODUCTION I am pleased to report that Churchill China made tax profits were up 11% at £2.3m despite negligible steady progress in 2010 with a clear recovery from the financial income from our average circa £5m cash previous year. In particular, sales and profitability in our balances. The second half of 2010 again contributed core Hospitality business recovered strongly from 2009 almost 75% of the Group’s operating profitability and the levels although this was offset by a materially weaker new financial year has started positively. contribution from our Retail business. Our consolidated Group revenues were up 5% against last year and pre- page 4 Above Left: Queens Mugs Above Top Right: Churchill Profile Above: Bottom Right: Churchill Options 20494.04 13/04/2011 Proof 3 Above: Alchemy Buffet page 5 20494.04 13/04/2011 Proof 3 Group revenues increased by 5% to £43.7m (2009: expansion of working capital, particularly inventories, £41.7m) reflecting increased demand from our which increased from £7.1m to £8.2m principally to Hospitality customers in the UK and abroad, partially support demand growth in our Hospitality business. offset by weaker demand from our Retail customers In addition, receivables increased by £0.9m at the year worldwide. end, a position which has subsequently reversed. Group operating profit was flat at £2.3m (2009: £2.3m) We incurred capital expenditure of £1.6m (2009: but pre-tax profit was almost 11% higher at £2.3m £2.4m) as we continued to invest selectively in our UK (2009: £2.1m). manufacturing base to improve efficiency and increase operational flexibility. Overall margins were slightly lower than 2009 reflecting both higher production costs incurred in meeting The deficit in our defined benefit scheme reduced to demand and building inventory levels in anticipation of more manageable levels as higher investment returns future sales within our Hospitality business, together continued through the year and assumptions in relation with a more competitive Retail environment. to long term inflation rates moderated. Financial income improved from 2009’s figure although DIVIDEND AND SHAREHOLDER RETURN net interest receipts remain constrained by poor returns on invested cash. We again had a notional charge of Having seen a modest recovery in 2010 we are confident £0.2m (2009: £0.3m) arising from our pension fund as a of further progress and the Board is therefore pleased to result of low discount rates. recommend a final dividend of 9.2p per share. Together Earnings per share increased by 10% to 15.8p (2009: a total dividend declared in respect of 2010 of 14.0p 14.3p). compared to 14.0p per share in 2009. with the interim dividend paid last October, this gives We continue to generate an acceptable level of cash from We have continued to generate long term shareholder operations although this was reduced in 2010 compared returns from both capital appreciation and dividend to the previous year. Over the medium term we continue income and are pleased that we have delivered a to generate cash in line with our operating profit. compound total return to shareholders in excess of 16% Cash balances were £4.4m (2009: £6.9m) reflecting an p.a. over the last five years. page 6 Above Left: Art De Cuisine Rustics Simmer Above Centre: Art De Cuisine Illuminate Above Right: Riedel Vinum 20494.04 13/04/2011 Proof 3 “We have continued to generate long term shareholder returns from both capital appreciation and dividend income” Above: Churchill Just Desserts page 7 20494.04 13/04/2011 Proof 3 “Demand from our Hospitality customers was strong throughout 2010” HOSPITALITY Demand from our Hospitality customers was strong centres in the Middle East and Eire. We believe that our throughout 2010, with sales for the year 11% ahead at design capability and breadth of product range played a £27.4m (2009: £24.6m). The net contribution to Group key role in securing this business. increased from £3.3m to £4.1m as a direct result of the improved sales levels. Investment in new product development coupled Our position in the UK, where Churchill is the clear capabilities will continue to be allocated to markets market leader, continued to strengthen and we and sectors where we believe Churchill sales have the increased sales during the year to £17.3m (2009: potential to grow in the long term. with continued expansion of our sales and marketing £16.4m). Underlying demand from a broad spectrum of customers had started to improve in the second half The new ‘Profile’ range was launched in January 2010 of 2009 and this trend continued in robust fashion on a and has proved to be very popular across a wide range month by month basis right up to the end of November of customers and countries. Profile combines the high 2010. As is well documented, bad weather affected performance characteristics of our ‘Super Vitrified’ travel, hospitality and retail activity in December across range but is lighter and more fashionable. much of the UK and sales in this key period for our Dining Out business were materially impacted by the In December 2010 we commissioned a new showroom conditions. Our restaurant, hotel and pub customers, at the Business Design Centre, Islington. Already a in the habit of taking advantage of Churchill’s superb great success with end users and distributors alike, service, tend to place orders for their ceramics at the this facility enables us to improve our coverage of the last minute. all important London market and has the show space required to display our entire ceramic offering alongside Export sales improved sharply by 23% to £10.1m (2009: the prestige Riedel glassware range which is targeted at £8.2m) reflecting a strong recovery in our performance premium hotels and restaurants. in many key overseas markets, including continental Europe and North America. During 2010 the Churchill export sales team won a number of major contracts for several prestige new sporting venues and conference page 8 20494.04 13/04/2011 Proof 3 Above: Alchemy Moonstone & Buffet page 9 20494.04 13/04/2011 Proof 3 “Prompt action to both reduce our cost base and refocus our business” RETAIL Sales to our Retail customers worldwide were down pressures in volume channels, we are withdrawing from by just under 5% at £16.3m (£17.1m). The pace of bespoke lines when margins are unsustainable. All our the decline in sales of bespoke own label products, attention is now concentrated on the sale of branded and mainly to our major UK supermarket customers, was licensed ranges at margins that are sustainable in the materially faster than we had expected. In addition, medium and long term. In this respect it is pleasing to margins were adversely impacted by higher input prices note that the decline in sales through volume accounts from overseas suppliers. As a result there was a sharp was nearly offset by the continued improvement in our decline in the Retail division’s net contribution to Group sales to the middle market where we continue to perform central costs from £1.7m to £0.7m as we were unable to well with brand licences including Cath Kidston, Jamie create suitable replacement activity in the period. Oliver, Disney and Alex Clark. The disappointing Retail performance has stimulated We will be reducing inventory levels throughout 2011 and a thorough review of our activity in this sector and we continuing to reshape the business around a profitable have taken prompt action to both reduce our cost base core of activity where we have a value proposition that and refocus our business. As a result of aggressive price customers are willing to pay for. page 10 Above: Cath Kidston Crush Mugs 20494.04 13/04/2011 Proof 3 “Churchill are industry leaders in firing technology” OPERATIONS 2010 was a challenging year for the Manufacturing and use of its potential to gain benefit across a wide range Operations team at Churchill. of business activities especially those that are market, customer and cost related. We completed the £1m installation of the energy efficient Eisenmann kiln complete with its robotic Our all important service levels were maintained but handling and placing devices. Churchill are industry at the cost of some manufacturing inefficiencies as leaders in firing technology and currently once fire Hospitality rose above expected levels. Operational 5.5m cups, mugs and bowls per annum. Consumers efficiency has now recovered and we have begun to are increasingly aware of carbon footprint issues reduce costs in this area. and we are working continuously to lower our energy consumption. Our sourcing team has done well to manage our supply Our new fully integrated computer system became by strong GDP growth particularly in China. We do not fully operational in April. Our objective is to make full expect this situation to ease in the short to medium term. base despite inflationary and labour issues created Above: Jamie Oliver Fluted Blue page 11 20494.04 13/04/2011 Proof 3 “We have some great people whose enthusiasm, ideas and effort are fundamental to Churchill’s success” We have some great people whose enthusiasm, ideas particular I would like to highlight Derek Stevenson who and effort are fundamental to Churchill’s success in a has now been with the Company for 50 years. complex and challenging environment. At one end of the spectrum we have a highly active graduate recruitment On a separate note, I am particularly pleased to welcome scheme which has brought into our business a valuable Alan McWalter (appointed in January 2011) to the injection of talent and energy to complement the Board as a non executive Director who brings extensive considerable experience of more senior executives. In marketing and retail experience to the Company. page 12 Above: Churchill Zen 20494.04 13/04/2011 Proof 3 “I am confident Churchill will continue to deliver enhanced shareholder value in 2011 and beyond” We are confident that our long term strategy of new demand. Our Retail business will continue to investment in all aspects of our Hospitality business will be reshaped during this year as we seek to restore continue to deliver results, driving an expected increase performance to acceptable levels. in market share in the UK, a continued recovery in European accounts and contributing to an improved Our markets will continue to provide challenges; performance in 2011. however, our long term business plan, strong balance sheet and record of cash generation will allow us to We have identified a number of specific projects in both invest in our business and maintain an attractive manufacturing that will improve production efficiency return to shareholders. I am confident that Churchill and give us the technical ability to sustain our new will continue to deliver enhanced shareholder value in product development programme and support the 2011 and beyond. increasing demands for operational flexibility imposed by the marketplace. Jonathan Sparey Chairman There are opportunities to expand both our Hospitality 29 March 2011 ceramic and non ceramic product offering to meet Above Top: Art De Cuisine Menu Theatre Above: Art De Cuisine Menu Nori Above Right: Art De Cuisine Menu Sizzle page 13 20494.04 13/04/2011 Proof 3 The Directors present their annual report and the audited consolidated financial statements of the Group for the year ended 31 December 2010. Principal activities, operating and financial review The Company is a public limited company listed on the Alternative Investment Market (AIM) and is incorporated and domiciled in the UK. The registered office is disclosed at the front of these accounts and the Company number is 2709505. The consolidated income statement for the year is set out on page 36. The principal activity of the Group is the manufacture and sale of ceramic and related products for hospitality and household markets around the world. A review of the operations of the Group during the year and its future prospects are given in the Chairman’s Statement on page 4 and Business Review section of this report on page 8. Dividends The Directors have paid the following dividends in respect of the years ended 31 December 2010 and 31 December 2009: Ordinary dividend: Second interim dividend 2009 9.2p (2008: 0.0p) per 10p ordinary share Final dividend 2009 0.0p (2008: 9.2p) per 10p ordinary share Interim dividend 2010 4.8p (2009: 4.8p) per 10p ordinary share The Directors now recommend payment of the following dividend: Ordinary dividend: Final dividend 2010 9.2p (2009: nil) per 10p ordinary share Dividends on treasury shares held by the Company are waived. 2010 £’000 1,004 – 525 1,529 2009 £’000 – 1,003 523 1,526 1,005 – Directors The Directors of the Company who have served during the year and up to the date of signing of the financial statements are as follows: J N E Sparey* A D Roper D J S Taylor D M O’Connor * Non executive R S Kettel* (retired 19 May 2010) I T Hicks J W Morgan* A J McWalter* (appointed 5 January 2011) The Directors retiring by rotation are A D Roper and J W Morgan who, being eligible, offer themselves for re-election. The unexpired terms of the service contracts of A D Roper and J W Morgan are 12 months and 2 months respectively. A J McWalter was appointed as a Director of the Company on 5 January 2011 and in accordance with the Company’s articles retires at the next Annual General Meeting. The unexpired term of A J McWalter’s service contract is 32 months. page 14 20494.04 13/04/2011 Proof 3 J N E Sparey has now served as a non executive Director of the Company for over 9 years and as such is now required under the terms of the Principles of Good Governance and Code of Best Practice (‘the Combined Code’) to retire and seek re-election as a Director on an annual basis. The unexpired term of his service contract is 2 months. The biographical details of the Directors are as follows: Jonathan Sparey, non executive Chairman, aged 53, is a senior partner in L.E.K. Consulting LLP, a leading international corporate strategy firm. He was previously a Director of the merchant bank Samuel Montagu and Co. He joined the Board in 2000. Andrew Roper, Chief Executive Officer, aged 62, has worked for the Company since 1973. He has responsibility for the development of Group strategy and for operational performance and development. He was appointed to his present role in 2007 following on from his role as Group Managing Director since 1998. David Taylor, Finance Director and Company Secretary, aged 51, has worked for the Group for 19 years. Following qualification as a Chartered Accountant with KPMG, he worked in a number of finance roles before joining Churchill in 1992. He was appointed to the Board in 1993. David O’Connor, Chief Operating Officer, aged 54, has worked for Churchill for 20 years in a number of production, operations and marketing roles. He has extensive experience within the Ceramics industry and joined the Board in 1999. Iain Hicks, Operations Director, aged 41, has worked for the Group in a variety of roles since joining Churchill in 1992. He has led the Group’s sourcing operation since it was established in 1999 and also manages Information Technology development within the Group. He was appointed to the Board in 2006. Jonathan Morgan, non executive Director, aged 53, is a Director of SVG Investment Managers Limited and has many years of experience in investment management within growth small and medium sized companies. He was previously Managing Director of Prudential plc’s Private Equity business in Europe and Asia Pacific. He joined the Board in 2007. Alan McWalter, non executive Director, aged 57, joined the Group in January 2011. He is a Director of several listed and private companies and has extensive high level experience within marketing roles in a number of major companies in the Retail and Consumer Goods sectors. Business review Business environment We operate in many different geographic markets serving hospitality and retail customers with a range of tabletop products. Whilst our principal exposure is to the UK market, where we generate over 63% of our gross revenue, we also enjoy significant sales to Europe and North America which respectively account for 20% and 10% of our turnover. Almost without exception all of these markets are subject to a high level of competitive pressure and our costs of operation require constant review and control. In our Retail markets customers are able to choose from a wide variety of alternative suppliers based both in the UK and overseas. There are relatively low costs of switching between providers, particularly in volume distribution channels. In middle market distribution channels, customer relationships are longer term, and whilst these are still subject to price pressure, customers value design, quality and long term partnerships. In hospitality markets there are higher barriers to entry given the nature and structure of the market which places a premium on service, quality and technical performance. page 15 20494.04 13/04/2011 Proof 3 Whilst total market size information is not easily available for our markets, we believe that there has generally been an increase in the overall size of our markets during the year as global macroeconomic conditions and consumer confidence have improved, particularly in Hospitality markets. Progress has only been possible given careful management of commercial relationships and a consistent programme of investment. Retail markets have generally remained more challenging particularly in the volume sector and whilst markets may have improved overall this has largely been as a result of lower pricing. Forecasts for the UK and our major export markets suggests that economic growth will be restrained in 2011. Our forward planning process assumes that there will be no major economic growth in 2011 and we continue to manage our business accordingly. The cost of imported product has risen through 2010 due to increased inflation in Far Eastern economies and exchange rate issues. Our UK manufacturing operations remain subject to tight cost control. Labour costs have risen marginally during the year, but are expected to remain stable during 2011. Energy costs are generally higher than those experienced in the corresponding period of 2010 although we expect lower utilisation. We believe that to succeed as a business we must remain agile and anticipate and respond to these changes. Our business model cannot remain static and we must constantly review our business and amend our operations where necessary. Strategy The Group’s strategy remains to generate improved shareholder returns through the provision of value to customers through excellence in design, quality and service. We aim to increase long term Group profitability principally through steady increments to sales and margins, but also in active control of our cost base. It is no longer sufficient simply to provide a value based offering, we must meet our customers’ expectations in key areas in order to remain their preferred supplier. Our strategies are designed to allow us to continue our long term record of growth in Hospitality markets and continue the recent success in middle market retail distribution channels. We aim to continue to supply our long term partners with attractive well designed ceramics. Design It is a key strategic aim to design products that meet our end users’ requirements in terms of performance, shape and surface design. Our target markets require product