Cushman & Wakefield Annual Report 2007

Plain-text annual report

C r a n s w i c k p l c R e p o r t & A c c o u n t s Y e a r e n d e d 3 1 M a r c h 2 0 0 7 Registered ofﬁce: Helsinki Road, Sutton Fields, Hull HU7 0YW Tel. 01482 372000 www.cranswick.co.uk REPORT & ACCOUNTS Year ended 31 March 2007 Cranswick was formed in the 1970’s by farmers in East Yorkshire to produce animal feed. The Company went onto the Stock Market in 1985 and since that time has evolved into a business that is highly focused on the food sector. Activities include the marketing of pigs, the supply of fresh pork, gourmet sausages, charcuterie, cooked meats, sandwiches and traditional dry cured bacon. This represents over 90 per cent of sales. Sales are also made into the pet and aquatic sector through the supply of bird and small animal food, marine ﬁsh and aquatic products. Share price 1985-2007 (pence) Start date is entry onto Stock Market, 4 December 1985 Source: Investec Financial highlights Turnover (£m) Proﬁt before tax* (£m) Earnings per share* (pence) Dividends per share (pence) 525 32.4 29.0 23.5 441 319 50.1 47.8 18.1 16.5 41.6 14.5 35 30 25 20 15 10 5 0 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 1 2 3 • Turnover up 19 per cent to £525m • Proﬁt before tax up 12 per cent at £32.4m* • Increase of 5 per cent in earnings per share to 50.1p* • Dividend up 10 per cent to 18.1p per share • Strong cash generation ‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 * Pre-exceptional gain ‘05 ‘06 ‘07 1 Cranswick plc – Report & Accounts 2007 2 Contents Chairman’s statement Review of activities Group operating and financial review Group Directors and business locations Directors Report of the Directors Cranswick and the environment Group income statement Group statement of recognised income and expense Company statement of recognised income and expense Group balance sheet Company balance sheet Group cashflow statement Company cashflow statement Notes to the accounts Corporate governance statement Statement of Directors’ responsibilities in relation to the financial statements Directors’ remuneration report Report of the auditors to the members of Cranswick plc Advisers Shareholder information Some of the awards in recent years to Cranswick businesses Production facilities 5 11 17 24 25 27 31 32 33 33 34 35 36 37 38 68 72 73 77 79 80 82 84 3 Cranswick plc – Report & Accounts 2007 4 “ The Board is proposing an increase in the ﬁnal dividend of 10 per cent to 12.2p per ordinary share ” Chairman’s statement I am pleased to be able to report to Shareholders that Cranswick has continued its successful development and is once again reporting record profits. Underlying sales growth was particularly strong resulting in an increase in market share which was further enhanced by the strategic acquisition of DeliCo on 1 November 2006. Results The Company achieved an increase in sales of 19 per cent to £525 million. Turnover in the food division was up by 21 per cent at £493 million and this accounted for 94 per cent of total Company sales. The increase in sales largely reﬂected organic growth although the DeliCo acquisition during the year added £9 million. Strong sales increases were evident across most food categories highlighting the success of the Company’s strategy in positioning itself in a number of growing, premium areas of the market. The Company’s other activity which is involved in the pet and aquatic sector saw a marginal reduction in sales reﬂecting higher aquatic sales but a decline in bird food. Proﬁt before tax and exceptional gains increased by 12 per cent from £29.0 million to £32.4 million. Earnings per share on a similar basis rose to 50.1 p (2006 – 47.8p). The increase of 5 per cent in earnings per share reﬂects a normal tax charge this year compared to a lower charge previously following the acquisition of Perkins, as well as additional shares in issue. Exceptional gains in both this year and last year relate to proﬁts on disposal of surplus properties. The exceptional gain before tax this year was £0.3m and in 2006 amounted to £2.1m. The results are considered in more detail in the review of activities section. Cash Flow Cash ﬂow was again very strong with cash generated from operations of £41.8 million, the same as the previous year. This allowed the Company to purchase DeliCo without increasing year-end borrowings. The net cash cost of the acquisition was £13.4 million with a further £3.6 million satisﬁed by shares. Capital expenditure, net of disposal proceeds, was slightly ahead of last year at £10.8 million resulting in borrowings of £75.9 million compared with £77.1 million a year ago. Interest cover pre exceptional gains was 7.9 times compared with 6.7 times in 2006. Dividend The Board is proposing an increase in the ﬁnal dividend of 10 per cent to 12.2p per ordinary share. Along with the interim dividend of 5.9p per ordinary share paid in January 2007 this makes a total dividend for the year of 18.1p per ordinary share, an increase of 10 per cent on last year’s 16.5p. The ﬁnal dividend, if approved by Shareholders, will be paid on 7 September 2007 to Shareholders on the register at the close of business on 6 July 2007. Shares will go ex-dividend on 4 July 2007. Shareholders will have the option to receive the dividend by way of scrip issue. 5 Cranswick plc – Report & Accounts 2007 6 Chairman’s statement “ Through a combination of acquisitions and organic development the business has evolved into one focused predominantly on the supply of premium food products ” �� Proﬁt before tax 1990-2007 (£m) �� Employees The year has not been without its challenges, which included a ﬁre in December 2006 at the Chorleywood aquatics site. The Company has continued to progress and on behalf of my colleagues on the Board I would like to express our sincere thanks to all members of staff for the expertise and commitment which they bring to the business. Strategic Development The Company was formed by farmers in the early 1970’s to produce pig feed. In 1988 the Board embarked on a strategy to broaden the base of the Company’s activities and to seek opportunities to develop into related areas offering greater scope to add value to the Company’s processes. Through a combination of acquisitions and organic development the business has evolved into one focused predominantly on the supply of premium food products. As part of this strategy the Company today announces the sale of the feed milling business of Cranswick Mill, the group’s original activity. There will be a cash inﬂow resulting from the sale and the reduction in working capital of approximately £7 million. The trading environment for this business has been particularly challenging in recent years following the substantial reduction in the UK pig herd. Despite some rationalisation of milling capacity in the industry there continues to be oversupply. Efforts to mitigate the impact of this have included the further development of the starter feed business and tight cost control. Feed sales in the year totalled £25 million and a small proﬁt was achieved. The opportunity to develop a solution to the challenges facing the business was explored and successfully concluded with BOCM Pauls, a leading supplier of animal feed. BOCM have plans for investment in the site and for the further development of the business. The sale of the feed milling business follows the sale of the pig production business in the previous ﬁnancial year. The pig marketing business of Cranswick Mill, the procurement arm of Cranswick Country Foods, is to continue as an integral part of the Group. We wish David Ball, managing director of Cranswick Mill, his colleagues and BOCM every future success. The food division was expanded in November with the acquisition of DeliCo, producer of sliced cooked meats, a growing category in the food sector. The business has been successfully integrated by the management team in the Cranswick Convenience Foods division. At the time of acquisition there 7 Cranswick plc – Report & Accounts 2007 8 Chairman’s statement “ The current year has commenced in an encouraging manner and the Board looks to the future with conﬁdence ” was substantial unutilised capacity in the relatively new production facility. Our plans for ﬁlling this capacity have been successful and the business is on track for a substantial increase in sales over the next year. Cranswick Gourmet Bacon, producer of traditional air-dried bacon, was established by way of joint venture in 2004 with Cranswick holding 70 per cent of the equity. This was increased to 85 per cent during the year and we anticipate that this will be increased to 100 per cent in the near future. The quality of the premium bacon produced by this business is underlined by the numerous awards it continues to pick up. The Company has recently received planning permission for the further development of the primary pork processing site in East Yorkshire which secures the longer term plans of this important part of the Company’s activities. Outlook Compound annual growth in sales over the past ﬁve years has been 18 per cent per annum and is a combination of both organic and acquisitive development. The past year has seen sales rise by 19 per cent and we anticipate further sales increases over the next year although, as reported previously, there are signs that the Company is facing a more competitive trading environment. The Board is conﬁdent that, with activities in a number of growing premium food categories and strong operational management teams, the maintenance of an unchanged strategy will continue the successful development of Cranswick. The current year has commenced in an encouraging manner and the Board looks to the future with conﬁdence. Martin Davey Chairman, 21 May 2007 9 Cranswick plc – Report & Accounts 2007 10 have achieved the highest ‘A’ grade BRC “ All the Cranswick food producing sites (British Retail Consortium) standards ” Review of activities – Food By the Chief Executive Bernard Hoggarth The strong sales growth continued, as in recent years, with sales up 21 per cent at £493 million. Sales of food products rose by 20 per cent, with agricultural products up 32 per cent. The food group’s businesses have all shown strong growth in the premium sectors, with our sausage and bacon sales growth being exceptional. The focus and investment in developing our foodservice sales is now bearing fruit with sales in the year exceeding £20 million. The vast majority of this growth has come from specialist lines sold into the gastro-pub chains and supplying the high street dining outlets. All the Cranswick food producing sites have achieved the highest ‘A’ grade BRC (British Retail Consortium) standards. We are also proud to have the ﬁrst food factory in the UK to score zero minor non-compliance at a recent audit. New product development continues to be the life blood of the business across the food operations. To put this into perspective fresh pork, sausage and bacon currently have 25 products under development and launched 88 new products during the year. As part of this process, it is very pleasing to report the food businesses collected 11 industry awards during the ﬁnancial year. The fresh pork business has been successful in gaining planning permission for a new replacement processing facility at the Preston site in East Yorkshire. This should be completed during the next two years. This development, coupled with investment we have made previously in the centrally packed meat plant adjoining, will consolidate its position as one of the most efﬁcient primary facilities, and is currently the largest pig processing plant in the UK. This will facilitate the continued development of our customer base and growth going forward. Overall, fresh pork sales in the UK grew by 2 per cent in the year, whilst the Cranswick pork business achieved an impressive 23 per cent increase. Recent investment in new equipment is facilitating the processing of by-product into organic matter which can be used as fertilizer. The tallow extracted in the process is utilised in the production of bio-fuel. We are currently exploring the possibility of using the recycled fuel to power the factory boilers for hot water and steam production and to fuel part of our own ﬂeet of vehicles. In addition we have immediately reduced vehicle movements, due to the previous removal off site of all such by products via HGV’s. The Lazenby’s sausage factory is just 2 years old, but due to the phenomenal success achieved in sales, and the development of new business, we are installing three new production lines to meet demand. This will require capital expenditure in excess of £2 million. The total sausage market showed no growth in the year, but premium categories grew by 19 per cent. The Cranswick business however achieved growth of 28 per cent. Lazenby’s was successful in becoming the licensee for the ‘Weight Watchers’ brand of sausage which we launched during the second half of the year. We also produce the “Black Farmer” brand, which was launched during the year, and Duchy Originals. The latter grew at almost 23 per cent, and reinforces again the continuing trend for consumers to ‘trade up’ in fresh prepared foods. 11 Cranswick plc – Report & Accounts 2007 12 Review of activities – Food Recently the Cranswick Gourmet Sausage Company launched the ‘Simply Sausage’ brand at The Ivy in London. This event was attended by buyers from the main retailers and a myriad of journalist and food writers and was hosted by celebrity chef James Martin. You can log onto the new website for information on this exciting new range at: www.simplysausages.com. The cooked meat business, Cranswick Convenience Foods, has continued to grow its sales well above the market place. Pre-packed cooked meat sales nationally rose by almost 7 per cent whereas Cranswick grew by 16 per cent. Deli sales declined slightly in line with the national fall of 3 per cent as consumers continue to switch to more pre-packed convenient formats. The DeliCo acquisition has integrated into the group well and is performing in line with expectations. By the summer this facility will be operating at over 90 per cent of capacity, again in line with our plans. There has been continued capital expenditure, in excess of £6.6 million across the cooked meat facilities during the year. This enables us to continue to be at the forefront of the sector, by incorporating the most modern, efﬁcient equipment into our specialist business units. This coupled with new product development and signiﬁcant growth in our customer base, bodes well for the future. Bacon sales were up a very healthy 65 per cent with which we are delighted. With further growth anticipated we are planning for additional production capacity. We have acquired a new freehold site ‘twixt Leeds and York of over 8,000 square meters which will enable us to continue to grow this business. We anticipate a weekly capacity from this new facility of in excess of 400 tonnes per week, this compares with a current peak of approximately 75 tonnes. The expected project cost will be approaching £9 million. This large investment will allow the continued focus on the development of the premium bacon category, in the same way that we have developed our sausage business over the last decade. Across the UK bacon market as a whole, we currently have less than a 2 per cent market share. Taking the premium categories on the other hand, Cranswick Gourmet Bacon Company has a 22 per cent market share. Our bacon business received 2 Gold Medals and 2 Silver Medals in the BPEX Foodservice awards and was awarded the Foodservice ‘Pork Product of the Year’ 2007. Continental Fine Foods, Cranswick’s Manchester based charcuterie business had an exceptional year with sales up 21 per cent to almost £70 million. The business invested in a new high speed slicing line during the year at a cost of £1 million which helped achieve average weekly volumes of over 700,000 packs, compared with 520,000 packs a year ago. Corned beef continues its revival with sales volumes up 22 per cent in the year. We are working with a small artisan producer of fresh ﬁlled pasta in Italy to bring all their facilities up to BRC standards, ready for serving the UK retail market. Following this accreditation we will launch this very special product with a major retail customer later this year. This highlights perfectly one of the main routes to market for Continental Fine Foods, driven by our skilled buyers, researchers and development teams. The Sandwich Factory (TSF) saw sales rise by 5 per cent in the year with sales of £36m. New business wins in the year include, Ryan Air, Flybe, BMI Baby, First Great Western Railways and the further development of exciting ranges with our retail customers. TSF has been working with Duchy Originals on a new organic range of sandwiches. The ﬁrst products should be launched during summer this year. These products will target the premium category with research having shown that there is demand for such premium products in the sector. Within the product portfolio are three new categories. We now produce and supply “food to go” solutions, salads and pizzas. Total units produced were 40 million, with approximately 25 per cent being alternatives to the standard skillet, or sliced sandwich. TSF has developed it’s plan to use more recyclable packaging during the year with the introduction of cardboard skillets, biodegradable webs and ‘returnable’ plastic distribution trays. Further “green “ initiatives include the development of an electrolyzed water supply to reduce the amount of chemicals used by the business in the factory cleaning process by 40 per cent. In summary, we believe our food businesses now operate from some of the best invested and most modern production facilities in the UK. This, coupled with the strong management teams we have in situ and the strength of our new product development teams, leads us to believe we are well placed to continue the proﬁtable growth and development of the food business. 13 Cranswick plc – Report & Accounts 2007 14 high proﬁle projects including seven large ocean “ During the year TMC supplied a number of exhibits to Sea Life centres around the UK ” Review of activities – Pet By the Chief Executive Derek Black Total sales were marginally down for the year at £31.5 million (2006 – £32.1 million) with increased sales of aquatic products and a reduction in food. In Pet Products, predominantly bird and small animal food, sales were a little under £20.5 million down 8 per cent. This was due mainly to an extremely hot summer, coupled with a mild autumn and winter. The public’s perception is that wild birds do not need feeding during a mild winter. Changing habitats and the need to protect endangered native birds means it is imperative to feed birds not only in winter but all year round and we, along with the RSPB, strive to get this message over to the public. Our target markets remain unchanged and include high street retail chains, wholesale discount multiples, retail membership groups, grocery and mail order. Sales in the TMC aquatic business were ahead of last year at almost £11 million (2006 – £9.7 million) up 12 per cent. Sales of marine livestock increased by 20 per cent. It is particularly pleasing to report the continued growth and development of the branch businesses. Manchester saw sales up 10 per cent and Bristol an increase of 26 per cent. Sales of dry goods were adversely impacted following a major ﬁre in the warehouse in December at the Chorleywood site and, as a consequence, there was a more modest rise in sales of 6 per cent on last year in this category. The building is presently being reconstructed and will be fully operational by July 2007. There will be no impact to proﬁt, due to the comprehensive levels of insurance cover in place. During the year TMC supplied a number of high proﬁle projects including 7 large ocean exhibits to Sea Life centres around the UK, including the new aquarium in Loch Lomond, a large recirculation and water treatment system for a cod hatchery in Scotland, and four large marine holding systems to a shellﬁsh supplier. New product launches has also been a key feature for the business with the development of the V2 ultra-violet skimmers, which was voted best Marine Product in 2006 by Practical Fishkeeping. 