that is aesthetically appealing whilst also being functional and robust. We offer a broad range of product satisfying a range of design styles, product types and price points. All our product, whether made in our own factory or sourced from third party manufacturers, is researched and designed within Churchill or in conjunction with experienced external designers and licensors. The ability to develop new products and ranges and to bring these to market is an important part of our success. We have invested significant resource in new staff and flexible technology to increase our capability in this area. We believe that our rate of expenditure in both revenue and capital projects will continue to give us significant advantage. Quality We understand that quality must exist throughout our business process. Quality is reflected not only in the appearance of our product but in its design, its performance in operation and in the systems which support the fulfilment of our contract with our customers. In addition to the maintenance of quality systems within manufacturing and operations, we have had to develop working methods with suppliers to ensure that the product that our customer receives is as they expect. This includes the identification and review of potential suppliers, and the periodic audit of established partners. We also measure quality through the review of customer feedback and active involvement with our customers after we have sold product to them. page 16 20494.04 13/04/2011 Proof 3 Customer Service Customer service remains a key element of our strategy. The fulfilment of customer expectations is critical to the maintenance of good relationships. Most of our customers are repeat customers and as such we must ensure that they return to Churchill. We have steadily developed our IT systems to forecast likely demand for products and to manage our stock holding to ensure that we meet ambitious on time, in full, delivery targets. In addition, we have organised our production facilities to balance efficient production with flexible manufacture to ensure that we can respond quickly to unexpected demand levels. We aim to invest regularly in new production technology in order to meet changing demand levels and to develop our IT systems in this area. We continue to invest in customer service. We assess our performance in this area principally by measurement of the degree to which we meet agreed order delivery schedules on time and in full. Future outlook The Board believes that long term demand for hospitality products in developed markets will continue to increase as leisure related spending grows. There has been a long term expansion in eating out in the UK and the Group intends to continue to extend its leading UK position whilst investing in the development of export markets. In the UK we believe that we will continue to reinforce our market leadership based on our programme of introducing new products specifically targeted at meeting customer requirements. The opportunities overseas may be divided into markets where hospitality is well established, but the Group has not yet achieved a reasonable market share and developmental markets where demand for hospitality products is likely to grow as local or regional economies develop. It is therefore believed that there will be significant opportunities for further and sustained growth in the medium and long term. Retail markets have been generally difficult for several years driven by changes in the structure of distribution channels within the market place and intense competitive pressure largely caused by over capacity in the worldwide ceramics market. The Group’s established strategy of developing sales to middle market distribution channels will continue whilst we will increasingly target our efforts within volume channels towards higher margin accounts. In the short term, economic uncertainty may affect the rate of growth of our core markets and this will be reflected in our approach to these markets. However, the Group will retain a long term, investment led approach to its development. Principal risks and uncertainties The Group’s operations are subject to a number of risks. The key business risks affecting the Group are set out below: Market change The Group operates in dynamic markets where there have been significant recent changes to economic conditions, the major distribution channels within each market and the relative competitive position of suppliers to these markets. It is therefore important that the Group continues to review the markets in which it currently operates and wishes to develop to ensure that it continues to meet customer needs in an efficient and profitable manner. The Group will actively manage its market exposure and profitability. The risk inherent in each market is offset by the relatively broad spread of our operations in geographic terms and by a widening portfolio of products to serve different segments of these markets. We are also actively developing new geographic markets. page 17 20494.04 13/04/2011 Proof 3 Currency exposure The Group’s position as a worldwide provider of ceramic and related products means that our profitability will be subject to currency fluctuations related to export sales and the purchase of certain products for resale. Our policy is generally to offer our customers the option to be invoiced in their local currency. Our non sterling receipts are principally denominated in US dollars and euros. Against US dollar receipts we have a natural offset due to our overseas sourcing operations where the cost of purchase from our third party suppliers is generally denominated in US dollars. We review and control our transactional foreign currency exposure regularly and take appropriate action to manage net exposures using simple option forward contracts. We do not as a matter of policy take longer term positions to cover economic foreign currency exposure in this area, but review currency rate changes as part of our pricing policy. Cost competitiveness Our markets have been subject to significant cost movements in recent years. We have augmented our UK production facilities with a wide range of third party suppliers who generally operate in lower cost environments. The spread of these suppliers gives us the ability to switch elements of production to obtain the best balance of quality and price. At present cost levels are generally rising faster in our supplier base than in our own production facilities. As such we will to continue to improve UK production capability. As a major user of energy within our production process we have an exposure to changes in availability and price of gas and electricity. We have sought to control this risk through management of our overall energy consumption and through contractual arrangements to ensure that we maintain adequate supplies of power at a cost which enables us to operate efficiently. Customer and supplier creditworthiness Whilst the Group maintains a strong balance sheet and credit position it operates in a market where both customers and suppliers are exposed to credit and liquidity related problems. The Group manages this risk by trading, where possible, on secured terms and by regularly reviewing the financial position of key business partners. Product compliance We are exposed to risk in relation to our products meeting accepted safety standards within the markets we serve. Each major geographic market applies different standards and legal penalties may be considerable for non compliance. We manage these risks principally through the monitoring of applicable standards, the testing of our product to ensure it meets these standards and sale in accordance with local regulations. We also, where practical, maintain appropriate external insurance. Key performance indicators Sales and sales growth The absolute level of sales and sales growth are reviewed regularly through the year against previous year and target levels. Sales 2010: £43.7m (2009: £41.7m). Sales growth 2010: 5% (2009: -1%). Our sales to UK customers fell by 3% overall as volume Retail channels became more competitive. This was partially offset by a much stronger performance in Hospitality markets. We increased our revenue from Europe by 24% where Spain in particular demonstrated a good recovery. North American sales, which grew by 20% were also strong. page 18 20494.04 13/04/2011 Proof 3 Customer service and inventory Customer service and inventory holding levels are reviewed on a regular basis as part of the operational management of the Group’s business. The main aim of this measure is to ensure that the Group’s strong reputation for on time order fulfilment is maintained, consistent with the efficient operation of production and sourcing activities and the optimisation of working capital. Inventory 2010: £8.2m (2009: £7.1m). Following the reduction in inventory achieved in 2009 and aligned to the growth in our sales to Hospitality customers we have increased production levels and inventory holdings to ensure we maintain customer service levels. Operating profit and profit before taxation The level of operating profit and significant factors affecting its delivery are reviewed and controlled on a regular basis. Operating profit 2010: £2.3m (2009: £2.3m). Operating profit before tax was maintained despite a loss in margin from a more competitive Retail market as both sales and gross profit moved forward in our Hospitality division. We incurred additional costs associated with longer term investment in new product development and in building inventory levels to support increased sales. Operating margins remained acceptable at 5.2% (2009: 5.5%). The level of profit before tax is reviewed on a monthly basis against previous performance and target levels. Profit before taxation 2010: £2.3m (2009: £2.1m). Profit before taxation moved forward by over 11% as operating profits were maintained, notional interest charge associated with our pension scheme liability reduced and our share of the profit of our associate Company Furlong Mills recovered. Operating cash generation The Group believes that over an extended time period it is important to generate cash at an operating level equivalent to declared operating profit. This measure identifies the effectiveness of our control over working capital demands and ensures that cash is available for further investment in the business, to meet taxation payments and to ensure that our shareholders receive an appropriate return. Operating profit 2010: £2.3m (2009: £2.3m). Operating cash generation 2010: £1.1m (2009: £3.4m). Percentage of operating cash generation to operating profit for the year 48% (2009: 151%). Three year average percentage of operating cash generation to operating profit 95% (2009: 147%). Operating cash generation reduced as both inventory and receivables increased. Inventory levels rose to support growth in our Hospitality business. The rise in receivables reflected both a higher level of business in the fourth quarter and slightly extended payment terms over the year end. Over a 3 year cycle operating cash generation remains in line with operating profits. page 19 20494.04 13/04/2011 Proof 3 Employees The Group recognises that well trained, motivated and committed employees are critical to the current and future success of our business. We aim to involve our workforce, through employee communication, team briefs and various internal forums to encourage our employees to engage with the Company’s strategy and goals. We have worked hard to develop and foster an open and constructive relationship with our employees and their trade union representation and meet with them regularly to discuss developments within the business. Training and development at all levels within the business is actively promoted, from essential skills to professional qualifications. We have worked extensively with our local further education college through Train to Gain with over 90% of our weekly paid employees working to at least one vocational qualification. Our programme to offer essential skills within the working day has been of substantial benefit to a number of the employees who took advantage of this opportunity. Our engineering and supervisory multi-skilling programmes are core to us meeting strategic manufacturing objectives. In difficult economic times our focus on training demonstrates our long term commitment to our workforce and this has helped overall morale, motivation and labour retention. Our ongoing graduate programme continues to bring high quality recruits to the business. The early members of this programme are now reaching high levels within the organisation and represent a key part of our management team. We remain committed to Total Quality Management using Business Improvement Techniques to engage employees in the development of new methods to improve quality, processes and performance. The Company is fully committed to its equal opportunities employment policy offering equality in recruitment, training, career development and promotion of all employees irrespective of gender, ethnic origin, age, nationality, marital status, religion, sexual orientation or disability. If an employee were to become disabled during their employment every effort would be made to retain them within the business and offer appropriate retraining. Health and safety The health and safety of our employees is central to our operations and we invest significant effort and resource to target continuous improvement. Health and safety is a Board responsibility and receives constant management focus, the Board has access to appropriately trained and skilled assistance to meet its obligations. Our approach to health and safety is embedded in our day-to-day working practices. Our health and safety policy is documented and published and we aim to identify and to reduce health and safety risks associated with our operations to the lowest practical levels. We work to continually improve Health and Safety providing a safe and healthy working environment for all our employees and visitors. NEBOSH, NVQs and internal training programmes are regularly offered to update safety skills for all our employees. Environment, social and community The Group considers and manages the impact of its actions on the environment and wider social and community issues. We are anxious that we take into account our economic, social and environmental impact locally, nationally and internationally. The principal impact of the Group’s operations on the environment are in relation to the energy it consumes and the waste products produced as part of its operations. Whilst the Company manufactures a product which may be reused many hundreds of times, a significant amount of energy is consumed in its production. As a result of this we have invested over several years to reduce our energy consumption and have replaced older systems and machinery with more modern energy efficient plant and procedures. We run ongoing programmes to minimise energy usage and waste. We understand that we have an impact on our local community and consider the effect of our actions on our local area. Where possible we work to reduce any adverse effects of our operations, consistent with the needs of other stakeholders within our business. We actively engage within our community through contact with our neighbours and local schools and particularly through local charity initiatives. We encourage and support our employees to become involved in community and charitable work. page 20 20494.04 13/04/2011 Proof 3 Research and development The introduction of new and innovative products and designs remains a cornerstone of our future strategy. The Group’s aim is to continue to identify future market trends and then to design and develop products that meet these needs. A significant effort is made to develop our process technology to allow the introduction of more complex product designs. New product development is controlled through regular meetings and the success of new launches is reviewed in the short term against individual targets and over the longer term as a function of our strategy. We have sought to develop our technical advantage and the Group is accredited by the United Kingdom Accreditation Service as an approved testing laboratory under ISO 17025. This will enable us both to optimise our own trading position and to offer services to other manufacturers. Overseas branches The Group’s principal operations are located within the United Kingdom; however, Churchill China plc also operates from a US based sales subsidiary and has recently established an Australian branch. Insurance for Directors The Group maintains insurance for the Directors in respect of their duties as Directors. Financing The Group currently has in place access to short term variable rate financing arrangements to provide finance for working capital requirements should they be required. Long term financing is from equity and retained earnings. Financial instruments The Group uses its own cash resources and forward exchange contracts and foreign currency bank accounts to manage its exposure to exchange rate risk caused by trading activities in currencies other than sterling. The risk management policy adopted is to regularly review forward foreign currency cash flows, identifying the currency effect of completed sale and purchase transactions, transactions which have been contracted for but not completed and an assessment of expected likely forward cash flows. The net currency exposure arising from this review is then managed using forward option contracts. Net currency exposures are generally covered between 3 and 6 months forward at any point in time. The Group does not trade in financial instruments. The Group has no material interest rate risk; the only interest rate exposure is in relation to returns on short term cash deposits and borrowings. Note 2 to the accounts include financial risk considerations. Land and buildings The current value of land and buildings is in the opinion of the Directors in excess of the value included in these accounts. This has not been quantified because independent valuations have not been undertaken. page 21 20494.04 13/04/2011 Proof 3 Substantial shareholdings The Directors have been advised of the following individual interests, or group of interests, other than those dealt with in the summary of Directors’ interests in the Report of the Remuneration Committee, held by persons acting together, which at 21 March 2011 exceeded 3% of the Company’s issued share capital: Shareholder New Landfinance Limited J A Roper S Baker E S & S J Roper Rensburg Sheppards Investment Management M J & G Roper Henderson Global Investors Number of ordinary shares Percentage 2,027,110 1,102,500 1,100,000 847,265 630,869 625,380 440,000 18.6% 10.1% 10.1% 8.2% 6.2% 5.8% 4.0% Share repurchase During the year the Company repurchased 32,000 (2009: nil) 10p ordinary shares at a total cost of £91,000 (2009: £nil) in order to improve overall shareholder return. 