15 Cranswick plc – Report & Accounts 2007 16 and proﬁt through a combination of investing in modern, efﬁcient factories, developing a range of quality products “ Cranswick has a long record of increasing sales and making sound acquisitions ” Group operating and ﬁnancial review Nature, objectives and strategies The Group’s businesses The Group’s operations are organised into two business divisions, food and pet. The performance of these two divisions in the year is discussed in the review of activities within the Statement to Shareholders on pages 11 to 15. The food business operates predominantly in the UK with the exception of a small operation selling specialist animal feed into Continental Europe, and the pet business operates entirely within the UK although a proportion of sales are export. The food business manufactures a range of high quality, predominantly fresh products including fresh pork, sausages, bacon and cooked meats for sale to the high street food retailers. It also supplies a range of pre-sliced, pre-packaged charcuterie products for sale into these same customers, sandwiches into the foodservice sector and manufactures pig and poultry feed for sale to pig farmers in the UK and Europe. The pig and poultry feed operation has been sold subsequent to the year-end. The markets in which the food business operates are competitive both in terms of pricing from fellow suppliers and the retail environment in general. The UK food retail market is known to be amongst the most competitive in the world. Despite this, Cranswick has a long record of increasing sales and proﬁts through a combination of investing in modern efﬁcient factories, developing a range of quality products and making sound acquisitions. The businesses are under the control of stable, experienced and talented operational management teams supported by a skilled workforce. The pet business produces a range of bird and small animal food for sale into specialist pet and more general retail outlets, as well as selling tropical marine ﬁsh and aquatic products largely into specialist retailers both in the UK and abroad. Environmental matters The Board believes that good environmental practices support the Board’s strategy by enhancing the reputation of the Company, the efﬁciency of production and the quality of products. The industry is subject to a range of UK and EU legislation. Environmental standards are being tightened on a regular basis and require increasing levels of investment. Compliance imposes costs and prolonged failure to comply could materially affect the Group’s ability to operate. Further information on the Group’s policies on minimising its environmental impact is given in our Environmental Report on page 31. Business objectives It is the Board’s view that meeting the following business objectives is key to achieving the ﬁnancial and non-ﬁnancial measures that increase shareholder value: • Delivering innovative, quality products to our customers 17 Cranswick plc – Report & Accounts 2007 • Maintaining the highest level of service to our customers • Improving operational efﬁciency • Securing employee health and safety • Maximising returns on investment Business strategies The Group’s market strategy is to focus on the growing quality end of the markets in which we operate, to establish meaningful and long-lasting relationships with our major customers by a combination of product development and high service levels and to invest in quality facilities and the latest equipment to enable us to operate as efﬁciently as possible. Each operating unit within the Group is given the responsibility for developing its own plans to deliver the objectives of the Group with particular emphasis on growing sales through product innovation and high service levels, improving operational efﬁciency and securing employee health and safety. The role of the Board in achieving Group objectives is to support operational management and to identify suitable acquisitions that will take the Group into new and growing areas of the market, will open up new customer relationships to the Group or will consolidate existing market positions. Business KPIs The Board has assessed that the following KPIs are the most effective measures of progress towards achieving the Group’s objectives. A report on performance against these KPIs is given on page 19. Organic sales growth – year on year increase in sales revenue excluding the impact of acquisitions and disposals. Gross return on sales – gross proﬁt as a percentage of sales revenue Net return on sales – operating proﬁt as a percentage of sales revenue Free cashﬂow – cash generated from operations less tax and interest paid. Current and future development and performance Business development and performance The key features of the year have been the record proﬁt before tax for the Group, the strong cash generation and the acquisition of Delico that has given us the additional capacity in cooked meats to supply new retail customers. The record of unbroken growth in proﬁts now goes back 19 years. The trading environment in which we operate has remained challenging; in particular it has proved difﬁcult to pass on inﬂationary increases in costs and we have experienced increasing competitor pressure although the efﬁciencies that we are achieving as we put extra volumes through our factories have mitigated to some extent against those pressures. Group revenue Group revenue from continuing activities 2007 £524.8m 2006 £441.2m The Group’s revenue from continuing activities has increased by 19 per cent, of which 17 per cent is organic and the balance relates to the November 2006 acquisition of Delico. Food sales excluding Delico increased by 18 per cent with fresh pork growing at 23 per cent, sausages at 28 per cent, bacon at 65 per cent, cooked meats at 16 per cent, charcuterie at 22 per cent and sandwiches at 5 per cent. Sales in the pet activities were slightly down on the previous year following disappointing bird food sales offset by excellent sales growth at Tropical Marine. Proﬁt before tax Group operating proﬁt before exceptional items Net ﬁnance costs Pre-tax proﬁt before exceptional items Exceptional items Proﬁt before tax 18 2007 £m 37.1 4.7 32.4 0.3 32.7 2006 £m 34.1 5.1 29.0 2.1 31.1 Group operating and financial review The increase in group operating proﬁt before exceptional items is entirely attributable to the growth in both sales and proﬁts in the food activities. The animal feed and pet operations were down slightly. The reduction in net ﬁnance costs was as a result of the strong cashﬂow in the year notwithstanding the acquisition of Delico for £17.9 million (excluding costs) of which £14.3 million was cash, partially offset by the increase in UK interest rates in the year. Performance against KPIs Organic sales growth Gross return on sales Net return on sales Free cashﬂow 2007 17.0% 16.4% 7.1% 2006 9.0% 17.4% 7.7% £29.9m £29.8m The Company has seen substantial growth in organic food sales over the past year driven by its expertise in product development, service levels, quality and value. Whilst further sales growth is anticipated in the forthcoming twelve months there are signs that the Company is facing a more competitive trading environment. Future development The Group will continue to seek to increase sales through a combination of product development with existing customers and business gains with new ones. The standard of our factories will be maintained at the highest level and suitable acquisition opportunities will be pursued. Resources, risks and relationships Resources The Group aims to safeguard the assets that give it competitive advantage, being its reputation for product innovation, product quality, food safety and service levels, its modern well-equipped factories, its operational management and its skilled workforce. Reputation It is the responsibility of local operational management assisted by their own product development team and Group Technical and Group Health & Safety to maintain and where possible enhance the Group’s reputation for product innovation, product quality, food safety and service levels. Factories The Group has some of the best-invested, modern facilities in the industry, having invested £55 million over the past four years, and it intends to continue investing to ensure that it maintains its competitive edge. Employees The Group aims to recruit, train and retain employees who are valued for their contribution and able to fulﬁll their potential in meeting the business objectives of their operating unit. The Group companies each have their strategies for retaining staff, including the provision of competitive terms and conditions and share options. The Group has had a Savings-related Share Option Scheme in place for over 10 years, which is open to all employees with 2 years’ service and has proved very successful with many staff now also shareholders. Principal risks and uncertainties The Group annually carries out a formal exercise to identify and assess the impact of risks on their businesses and the exercise has recently been reviewed. The more signiﬁcant risks and uncertainties faced by the Group, in line with the rest of the food manufacturing sector, were identiﬁed as customer retention, food scares, margins and proﬁtability, and competition. The corporate governance report on pages 68 to 71 describes more about the Group’s risk management processes. Relationships The Board encourages businesses to support local community organisations and charities in the locations in which they operate. 19 Cranswick plc / Report & Accounts 2006/07 20 Group operating and financial review Financial position and performance Exceptional items The exceptional item in 2007 relates to the proﬁt on sale of the former pet products facility at Beverley, East Yorkshire. Deferred tax of £229,000, of which £150,000 relates to the prior year, was provided on the rolled-over gain. The exceptional item in 2006 relates to the proﬁt of £2.1 million on sale of the former sausage factory at Cottingham, East Yorkshire less taxation of £0.6 million. Finance costs Finance costs have decreased from £5.1 million in 2006 to £4.7 million in the current year reﬂecting reduced bank borrowings on the back of the strong cashﬂow in the year partially offset by higher UK interest rates and the acquisition of DeliCo. Taxation An analysis of the tax charge is set out in note 8 to the ﬁnancial statements. The total tax charge as a percentage of proﬁt before taxation was 30.6 per cent in the current year and 26.6 per cent in 2006, the latter rate reﬂecting the impact of tax losses acquired. The standard rate of UK Corporation tax was 30 per cent in both years. In addition the Group beneﬁts from tax amounts taken directly to equity and included in the Group Statement of Recognised Income and Expense. Earnings per share Basic earnings per share before exceptionals increased by 5 per cent to 50.1 pence. Due to the large exceptional gain in the prior year, there was a reduction in earnings per share after exceptionals of 1.0 pence. The average number of shares in issue, which is the basis of both calculations, was 1 per cent higher in 2007 than 2006. Cashﬂow Operating activities were in line with the previous year generating £41.8 million (2006 - £41.8 million) of cash and cash equivalents. The net cash outﬂow from investing activities of £24.3 million reﬂects the cash component of the Delico acquisition of £13.5 million plus capital additions of £12.0 million less sales proceeds of £1.1 million. The previous year’s outﬂow was £10.1 million and comprised capital additions of £14.0 million less disposals of £3.9 million. The £10.1 million of net cash used in ﬁnancing activities in 2007 is largely due to interest paid of £4.0 million and dividends paid of £6.5 million. The additional borrowings of £10.0 million to fund the DeliCo acquisition, and £1.8 million proceeds from the issue of share capital were almost offset by the repayment of borrowings of £11.4 million. The prior year cash outﬂow from ﬁnancing comprised repayment of borrowings of £18.8 million, interest paid of £5.1 million and dividends paid of £5.8 million. The overall result is a net decrease in cash and cash equivalents of £0.5 million (2005 – £3.3 million). Capital structure The Group’s capital structure is as follows: Net debt (note 26) Cranswick plc shareholders’ equity Capital employed 2007 £m 75.9 135.7 211.6 2006 £m 77.1 112.4 189.5 More details about the Group’s capital structure are set out in Note 22 Financial Instruments. Distributions, capital raising and share repurchases Under IFRS dividends paid and proposed during the year are no longer shown on the proﬁt and loss account but are charged against reserves when they are paid. Details of dividends paid and proposed during the year are given in the Directors’ Report on page 27. The proposed ﬁnal dividend for 2007 together with the interim paid in January 2007 amount to 18.1 pence per share which is 10 per cent higher than the previous year. The increase in share capital of the Group comprises 478,766 in respect of the Delico acquisition, 195,000 shares allotted to Cranswick Trustees Limited at par in respect of the Long Term Incentive Plan approved at last year’s Annual General Meeting, 458,693 of share options 21 Cranswick plc / Report & Accounts 2006/07 22 Group operating and financial review exercised during the year and 152,236 in respect of scrip dividends. There were no share repurchases during the year. Treasury policies Foreign currency risk The major foreign exchange risk facing the Group is in the purchasing of product in the charcuterie and pet food operations. The major currencies involved are the Euro and the US dollar. The policy of the Group is to seek to mitigate the impact of this risk by taking out forward contracts with UK banks for up to 12 months ahead and for amounts that commence at approximately 25 per cent of the requirement and move progressively towards full cover. At least 2 members of the main board attend the monthly meetings of the subsidiary boards at which the key decisions on currency cover are taken. Interest rate risk The main board set the policy on interest rate risk at the time of the Perkins acquisition when borrowings increased signiﬁcantly. Cover was implemented by taking out an interest rate swap agreement with a UK bank on the amortising portion (£45 million) of the medium term loan drawn down to ﬁnance the acquisition. This is being repaid at the rate of £5.625 million every 6 months from March 2006 to September 2009. The policy is reviewed from time to time as circumstances change. The monitoring of interest rate risk is handled entirely at head ofﬁce based on the monthly consolidation of cashﬂow projections and the daily borrowings position. Credit risk Practically all sales are made on credit terms, the majority of which are to the major UK food retailers. Overdue accounts are reviewed at the monthly board meetings of the operations. The incidence of bad debts is very low. Every attempt is made to resist advance payments for goods and services; where this proves impossible arrangements are put in place wherever possible to guarantee the repayment of the monies in the event of default. Liquidity risk The Group has historically been very cash generative. The bank position for each operation is monitored on a daily basis and capital expenditure above a certain level is approved at the monthly board meeting of each operation at which at least two members of the main board are present and reported at the subsequent monthly main board meeting. Each operation has access to the Group’s overdraft facility and all term debt is arranged centrally. The current bank facilities available to the Group are a term loan of £45.0 million repayable in January 2010, an amortising loan facility of £28.125 million repayable at the rate of £11.25 million per annum, a revolving credit facility of £20.0 million and an overdraft facility of £10.0 million. Unutilised facilities at 31 March 2007 were £25.2 million (2006 – £23.0 million). Price risk The major exposure the Group has to raw material price ﬂuctuations is pig meat part of which is as a result of currency movements. Historically this has been volatile across Europe but recently the market has been more stable. The Group does not seek to hedge against pig price movements because of the downside risk. Further details of the Group’s ﬁnancial instruments are disclosed in Note 22 to the accounts. 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. For this reason, they continue to adopt the going concern basis in preparing the ﬁnancial statements. On behalf of the Board, John Lindop Finance Director, 21 May 2007 23 Cranswick plc – Report & Accounts 2007 24 Directors Executive Directors Martin Davey, Chairman Martin qualiﬁed as a chartered accountant with Pannell Kerr Forster. He joined Cranswick and became Finance Director in 1985. He was appointed Chief Executive in 1988 and became Chairman in 2004. Since 2004 Martin has been a non-executive director of Thorntons plc, on which he spends one day per month. All fees receivable are paid to the Company. John Lindop, Finance John qualiﬁed as a chartered accountant with Robson Rhodes’ London ofﬁce. He spent ten years with Northern Foods plc where he was latterly Group Financial Controller and Company Secretary. In 1992 he joined Cranswick as Company Secretary and was appointed to the Board as Finance Director in 1993. Since 2006 John has been a non-executive director of Black Sheep Brewery plc, on which he spends one day per month. All fees receivable are paid to the Company. Bernard Hoggarth, Chief Executive Food Bernard holds a National Diploma in Agriculture from the Norfolk College of Agriculture. He joined Cranswick in 1978, focusing on the agribusiness activity before becoming involved in the development of the food manufacturing business during the 1990’s. He was appointed a director in 1988 and Chief Executive of Food in 2004. Derek Black, Chief Executive Pet Derek gained experience in the agricultural industry before joining Cranswick in 1980. He was responsible for the development of the grain trading business until its sale in 1996. He became involved in the formation of the pet business in 1993 and has focused exclusively on its activities since 1996. He was appointed a director in 1988 and Chief Executive of Pet in 2004. Adam Couch, Food Adam joined Cranswick in 1991 as a graduate trainee from Hull University, where he graduated in accountancy. Adam was appointed a director in 2003 and is Managing Director of the fresh pork operations. Non-executive Directors John Worby John is a chartered accountant with many years experience in the food industry, having worked for Uniq plc (previously Unigate PLC) from 1978 until 2002, in various roles including group ﬁnance director and deputy chairman. He was appointed a non-executive director of Cranswick plc in 2005 and is Senior Independent Director and Chairman of the Audit Committee. John has a number of non-executive directorships including Genus plc and Smiths News plc. He is also a trustee of Uniq Pension Trustees Limited. Noel Taylor Noel is a qualiﬁed engineer with many years experience in the pork and bacon sector. He joined the board of F T Sutton & Son (Rossendale) Limited (“Suttons”) as commercial director in 1983, subsequently becoming managing director. Suttons was acquired by Cranswick in 1992 and Noel was appointed a director. He became a non-executive director in 1999. Patrick Farnsworth Patrick has many years experience in the food industry, having worked for William Jackson & Son Limited, a Hull-based private company, since 1965, where he was Joint Group Managing Director from 1995 until his retirement in 2005. He was appointed a non-executive director of Cranswick plc in 2004 and was the senior independent director until 2005. Member of Remuneration Committee Member of Audit Committee Member of Nomination Committee 25 Cranswick plc – Report & Accounts 2007 26 Report of the Directors The Directors submit their report and the audited accounts of the Company for the year ended 31 March 2007. Principal activities, business review and future developments The Company’s activities are focused in the food and pet sectors. A review of the business and future development of the group and a discussion of the principal risks and uncertainties faced by the group is presented in the Statement to Shareholders on pages 5 to 15 and in the Group Operating and Financial Review on pages 17 to 23. Results and dividends The proﬁt on ordinary activities before taxation was £32.7 million (2006 – £31.1 million). After a taxation charge of £10.0 million (2006 – £8.3 million), the proﬁt for the year is £22.7 million (2006 – £22.8 million). An interim dividend of 5.9p per ordinary share was paid on 26 January 2007. The directors recommend the payment of a ﬁnal dividend for the year, which is not reﬂected in these accounts, of 12.2p per ordinary share which, together with the interim dividend, represents 18.1p per ordinary share, totaling £8.3 million (2006 – 16.5p per ordinary share, totaling £7.4 million). Subject to approval at the Annual General Meeting, the ﬁnal dividend will be paid in cash or scrip form on 7 September 2007 to members on the register at the close of business on 6 July 2007. The shares will go ex-dividend on 4 July 2007. Financial instruments The Group’s risk management objectives and policy are discussed in the Treasury Policies section of the Group Operating and Financial Review on page 23. Directors and their interests The Directors of the Company currently in ofﬁce are as stated on page 25. Each of the current Directors served for the whole of the year under review. Martin Davey and Bernard Hoggarth retire in accordance with the Articles of Association and, being eligible, each offers himself for re-election. The interests of the Directors, as deﬁned by the Companies Act 1985, in the ordinary shares of the Company, other than in respect of options to acquire ordinary shares (which are detailed in the analysis of options included in the Directors’ Remuneration Report on pages 73 to 76), are as follows: At 31 March 2007 – Ordinary Shares At 31 March 2006 – Ordinary Shares MTP Davey DJ Black AH Couch B Hoggarth JD Lindop RN Taylor PW Farnsworth JG Worby All the above interests are beneﬁcial. 