35,400 (2009: 10,000) shares were reissued in respect of employee share option schemes for a total consideration of £49,000 (2009: £21,000). The maximum number of shares held by the Company during the year was 35,400 10p ordinary shares. The Company retains a power, subject to the fulfilment of certain conditions and as approved at the 2010 Annual General Meeting, for the further purchase of its own shares. Suppliers The Group agrees terms and conditions covering its business with its suppliers at the time of each transaction or in advance. In normal circumstances payment is generally made in accordance with these terms, subject to suppliers meeting the agreed terms and conditions. The Group’s average creditor payment period at 31 December 2010 was 36 days (2009: 38 days). The Company has no trade creditors. Political and charitable contributions Contributions made by the Group during the year for political and charitable purposes were £nil (2009: £nil) and £3,000 (2009: £4,000) respectively. In addition to the above, the Group regularly donates quantities of product to charitable causes. The estimated value of these donations in 2010 was £9,000 (2009: £9,000). The Group’s policy in respect of charitable donations is to support local charities and institutions, particularly in relation to education and sport. page 22 20494.04 13/04/2011 Proof 3 Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and the parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: l select suitable accounting policies and then apply them consistently; l make judgements and accounting estimates that are reasonable and prudent; l state whether IFRSs as adopted by the European Union and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Group and parent Company financial statements respectively; l prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Disclosure of information to auditors In the case of each of the persons who are Directors at the date of this report, as far as each Director is aware, there is no relevant audit information of which the Company’s auditors are unaware. Relevant information is defined as ‘information needed by the Company’s auditors in connection with preparing their report’. Each Director has taken all the steps that he ought to have taken in his duty as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Independent auditors The auditors, PricewaterhouseCoopers LLP, have indicated their willingness to continue in office and a resolution that they be reappointed will be proposed at the Annual General Meeting. By order of the Board D J S Taylor Company Secretary 29 March 2011 page 23 20494.04 13/04/2011 Proof 3 Remuneration policy This section of the Report of the Remuneration Committee is not audited. The terms of Reference for the Remuneration Committee are listed below: l To determine, on behalf of the Board and the Shareholders, the Company’s broad policy for Executive reward and the entire individual remuneration including terms of service for each of the Executive Directors (and as appropriate other nominated Senior Executives). In doing so, to give the Executive Directors appropriate encouragement to enhance Company performance and ensure that they are fairly but reasonably rewarded for their individual responsibilities, abilities and contribution. l To report and account directly to the Shareholders, on behalf of the Board, for their decisions. l The Remuneration Committee issued a policy statement which is endorsed by the Board. In determining its policy the Committee has given full consideration to Section B of the best practices provisions annexed to the Listing Rules of the London Stock Exchange. The two elements of this statement are: l Total rewards to Executive Directors are intended to provide a comprehensive benefit package which both attracts and motivates individuals of calibre and experience to achieve continuous improvement in shareholder benefits (whilst at all times maintaining the highest levels of integrity). Reflecting individual responsibilities, abilities, expertise and preferences, a balance is sought between guaranteed income through salary and pension with incentives aligned to measurable criteria in relation to short term performance in the form of annual bonus schemes and longer term share based plans. l Total rewards will be set with acknowledgement of comparable rewards in industry-related public companies and those of similar scale and also with sensitivity to subordinate staff within the Company with whom the packages will as far as possible be consistent and fair. The Remuneration Committee has the power to consider the Group’s performance on environmental, social and governance issues when setting the remuneration of Executive Directors. The Remuneration Committee is composed of J W Morgan, who acts as Chairman, J N E Sparey and A J McWalter, all of whom are non executive Directors. During the year the following provided advice which materially assisted the Remuneration Committee: A D Roper (Chief Executive Officer) and A M Basnett (HR Director, Churchill China (UK) Limited). page 24 20494.04 13/04/2011 Proof 3 Directors’ emoluments This section of the Report of the Remuneration Committee is audited. Emoluments of the Directors were as follows: 2010 Executive A D Roper D J S Taylor D M O’Connor I T Hicks Non executive J N E Sparey R S Kettel J W Morgan 2009 Executive A D Roper D J S Taylor D M O’Connor I T Hicks Non executive J N E Sparey R S Kettel J W Morgan Performance bonuses £ Salary £ 200,000 170,231 184,000 132,333 58,000 12,644 36,000 5,000 10,000 25,000 15,000 – – – Benefits Aggregate in kind emoluments £ £ Aggregate emoluments including pensions £ Pensions (see below) £ 1,039 12,959 1,135 1,135 – – – 206,039 193,190 210,135 148,468 58,000 12,644 36,000 – 11,916 12,880 9,263 – – – 206,039 205,106 223,015 157,731 58,000 12,644 36,000 793,208 55,000 16,268 864,476 34,059 898,535 199,667 164,000 169,000 118,000 58,000 36,000 36,000 20,000 20,000 20,000 10,000 – – – 993 15,318 14,121 8,258 – – – 220,660 199,318 203,121 136,258 58,000 36,000 36,000 – 11,480 11,830 8,260 – – 220,660 210,798 214,951 144,518 58,000 36,000 36,000 780,667 70,000 38,690 889,357 31,570 920,927 There were no contracts of significance during or at the end of the financial year in which a Director of the Company was materially interested. Performance bonuses for executive Directors are earned on a basis combining increases in Group profitability and the achievement of defined personal performance objectives. Benefits in kind include the provision of car benefits, fuel benefits and medical insurance. No Director waived emoluments in respect of the years ended 31 December 2010 and 2009. Pension costs represent contributions as defined by the London Stock Exchange guidance and are contributions made by the Group to defined contribution schemes. For additional information in respect of Directors’ pensions refer to the section ‘Pensions’ below. page 25 20494.04 13/04/2011 Proof 3 Share options This section of the Report of the Remuneration Committee is audited. Details of share options granted under the Executive and unapproved Executive schemes are as follows: D J S Taylor Unapproved Executive scheme Approved Executive scheme Unapproved Executive scheme Unapproved Executive scheme Unapproved Executive scheme D M O’Connor Unapproved Executive scheme Approved Executive Scheme Unapproved Executive Scheme I T Hicks Approved Executive scheme Unapproved Executive scheme Number of options Number of options Date of 31 December 31 December 2010 2009 grant Exercise price pence Date from which exercisable 13.04.00 05.12.00 05.12.00 19.04.02 30.04.04 – – – 15,000 10,000 7,500 2,000 20,500 15,000 10,000 118.5 151 151 171 208 Apr 2003 Dec 2003 Dec 2003 Apr 2005 Apr 2007 25,000 55,000 Expiry date Apr 2010 Dec 2010 Dec 2010 Apr 2012 Apr 2014 19.04.02 30.04.04 30.04.04 – 4,000 6,000 10,000 4,000 6,000 171 208 208 Apr 2005 Apr 2007 Apr 2007 Apr 2012 Apr 2014 Apr 2014 10,000 20,000 30.04.04 30.04.04 6,000 4,000 6,000 4,000 208 208 Apr 2007 Apr 2007 Apr 2014 Apr 2014 10,000 10,000 No share options were granted to Directors during the year. On 1 April 2010 D J S Taylor exercised 7,500 share options granted under the Unapproved Executive Share Option Scheme at an exercise price of 118.5p, 2,000 share options granted under the Executive Share Option Scheme and 20,500 share options under the Unapproved Executive Share Option Scheme, both at an exercise price of 151p. On the same day D M O’Connor exercised 10,000 share options granted under the Unapproved Executive Share Option scheme at an exercise price of 171p. The market price at the date of exercise was 275p. Share options are granted to Directors in accordance with the terms of reference of the Remuneration Committee (see page [18]) to provide encouragement to enhance Group performance in the long term and having regard to each employee’s responsibilities, ability and contribution. The grant of options is made at market value at the date of grant at no cost to the employee. page 26 20494.04 13/04/2011 Proof 3 The above options are only exercisable subject to the satisfaction of performance criteria in relation to sustained improvement in the financial performance of the Group. In the case of the above options the Remuneration Committee consider that a sustained improvement in the financial performance of the Group represents an increase in the adjusted basic earnings per ordinary share of the Group of at least 6% above the increase in the Retail Price Index over the 3 year period from the beginning of the financial year in which the option was granted. Shares options are granted to other employees; however, these employees are not considered key management as defined by IAS 24. Phantom Share Scheme This section of the Report of the Remuneration Committee is audited. Details of share options granted under the Phantom Share Scheme are as follows: Number of Number of phantom phantom shares shares Date of 31 December 31 December 2010 2009 grant 19.12.07 19.12.07 12.05.08 19.12.07 19.12.07 12.05.08 19.12.07 19.12.07 12.05.08 15,000 15,000 10,000 15,000 15,000 10,000 15,000 15,000 10,000 15,000 15,000 10,000 15,000 15,000 10,000 15,000 15,000 10,000 Base value pence Cap value pence 300 300 284 300 300 284 300 300 284 550 700 684 550 700 684 550 700 684 Date from which exercisable Dec 2010 Dec 2011 May 2012 Dec 2010 Dec 2011 May 2012 Dec 2010 Dec 2011 May 2012 Expiry date Dec 2012 Dec 2012 May 2013 Dec 2012 Dec 2012 May 2013 Dec 2012 Dec 2012 May 2013 D J S Taylor D M O’Connor I T Hicks The above options are only exercisable subject to the satisfaction of performance criteria in relation to a sustained improvement in the financial performance of the Group. In the case of the above options the Remuneration Committee considers that a sustained improvement in the financial performance of the Group represents an increase in the adjusted basic earnings per ordinary share of the Group of at least 2% per annum above the Retail Price Index over the period from the beginning of the financial year in which the option was granted. The market price of the Company’s shares at the end of the financial year was 305p (2009: 275p). The range of prices for the year to 31 December 2010 was 257.75p to 310.0p (2009: 155p to 299.75p) per ordinary share. page 27 20494.04 13/04/2011 Proof 3 Gains made by Directors on share options This section of the Report of the Remuneration Committee is audited. The gains made by the Directors from the exercise of share options during the year, calculated at the market share price at the date of exercise of the options is as follows: D J S Taylor D M O’Connor Pensions This section of the Report of the Remuneration Committee is audited. 2010 £ 39,638 10,400 50,038 2009 £ – – – The method of provision of pension benefits to Directors changed during 2006. Up to 31 March 2006 benefits were provided through a defined benefit scheme, the Churchill Group Retirement Benefit Scheme. On 31 March 2006 the accrual of future benefits under this scheme ceased and future pension provision was made under a Group Personal Pension arrangement. The disclosures below reflect this change. Pension benefits earned by Directors under the defined benefit scheme were as follows: A D Roper D J S Taylor D M O’Connor I T Hicks The disclosure above is in accordance with London Stock Exchange guidance. Change in benefit over the year (excl. inflation) £ – – – – – Accrued benefit £ 116,009 27,350 26,866 16,252 186,477 Capital value of increase £ – – – – – Increase in benefit over Transfer value at Change in Transfer value at transfer value the year 31 December 31 December less Directors’ 2009 contributions £ 2010 £ (incl. inflation) £ £ A D Roper D J S Taylor D M O’Connor I T Hicks – – – – – 1,924,740 371,331 281,382 98,210 1,776,247 394,136 302,042 116,154 148,493 (22,805) (20,660) (17,944) 2,675,663 2,588,579 87,084 The disclosure above is in accordance with the guidance in the Companies Act 2006. The accrued benefit above is the amount of pension that would be paid each year on retirement based on service to 31 December 2010 or the date of retirement if earlier. page 28 20494.04 13/04/2011 Proof 3 All transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11. The transfer values of the accrued entitlement represent the value of assets that the pension scheme would need to transfer to another pension provider on transferring the scheme’s liability in respect of the Directors’ pension benefits that they earned in respect of qualifying services. They do not represent the sums payable to the individual Directors. The transfer value above discloses the current value of the increase in accrued benefits that the Director has earned in the period, whereas the change in his transfer value discloses the absolute increase or decrease in his transfer value and includes the change in value of accrued benefits that results from market volatility affecting the transfer value at the beginning of the period, as well as the additional value earned in the year. All scheme members have the opportunity to pay Additional Voluntary Contributions. Neither the contributions nor the resulting benefits are included in the above table. All executive Directors are deferred members of the Churchill Retirement Benefit Scheme. The pension benefit of A D Roper is funded to allow retirement based on accrued service to 31 March 2006 on attaining the age of 60 years. The pension benefit of D J S Taylor is funded to allow retirement between the ages of 60 and 65 with a pension based on accrued service to 31 March 2006. The pension benefits of D M O’Connor and I T Hicks are funded to allow retirement at 65 with a pension based on accrued service to 31 March 2006. D J S Taylor, D M O’Connor and I T Hicks are members of the Churchill China 2006 Group Personal Pension Plan. Contributions paid by the Group in respect of this scheme were at a rate of 7% of pensionable salary. Only basic salary is pensionable. Contributions made by the Group were as shown on page 25. Directors’ service contracts This section of the Report of the Remuneration Committee is not audited. Executive Directors are not appointed on contracts for a fixed duration. All executive Directors have contracts of service which can be terminated with a notice period of 12 months from the Company or 6 months from the Director. A D Roper’s service contract was signed on 10 September 2009, D J S Taylor’s on 6 October 2009, D M O’Connor’s on 21 March 2000 and I T Hicks’ on 14 September 2009. Non executive Directors are appointed on fixed term contracts of 2 or 3 years’ duration. J N E Sparey and J W Morgan signed fixed term contracts of 2 year’s duration on 19 May 2009. A J McWalter signed a fixed term contract of 3 years duration on 31 December 2010. There are no defined contractual payments in the event of termination of a Director’s service contract. page 29 20494.04 13/04/2011 Proof 3 Directors’ interests This section of the Report of the Remuneration Committee is not audited. The interests of the Directors and their immediate families and family trusts at 31 December 2010 in the 10p ordinary shares of the Company were as follows: A D Roper D J S Taylor D M O’Connor J N E Sparey I T Hicks J W Morgan A J McWalter 2010 2009 662,430 17,500 5,599 45,600 2,500 28,000 – 864,930 13,500 5,599 43,100 2,500 28,000 – 761,629 957,629 A D Roper’s non-beneficial shareholdings included above at 31 December 2010 were nil (2009: 202,500) 10p ordinary shares, as trustee of various trusts established for the benefit of his children. A D Roper’s interest in the 10p ordinary shares of the Company at 31 December 2010 represented 6.1% (2009: 7.9%) of the Company’s issued share capital. There has been no change in the interests set out above between 31 December 2010 and 29 March 2011. page 30 20494.04 13/04/2011 Proof 3 Performance Graph This section of the Report of the Remuneration Committee is not audited. Total Shareholder Return 250 200 150 100 50 0 2005 2006 2007 2008 2009 2010 Churchill AIM FTSE Fledgling (Source: Brewin Dolphin) Over the 5 year period against which the total shareholder return from the Group is being assessed, performance has been substantially above that generated by the AIM index and well above that shown by the FTSE Fledgling index. Total returns in the year have been supported by improved profitability and continuation of our dividend policy. Our overall 5 year return has remained positive at an average compound rate of over 16%. Over the 5 year period total shareholder return from the Company has been 118%, whilst that achieved by the AIM index as a whole was -5% and the FTSE Fledgling 48%. In the year to 31 December 2010 the overall return from the Company was 16%, the AIM index achieved a 44% return and the FTSE Fledgling index 22%. In the opinion of the Directors the above indices are the most appropriate indices against which to measure the total shareholder return of Churchill China plc as they are constituted of businesses of similar size to the Group. On behalf of the Board J W Morgan Chairman of the Remuneration Committee 29 March 2011 page 31 20494.04 13/04/2011 Proof 3 This statement is unaudited. As a Company quoted on the Alternative Investment Market of the London Stock Exchange, the Company is not required to comply with the Principles of Good Governance and Code of Best Practice (‘the Combined Code’). However, the Board supports the standards required by the Combined Code and seeks to comply with the principles of the Code as far as practically possible. The Board of Directors The Board is currently composed of 4 executive and 3 non executive Directors and meets at least 11 times per year. It is felt that the current composition and operation of the Board is adequate to ensure a balance of power and authority. The non executive members of the Board take an active and influential part in Board procedures and a senior independent non executive Director, J W Morgan, has been formally appointed. The Combined Code recommends that the Boards of listed companies include at least 3 independent non executive Directors. J W Morgan and A J McWalter are considered to be independent. J N E Sparey is no longer considered to be independent as his period of service now exceeds 10 years.The Board does not consider this is a material departure from the terms of the Combined Code. In addition to a formal agenda covering financial control, management and business development, there is appropriate debate addressing areas outside the regular agenda to ensure that all Directors are able to take an informed view of the progress of the business. The nature of the organisational structure of the Group allows executive Directors to maintain a close involvement in all aspects of the Group’s operations. A schedule