183,036 82,883 44,627 101,642 101,778 297,200 1,058 1,641 182,118 78,793 43,620 101,642 97,763 297,200 1,034 1,641 27 Cranswick plc – Report & Accounts 2007 28 Report of the Directors There have been no other changes to the above interests in the period from 1 April 2007 to 11 May 2007. Major shareholders The Company has been informed of the following interests at 11 May 2007 in the 45,956,062 ordinary shares of the Company, as required by the Companies Act 1985: AMVESCAP PLC Legal & General Investment Management Number of shares % of issued share capital 13,230,968 2,555,694 28.8 5.6 Employment policies The Company’s policy on employee involvement is to adopt an open management style, thereby encouraging informal consultation at all levels about aspects of the Company’s operations. Employees participate directly in the success of the business by participation in the SAYE share option schemes. Employment policies are designed to provide equal opportunities irrespective of colour, ethnic or natural origin, nationality, sex, religion, marital or disabled status. Full consideration is given to applications for employment by and the continuing employment, training and career development of disabled people. Payment of suppliers Payment terms are agreed with each supplier and every endeavour is made to adhere to the agreed terms. The average credit terms for the Group as a whole, based on the year-end trade creditors ﬁgure and a 365 day year, is 38 days. The average credit taken by our customers on a similar basis is 35 days. Events since the balance sheet date On 18 May 2007, the Group disposed of its feed milling business. Sale proceeds of £3.0m in respect of certain ﬁxed assets and goodwill were received with a further £1.0m for other ﬁxed assets in 12 months time. The net book value of these assets was £2.7m at the balance sheet date. Further cash of approximately £3.0m will be received as working capital is realised. No adjustment has been made in these ﬁnancial statements for the proﬁt on disposal. Auditors Ernst & Young LLP have expressed their willingness to continue in ofﬁce and a resolution proposing their re-appointment will be submitted at the Annual General Meeting. Directors’ statement as to disclosure of information to auditors The Directors who were members of the Board at the time of approving the Directors’ Report are listed on page 25. Having made enquiries of fellow Directors and of the Company’s auditors, each of these directors conﬁrm that: • to the best of each Director’s knowledge and belief, there is no information relevant to the preparation of their report of which the Company’s auditors are unaware; and • each Director has taken all the steps a director might reasonably be expected to have taken to be aware of relevant audit information and to establish that the Company’s auditors are aware of that information. Annual General Meeting and Special Business to be transacted at the Annual General Meeting The Notice convening the Annual General Meeting can be found in the separate Notice of Annual General Meeting accompanying this Report & Accounts. Details of the Special Business to be transacted at the Annual General Meeting are contained in the separate letter from the Chairman, which also accompanies this Report & Accounts. By Order of the Board John Lindop Secretary, 21 May 2007 29 Cranswick plc – Report & Accounts 2007 30 Cranswick and the Environment Managing the impact that the business has on the environment is an important measure of the Company performance. Retail customers, ﬁnancial investors and consumers all have a growing interest in the preservation of the environment, and seek assurances that the business is operated with the upmost care. A commitment to safe guarding the environment is increasingly inﬂuencing the business both in terms of reducing greenhouse gas emissions and tightening controls for the disposal of waste and the treatment of efﬂuent. The costs associated with the use of fossil fuels and the disposal of waste has in recent years risen signiﬁcantly and will continue to do so in the future. This challenge is being met by progressing a proactive environmental management initiative which is aimed at identifying those areas which will minimise the carbon footprint, and/or reduce waste, and at the same time improve business efﬁciency by managing operating costs. Two of the largest manufacturing sites, Preston and Valley Park, are already beneﬁting by being certiﬁed against ISO 14001 which is the international recognized operating standard for environmental management. To identify where the environmental impact of our business can be further reduced the expertise within these two sites has been utiliesed to carry out our own in-house environmental health checks, and work with the Carbon Trust and Envirowise has begun to beneﬁt from their experience and knowledge in assessing the current environmental performance of each of our sites in the key areas of energy, water, waste, packaging & emissions reduction. This will allow the business to set speciﬁc reduction targets for each of these key performance indicators and the results will be reviewed by the Board. Other performance environmental benchmarking indicators are being sought to assess progress when measured against other businesses operating in a similar market. Cranswick will also encourage all employees to address their individual environmental responsibilities within the framework of their normal operating procedures. Future investment in sites, processes and equipment will beneﬁt from the use of best available technology in minimizing the impact that our business has on the environment. Examples of the good environmental work that is already going on within group are: The Preston based meat processing site has invested in equipment to minimize waste streams from the site by employing the latest technology in waste reduction by the use of separation through centrifuges. The resulting effect will be to dramatically reduce vehicle demand for removing waste and to eventually eradicate the need for further processing once it has left the site. Further beneﬁts of the by-product processing system include the production of an organic compostible material that can be spread on land, and the extraction of tallow for the production of bio-fuel which ultimately could fuel the sites boilers and part of its own ﬂeet of vehicles. One of the largest sites, Valley Park, will signiﬁcantly reduce its landﬁll volume with part of the waste stream going to a local Waste to Energy Plant. Improved separation of the plastic wastes in the factory will enable a higher proportion to be recycled with reciprocal beneﬁts in income from the recycled material. The Sandwich Factory has recently completed 6 months of trial work in assessing the use of on-site generated electrolysed water disinfectant solutions and this has been rolled out to a number of sites. In so doing the site has substantially reduced its reliance on the use of quaternary ammonium compound based disinfectants by 90 per cent and chemical based detergents by 40 per cent, thereby beneﬁting the environment, and operating costs. The recently launched Simply Sausage range incorporates printed sleeves manufactured from 100 per cent recycled material, and uses trays which contain 85 per cent recycled material. In addition to this we are working on converting all of our sausage range packaging to recycled board and are also evaluating other compostible materials. A copy of the full environmental policy is available on request from Cranswick. 31 Cranswick plc – Report & Accounts 2007 Group income statement for the year ended 31 March 2007 2007 2006 Before exceptionals Exceptionals Total Before exceptionals Exceptionals Total Notes £’000 £’000 £’000 £’000 £’000 £’000 Revenue 3 524,823 - 524,823 441,178 Cost of sales Gross proﬁt (438,508) 86,315 Operating expenses (49,239) - - - - (438,508) (364,388) 86,315 76,790 (49,239) (42,720) 37,076 34,070 - - - - - 441,178 (364,388) 76,790 (42,720) 34,070 37,076 Operating proﬁt Proﬁt on disposal of property, plant and equipment Proﬁt before ﬁnance and taxation Finance revenue Finance costs 4 5 3 - 281 281 - 2,079 2,079 37,076 281 37,357 34,070 2,079 36,149 7 7 6 (4,707) - - 6 25 (4,707) (5,076) - - 25 (5,076) Proﬁt before tax 32,375 281 32,656 29,019 2,079 31,098 Taxation 8 (9,773) (229) (10,002) (7,716) (562) (8,278) Proﬁt for the year 25 22,602 52 22,654 21,303 1,517 22,820 22,574 80 22,654 22,784 36 22,820 11 11 50.1p 49.7p 0.1p 0.1p 50.2p 49.8p 47.8p 47.4p 3.4p 3.4p 51.2p 50.8p Proﬁt for the year attributable to: Equity holders of the parent Minority interest Earnings per share: (total and continuing) Basic Diluted 32 Group statement of recognised income and expense for the year ended 31 March 2007 Income and expense recognised directly in equity Proﬁt/(losses) on effective cash ﬂow hedges taken to equity Exchange differences on retranslation of foreign operations Deferred tax recognised directly in equity Corporation tax recognised directly in equity Transitional adjustment on adoption of IAS 32 and IAS 39 at 1 April 2005 Deferred tax on transitional adjustment Net income recognised directly in equity Proﬁt for the year Total recognised income and expense for the year Attributable to: Equity holders of the parent Minority interest Company statement of recognised income and expense for the year ended 31 March 2007 Income and expense recognised directly in equity Gain/(loss) on effective cash ﬂow hedges taken to equity Deferred tax recognised directly in equity Corporation tax recognised directly in equity Transitional adjustment on adoption of IAS 32 and IAS 39 at 1 April 2005 Deferred tax on transitional adjustment Net income recognised directly in equity Proﬁt for the year Total recognised income and expense for the year 2007 £’000 2006 £’000 369 (5) 300 712 - - 1,376 22,654 24,030 (85) 6 124 529 45 (14) 605 22,820 23,425 23,950 23,389 80 36 24,030 23,425 2007 £’000 2006 £’000 452 (118) 712 - - 1,046 6,665 7,711 (191) 100 529 45 (14) 469 10,160 10,629 33 Cranswick plc – Report & Accounts 2007 Group balance sheet 31 March 2007 Non-current assets Goodwill Property, plant and equipment Current assets Inventories Trade and other receivables Other ﬁnancial assets Cash and cash equivalents Total current assets Non-current assets classiﬁed as held for sale Total assets Current liabilities Trade and other payables Other ﬁnancial liabilities Income tax payable Provisions Total current liabilities Non-current liabilities Other payables Other ﬁnancial liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Called-up share capital Share premium account Share-based payments Hedging and translation reserves Retained earnings Equity attributable to members of the parent company Minority interests Total equity J Lindop Finance Director M Davey Chairman 21 May 2007 34 Notes 12 13 15 16 17 26 18 19 20 21 19 20 8 21 23 25 25 25 25 2007 £’000 117,520 80,277 197,797 24,626 66,416 330 2,262 93,634 2006 £’000 111,921 67,725 179,646 18,555 54,027 106 5,000 77,688 - 688 291,431 258,022 (65,073) (16,933) (3,834) (289) (86,129) (37) (61,544) (6,150) (1,736) (69,467) (53,376) (19,422) (3,138) (334) (76,270) (76) (62,720) (4,657) (1,877) (69,330) (155,596) (145,600) 135,835 112,422 4,595 47,204 1,018 351 82,564 135,732 103 135,835 4,467 40,797 531 (13) 66,604 112,386 36 112,422 Company balance sheet 31 March 2007 Non-current assets Property, plant and equipment Investments in subsidiary undertakings Current assets Trade and other receivables Other ﬁnancial assets Income tax receivable Total current assets Total assets Current liabilities Trade and other payables Other ﬁnancial liabilities Income tax payable Total current liabilities Non-current liabilities Other ﬁnancial liabilities Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Called-up share capital Share premium account General reserve Merger reserve Share-based payments Hedging reserve Retained earnings Equity attributable to members of the parent company M Davey Chairman 21 May 2007 J Lindop Finance Director Notes 13 14 16 17 19 20 20 8 23 25 25 25 25 25 25 2007 £’000 2,339 155,430 157,769 2006 £’000 2,368 137,231 139,599 25,660 30,794 306 1 - 51 25,967 30,845 183,736 170,444 (41,654) (16,279) - (57,933) (61,544) (403) (61,947) (31,372) (18,948) - (50,320) (62,720) (236) (62,956) (119,880) (113,276) 63,856 57,168 4,595 47,204 4,000 1,806 210 306 5,735 63,856 4,467 40,797 4,000 1,806 142 (146) 6,102 57,168 35 Notes 2007 £’000 2006 £’000 37,357 36,149 9,252 487 (39) (250) (5,329) (9,141) 9,493 41,830 (7,936) 33,894 6 (13,506) (11,979) 1,147 (24,332) (3,966) 1,776 10,000 (40) (11,395) (6,467) (10,092) (530) 46 (10) (494) 8,087 284 (36) (2,220) 1,125 (5,751) 4,200 41,838 (6,954) 34,884 25 - (14,064) 3,929 (10,110) (5,119) 1,691 - - (18,753) (5,847) (28,028) (3,254) 3,291 9 46 Cranswick plc – Report & Accounts 2007 Group cash ﬂow statement for the year ended 31 March 2007 Operating activities Proﬁt before ﬁnance and taxation Adjustments to reconcile group operating proﬁt to net cash inﬂows from operating activities Depreciation Share based payments Release of government grants Proﬁt on sale of property, plant and equipment (Increase)/decrease in inventories and biological assets Increase in trade and other receivables Increase in trade and other payables Cash generated from operations Tax paid Net cash from operating activities Cash ﬂows from investing activities Interest received Acquisition of subsidiaries Purchase of property, plant and equipment Proceeds from sale of equipment Net cash used in investing activities Cash ﬂows from ﬁnancing activities Interest paid Proceeds from issue of share capital Proceeds from borrowings Issue costs of long-term borrowings Repayment of borrowings Dividends paid Net cash used in ﬁnancing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Effect of foreign exchange rates Cash and cash equivalents at end of period 26 26 36 Company cash ﬂow statement for the year ended 31 March 2007 Operating activities Proﬁt before ﬁnance and taxation Adjustments to reconcile operating proﬁt to net cash inﬂows from operating activities Depreciation Share based payments Decrease in trade and other receivables Increase in trade and other payables Cash generated from operations Tax received Net cash from operating activities Cash ﬂows from investing activities Interest received Dividends received Purchase of property, plant and equipment Payments to acquire investments in subsidiaries Net cash generated/(used) in investing activities Cash ﬂows from ﬁnancing activities Interest paid Dividends paid to equity shareholders Proceeds from issue of share capital Proceeds from borrowings Issue costs of long-term borrowings Repayment of borrowings Net cash used in ﬁnancing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 26 26 Notes 2007 £’000 2006 £’000 9,089 5,843 35 68 5,135 10,838 25,165 744 25,909 - 6,466 (6) (14,599) (8,139) (9,266) (6,467) 1,776 10,000 (40) (11,395) (15,392) 2,378 (4,480) (2,102) 25 70 9,213 11,140 26,291 490 26,781 7 102 (51) - 58 (7,317) (5,847) 1,691 - - (18,753) (30,226) (3,387) (1,093) (4,480) 37 Cranswick plc – Report & Accounts 2007 Notes to the accounts 1. Authorisation of ﬁnancial statements and statement of compliance with IFRS The Group and Company ﬁnancial statements of Cranswick plc (the “Company”) for the year ended 31 March 2007 were authorised for issue by the Board of Directors on 21 May 2007 and the balance sheets were signed on the Board’s behalf by M Davey and J Lindop. Cranswick plc is a public limited company incorporated and domiciled in England and Wales. The Company’s ordinary shares are traded on the London Stock Exchange. The Group’s ﬁnancial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The Company’s ﬁnancial statements have been prepared in accordance with IFRS as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 1985. The principal accounting policies adopted by the Group and by the Company are set out in note 2. The Company has taken advantage of the exemption provided under section 230 of the Companies Act 1985 not to publish its individual income statement and related notes. 2. Accounting policies Basis of preparation The ﬁnancial statements of Cranswick plc, both consolidated and company, have been prepared under IFRS as adopted by the European Union. A summary of the principal accounting policies, which have been consistently applied throughout the year and the preceding year, is as follows: Basis of consolidation The Group ﬁnancial statements consolidate the ﬁnancial statements of Cranswick plc and its subsidiaries. The results of undertakings acquired or sold are consolidated for the periods from the date of acquisition or up to the date of disposal. Acquisitions are accounted for under the purchase method of accounting. Foreign currencies In the accounts of the Group’s companies, individual transactions denominated in foreign currencies are translated into functional currency at the actual exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into functional currency at the rates ruling at the balance sheet date. Proﬁts and losses on both individual foreign currency transactions during the year and monetary assets and liabilities are dealt with in the income statement. On consolidation, the income statements of the overseas subsidiaries are translated at the average exchange rates for the year and the balance sheets at the exchange rates at the balance sheet date. The exchange differences arising as a result of translating income statements at weighted average rates and restating opening net assets at closing rates are taken to the translation reserve and the gain or loss on disposal of an overseas subsidiary is calculated after taking into account cumulative exchange gains or losses in respect of that subsidiary. Cumulative exchange differences at the date of transition to IFRS were deemed to be nil. Revenue Revenue excludes inter-company sales and value-added taxes and represents the invoiced value of goods sold less estimated returns. Revenue is recognised to the extent it is probable that the economic beneﬁts will ﬂow to the Group and the revenue, and any associated costs, can be measured reliably. Revenue on the sale of goods is recognised when the signiﬁcant risks and rewards of ownership of the goods have passed to the buyer on despatch. Intangible assets Goodwill is the excess of the fair value of the consideration paid for a business over the fair value of the identiﬁable assets, liabilities and contingent liabilities acquired. Goodwill is capitalised and subject to an impairment review, both annually and when there are indications that the carrying value may not be recoverable. 38 Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount is less than the carrying amount, an impairment loss is recognised. When an entity is disposed of, any goodwill associated with it is included in the carrying amount of the operation when determining the gain or loss on disposal except that goodwill arising on acquisitions prior to 31 March 2004 which was previously deducted from equity is not recycled through the income statement. Intangible assets acquired as part of an acquisition of a business are capitalised at fair value separately from goodwill only if the fair value can be measured reliably on initial recognition and the future economic beneﬁts are expected to ﬂow to the Group. Taxation Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance sheet date. Deferred tax is provided on temporary differences at the balance sheet date between the tax base of assets and liabilities and their carrying amounts for ﬁnancial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: i. except where the deferred income tax liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting proﬁt nor taxable proﬁt or loss; and ii. in respect of taxable temporary differences associated with investments in subsidiaries, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable proﬁts will be available against which the temporary differences can be utilised: i. except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or a liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting proﬁt nor taxable proﬁt or loss; and ii. in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable proﬁt will be available against which the temporary differences can be utilised. Deferred income tax assets and liabilities are measured at the tax rates that apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement. Otherwise income tax is recognised in the income statement. Property, plant and equipment Property, plant and equipment are included at cost less accumulated depreciation and any provision for impairment. Freehold land is not depreciated. Depreciation is charged on property, plant and equipment on the depreciable amount, being cost less the estimated residual value (based on prices prevailing at the balance sheet date) on a straight line basis over their estimated useful economic lives, or the estimated useful economic lives of their individual parts. 39 Cranswick plc – Report & Accounts 2007 Useful economic lives are principally as follows: Freehold buildings Short leasehold improvements Plant and equipment Motor vehicles 50 years Residue of lease 5-11 years 4 years The carrying value of property, plant and equipment is reviewed for impairment individually or at the cash generating unit level when events or changes in circumstances indicate that the carrying value may not be recoverable. Capitalised borrowing costs Borrowing costs incurred in ﬁnancing the construction of qualifying assets such as property, plant and equipment are capitalised up to the date at which the relevant asset is substantially complete. Borrowings costs are calculated using the Group’s weighted average cost of borrowing during the period of capitalisation. All other borrowing costs are expensed as incurred. Accounting for leases i. Finance leases Assets which are ﬁnanced by leasing agreements that transfer substantially all the risks and rewards of ownership to the lessee (ﬁnance leases) are capitalised at the inception of the lease at fair value or, if lower, the present value of the minimum lease payments, in property, plant and equipment and the corresponding capital cost is shown as an obligation to the lessor in borrowings. Depreciation is charged to the income statement over the shorter of the estimated useful life and the term of the lease. The interest element of the rental obligations is allocated to accounting periods during the lease term to reﬂect a constant rate of interest on the remainder of the capital amount outstanding. ii. Operating leases Leases, which are not ﬁnance leases, are classiﬁed as operating leases. Lease payments are charged to the income statement on a straight line basis over the term of the lease. Government grants and contributions UK Regional Development Grants and grants receivable from the European Union and DEFRA in respect of property, plant and equipment are credited to deferred income and released to the income statement over the relevant depreciation period. Inventories Inventories, with the exception of biological assets such as tropical marine ﬁsh, are stated at the lower of cost, on a ﬁrst in, ﬁrst out basis, and net realisable value after making allowance for any obsolete or slow-moving items. In the case of ﬁnished goods, cost comprises direct materials, direct labour and an appropriate proportion of manufacturing ﬁxed and variable overheads based on a normal level of activity. Biological assets Biological assets are included in the balance sheet at fair value less estimated point of sale costs. Gains and losses are charged to the income statement in the period in which they arise. Cash and cash equivalents Cash equivalents are deﬁned as cash at bank and in hand including short term deposits with original maturity within 3 months. For the purposes of the group cashﬂow statement, cash and cash equivalents consist of cash and cash equivalents net of outstanding bank overdrafts. Financial instruments i. Debt instruments, including bank borrowings Debt instruments are initially recognised at the fair value of net proceeds received after the deduction of issue costs. Subsequently debt instruments are recognised at amortised cost using the effective interest method. Issue costs are charged to the income statement over the term of the debt at a constant rate on the balance sheet carrying amount under the effective interest method. 