of matters reserved for Board decision is maintained and a procedure exists to allow Directors access to independent professional advice if required. The following table shows the attendance of Directors at Board meetings through the year. A D Roper D J S Taylor R S Kettel (until retirement) D M O’Connor J N E Sparey I T Hicks J W Morgan Meetings held Meetings attended 12 12 6 12 12 12 12 12 12 5 11 11 12 11 The Directors consider that the Board of Directors includes key management for all areas of the business and that there are no other key management which require disclosure. There are 2 principal sub-committees of the Board. The Audit Committee, which is wholly composed of non executive Directors, meets at least twice per year to receive reports from executive management and external auditors and is normally attended by the Finance Director. The Audit Committee is currently chaired by J W Morgan. It is intended that A J McWalter will assume the chairmanship of this Committee after the 2011 Annual General Meeting. The Remuneration Committee is wholly composed of non executive Directors and is normally attended by the Chief Executive Officer who takes no part in discussions on his own remuneration. The Remuneration Committee is chaired by J W Morgan. Terms of reference for both Committees and a remuneration policy statement have been agreed by the Board. The Company does not have a Nomination Committee as new Board appointments are discussed by the Board as a whole, rather than by delegation to a Committee. page 32 20494.04 13/04/2011 Proof 3 Internal control The Board of Directors has overall responsibility for the Group’s system of internal control and is responsible for reviewing its effectiveness. This system is designed to manage rather than eliminate the risk of failure to achieve business objectives and provides reasonable, but not absolute, assurance against material misstatement or loss. The Board has established a system for ongoing review of risk assessment and management procedures to ensure that the controls on which it places reliance are operating satisfactorily and that new risks to which the business becomes exposed through its activities are recognised and appropriate controls implemented. These procedures have been in operation throughout the year and in the period to the date of this report. The risks to which the Group is exposed are formally reviewed by the Board twice a year. More regular reviews of individual risk areas are carried out and the results reported to the Board. Operational responsibility for each of the main risk areas has been clearly identified and are allocated to either Directors of the Company or of the Company’s principal operating subsidiary Churchill China (UK) Limited, under the supervision of the Board as a whole. Individual managers and employees are also aware, where appropriate, of their responsibilities in both identifying and controlling risk. The Company’s systems in relation to risk assessment and control seek to ensure that as part of the normal process of business management material risks are identified and brought to the attention of the Board. Directors review risk as part of a regular programme of meetings covering both general business processes and specific risk areas. A system of reporting is in place to provide control information on key risk areas within reports submitted to the Board and reviewed. In addition to this, Directors and managers are aware of their responsibility to monitor both changes in business activity and changes to the economic legislative environment in which the Company operates. Potential new risk areas have been identified and control procedures documented. The Board and the Audit Committee have reviewed the effectiveness of the system of internal control during the year. Internal audit The Company does not employ an internal audit department and does not believe that, given the size and structure of the business, the geographic proximity of its major operations and the close control effected by the involvement of executive Directors in the day-to- day running of the business, such a department would not provide an effective means of gaining significant improvements in internal control. The requirement for an internal audit function is reviewed annually. Internal financial control The Board of Directors has overall responsibility for the Group’s systems of internal financial control which it exercises through an organisational structure with authorisation, monitoring and reporting procedures which are appropriate to the needs of the business. These systems have been designed to give the Board reasonable, but not absolute, assurance against material misstatement or loss. The principal features of the Group’s system of internal financial control are: the maintenance of a control environment in which the need for the highest standards of behaviour and integrity are communicated to employees; the use of a detailed reporting system covering performance against comprehensive financial and other key operating indicators. The Board and the Audit Committee have reviewed the operation and effectiveness of the system of internal financial control during the year. The Board has responded to this review with management and work to address the areas identified. Going concern The Board confirms that having made enquiries, the Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing financial statements. By order of the Board D J S Taylor Company Secretary 29 March 2011 page 33 20494.04 13/04/2011 Proof 3 We have audited the Group and parent Company financial statements (the ‘financial statements’) of Churchill China plc for the year ended 31 December 2010 which comprise the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated balance sheet, the Company balance sheet, the Consolidated statement of changes in equity, the Consolidated cash flow statement, the Reconciliation of operating profit to net cash inflow from operating activities and the related notes. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent Company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Respective responsibilities of Directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page [16], the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. Opinion In our opinion: l l l l the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 December 2010 and of the Group’s profit and cash flows for the year then ended; the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. page 34 20494.04 13/04/2011 Proof 3 Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: l adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or the parent Company financial statements are not in agreement with the accounting records and returns; or l l certain disclosures of Directors’ remuneration specified by law are not made; or l we have not received all the information and explanations we require for our audit. Mike Robinson (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Birmingham 29 March 2011 page 35 20494.04 13/04/2011 Proof 3 Revenue Operating profit Share of results of associate company Finance income Finance costs Profit before income tax Income tax expense Profit for the year Attributable to equity holders of the Company Earnings per ordinary share Diluted earnings per share All of the above figures relate to continuing operations. Total 2010 £’000 Total 2009 £’000 Notes 4 43,746 41,705 5 15 8 8 10 2,287 162 41 (176) 2,314 (583) 2,288 (18) 119 (320) 2,069 (513) 1,731 1,556 1,731 1,556 11 11 15.8p 15.8p 14.3p 14.2p The notes on pages 43 to 75 are an integral part of these consolidated financial statements. The Company has elected to take the exemption under section 408 of the Companies Act 2006 to not present the parent Company profit and loss account. The profit of the parent company for the year was £68,000 (2009: loss of £23,000). page 36 20494.04 13/04/2011 Proof 3 Other comprehensive income Actuarial gain/(loss) on defined benefit obligations (note 23) Currency translation differences Other Other comprehensive income for the year Profit for the year Total comprehensive income/(expense) for the year Attributable to: Equity holders of the Company 2010 £’000 1,894 7 – 1,901 1,731 2009 £’000 (4,136) (14) 2 (4,148) 1,556 3,632 (2,592) 3,632 (2,592) Amounts in the statement above are disclosed net of tax. The income tax relating to each component of other comprehensive income is disclosed in note 10. The Company has no recognised gains and losses other than those included in its profit and loss account and therefore no separate Statement of Total Recognised Gains and Losses has been presented. page 37 20494.04 13/04/2011 Proof 3 Assets Non current assets Property, plant and equipment Intangible assets Investment in associate Deferred income tax assets Current assets Inventories Trade and other receivables Cash and cash equivalents Assets held for sale Total assets Liabilities Current liabilities Trade and other payables Current income tax liabilities Non current liabilities Deferred income tax liabilities Retirement benefit obligations Total liabilities Net assets Shareholders’ equity Issued share capital Share premium account Treasury shares Other reserves Retained earnings Total equity Notes 2010 £’000 2009 £’000 13 14 15 22 18 19 15,030 368 887 1,266 14,299 498 725 2,163 17,551 17,685 8,197 9,963 4,442 7,142 9,031 6,882 22,602 23,055 20 – 662 22,602 23,717 40,153 41,402 21 (6,735) (501) (6,907) (574) (7,236) (7,481) 22 23 (1,678) (4,670) (1,676) (7,709) (13,584) (16,866) 26,569 24,536 24 24 25 26 27 1,096 2,348 (91) 1,202 22,014 1,095 2,332 (117) 1,234 19,992 26,569 24,536 The notes on pages 43 to 75 are an integral part of these consolidated financial statements. The financial statements on pages 36 to 75 were approved by the Board of Directors on 29 March 2011 and were signed on its behalf by: A D Roper Director D J S Taylor Director Company number 2709505 page 38 20494.04 13/04/2011 Proof 3 Fixed assets Investment in associate Investments in subsidiaries Current assets Debtors: amounts falling due after more than one year Debtors: amounts falling due within one year Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Net assets Capital and reserves Called up share capital Share premium account Treasury shares Other reserves Profit and loss account Total shareholders’ funds Notes 15 16 19 19 21 24 24 25 26 27 2010 £’000 355 2,195 2009 £’000 355 2,195 2,550 2,550 6,861 299 611 7,771 (21) 8,500 290 517 9,307 (26) 7,750 9,281 10,300 11,831 10,300 11,831 1,096 2,348 (91) 24 6,923 1,095 2,332 (117) 69 8,452 10,300 11,831 The notes on pages 43 to 75 are an integral part of these consolidated financial statements. The financial statements on pages 36 to 75 were approved by the Board of Directors on 29 March 2011 and were signed on its behalf by: A D Roper Director D J S Taylor Director page 39 20494.04 13/04/2011 Proof 3 Balance at 1 January 2009 24,086 1,095 2,332 (138) 1,236 28,611 Retained earnings £’000 Share capital £’000 Share premium £’000 Treasury shares £’000 Other reserves £’000 Total £’000 Comprehensive income: Profit for the year Other comprehensive income: Depreciation transfer – gross Depreciation transfer – tax Actuarial losses – net of tax Currency translation Total comprehensive expense Transactions with owners Dividends relating to 2008 and 2009 Share based payment Treasury shares Total transactions with owners 1,556 12 – (4,136) – (2,568) (1,526) – – (1,526) – – – – – – – – – – – – – – – – – – – – – – – – – – – – 21 21 – 1,556 (12) 2 – (14) – 2 (4,136) (14) (24) (2,592) – 22 – 22 (1,526) 22 21 (1,483) Balance at 1 January 2010 19,992 1,095 2,332 (117) 1,234 24,536 Comprehensive income: Profit for the year Other comprehensive income: Depreciation transfer – gross Depreciation transfer – tax Actuarial gains – net of tax Currency translation Total comprehensive income Transactions with owners Dividends relating to 2009 and 2010 Proceeds of share issue Share based payment Treasury shares Total transactions with owners 1,731 12 (18) 1,894 – 3,619 (1,529) – – (68) (1,597) – – – – – – – 1 – – 1 – – – – – – – 16 – – 16 – – – – – – – – – 26 26 – 1,731 (12) 18 – 7 – – 1,894 7 13 3,632 – – (45) – (1,529) 17 (45) (42) (45) (1,599) Balance at 31 December 2010 22,014 1,096 2,348 (91) 1,202 26,569 page 40 20494.04 13/04/2011 Proof 3   Cash flow from operating activities Cash generated from operations (see note page 42) Interest received* Interest paid Income tax paid Net cash generated from operating activities Investing activities Purchases of property, plant and equipment Proceeds on disposal of property, plant and equipment Purchases of intangible assets Net cash used in investing activities Financing activities Issue of ordinary shares Purchase of treasury shares Dividends paid Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Exchange losses on cash and cash equivalents Cash and cash equivalents at the end of the year 2010 £’000 1,092 41 (20) (564) 2009 £’000 3,439 119 – (559) 549 2,999 (1,507) 129 (58) (2,196) 42 (194) (1,436) (2,348) 67 (91) (1,529) 21 – (1,526) (1,553) (1,505) (2,440) 6,882 – (854) 7,738 (2) 4,442 6,882 * Conventionally interest received is included under the heading ‘Investing activities’; however, the Directors believe that as the Group holds cash in support of operating activities it should be disclosed as part of cash generated from operating activities. page 41 20494.04 13/04/2011 Proof 3 Continuing operating activities Operating profit Adjustments for: Depreciation and amortisation Profit on disposal of property, plant and equipment (Credit)/charge for share based payments Difference between pension service cost and contributions (see note 23) Changes in working capital: Inventory Trade and other receivables Trade and other payables Net cash inflow from operations 2010 £’000 2009 £’000 2,287 2,288 1,530 (12) (45) (495) (1,055) (922) (196) 1,396 (14) 22 (410) 1,335 (415) (763) 1,092 3,439 page 42 20494.04 13/04/2011 Proof 3 1 Summary of significant accounting policies The consolidated financial statements of Churchill China plc have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRIC Interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Going concern After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements. Changes in accounting policy and disclosures (a) The following new standards, interpretations and amendments to standards are mandatory for the first time for the financial year beginning 1 January 2010, but are not currently relevant to the Group (although they may affect the accounting for future transactions and events). IFRS 3 (revised), ‘Business combinations’, and consequential amendments to IAS 27, ‘Consolidated and separate financial statements’, IAS 28, ‘Investments in associates’, and IAS 31, ‘Interests in joint ventures’, are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. IFRIC 17, ‘Distribution of non-cash assets to owners’ (effective on or after 1 July 2009). IFRIC 18, ‘Transfers of assets from customers’, effective for transfer of assets received on or after 1 July 2009. IFRIC 9, ‘Reassessment of embedded derivatives and IAS 39, Financial instruments: Recognition and measurement’, effective 1 July 2009. IFRIC 16, ‘Hedges of a net investment in a foreign operation’ effective 1 July 2009. IAS 1 (amendment), ‘Presentation of financial statements’. IAS 36 (amendment), ‘Impairment of assets’, effective 1 January 2010.) IFRS 2 (amendments), ‘Group cash-settled share-based payment transactions’, effective from 1 January 2010. IFRS 5 (amendment), ‘Non-current assets held for sale and discontinued operations’. (b) New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2010 and not early adopted. The Group’s assessment of the impact of these new standards and interpretations is set out below. IFRS 9, ‘Financial instruments’, issued in November 2009, introduces new requirements for classifying and measuring financial assets and it may affect the Group’s accounting for its financial assets. page 43 20494.04 13/04/2011 Proof 3 1 Summary of significant accounting policies (continued) The standard is not applicable until 1 January 2013 but is available for early adoption. However, the standard has not yet been endorsed by the EU. The Group is yet to assess IFRS 9’s full impact. However, initial indications are that it will not significantly affect the financial disclosure or accounting of the Group. Revised IAS 24 (revised), ‘Related party disclosures’, issued in November 2009, is mandatory for periods beginning on or after 1 January 2011. Earlier application, in whole or in part, is permitted. However, the standard has not yet been endorsed by the EU. The revised standard clarifies and simplifies the definition of a related party. The Group will apply the revised standard from 1 January 2011. When the revised standard is applied, the Group and the parent will need to disclose any transactions between its subsidiaries and its associates. It is not believed that there will be any significant impact on related party disclosures. ‘Classification of rights issues’ (amendment to IAS 32), issued in October 2009. The amendment applies to annual periods beginning on or after 1 February 2010. Earlier application is permitted. The amendment addresses the accounting for rights issues. The Group will apply the amended standard from 1 January 2011, but it is not presently expected to have any impact on the Group’s financial statements. IFRIC 19, ‘Extinguishing financial liabilities with equity instruments’, effective 1 July 2010. The Group will apply the interpretation from 1 January 2011, subject to endorsement by the EU. It is not expected to have any impact on the Group or the parent entity’s financial statements. ‘Prepayments of a minimum funding requirement’ (amendments to IFRIC 14). The amendments correct an unintended consequence of IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’. The Group will apply these amendments for the financial reporting period commencing on 1 January 2011, but it is not expected to have any impact on the Group or the parent entity’s financial statements. Basis of consolidation The consolidated financial statements of Churchill China plc include the results of the Company, its subsidiaries and associated companies. The financial statements of each undertaking in the Group are prepared to the balance sheet date under UK GAAP. Subsidiaries and associates accounting policies are amended, where necessary, to ensure consistency with the accounting policies adopted by the Group. Intra Group transactions are eliminated on consolidation. (a) Subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for the purchase of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. page 44 20494.04 13/04/2011 Proof 3 1 Summary of significant accounting policies (continued) (b) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss. The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Dilution in gains and losses arising in investments in associates are recognised in the income statement. Segment reporting Operating segments are reported in a way consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments has been identified as the Board of Churchill China plc. Income and expenditure arising directly from a business segment are identified to that segment. Income and expenditure arising from central operations which relate to the Group as a whole or cannot reasonably be allocated between segments are classified as unallocated. Revenue Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods provided in the normal course of business, net of discounts, rebates and sales related taxes. Sales of goods are recognised when goods have been delivered and title in those goods has passed. Rebates are recognised at their anticipated level as soon as any liability is expected to arise and are deducted from gross revenue. Interest income is recognised on a time basis by reference to the principal outstanding and at the effective interest rate applicable. Dividend income is recognised when the Group’s right to receive payment has been established. Leases Management review new leases and classify them as operating or finance leases in accordance with the balance of risk and reward between lessee and the lessor. Lease payments made under operating leases are charged to income on a straight-line basis over the term of the lease. Operating profit and exceptional items Operating profit is stated both before and after the effect of exceptional items but before the Group’s share of results in associate companies, impairment of investment in associate companies, finance income and costs and taxation. The Group has adopted a columnar income statement format which seeks to highlight significant items within the Group results for the period. Such items are considered by the Directors to be exceptional in size and nature rather than being representative of the underlying trading of the Group, and may include such items as restructuring costs, material impairments of non current assets, material profits and losses on the disposal of property, plant and equipment, material increases or reductions in pension scheme costs and material increases or decreases in taxation costs as a result of changes in legislation. The Directors apply judgement in assessing the particular items, which by virtue of their size and nature are separately disclosed in the income statement and notes to the financial statements as ‘Exceptional items’. The Directors believe that the separate disclosure of these items is relevant in understanding the Group’s financial performance. page 45 20494.04 13/04/2011 Proof 3 1 Summary of significant accounting policies (continued) Dividends Dividends to the Company’s shareholders are recognised as a liability in the Group’s financial statements in the period in which the dividends are paid, following approval by the Company’s shareholders. Interest received/paid Interest received and paid is treated in the cash flow statement as a cash flow from operating activities as this reflects the nature of the Group’s business. Retirement benefit costs The Group operates a defined benefit pension scheme and defined contribution pension schemes. The defined benefit scheme is valued every three years by a professionally qualified independent Actuary. In intervening years, the Actuary reviews the continuing appropriateness of the valuation. Scheme liabilities are measured using the projected unit method and the amount recognised in the balance sheet is the present value of these liabilities at the balance sheet date. The discount rate used to calculate the present value of liabilities is the interest rate attaching to high quantity corporate bonds. The assets of the scheme are held separately from those of the Group and are measured at fair value. The accrual of further benefits under the scheme ceased on 31 March 2006. The regular service cost of providing retirement benefits to employees during the year, together with the cost of any benefits relating to past service and any benefits arising from curtailments, is charged or credited to operating profit in the year. These costs are included within staff costs. A net credit or cost representing the expected return on the market value of the assets of the scheme during the year less a charge representing the expected increase in the present value of the liabilities in the scheme arising from the liabilities of the scheme being 1 year closer to payment is included within finance income or cost. The difference between the market value of assets and the present value of accrued pension liabilities is shown as an asset or liability in the balance sheet. Actuarial gains and losses are recognised in the statement of comprehensive income in the year, together with differences arising from changes in actuarial assumptions. Costs associated with defined contribution schemes represent contributions payable by the Group during the year and are charged to the income statement as they fall due. Share based payments Where share options have been issued to employees, the fair value of options at the date of grant is charged to the Income Statement over the period over which the options are expected to vest. The number of ordinary shares expected to vest at each balance sheet date are adjusted to reflect non market vesting conditions such that the total charge recognised over the vesting period reflects the number of options that ultimately vest. Market vesting conditions are reflected within the fair value of the options granted. If the terms and conditions attaching to options are amended before the options vest any change in the fair value of the options is charged to the Income Statement over the remaining period to the vesting date. National insurance contributions payable by the Company in relation to unapproved share option schemes are provided for on the difference between the share price at the balance sheet date and the exercise price of the option where the share price is higher than the exercise price. Foreign currencies The individual financial statements of each Group company are presented in the currency of the primary economic environment in which the Company operates (its functional currency). For the purpose of the consolidated financial statements, the results of each entity are expressed in sterling, which is the presentation currency of the Group and is the presentation currency for the consolidated financial statements. page 46 20494.04 13/04/2011 Proof 3 1 Summary of significant accounting policies (continued) Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Non monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at average exchange rates for the period. Exchange differences arising, if any, are dealt with through reserves. In order to manage its exposure to certain foreign exchange risks, the Group enters into forward currency contracts (see ‘Derivative financial instruments’ below). Derivative financial instruments The Group’s operations expose it to the financial risks of changes in exchange rates. The Group uses forward currency contracts to mitigate this exposure. The Group does not use derivative financial instruments for speculative purposes. Changes in the fair value of derivative financial instruments are recognised immediately in the income statement as soon as they arise. Contracts are initially recognised at fair value. Gains and losses on all derivatives held at fair value outstanding at a balance sheet date are recognised in the income statement. Hedge accounting is not considered to be appropriate to the above currency risk management techniques and has not been applied. Taxation Income tax expense represents the sum of the current tax and deferred tax. Current tax is based on the taxable profit for the year. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for, if it arises from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction there is no effect on either accounting or taxable profit or loss. The Group’s liability for deferred tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date or are expected to apply when the related deferred income tax asset is realised or deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities may be set off against each other provided there is a legal right to do so and it is management’s intention to do so. Property, plant and equipment Property, plant and equipment is shown at cost, net of depreciation, as adjusted for the revaluation of certain land and buildings. Depreciation is calculated so as to write off the cost, less any provision for impairment, of plant, property and equipment, less their estimated residual values over the expected useful economic lives of the assets concerned. The principal annual rates used for this purpose are: Freehold buildings Plant Motor vehicles Fixtures and fittings % 2 on cost or valuation 10-25 on cost 25 on reducing net book value 25-33 on cost Freehold land is not depreciated. page 47 20494.04 13/04/2011 Proof 3 1 Summary of significant accounting policies (continued) The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amounts. Intangible assets Intangible assets, which comprise computer software, are shown at cost net of amortisation. Amortisation is calculated so as to write off the cost, less any provision for impairment, of intangible assets, less their estimated residual values over the expected useful economic lives of the assets concerned. The principal annual rate used for this purpose is: Computer software % 33 on cost The Group has no goodwill. Impairment of non financial assets At each reporting date the Directors assess whether there is any indication that an asset may be impaired. If any such indicator exists the Group tests for impairment by estimating the recoverable amount of the asset. If the recoverable amount is less than the carrying value of an asset an impairment loss is required. In addition to this, assets with indefinite lives are tested for impairment at least annually. The recoverable amount is measured as the higher of net realisable value or value in use. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined on a first in, first out basis and includes, where appropriate, direct materials, direct labour, overheads incurred in bringing inventories to their present location and condition and transport and handling costs. Net realisable value is the estimated selling cost less all further costs to sale. Provision is made where necessary for obsolete, slow-moving and defective inventories. Available for sale financial assets Available for sale financial assets are non derivatives that are either designated in this category or not classified to any of the other financial asset categories. They are included in non current assets unless the Directors intend to dispose of the investment within 12 months of the balance sheet date. At each reporting date the Directors assess whether there is an indication an asset may be impaired. If any such indicator exists the Group tests for impairment by estimating the recoverable amount of the asset. If the recoverable amount is less than the carrying value of an asset an impairment loss is required. In addition to this, assets with indefinite lives are tested for impairment at least annually. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment is established where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Trade receivables are as defined under IAS 39. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held on call with banks, other short term highly liquid investments with original maturities of 3 months or less, and bank overdrafts. Cash and cash equivalents are as defined under IAS 39. Non current assets held for sale Non current assets are classified as being held for sale when their value is expected to be recovered through disposal rather than continuing usage within the business and when the future sale is considered to be highly probable. Management must be committed to sale which should be expected to be completed to qualify for recognition as a completed sale within 1 year from the date of classification. Non current assets are measured at the lower of carrying value and fair value less disposal costs, and are no longer depreciated. page 48 20494.04 13/04/2011 Proof 3 1 Summary of significant accounting policies (continued) Provisions Provisions are recognised when (i) the Group has a present legal or constructive obligation as a result of past events, (ii) it is probable that an outflow of resources will be required to settle the obligation and (iii) the amount has been reliably estimated. The Directors estimate the amount of provisions required to settle any obligation at the balance sheet date. Provisions are discounted to their present value where the effect would be material. Parent Company significant accounting policies The Company financial statements are prepared under UK GAAP. The financial statements have been prepared under the historical cost convention in accordance with the Companies Act 2006 and applicable accounting standards in the United Kingdom. The principal accounting policies applied in the preparation of the Company financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Fixed asset investments Fixed asset investments, comprising investments in subsidiary and associated companies, are stated at cost less any provisions for impairment. Where an event has occurred that gives rise to doubt about the recovery of the carrying value an impairment assessment is made. The impairment is calculated by comparing the investments carrying value to the recoverable amount as required by FRS 11 ‘Impairment of fixed assets and goodwill’. Other Policies in relation to dividends and share based payments are the same as the Group accounting policies. 2 Financial risk management Financial risk factors The Group’s activities expose it to a variety of financial risks; market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk), credit risk, price risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to manage certain risk exposures. Financial risk management is carried out by the finance department under policies approved by the Board of Directors. (a) Market risk (i) Currency risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily in relation to the US dollar and euro. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. The Group’s treasury risk management policy is to secure all of the contractually certain cash flows (mainly export sales and the purchase of inventory) in each major currency. Contractual certainty is considered to be where the Group has received a firm sales order or placed a firm purchase order. At 31 December 2010, if sterling had weakened/strengthened by 5% against the US dollar with all other variables held constant, post-tax profit for the year would have been £27,000 (2009: £9,000) lower/higher, mainly as a result of foreign exchange gains/ losses on translation of US dollar denominated trade payables and cash balances. Equity would have been a further £11,000 (2009: £9,000) higher/lower mainly as a result of differences in the translation of US dollar investments in subsidiary undertakings. If sterling had weakened/strengthened by 5% against the euro with all other variables held constant, post-tax profit for the year would have been £140,000 (2009: £157,000) higher/lower, mainly as a result of foreign exchange gains/losses on translation of euro denominated trade receivables and cash balances. There would have been no substantial other changes in Equity. page 49 20494.04 13/04/2011 Proof 3 2 Financial risk management (continued) (ii) Cash flow and fair value interest rate risk The Group holds significant interest bearing assets and its finance income and operating cash flows are linked to changes in market interest rates. The Group has no significant short or long term borrowings. The Group identifies cash balances in excess of short and medium term working capital requirements (see liquidity risk) and invests these balances in short and medium term money market deposits. At 31 December 2010, had the rates achieved been 0.1% higher/lower with all other variables held constant then post-tax profit for the year would have been £4,000 (2009: £5,000) higher/lower. Other components of equity would have been unchanged (b) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents and credit exposures including outstanding trade receivables and committed transactions. For banks with which the Group places balances on deposit, only independently rated parties with a minimum rating of ‘A’ are accepted. Cash and cash equivalents are as follows: Lloyds Banking Group plc National Westminster Bank plc Other Credit rating AA– AA– Min A 2010 £’000 4,147 25 270 2009 £’000 6,427 25 430 4,442 6,882 Risk attached to the receipt of UK trade receivables is largely controlled through the assessment of the credit quality of each customer, taking into account its financial position, past experience and third party credit information. Risks attaching to export trade receivables are controlled through the use of export credit insurance and confirmed letters of credit. Where these cannot be obtained the credit control department assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. The Group manages its debt position and considers it is in a position of having limited credit risk (see note 19). (c) Price risk As explained in the Directors’ report, the Group results are affected by changes in market prices. The risk attached to this is managed by close relationships with suppliers and ongoing product development. (d) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and available funding through committed credit facilities. Liquidity risk is managed on a Group basis with expected cash flows being monitored against current cash and cash equivalents and committed borrowing facilities. The Group has no long term borrowing and funds its operations from its own cash reserves and the Directors do not consider there to be significant liquidity risk. All liabilities are generally due within 3 months. page 50 20494.04 13/04/2011 Proof 3 2 Financial risk management (continued) Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to provide finance for the long term development of the business and to generate returns for shareholders and benefits for other stakeholders in the business. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group currently has no debt. Fair value estimation The carrying value less impairment provision of trade and other receivables and trade and other payables are assumed to approximate their fair values. 