40 Notes to the accounts ii. Derivative ﬁnancial instruments The Group uses derivative ﬁnancial instruments such as foreign currency contracts and interest rate swaps to hedge its cash ﬂow risks associated with interest rate and foreign currency ﬂuctuations. Such derivative ﬁnancial instruments are stated at fair value. The fair value of forward contracts is calculated by reference to current forward exchange rates for contracts with a similar maturity proﬁle. The fair value of interest rate swaps is determined by reference to market values for similar instruments. Where derivatives meet the special hedging criteria under IAS 39 for cash ﬂow hedges the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity and the ineffective portion is recognised in net proﬁt or loss. Gains or losses recognised in equity are transferred to the income statement in the same period in which the hedged item affects the net proﬁt and loss. For derivatives that do not qualify for special hedge accounting under IAS 39, any gains or losses arising from changes in fair value are taken directly to net proﬁt or loss for the period. Employee beneﬁts i. Pensions The Group operates a number of deﬁned contribution schemes for employees under which contributions are paid into schemes managed by major insurance companies. Contributions are calculated as a percentage of employees’ earnings and obligations for contributions to the schemes are recognised as cost of sales or operating expenses in the income statement in the period in which they arise. ii. Equity settled share based payments The Company operates a savings related share option scheme under which options have been granted to Group employees (SAYE scheme). The company reﬂects in the income statement the cost of share based payments granted to its own employees. The fair value of options granted after 7 November 2002 which have not vested prior to 1 January 2005 is calculated using the Black-Scholes model and the resulting cost is charged to the income statement over the vesting period. In addition, the Company operates an executive share option scheme for senior executives. Share options issued are exercisable subject to the attainment of certain market-based performance criteria. The fair value of options granted after 7 November 2002 which have not vested prior to 1 January 2005, is calculated using mathematical models, including the Black-Scholes model, modiﬁed for the impact of market-based performance criteria and the resulting cost is charged to the income statement over the vesting period. The Company and Group re-assesses its estimate of the number of options that are expected to become exercisable at each balance sheet date as a result of changes in the expectation of achievement of non-market based performance conditions. Any adjustments to the original estimates are recognised in the income statement. Non-current assets held for sale On classiﬁcation as held for sale, non-current assets are recognised at the lower of carrying amount and fair value less costs to sell and no further depreciation is charged. Impairment losses on initial classiﬁcation as held for sale are included in proﬁt or loss, as are any gains and losses on subsequent re-measurement. Exceptional items Exceptional items are material items which derive from events or transactions that fall within the ordinary activities of the reporting entity and which individually or, if of a similar type, in aggregate need to be disclosed by virtue of their size or incidence if the ﬁnancial statements are to give a true and fair view. Dividends Dividends receivable by the Company are recognised in the income statement if they are declared, appropriately authorised and no longer at the discretion of the entity paying the dividend, prior to the balance sheet date. Dividends payable by the Company are recognised when declared and therefore ﬁnal dividends proposed after the balance sheet date are not recognised as a liability at the balance sheet date. Dividends paid to shareholders are shown as a movement in equity rather than on the face of the income statement. 41 Cranswick plc – Report & Accounts 2007 Investments Investments in subsidiaries are shown at cost less any provision for impairment. New standards and interpretations not applied During the year, the IASB and IFRIC have issued a number of new standards and interpretations with an effective date after the date of these ﬁnancial statements. The Directors do not consider that the adoption of these standards and interpretations will have a material impact on the Group’s and Company’s ﬁnancial statements in the period of initial application. The standards not applied are as follows: International Accounting Standards (IAS/IFRS’s) IFRS 7 IFRS 8 IAS 1 Financial Instruments: Disclosures Operating Segments Amendment – Presentation of Financial Statements: Capital Disclosures International Financial Reporting Interpretations Committee (IFRIC) IFRIC 8 IFRIC 9 IFRIC 10 IFRIC 11 IFRIC 12 Scope of IFRS 2 Reassessment of Embedded Derivatives Interim Financial Reporting and Impairment IFRS 2 – Group and Treasury Share Transactions Service Concession Arrangements Effective date 1 January 2007 1 January 2009 1 January 2007 1 May 2006 1 June 2006 1 November 2006 1 March 2007 1 January 2008 Upon adoption of IFRS 7, the Group will have to disclose additional information about its ﬁnancial instruments, their signiﬁcance and the nature and extent of risks that they give rise to. More speciﬁcally the Group will need to disclose the fair value of its ﬁnancial instruments and its risk exposure in greater detail. There will be no effect on reported income or net assets. Upon adoption of IFRS 8, the Group will have to disclose additional information about its operating segments, although it is anticipated there will be no effect on reported income or net assets. 3. Revenue and segmental analysis The Group’s primary segments are Food and Pet business segments as the Group’s management and reporting structure is set out along these lines and the two segments exhibit different risks and rates of return. The results are discussed in the review of activities. Secondary segment information is presented geographically. There are no signiﬁcant transactions between the primary segments. 42 Notes to the accounts Business segments Food £’000 2007 Pet £’000 Total £’000 Food £’000 2006 Pet £’000 Total £’000 Revenue 493,365 31,458 524,823 409,119 32,059 441,178 38,936 - 38,936 566 281 847 Result before exceptionals Exceptionals Results Central costs Proﬁt before ﬁnance and taxation Net ﬁnance costs Proﬁt before taxation Income taxes Proﬁt for the year All revenue derives from sales of goods from continuing operations. Assets and liabilities Assets (excluding goodwill) Goodwill Assets (including goodwill) Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities 152,516 117,520 270,036 18,745 - 18,745 57,012 2,985 39,502 281 39,783 (2,426) 37,357 (4,701) 32,656 (10,002) 22,654 171,261 117,520 288,781 2,650 291,431 59,997 95,599 155,596 35,433 2,079 37,512 796 - 796 119,753 111,921 231,674 20,401 - 20,401 48,277 2,724 36,229 2,079 38,308 (2,159) 36,149 (5,051) 31,098 (8,278) 22,820 140,154 111,921 252,075 5,947 258,022 51,001 94,599 145,600 Unallocated assets and liabilities comprise certain items of property, plant and equipment, non-current assets classiﬁed as held for sale, loan notes, net debt and taxation balances. Other segment information Capital expenditure: Property, plant and equipment Depreciation Impairments of property plant & equipment 11,383 8,697 - 424 555 - 11,807 9,252 - 13,384 7,567 - 916 520 - 14,300 8,087 - In addition, £10,206,000 of property, plant and equipment was acquired as part of the Delico acquisition which relates to the Food and UK segments. Geographical segments The following table sets out sales by destination, regardless of where the goods were produced: UK Continental Europe Rest of World Sales revenue by geographical market 2007 £’000 2006 £’000 513,738 10,599 486 524,823 430,707 10,218 253 441,178 43 Cranswick plc – Report & Accounts 2007 The following table sets out the geographical location of the group’s assets and of additions to property, plant and equipment and intangible assets: UK Continental Europe Unallocated assets 4. Group operating proﬁt This is stated after charging: Operating costs Selling and distribution Administration Depreciation of property, plant and equipment Release of government grants Operating lease payments – minimum lease payments Net foreign currency differences Cost of inventories recognised as an expense (Decrease)/Increase in provision for inventories Audit of the ﬁnancial statements* * £26,000 relates to the Company (2005 – £25,000). Carrying amount of segment assets, including goodwill Additions to property, plant and equipment and intangible assets 2007 £’000 2006 £’000 2007 £’000 2006 £’000 288,529 252 2,650 291,431 251,737 338 5,947 258,022 11,803 14,275 4 - 25 - 11,807 14,300 2007 £’000 22,043 27,196 49,239 9,252 (39) 3,744 (303) 2006 £’000 18,347 24,373 42,720 8,087 (36) 2,858 208 358,706 289,481 (81) 149 78 140 In addition, payments to Ernst & Young LLP for non audit services amounted to £156,000 (2006 – £126,000) of which £nil related to the transition to IFRS (2006 – £55,000), £5,000 for an audit related service (2006 – nil), £73,000 (2006 – £nil) related to due diligence services and £78,000 (2006 – £71,000) to taxation. 5. Exceptional items Non-recurring income during the year was as follows: Recognised below operating proﬁt Proﬁt on disposal of property, plant and equipment 2007 £’000 2006 £’000 281 2,079 The corporation tax charge associated with these exceptional items amounted to £nil (2006 – £nil). Deferred tax of £229,000, of which £150,000 relates to the prior year, (2006 – £562,000) was provided on the rolled-over gain. The cash ﬂow impact of exceptional items is £770,000 (2006 – £2,975,000) received in relation to asset disposals after associated costs. 