3 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below. (a) Net realisable value of excess inventories The Group identifies inventory where it is believed that the quantity held is in excess of that which may be realised at normal price levels. The realisable value of this inventory is assessed taking into account the estimated sales price less further costs of sale. If the estimated net realisable value of excess inventories were to be 10% higher or lower than management’s estimates the value of this provision would change by £211,000 (2009: £342,000). (b) Pension benefits The present value of the pension obligations depend on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost or income for pensions include the discount rate. Any changes in these assumptions will impact the carrying amount of pension obligations. The Group determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate discount rate the Group considers the interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. Other key assumptions for pension obligations are based in part on current market conditions. Additional information is disclosed in note 23. (c) Recognition of deferred tax assets The Group reassesses each year whether it is appropriate to recognise the deferred tax assets in the financial statements based upon the likelihood that the assets can be recovered. The assessment is based on the expected reversal of temporary timing differences. page 51 20494.04 13/04/2011 Proof 3 4 Segmental analysis Management has determined the operating segments are based on the reports reviewed by the Chief Operating Decision Maker and the Strategic Steering Committee of the Board that are used to make strategic decisions. The Board considers the business primarily based on the market and product Groups, but also from a geographic perspective. Geographically, management considers the performance in relation to the UK, rest of Europe, North America and Rest of the World. The reportable operating product segments derive their revenue primarily from the sale of ceramic products to the Retail and Hospitality sectors. The Board assesses the performance of the operating segments based on the measure of operating profit, as analysed in the management accounts. This measurement basis excludes the effects of non-recurring expenditure from the operating segments such as restructuring costs and goodwill impairments when the impairment is the result of an isolated, non-recurring event. The measure also excludes the effects of equity-settled share-based payments and unrealised gains/losses on financial instruments. Interest income and expenditure are not allocated to segments, as this type of activity is driven by the central treasury function, which manages the cash position of the Group. (a) Primary reporting format – business segments The business is managed in two main business segments – Hospitality and Retail. Hospitality £’000 31 December 2010 Retail Unallocated £’000 £’000 Group £’000 Revenue from external customers 27,398 16,348 – 43,746 Contribution to Group overheads excluding depreciation Depreciation and amortisation 4,914 (859) 1,060 (305) (2,157) (366) 3,817 (1,530) Operating profit Share of results of associated company Finance income Finance cost Profit before income tax 4,055 755 (2,523) 2,287 162 41 (176) 2,314 Hospitality £’000 31 December 2009 Retail Unallocated £’000 £’000 Group £’000 Revenue from external customers 24,554 17,151 – 41,705 Contribution to Group overheads excluding depreciation Depreciation and amortisation 4,183 (894) 1,911 (185) (2,410) (317) 3,684 (1,396) Operating profit Share of results of associated company Finance income Finance cost Profit before income tax 3,289 1,726 (2,727) 2,288 (18) 119 (320) 2,069 The ‘Unallocated’ Group overheads principally comprise costs associated with the centralised functions of the parent Company Board, finance and administration and information technology. page 52 20494.04 13/04/2011 Proof 3 4 Segmental analysis (continued) There are no material inter-segment revenues (2009: £nil). Any inter segment revenues are carried out on an arm’s length basis. Revenue from external parties is measured in a manner consistent with the consolidated income statement. Segment assets consist primarily of property, plant and equipment, inventories, trade and other receivables. Unallocated assets comprise intangible assets, investment in associates, available-for-sale financial assets, deferred taxation and cash and cash equivalents. Segment liabilities comprise trade and other payables. Unallocated liabilities comprise items such as trade and other payables, current taxation, deferred taxation and retirement benefit obligations. Capital expenditure comprises additions to property, plant and equipment (note 13) and intangible assets (note 14). Segment assets and liabilities at 31 December 2010 and capital expenditure for the year ended on that date are as follows: Assets excluding inventories Inventories Investment in associates Total assets Total liabilities Capital expenditure Hospitality £’000 Retail Unallocated £’000 £’000 15,229 5,311 – 7,456 2,886 – 8,384 – 887 Group £’000 31,069 8,197 887 20,540 10,342 9,271 40,153 3,778 1,006 899 123 8,907 13,584 457 1,586 Segment assets and liabilities at 31 December 2009 and capital expenditure for the year ended on that date are as follows: Assets excluding inventories Inventories Investment in associates Total assets Total liabilities Capital expenditure Any sales between segments are carried out on an arm’s length basis. Hospitality £’000 Retail Unallocated £’000 £’000 14,642 4,481 – 7,234 2,661 – 11,659 – 725 Group £’000 33,535 7,142 725 19,123 9,895 12,384 41,402 3,225 1,455 12,186 16,866 794 1,531 273 2,598 page 53 20494.04 13/04/2011 Proof 3 4 Segmental analysis (continued) (b) Secondary reporting format – geographical segments The Group’s two business segments operate in four main geographical segments, even though they are managed on a worldwide basis. Geographical segment – Revenue United Kingdom Rest of Europe North America Other 2010 £’000 27,568 8,666 4,368 3,144 2009 £’000 28,453 6,973 3,628 2,651 43,746 41,705 The total assets of the business are allocated as follows: United Kingdom £39,362,000 (2009: £40,489,000), Rest of Europe £43,000 (2009: £31,000), North America £743,000 (2009: £852,000), Other £5,000 (2009: £30,000). Capital expenditure was made as follows: United Kingdom £1,586,000 (2009: £2,596,000), Other £nil (2009: £2,000). 5 Expenses by nature Changes in inventories of finished goods and work in progress Raw materials used Purchase of goods for resale Employee benefit expense (note 7) Other external charges Depreciation and amortisation charges Profit on disposal of property, plant and equipment Foreign exchange losses/(gains) Total 2010 £’000 (1,039) 2,775 11,446 15,421 11,323 1,530 (12) 15 Total 2009 £’000 1,358 2,113 9,766 14,258 10,691 1,396 (14) (151) Total cost of sales distribution costs and administrative expenses 41,459 39,417 page 54 20494.04 13/04/2011 Proof 3 6 Average number of people employed The average monthly number of persons (including executive Directors) employed by the Group during the year was: By activity Production Sales and administration The Company had no employees (2009: none). 7 Employee benefit expense Staff costs (for the employees shown in note 6) Wages and salaries Social security costs Defined contribution pension cost (see note 23) Other pension costs (see note 23) Share options granted to Directors and employees (see note 24) 2010 Number 2009 Number 340 215 555 278 232 510 2010 £’000 13,753 1,154 405 154 (45) 2009 £’000 12,605 1,080 404 147 22 15,421 14,258 Directors’ emoluments The statutory disclosures for Directors’ emoluments, being the aggregate emoluments, the aggregate amount of gains made by Directors on the exercise of share options and the amount of money receivable by Directors under long term incentive plans in respect of qualifying services, have been included within the Remuneration Report. In addition, statutory disclosures in respect of the number of Directors to whom retirement benefits are accruing is disclosed. Company The Company did not make any payments to employees (2009: nil). 8 Finance income and costs Interest income on cash and cash equivalents Finance income Interest on pension scheme (note 23) Other interest Finance costs Net finance cost 20494.04 13/04/2011 Proof 3 2010 £’000 2009 £’000 41 41 (156) (20) 119 119 (320) – (176) (320) (135) (201) page 55 9 Auditors’ remuneration Amounts paid to the Group’s auditors were as follows: Audit services – audit of subsidiaries Audit services – audit of parent and consolidated financial statements (Company £1,500, 2009: £1,500) Non-audit services – taxation advice 10 Income tax expense Group Current tax – current year – adjustment in respect of prior years Deferred tax (note 22) Origination and reversal of temporary differences Income tax expense 2010 £’000 2009 £’000 75 7 13 95 2010 £’000 535 (45) 490 93 583 63 7 26 96 2009 £’000 589 (145) 444 69 513 A number of changes to the UK corporation tax rules were announced in the June 2010 Budget. The Finance (No.2) Act 2010, which was substantively enacted on 20 July 2010, includes legislation reducing the main rate of corporation tax from 28% to 27% from 1 April 2011. Further reductions in the main rate are proposed to reduce the rate by 1% per annum to 24% by 1 April 2014. The proposed reductions of the main rate of corporation tax by 1% each year are expected to be enacted separately each year. The overall effect of the further changes from 27% to 24%, if these applied to the deferred tax balance at 31 December 2010, would not reduce the deferred tax liability by a material amount. The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profit of the consolidated entities as follows: 2010 £’000 2009 £’000 2,314 2,069 648 18 (45) (66) 28 583 579 17 (145) – 62 513 Profit before income tax Tax calculated at domestic tax rates applicable to profits in the respective countries Expenses not deductible for tax purposes Adjustment in respect of prior periods Change in rate of deferred tax Other Tax charge The weighted average applicable tax rate was 28% (2009: 28%). page 56 20494.04 13/04/2011 Proof 3 10 Income tax expense (continued) During the year a charge of £806,000 (2009: credit of £1,608,000) in relation to deferred tax arising from actuarial gains and losses on the Group’s defined benefit pension obligation and a credit of £18,000 (2009: £2,000) in relation to the reversal of deferred taxation on the revaluation of land and buildings were adjusted directly within equity. 11 Earnings per ordinary share The basic earnings per ordinary share is based on the profit after income tax and on 10,934,092 (2009: 10,904,065) ordinary shares, being the weighted average number of ordinary shares in issue during the year. The adjusted basic earnings per ordinary share is based on the profit after income tax and adjusted to take into account exceptional items. The Directors believe that adjusted earnings per share more closely reflects the underlying performance of the Group. 2010 2009 Pence per Pence per share share Basic earnings per share (based on earnings £1,731,000 (2009: £1,556,000)) 15.8 14.3 Diluted earnings per ordinary share is based on the profit after income tax and on 10,964,639 (2009: 10,934,139) ordinary shares, being the weighted average number of ordinary shares in issue during the year of 10,934,092 (2009: 10,904,065) increased by 30,547 (2009: 30,074) shares, being the weighted average number of ordinary shares which would have been issued if the outstanding options to acquire shares in the Group had been exercised at the average share price during the year. Adjusted diluted adjusted earnings per ordinary share is based on the profit after income tax and adjusted to take into account exceptional items. 2010 2009 Pence per Pence per share share Diluted basic earnings per share (Based on earnings £1,731,000 (2009: £1,556,000)) 15.8 14.2 12 Dividends The dividends paid in the year were as follows: Ordinary Second interim 2009 9.2p per 10p ordinary share (2008: nil) Final 2009 0.0p per 10p ordinary share (Final 2008: 9.2p) Interim 2010 4.8p per 10p ordinary share paid (Interim 2009: 4.8p) The Directors now recommend payment of the following dividend: Ordinary dividend: Final dividend 2010 9.2p (2009: nil) per 10p ordinary share Dividends on treasury shares held by the Company are waived. 20494.04 13/04/2011 Proof 3 2010 £’000 1,004 – 525 2009 £’000 – 1,003 523 1,529 1,526 1,005 – page 57 13 Property, plant and equipment The Company has no property, plant and equipment (2009: none). Details of those relating to the Group are as follows: Group At 1 January 2009 Cost Accumulated depreciation Net book amount Year ended 31 December 2009 Opening net book amount Additions Disposals Transfer to assets held for sale (note 20) Depreciation charge Freehold land and buildings £’000 Plant £’000 Motor vehicles £’000 Fixtures and fittings £’000 Total £’000 11,503 (1,716) 14,696 (11,638) 956 (372) 1,946 (1,486) 29,101 (15,212) 9,787 3,058 584 460 13,889 9,787 707 – (662) (172) 3,058 1,325 – – (761) 584 70 (29) – (145) 460 286 – – (209) 13,889 2,388 (29) (662) (1,287) Closing net book amount 9,660 3,622 480 537 14,299 At 31 December 2009 Cost Accumulated depreciation 11,104 (1,444) 15,864 (12,242) 958 (478) 2,231 (1,694) 30,157 (15,858) Net book amount 9,660 3,622 480 537 14,299 Year ended 31 December 2010 Opening net book amount Additions Disposals Transfer from assets held for sale (note 20) Depreciation charge 9,660 114 – 662 (186) 3,622 813 – – (801) 480 306 (117) – (140) 537 309 – – (229) 14,299 1,542 (117) 662 (1,356) Closing net book amount 10,250 3,634 529 617 15,030 At 31 December 2010 Cost Accumulated depreciation 11,880 (1,630) 16,677 (13,043) 923 (394) 2,540 (1,923) 32,020 (16,990) Net book amount 10,250 3,634 529 617 15,030 page 58 20494.04 13/04/2011 Proof 3 14 Intangible assets The Company has no intangible fixed assets (2009: none). Details of these relating to the Group are as follows: Group At 1 January 2009 Cost Accumulated amortisation Net book amount Year ended 31 December 2009 Opening net book amount Additions Amortisation charge Closing net book amount At 31 December 2009 Cost Accumulated amortisation Net book amount Year ended 31 December 2010 Opening net book amount Additions Amortisation charge Closing net book amount At 31 December 2010 Cost Accumulated amortisation Net book amount Computer software £’000 578 (181) 397 397 210 (109) 498 788 (290) 498 498 44 (174) 368 832 (464) 368 page 59 20494.04 13/04/2011 Proof 3 15 Investment in associate Cost At 1 January Share of profit/(loss) At 31 December Impairment At 1 January Impairment of investment in associate At 31 December Net book value Closing net book amount Group 2010 £’000 Group Company 2010 £’000 2009 £’000 Company 2009 £’000 876 196 1,467 (591) 1,072 876 151 34 185 724 (573) 151 355 – 355 – – – 355 – 355 – – – 887 725 355 355 The investment in associate represents a holding of 34.4% of the issued £1 ordinary shares of Furlong Mills Limited, a company registered in England, whose principal activity is that of a potters miller. Share of associate’s assets Share of associate’s liabilities Share of associate’s net assets 2010 £’000 1,456 (370) 2009 £’000 1,260 (336) 1,086 924 The total revenue of Furlong Mills Limited for its year ended 31 December 2010 was £6,137,000 (2009: £5,343,000) and profit before tax was £340,000 (2009: loss £1,717,000). During the year the Group purchased raw materials to a value of £1,932,000 (2009: £1,437,000) from Furlong Mills Limited. The Group has historically carried its investment in Furlong Mills Limited at a net amount after an impairment reflecting the Board’s view of the recoverable amount of the investment. In the year to 31 December 2009 Furlong Mills Limited performed an impairment review of its property, plant and equipment and reduced the carrying value of these assets in its Company balance sheet. The Group consequently released an equivalent amount reflecting its share of this impairment. The difference between the carrying value of the Group’s interest in associate and the share of associate’s net assets reflects the remaining impairment charged in the Group’s accounts and adjustments in relation to accounting policies. In the Group’s consolidated financial statements the investment is accounted for on the equity basis. Within the Company’s accounts the investment is shown at historic cost. page 60 20494.04 13/04/2011 Proof 3 16 Investment in subsidiaries Company Cost or valuation At 1 January and 31 December 2010 Impairment At 1 January 2009 and 31 December 2010 Net book value At 31 December 2010 2010 £’000 2009 £’000 2,627 2,627 432 432 2,195 2,195 Interests in Group undertakings Interests in Group undertakings comprise the cost of investments in subsidiary undertakings. The principal operating subsidiaries of the Group are as follows: Name of company Proportion of nominal value of issued held shares held Description of shares Country of incorporation Principal activity Churchill China (UK) Limited England and Wales Ordinary Churchill Ceramics (UK) Limited England and Wales Ordinary Churchill China, Inc USA Ordinary 100% Manufacture and sale of ceramic and related products 100% Provision of management and property services within the Group Sale of ceramic and related products 100% Dormant companies within the Group are not included in the above analysis. page 61 20494.04 13/04/2011 Proof 3 17 Available for sale financial assets Fair value/Cost At 1 January and 31 December 2010 Impairment At 1 January and 31 December 2010 Fair value/Net book value At 1 January and 31 December 2010 Group Company Available for sale financial Other assets investments £’000 £’000 – – – 43 43 – The above represents 35.9% (2009: 35.9%) of the issued ordinary share capital of Shraff Management Limited, a company registered in England and Wales. The Directors do not consider that the investment in Shraff Management Limited should be accounted for as an associate as Churchill China plc is not in a position to and does not exercise significant influence over Shraff Management Limited, taking into account other large third party shareholdings. 18 Inventories The Company has no inventory (2009: none). Details of inventory relating to the Group are as follows: Raw materials Work in progress Finished goods 2010 £’000 72 584 7,541 2009 £’000 56 396 6,690 8,197 7,142 The Directors do not consider there is a material difference between the carrying value and replacement cost of inventories. The cost of inventories recognised as an expense and included in the income statements amounted to £25,696,000 (2009: £23,872,000) page 62 20494.04 13/04/2011 Proof 3 19 Trade and other receivables Trade receivables Less: provision for impairment of trade receivables Trade receivables – net Other Prepayments Receivables from related parties (note 29) Less non current portion: loans to related parties Group 2010 £’000 9,738 (234) 9,504 223 236 – 9,963 – 2009 £’000 8,717 (147) 8,570 152 309 – 9,031 – Company 2010 £’000 2009 £’000 – – – 150 – 7,010 7,160 6,861 – – – 150 – 8,640 8,790 8,500 Current portion 9,963 9,031 299 290 All non current receivables are due within 5 years from the balance sheet date. The Group operates a credit risk management policy. Risk attached to the receipt of UK trade receivables is largely controlled through the assessment of the credit quality of each customer, taking into account its financial position, past experience and third party credit information. Risks attaching to export trade receivables are controlled through the use of export credit insurance and confirmed letters of credit. Where these cannot be obtained the credit control department assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Trade receivables that are less than 3 months past due and not covered by insurance arrangements are not considered impaired unless there is specific evidence to the contrary. As of 31 December 2010, trade receivables of £7,201,000 (2009: £7,758,000) were fully performing. As of 31 December 2010, trade receivables of £2,058,000 (2009: £599,000) were past due but not impaired. The ageing of these receivables is as follows: Up to 3 months 3 to 6 months Over 6 months 2010 £’000 1,918 118 22 2,058 2009 £’000 548 46 5 599 page 63 20494.04 13/04/2011 Proof 3 19 Trade and other receivables (continued) As of 31 December 2010 trade receivables with a gross value of £479,000 (2009: £360,000) were impaired and provided for. The amount of provision for 31 December 2010 was £234,000 (2009: £147,000). The individually impaired receivables relate to customers which are in unexpectedly difficult economic conditions. It was assessed that a portion of the receivables is expected to be recovered. The ageing of these receivables is as follows: Up to 3 months 3 to 6 months Over 6 months 2010 £’000 2009 £’000 350 43 86 479 308 33 19 360 The Directors consider that the carrying value of trade and other receivables is approximate to their fair value. Movements on the Group provision for impairment of trade receivables are as follows: At 1 January Provision for receivables impairment Receivables written off during the year as uncollectable At 31 December 2010 £’000 147 234 (147) 2009 £’000 108 147 (108) 234 147 The creation and release of provision for impaired receivables have been included in ‘other external charges’ in the income statement (note 5). Amounts charged to the allowance account are generally written off, when there is no expectation of recovering additional cash. The other classes are within trade and other receivables do not contain impaired assets. The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies: Pounds Euros US dollars 2010 £’000 7,388 922 1,653 2009 £’000 6,965 726 1,340 9,963 9,031 During the year the Group had losses of £15,000 (2009: gain of £151,000) on forward option contracts that have been recognised in the Income Statement and as at 31 December held forward exchange contracts for the sale of euros of £765,000 (2009: £444,000) and the sale of US dollars of £nil (2009: £484,000). These contracts are held at their fair value with a loss of £12,000 (2009: gain of £7,000) recognised in relation to the contracts outstanding at the year end. page 64 20494.04 13/04/2011 Proof 3 19 Trade and other receivables (continued) Company As of 31 December 2010, Company receivables of £7,160,000 (2009: £8,790,000) were fully performing. Amounts receivable are repayable in accordance with agreed terms. No interest is chargeable. The carrying amounts of the Company’s receivables are denominated in the following currencies: Pounds US dollars 20 Assets held for sale Land and buildings 2010 £’000 7,120 40 2009 £’000 8,758 32 7,160 8,790 2010 £’000 2009 £’000 – 662 The Land and Buildings disclosed as an Asset held for sales in 2009 have been transferred to Property, Plant and Equipment (note 13) as it is the Group’s present intention to retain this asset in the longer term and no sale is anticipated in the next 12 months. The assets are held within unallocated assets in the segmental analysis (see note 4). 21 Trade and other payables Trade payables Amounts due to related parties Social security and other taxes Accrued expenses Group 2010 £’000 1,076 336 923 4,400 2009 £’000 1,985 24 753 4,145 6,735 6,907 Company 2010 £’000 2009 £’000 – 13 7 1 21 – 13 12 1 26 All the above liabilities mature within 12 months from 31 December 2010. page 65 20494.04 13/04/2011 Proof 3 22 Deferred income tax Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts are as follows: Group Deferred tax assets: – Deferred tax asset to be recovered after more than 12 months – Deferred tax asset to be recovered within 12 months Deferred tax liabilities: – Deferred tax liabilities to be recovered after more than 12 months – Deferred tax liabilities to be recovered within 12 months Deferred tax (liability)/asset (net) The net movement on the deferred income tax account is as follows: At 1 January Income statement charge (note 10) Tax (charged)/credited directly to equity (note 27) At 31 December 2010 £’000 1,151 115 2009 £’000 2,062 101 1,266 2,163 (1,633) (45) (1,652) (24) (1,678) (1,676) (412) 487 2010 £’000 487 (93) (806) 2009 £’000 (1,054) (69) 1,610 (412) 487 The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: Deferred tax liabilities At 1 January 2009 Charged to the income statement Credited directly to equity At 31 December 2009 Charged/(credited) to the income statement Accelerated tax Land and buildings depreciation revaluation £’000 £’000 1,289 38 – 1,327 20 351 – (2) 349 (18) Total £’000 1,640 38 (2) 1,676 2 At 31 December 2010 1,347 331 1,678 page 66 20494.04 13/04/2011 Proof 3 22 Deferred income tax (continued) Deferred tax assets At 1 January 2009 Charged to the income statement Credited directly to equity At 31 December 2009 Charged/(credited) to the income statement Charged directly to equity Retirement benefit obligation £’000 (576) 25 (1,608) (2,159) 92 806 Other £’000 (10) 6 – (4) (1) – Total £’000 (586) 31 (1,608) (2,163) 91 806 At 31 December 2010 (1,261) (5) (1,266) The deferred income tax credited to equity during the past year is as follows: Fair value reserves in shareholders’ equity: Tax on actuarial loss on retirement benefits scheme Tax on difference between depreciation on buildings on an actual and historical cost basis 2010 £’000 2009 £’000 (806) – (1,608) (2) (806) (1,610) Deferred income tax of £18,000 (2009: £2,000) was transferred from other reserves (note 26) to retained earnings (note 27). This represents deferred tax on the difference between the actual depreciation on buildings and the equivalent depreciation based on the historical cost of buildings. Deferred income tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through the future taxable profits is probable. The Group has not recognised deferred income tax assets of £1,511,000 (2009: £1,511,000) in respect of capital losses amounting to £5,395,000 (2009: £5,395,000) that can be carried forward against future capital gains. page 67 20494.04 13/04/2011 Proof 3 23 Retirement benefit obligations Balance sheet obligations Pension benefits Income statement charge Pension benefits Finance cost 2010 £’000 2009 £’000 4,670 7,709 559 156 551 320 The Group operates three principal pension schemes: a funded pension scheme, the Churchill Group Retirement Benefit Scheme, providing benefits based on final pensionable salary which was closed to new entrants in 1999 and to which the accrual of future benefits ceased on 31 March 2006; the Churchill China 1999 Pension Scheme; and the Churchill China 2006 Group Personal Pension Plan. Both of the latter schemes are defined contribution schemes providing benefits based on contributions paid. The assets of the schemes are held separately from those of the Group. The total pension cost for the Group was £559,000 (2009: £551,000). Of this cost, £nil (2009: £nil) related to the Churchill Group Retirement Benefit Scheme, £164,000 (2009: £158,000) was in respect of the Churchill China 1999 Pension Scheme and £241,000 (2009: £246,000) was in respect of the Churchill China 2006 Group Personal Pension Scheme. The balance of cost was incurred in respect of overseas and other pension arrangements. At the year end amounts due to pension funds in respect of Company contributions were £58,000 (2009: £57,000). No contributions have been made to the Churchill Group Retirement Benefit Scheme in relation to current service since the date of cessation of the future accrual of benefits on 31 March 2006. Prior to that date the Group paid contributions to the Scheme at a rate of 13.6% of pensionable salary. In addition, a contribution of £495,000 (2009: £410,000) was made in respect of the amortisation of past service liabilities. The forward funding rate of the Scheme was agreed with the Scheme Trustees and Actuary following the completion of the 31 May 2008 triennial actuarial valuation in March 2009. The Group expects to make payments of £495,000 per annum in respect of the amortisation of past service deficits, subject to completion of the 31 May 2011 triennial actuarial valuation. The amounts recognised in the balance sheet are determined as follows: Present value of funded obligations Fair value of plan assets Liability in balance sheet The movement in the present value of defined benefit obligation over the year is as follows: At 1 January Interest cost Actuarial (gains)/losses Benefits paid At 31 December 2010 £’000 2009 £’000 34,898 (30,228) 34,550 (26,841) 4,670 7,709 2010 £’000 2009 £’000 34,550 1,969 (887) (734) 25,275 1,668 8,433 (826) 34,898 34,550 Actuarial gains in 2010 include £1,296,000 in respect of the change of inflation index used to calculate the increase of benefits in deferment from RPI to CPI. page 68 20494.04 13/04/2011 Proof 3 23 Retirement benefit obligations (continued) The movement in the fair value of plan assets over the year is as follows: At 1 January Expected return on plan assets Actuarial gains Employer contributions Benefits paid At 31 December Plan assets are comprised as follows: Equity investments Debt investments Other 2010 £’000 2009 £’000 26,841 1,813 1,813 495 (734) 23,220 1,348 2,689 410 (826) 30,228 26,841 2010 £’000 22,155 4,605 3,468 30,228 2009 £’000 17,783 4,986 4,072 26,841 73% 15% 12% 66% 19% 15% The expected return on plan assets is determined by considering the expected returns on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields at the balance sheet date. Expected returns on equity and property investments reflect long term real rates of return experienced in the respective markets. The amounts recognised in the income statement are as follows: Interest cost Expected return on plan assets Net cost recognised in finance cost The actual return on plan assets was a gain of £3,626,000 (2009: gain £4,037,000). 20494.04 13/04/2011 Proof 3 2010 £’000 2009 £’000 1,969 (1,813) 1,668 (1,348) 156 320 page 69 23 Retirement benefit obligations (continued) At 31 December Present value of funded obligations Fair value of plan assets 2010 £000 2009 £000 2008 £000 2007 £000 2006 £000 34,898 30,228 34,550 26,841 25,275 23,220 29,209 28,119 30,960 27,012 Liability in balance sheet 4,670 7,709 2,055 1,090 3,948 Experience adjustments on scheme assets: Amount Experience adjustments on scheme liabilities: Amount 1,813 2,689 (6,463) (200) 839 835 (414) 372 (192) 310 The principal actuarial assumptions used were as follows: Pension benefits Discount rate Inflation rate – RPI – CPI Expected return on plan assets Rate of increase of pensions in payment Rate of increase of deferred pensions 2010 % per annum 2009 % per annum 5.6% 3.6% 3.1% 6.6% 3.6% 3.1% 5.7% 3.5% – 6.8% 3.5% 3.5% Assumptions regarding future mortality rates are set based on advice in accordance with published statistics and experience. The average life expectancy in years of a pensioner retiring at age 65 at the balance sheet date is as follows: Male Female 2010 Number 2009 Number 20.9 24.2 20.9 24.1 The average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, is as follows: 2010 Number 2009 Number 22.8 26.2 22.7 26.1 Male Female page 70 20494.04 13/04/2011 Proof 3 23 Retirement benefit obligations (continued) Sensitivity A sensitivity analysis has been carried out on effect of varying certain assumptions within the calculation of retirement benefit obligations. The effect of a 0.25% increase in the discount rate to 5.85% would be to reduce scheme liabilities by £1,696,000 (4.9%). The effect of a 0.25% decrease in the discount rate to 5.35% would be to increase scheme liabilities by £1,810,000 (5.2%). The effect of a 0.25% increase in RPI inflation to 3.85% and CPI inflation to 3.35% would increase scheme liabilities by £1,325,000 (3.8%). The effect of a 0.25% decrease in RPI inflation to 3.35% and CPI inflation to 2.85% would decrease scheme liabilities by £1,241,000 (3.6%) The effect of a 1 year increase to life expectancy would increase scheme liabilities by £878,000 (2.5%). The effect of a 1 year reduction in life expectancy would be to reduce scheme liabilities by £893,000 (2.6%) 24 Issued share capital and premium Group and Company At 1 January 2009 Employee share option schemes At 31 December 2009 Employee share option schemes At 31 December 2010 Number of shares ’000 Ordinary shares £’000 Share premium £’000 10,948 – 10,948 10 1,095 – 1,095 1 2,332 – 2,332 16 10,958 1,096 2,348 The total authorised number of ordinary shares is 14,300,000 (2009: 14,300,000) with a par value of 10p (2009: 10p) per share. All issued shares are fully paid. Share option schemes The Executive share option scheme was introduced in October 1994 and a complementary unapproved Executive share option scheme was approved by shareholders in October 1996. Options under these schemes are granted with a fixed exercise price equal to the market price of the shares at the date of issue. Options are normally only exercisable after 3 years from the date of grant and expire 10 years from the date of grant. Options granted will be exercisable given satisfaction of the requirement that adjusted earnings per ordinary share will increase by at least 6% above the increase in the Retail Price Index over the 3 year period from the beginning of the financial year in which the option was granted. Payment of the exercise price of options exercised is received in cash. A charge to the Income Statement has been made to reflect the fair value of options granted since 7 November 2002. Options have been valued using the Black–Scholes option pricing model. No performance conditions were used in the fair value calculations. page 71 20494.04 13/04/2011 Proof 3 24 Issued share capital and premium (continued) The fair value per option granted and the assumptions used in the calculation were as follows: Grant date 30 April 2004 Share price at grant date Exercise price Number of employees Shares under option (30,000 lapsed; 10,000 exercised) Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk free rate Expected dividends expressed as a dividend yield Fair value per option 208p 208p 12 110,000 3 25% 10 5 4.8% 5.2% 24p The following options exercisable over ordinary shares were outstanding at 31 December 2010: Number of shares The Executive share option scheme The unapproved Executive share option scheme 2010 2009 Exercise price Date from which exercisable Expiry date – 33,000 2,000 37,000 151p 208p December 2003 April 2007 December 2010 April 2014 – – 30,000 37,000 12,500 21,500 40,000 43,000 118.5p 151p 171p 208p April 2003 December 2003 April 2005 April 2007 April 2010 December 2010 April 2012 April 2014 100,000 156,000 Expected volatility is based on historical volatility over the last 3 years. The expected life is the average expected period to exercise. The risk free rate of return is the yield on zero coupon UK government bonds of a term consistent with the assumed option life. A reconciliation of option movements for the year to 31 December 2010 is set out below. 2010 2009 2010 Weighted average exercise price 2009 Weighted average exercise price Number 000 Number 000 Outstanding at 1 January Forfeited/lapsed Exercised Outstanding at 31 December Exercisable at 31 December page 72 156,000 (10,500) (45,500) 182.8p 205.3p 146.5p 166,000 – (10,000) 100,000 100,000 196.9p 196.9p 156,000 156,000 184.3p – 208.0p 182.8p 182.8p 20494.04 13/04/2011 Proof 3 24 Issued share capital and premium (continued) There were no share options granted during the year (2009: £nil). 2010 Weighted average exercise price 2010 2010 2010 Weighted Weighted 2009 average remaining remaining life (expected) (contractual) average Weighted average exercise price life Number ‘000 2009 2009 2009 Weighted Weighted average remaining life (expected) (contractual) average remaining life Number 000 100p–149p 150p–199p 200p–250p – 171p 208p – 30,000 70,000 – 0.0 0.0 – 0.9 3.3 118.5p 163.6p 208.0p 12,500 63,500 80,000 0.0 0.0 0.0 0.3 1.9 4.3 The weighted average share price for options exercised in the period was 146.5p (2009: 208.0p). The total credit during the year for employee share based payment plans was £45,000 (2009: charge £22,000), all of which related to equity settled share based payment transactions. 25 Treasury shares Group and Company As at 1 January 2010 Purchase of own shares Reissue of shares Transfer to retained earnings (note 27) As at 31 December 2010 £’000 117 91 (49) (68) 91 During the year the Group repurchased 32,000 (2009: nil) 10p ordinary shares and reissued 35,400 (2009: 10,000) of these under employee share option schemes. The Group currently holds 32,000 (2009: 35,400) shares in Treasury. 26 Other reserves Group Balance at 1 January 2009 Depreciation transfer – gross Depreciation transfer – tax Share based payment charge Currency translation Balance at 31 December 2009 Depreciation transfer – gross Depreciation transfer – tax Share based payment credit Currency translation Balance at 31 December 2010 Land and buildings Currency revaluation translation £’000 £’000 Share based payment £’000 Other reserves £’000 900 (12) 2 – – 890 (12) 18 – – 896 36 – – – (14) 22 – – – 7 29 47 – – 22 – 69 – – (45) – 24 20494.04 13/04/2011 Proof 3 Total £’000 1,236 (12) 2 22 (14) 1,234 (12) 18 (45) 7 253 – – – – 253 – – – – 253 1,202 page 73 26 Other reserves (continued) The land and buildings revaluation reserve is the reserve created under UK GAAP where the land and buildings were revalued in 1992. On adoption of IFRS the Group took the exemption conferred by IFRS 1 to treat this revalued amount as deemed cost on transition because it approximated to fair value at that time. The release between the revaluation reserve and the profit and loss reserve is the release to distributable reserves of the additional depreciation on revaluation. Other than the revaluation reserve, there are no restrictions on the distribution of the reserves. Company Other reserves of £24,000 (2009: £69,000) represent provision for share based payment as shown in the above table. 27 Retained earnings At 1 January 2009 Profit/(loss) for the year Dividends paid in 2009 Depreciation transfer on land and buildings net of tax Actuarial losses net of tax At 31 December 2009 At 1 January 2010 Profit for the year Dividends paid in 2010 Depreciation transfer on land and buildings net of tax Actuarial gains net of tax Transfer from treasury shares (note 25) At 31 December 2010 Group Company £’000 £’000 24,086 1,556 (1,526) 12 (4,136) 10,001 (23) (1,526) – – 19,992 8,452 19,992 1,731 (1,529) (6) 1,894 (68) 8,452 68 (1,529) – – (68) 22,014 6,923 28 Commitments Capital commitments Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows: Property, plant and equipment Intangible assets: Computer software Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 604 44 648 696 33 729 – – – – – – page 74 20494.04 13/04/2011 Proof 3 28 Commitments (continued) Operating lease commitments The Group has financial commitments in respect of non cancellable operating leases of plant and machinery for which the payments extend over a number of years as follows: Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 Payments under operating leases charged against income during the year Future aggregate minimum commitments under non-cancellable operating leases: No later than 1 year Later than 1 year and no later than 5 years 4 3 – 31 4 3 – – – – – – 29 Related party transactions Details of related party transactions for the Group are shown in the Directors’ Report, Report of the Remuneration Committee and in the Notes to the financial statements appropriate to the type of transaction being dealt with. The Directors do not consider the Company to have an ultimate controlling party. Company Details of related party transactions involving the Company were as follows: Subsidiaries Management charge to Churchill China, Inc Interest received from Churchill China (UK) Limited Loans repaid – Churchill China (UK) Limited Loans outstanding as at the year end (mainly Churchill China (UK) Limited) 2010 £’000 6 3 1,639 7,010 2009 £’000 6 5 1,686 8,640 30 Financial instruments by category The accounting policies for financial instruments have been applied to the line items in the accounts. All financial assets and including cash and cash equivalents are classified as loans and receivables, with the exception of financial assets available for sale, in both 2010 and 2009, as disclosed in note 17. page 75 20494.04 13/04/2011 Proof 3 Turnover 45,930 46,930 41,969 41,705 43,746 2006 £’000 2007 £’000 2008 £’000 2009 £’000 2010 £’000 Operating profit before exceptional items Share of results of associate net of impairment Finance income/(cost) Profit on ordinary activities before profit on disposal of fixed asset and exceptional items Exceptional items Profit on disposal of property Profit before taxation Income tax expense Income tax expense – exceptional Profit after taxation Dividends Net assets employed Ratios Operating margin before exceptional items Basic earnings per share (p) Adjusted basic earnings per share (p) 2,795 (7) 294 3,082 784 1,876 5,742 (1,631) – 3,230 120 694 4,044 – 798 4,842 (1,147) – 2,804 (71) 629 3,362 – – 3,362 (938) (919) 2,288 (18) (201) 2,069 – – 2,069 (513) – 2,287 162 (135) 2,314 – – 2,314 (583) – 4,111 3,695 1,505 1,556 1,731 (1,217) (1,375) (1,531) (1,526) (1,529) 25,653 29,731 28,612 24,536 26,569 6.1% 37.7 20.5 6.9% 33.8 26.5 6.7% 13.8 22.2 5.5% 14.3 14.3 5.2% 15.8 15.8 The adjusted basic earnings per share is based on the profit on ordinary activities after taxation and adjusted to take into account exceptional items, profit on disposal of fixed assets and the recognition of related deferred tax assets. The above figures for the year ended 31 December 2006 have been adjusted to reflect the introduction of International Financial Reporting Standards. page 76 20494.04 13/04/2011 Proof 3 Notice is hereby given that the Annual General Meeting of Churchill China plc will be held at Marlborough Pottery, High Street, Sandyford, Tunstall, Stoke-on-Trent on Wednesday 18 May 2011 at 11.30 a.m. for the following purposes: Ordinary Business To consider and, if thought fit, to pass the following resolutions which will be proposed as ordinary resolutions: 1. That the reports of the Directors and the Auditors and the Financial Statements for the year ended 31 December 2010 be received. 2. That a final dividend of 9.2p on each ordinary share be declared in respect of the year ended 31 December 2010. 3. That Andrew Roper be re-elected as a Director. 4. That Jonathan Morgan be re-elected as a Director. 5. That Alan McWalter be elected as a Director. 6. That Jonathan Sparey be re-elected as a Director. 7. That the Auditors, PricewaterhouseCoopers LLP, be reappointed and that the Directors be authorised to fix their remuneration for the year ending 31 December 2011. 8. That the Directors’ Remuneration Report for the year ended 31 December 2010 be approved. Special Business To consider and, if thought fit, to pass the following resolutions which will be proposed as special resolutions: 9. That: (a) the Directors be and they are hereby empowered under Section 570 of the Companies Act 2006 (‘the Act’) to allot equity securities (as defined in Section 560 of the Act) for cash under the authority conferred by a resolution dated 21 May 2008, as if Section 561 of the Act did not apply to such allotment, provided that this power shall be limited to: (i) the allotment of equity securities in connection with an offer of equity securities to: (1) ordinary shareholders in proportion (as nearly as may be) to their existing holdings; and (2) holders of other equity securities, if this is required by the rights of those securities, or, if the Directors consider it necessary as permitted by the rights of those securities, but subject to such exclusions and other arrangements as the Directors may consider necessary or desirable to deal with fractional entitlements, record dates, treasury shares or any legal, practical or regulatory problems under the laws of any territory (including the requirements of any regulatory body or stock exchange) or any other matter; and (ii) the allotment of equity securities (otherwise than as mentioned in sub-paragraph (a) of this resolution) up to an aggregate nominal amount of £109,259; (b) unless previously renewed, varied or revoked, this power shall expire at the conclusion of the next Annual General Meeting or 18 November 2012, whichever is the earlier, but during this period the Company may make an offer or agreement which would or might require equity securities to be allotted after this authority expires and the Directors may allot equity securities in pursuance of that offer or agreement notwithstanding that the authority has expired; (c) this power applies in relation to a sale of shares which is an allotment of equity securities by virtue of Section 560(2)(b) of the Act. page 77 20494.04 13/04/2011 Proof 3 10. That the Company be generally and unconditionally authorised for the purposes of Sections 693 and 701 of the Act to make market purchases (within the meaning of Section 693(4) of the Act) of ordinary shares of 10p each in the capital of the Company (‘Ordinary Shares’) on such terms and in such manner as the Directors of the Company may from time to time determine, provided that: (a) the maximum aggregate number of Ordinary Shares hereby authorised to be purchased is 1,092,590; (b) the minimum price which may be paid for an Ordinary Share, exclusive of all expenses, shall be 10p; (c) the maximum price which may be paid for an Ordinary Share, exclusive of all expenses, cannot be more than an amount equal to the higher of: (i) 5% above the average of the middle market quotations for an Ordinary Share as derived from the Alternative Investment Market section of the London Stock Exchange Daily Official List for the 5 business days immediately preceding the date on which such Ordinary Share is purchased; and (ii) the price stipulated by Article 5(1) of Commission Regulation (EC) No 2273/2003 (the Buy-back and Stabilisation Regulation); (d) unless previously renewed, varied or revoked, the authority hereby conferred shall expire at the conclusion of the Company’s next Annual General Meeting or 18 November 2012, whichever is the earlier; and (e) the Company may prior to the expiry of the authority hereby conferred make a contract or contracts to purchase Ordinary Shares under such authority which will or may be executed wholly or partly after the expiry of such authority. 11. That a General meeting other than an Annual General Meeting may be called on not less than 14 clear days’ notice. By Order of the Board D J S Taylor Company Secretary Dated 20 April 2011 Registered Office Marlborough Pottery High Street Tunstall Stoke-on-Trent ST6 5NZ Registered Number 2709505 The Directors of the Company consider that all the proposals to be considered at the Annual General Meeting are in the best interests of the Company and its members as a whole and are most likely to promote the success of the Company for the benefit of its members as a whole. The Directors unanimously recommend that you vote in favour of all the proposed resolutions. page 78 20494.04 13/04/2011 Proof 3 1. Members are entitled to appoint a proxy to exercise all or any of their rights to attend and to speak and vote on their behalf at the meeting. A shareholder may appoint more than one proxy in relation to the AGM provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that shareholder. A proxy need not be a shareholder of the Company. A form of proxy which may be used to make such appointment and give proxy instructions accompanies this notice. Instructions for use are shown on the form. If you do not have a form of proxy and believe that you should have one, or if you require additional forms, please contact our registrars, Equiniti , on 0871 384 2287. Calls to this number from a BT landline cost 8p per minute; other providers’ costs may vary. If calling from overseas, please call +44 (0)121 415 7047. Lines are open 8.30 a.m. – 5 p.m., Monday–Friday. To appoint more than one proxy, you may photocopy the proxy form. 2. To be valid, any form of proxy or other instrument appointing a proxy must be received by post or (during normal business hours only) by hand at the offices of the Company’s registrars, Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA, no later than 11.30 a.m. on 16 May 2011. If you return more than one proxy appointment, that received last by the Registrar before the latest time for the receipt of proxies will take precedence. You are advised to read the terms and conditions of use carefully. 3. The return of a completed form of proxy will not prevent a shareholder attending the AGM and voting in person if he/she wishes to do so. 4. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided that they do not do so in relation to the same shares. 5. Any person to whom this notice is sent who is a person nominated under Section 146 of the Act to enjoy information rights (a ‘Nominated Person’) may, under an agreement between him/her and the shareholder by whom he/she was nominated, have a right to be appointed (or to have someone else appointed) as a proxy for the AGM. If a Nominated Person has no such proxy appointment or does not wish to exercise it, he/she may, under any such agreement, have a right to give instructions to the shareholder as to the exercise of voting rights. 6. The statement of the rights of shareholders in relation to the appointment of proxies in notes 1 and 2 above does not apply to Nominated Persons. The rights described in these paragraphs can only be exercised by shareholders of the Company. 7. To be entitled to attend and vote at the AGM (and for the purpose of the determination by the Company of the votes they may cast), shareholders must be registered in the Register of Members of the Company at 11.30 a.m. on 16 May 2011 (or, in the event of any adjournment, on the date which is 2 days before the time of the adjourned meeting). Changes to the Register after the relevant deadline shall be disregarded in determining the rights of any person to attend and vote at the meeting. There are no other procedures or requirements for entitled shareholders to comply with in order to attend and vote at the AGM. Voting at the meeting will be conducted by way of a show of hands, unless a poll is correctly called for. 8. As at 20 April 2011 (being the last practicable date prior to publication of this Notice), the Company’s total issued equity share capital consists of 10,957,976 ordinary shares, carrying one vote each. Therefore, the total voting rights in the Company as at 20 April 2011 are 10,957,976. 9. Under Section 527 of the Act, members meeting the threshold requirements set out in that Section have the right to require the Company to publish on a website a statement setting out any matter relating to: (i) the audit of the Company’s accounts (including the auditors’ report and the conduct of the audit) that are to be laid before the AGM; or (ii) any circumstance connected with an auditor of the Company ceasing to hold office since the previous meeting at which annual accounts and reports were laid in accordance with Section 437 of the Act. The Company may not require the shareholders requesting any such website publication to pay its expenses in complying with Sections 527 or 528 of the Act. Where the Company is required to place a statement on a website under Section 527 of the Act, it must forward the statement to the Company’s auditors not later than the time when it makes the statement available on the website. The business which may be dealt with at the AGM includes any statement that the Company has been required under Section 527 of the Act to publish on a website. page 79 20494.04 13/04/2011 Proof 3 10. Pursuant to Section 319A of the Act, the Company must cause to be answered at the AGM any question relating to the business being dealt with at the AGM which is put by a member attending the meeting, except in certain circumstances, including if it is undesirable in the interests of the Company or the good order of the meeting that the question be answered or if to do so would involve the disclosure of confidential information. 11. Except as provided above, members who wish to communicate with the Company in relation to the AGM should do so using the following means: (1) by writing to the Company Secretary at the Registered Office address; or (2) by writing to the Registrars, Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA. No other methods of communication will be accepted, In particular, you may not use any electronic address provided either in this Notice or in any related documents for any purposes other than expressly stated. 12. A copy of this Notice, and other information required by Section 311A of the Act, can be found at www.churchillchina. plc.uk. 13. Copies of the Directors’ Service Contracts and the non executive Directors’ letter of appointment will be available for inspection at the Company’s Registered Office address on weekdays (Saturdays and public holidays excepted) during business hours from the date of this Notice until the conclusion of the AGM. page 80 20494.04 13/04/2011 Proof 3 The notes on the following pages give an explanation of certain of the proposed resolutions. 1. Resolutions 3 and 4: In accordance with the Company’s Articles of Association at every AGM a certain number of Directors must retire by rotation. Mr A Roper and Mr J Morgan are retiring by rotation and resolutions 3 and 4 seek approval for their re-election as Executive and Non Executive Director respectively. 2. Resolution 5: Is a resolution to elect Mr A McWalter as a non executive Director who has been appointed to the Board since the date of the last AGM and under the Articles of Association of the Company must retire and be elected at the next AGM. The basis upon which the Board believes that Mr McWalter should be elected is that he will bring significant experience to the Board from both his executive and non executive roles and will allow the Company to satisfy Corporate Governance obligations in relation to the composition and balance of the Board under the Combined Code. 3. Resolution 6: Is a resolution to re-elect Mr J Sparey who having served in excess of 9 years as a non executive Director must now, in accordance with guidance under the Combined Code, retire and offer himself for re-election each year. Biographical details for the Directors are set out on page 15 of the Report and Accounts. Each of the Directors has had a formal performance evaluation and the Board believes that each of them continues to be effective and demonstrates commitment to the role. 4. Resolution 9: Under Section 570 of the Act, when new shares are allotted or treasury shares are sold for cash, they must first be offered to existing shareholders pro rata to their holdings. This special resolution empowers the Directors to: (a) allot shares of the Company in connection with a rights issue, scrip dividend or other similar issue; and (b) otherwise allot shares of the Company, or sell treasury shares for cash, up to an aggregate nominal value of £109,259 (representing in accordance with institutional investor guidelines, approximately 10% of the total issued equity share capital as at 20 April 2011) (being the last practicable date prior to the publication of this Notice) as if the pre-emption rights of Section 570 did not apply. Except in relation to the Company’s employee share schemes, the Directors have no immediate plans to make use of this power. In line with best practice, the Company confirms that it has not issued more than 7.5% of its issued share capital on a non-pro rata basis over the last 3 years, and it confirms its intention to adhere to the provisions in the Pre-Emption Group Statement of Principles regarding cumulative usage of authorities of no more than 7.5% of the issued ordinary share capital within a rolling 3 year period. This power shall cease to have effect at the conclusion of the next AGM or on 18 November 2012, whichever is the earlier.. page 81 20494.04 13/04/2011 Proof 3 5. Resolution 10 renews the Directors’ current authority to make limited market purchases of the Company’s ordinary shares. The power is limited to a maximum aggregate number of 1,092,590 ordinary shares (representing approximately 10% of the issued share capital excluding treasury shares as at 20 April 2011 (being the last practicable date prior to publication of this Notice)) and details the minimum and maximum prices that can be paid, exclusive of expenses. Any purchases of ordinary shares would be made by means of market purchase through the London Stock Exchange. The Directors undertake that the authority conferred by this resolution, if approved, will only be used if to do so would result in an increase in earnings per share and be in the best interests of shareholders generally. Current legislation allows companies to hold shares acquired by way of market purchase in treasury, rather than having to cancel them. The Directors may use the authority to purchase shares and hold them in treasury (and subsequently sell or transfer them out of treasury as permitted in accordance with legislation) rather than cancel them, subject to institutional guidelines applicable at the time. Shares will only be purchased if to do so would result in an increase in earnings per share and is in the best interests of shareholders generally. The Board has previously indicated its intention to continue to return surplus cash to shareholders via on-market purchase of its own shares where it is not required to finance the organic expansion of the business, acquisitions and dividend payments. The authority conferred by this resolution will expire at the conclusion of the next AGM or on 18 November 2012, whichever is the earlier. 6. Resolution 11 is required under the Shareholders’ Rights Regulations in order to preserve the ability of the Company to call general meetings on 14 days’ notice, with shareholders’ approval. The approval will be effective until the 2012 Annual General Meeting when it is intended that a similar resolution will be proposed. The Company will also need to meet the requirements for electronic voting under the Regulations before it can call a general meeting on 14 days’ notice. page 82 20494.04 13/04/2011 Proof 3 page 83 20494.04 13/04/2011 Proof 3 page 84 20494.04 13/04/2011 Proof 3 Financial Highlights Five Year Performance Company Profile Chairman's Statement Financial Review Operational Review People Prospects Directors’ Report Report of the Remuneration Committee Corporate Governance Independent Auditors’ Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Company Balance Sheet Consolidated Statement of Changes in Equity 1 2 3 4 6 8 12 13 14 24 32 34 36 37 38 39 40 Consolidated Cash Flow Statement 41 Reconciliation of Operating Profit to Net Cash from Operating Activities 42 Notes to the Financial Statements Five Year Financial Record 43 76 Notice of Annual General Meeting 77 Above: Disney 100 Acre Wood 20494.04 13/04/2011 Proof 3 20494.04 13/04/2011 Proof 3 China plc China plc Churchill China plc Marlborough Pottery, High Street, Tunstall, Stoke-on-Trent, ST6 5NZ www.churchillchina.com ©Churchill China plc 2011 Annual Report 2010 20494.04 13/04/2011 Proof 3 20494.04 13/04/2011 Proof 3 

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