44 Notes to the accounts 6. Employees Group Staff costs: Wages and salaries Social security costs Other pension costs 2007 £’000 59,130 5,293 921 65,344 2006 £’000 53,229 4,559 765 58,553 Included within wages and salaries is a total expense for share based payments of £487,000 (2006 – £284,000) all of which arises from transactions accounted for as equity-settled share based payment transactions. Company Staff costs: Wages and salaries Social security costs Other pension costs 2007 £’000 1,610 188 219 2,017 2006 £’000 1,248 144 197 1,589 Included within wages and salaries is a total expense for share based payments of £68,000 (2006 – £70,000) all of which arises from transactions accounted for as equity-settled share based payment transactions. The average monthly number of employees during the year was: Production Selling and distribution Administration 2007 No 2,567 204 253 3,024 2006 No 2,320 180 222 2,722 The Group and Company consider the Directors to be the Key Management Personnel. Details of each Director’s remuneration, pension contributions and share options are detailed in the Report on Directors’ Remuneration on pages 73 to 76. The employee costs shown above include the following emoluments in respect of Directors of the Company: Group and Company 2007 £’000 2006 £’000 Directors’ remuneration (excluding IFRS 2 share option charge) 3,724 2,832 Aggregate gains made by directors on exercise of share options 487 693 7. Finance revenue and costs Bank interest received Loan note interest paid Bank interest paid and similar charges Movement in discount on provisions 2007 £’000 2006 £’000 (6) (25) 45 4,610 52 4,707 42 4,974 60 5,076 45 Cranswick plc – Report & Accounts 2007 8. Taxation a) Analysis of tax charge in the year Tax charge based on the proﬁt for the year: UK corporation tax UK corporation tax on proﬁts of the year Adjustments in respect of previous years Overseas taxation Overseas taxation on proﬁts of the year Adjustments in respect of previous years Total current tax UK deferred tax Originating and reversal of temporary differences Adjustments in respect of previous years Total deferred tax 2007 £’000 9,323 (6) 9,317 25 - 9,342 430 230 660 2006 £’000 7,720 12 7,732 101 - 7,833 1,436 (991) 445 Tax on proﬁt on ordinary activities 10,002 8,278 The prior year’s tax charge was reduced by £941,000 due to the purchase of group relief at a discount from the former owners of subsidiary companies which has increased the capital allowances available to the Group. Tax relating to items charged or credited directly to equity: Group Share based payments Net gain/(loss) on revaluation of cash ﬂow hedges Corporation tax credit on share options exercised Transitional adjustments on adoption of IAS 32 and IAS 39 Tax credit in the statement of recognised income and expense Company Net gain/(loss) on revaluation of cash ﬂow hedges Corporation tax credit on share options exercised Deferred tax credit on share options exercised Transitional adjustments on adoption of IAS 32 and IAS 39 Tax credit in the statement of recognised income and expense b) Factors affecting tax charge for the period 2007 £’000 (411) 111 (712) - (1,012) 135 (712) (17) - (594) 2006 £’000 (98) (26) (529) 14 (639) (58) (529) (42) 14 (615) The tax assessed for the year is lower than the standard rate of corporation tax in the UK. The differences are explained below: Proﬁt on ordinary activities before tax Proﬁt on ordinary activities multiplied by standard rate 2007 £’000 2006 £’000 32,656 31,098 of corporation tax in the UK of 30 per cent (2005 – 30 per cent) 9,797 9,329 Effect of: Disallowed expenses Rollover and indexation Other Adjustments in respect of prior years Total tax charge for the year 46 44 (40) (23) 224 10,002 75 (137) (10) (979) 8,278 Notes to the accounts c) Deferred tax Group Deferred tax liability in the balance sheet Accelerated capital allowances Rollover and holdover relief Other temporary differences Share based payments Deferred tax liability Deferred tax in the income statement Accelerated capital allowances Payment for group relief Share based payments Rollover relief Other temporary differences Deferred income tax expense Company Deferred tax liability in the balance sheet Accelerated capital allowances Rollover relief Other temporary differences Share based payments Deferred tax liability 2007 £’000 5,424 938 592 (804) 6,150 918 - (80) 66 (244) 660 153 41 294 (85) 403 2006 £’000 3,372 873 725 (313) 4,657 (1,131) 468 (98) 562 644 445 135 41 158 (98) 236 d) Temporary differences associated with Group investments At 31 March 2007 no deferred tax liability has been recognised (2006 – £nil) in respect of any taxes that would be payable on the unremitted earnings of certain of the Group’s subsidiaries as the Group can control the timing of any such payments. There are no income tax consequences to the Group in relation to dividends paid to shareholders. 9. Proﬁt attributable to members Of the proﬁt attributable to members, the sum of £6,665,000 (2006 – £10,160,000) has been dealt with in the accounts of Cranswick plc. 10. Equity dividends Declared and paid during the year Final dividend for 2006 – 11.1p per share (2005 – 9.8p) Interim dividend for 2007 – 5.9p per share (2006 – 5.4p) Dividends paid Proposed for approval of shareholders at the Annual General Meeting on 30 July 2007 Final dividend for 2007 – 12.2p (2006 – 11.1p) 2007 £’000 4,959 2,667 7,626 5,607 2006 £’000 4,335 2,406 6,741 4,958 11. Earnings per share Basic earnings per share amounts are calculated by dividing net proﬁt for the year attributable to members of the parent company of £22,574,000 (2006 – £22,784,000) by the weighted average number of shares outstanding during the year. In calculating diluted earnings per share amounts, the weighted average number of shares is 47 Cranswick plc – Report & Accounts 2007 adjusted for the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares into ordinary shares. The Group discloses in its consolidated income statement as exceptional items those material items which individually or, if of a similar type, in aggregate need to be disclosed by virtue of their size or incidence if the ﬁnancial statements are to give a true and fair view. Accordingly, basic and diluted earnings per share are also presented on this basis using the weighted average number of ordinary shares for both basic and diluted amounts as per the table below. Basic weighted average number of shares Dilutive potential ordinary shares – share options 2007 2006 Thousands Thousands 44,967 366 45,333 44,477 359 44,836 Basic weighted average number of shares for 2007 excludes shares held during the year by the Cranswick plc Employee Beneﬁt Trust. 12. Intangible ﬁxed assets Group Cost At 31 March 2005 and at 31 March 2006 Acquisition of subsidiary undertakings At 31 March 2007 Impairments as at 31 March 2005, 2006 and 2007 Net book amounts at 31 March 2006 Net book amounts at 31 March 2007 Goodwill £’000 111,921 5,599 117,520 - 111,921 117,520 In August 2006, the Group increased its investment in Cranswick Gourmet Bacon Company Ltd from 70 per cent to 85 per cent. Goodwill arising from this amounted to £60,000. Goodwill of £5,539,000 arising on the acquisition of Delico Limited is detailed further in Note 14. The Company has no intangible assets. As from 1 April 2004, the date of transition to IFRS, goodwill is no longer amortised but is instead subject to annual impairment testing. Goodwill acquired through business combinations has been allocated for impairment testing purposes to the following principal cash generating units: Cash generating unit Cooked meats Sandwiches Continental Fine Foods Other 48 2007 £’000 86,903 16,526 10,968 3,123 117,520 2006 £’000 81,364 16,526 10,968 3,063 111,921 Notes to the accounts Assumptions used The recoverable amount for each cash generating unit has been determined based on value in use calculations using annual budgets for each business for the following year, approved by the Board of Directors, and cash ﬂow projections for the next four years. Forecast replacement capital expenditure is included from budgets and thereafter capital is assumed to represent 100 per cent of depreciation. Subsequent cash ﬂows are forecast to grow in line with the assumed long-term trend in UK GDP of circa 2.5 per cent derived from third party market information. A discount rate of 9.8 per cent has been used (2006 – 8.5 per cent) being management’s estimate of the Group’s weighted average cost of capital. The calculation is most sensitive to the following assumptions: • Sales volumes • Gross margin • Discount rate Sales volumes are inﬂuenced by the growth of the underlying food segment, the market shares of our customers, selling prices, and the quality of our products and service. Historical volumes are used as the base and adjusted over the projection period in line with current growth rates. These sectors have historically demonstrated growth rates higher than GDP but for these purposes a reversion to long-term GDP growth is assumed beyond the ﬁve year period of cash ﬂow projections. Gross margin depends upon average selling prices, the cost of raw materials and changes in the cost of production overheads. Historical margins are used as the base, adjusted for management’s expectations derived from experience. All calculations of this nature are sensitive to the discount rate used. Management’s estimate of the Group’s weighted average cost of capital has been used for each cash generating unit. Management believes that currently the assumptions used are unlikely to change to an extent which reduced value in use below that of recoverable amount. Assumptions and projections are updated on an annual basis. 49 Cranswick plc – Report & Accounts 2007 13. Property, plant and equipment Group Cost At 31 March 2005 Additions Transfers to assets held for resale Disposals At 31 March 2006 On acquisition of subsidiary undertaking Additions Transfer from/(to) assets held for resale Disposals At 31 March 2007 Depreciation At 31 March 2005 Charge for the year Transfers to assets held for resale Relating to disposals At 31 March 2006 On acquisition of subsidiary undertaking Charge for the year Transfer from/(to) assets held for resale Relating to disposals At 31 March 2007 Net book amounts At 31 March 2005 At 31 March 2006 At 31 March 2007 Freehold land and buildings Leasehold improvements Plant equipment and vehicles Total £’000 £’000 £’000 £’000 27,106 1,582 (952) (156) 27,580 - 132 231 (140) 15,627 863 - (3) 16,487 - 318 - - 27,803 16,805 1,957 470 (264) (15) 2,148 - 466 10 (76) 2,548 5,113 869 - (3) 5,979 - 919 - - 6,898 25,149 25,432 25,255 10,514 10,508 9,907 60,096 11,855 - (3,396) 68,555 16,363 11,357 (61) (2,051) 94,163 32,603 6,748 - (2,581) 36,770 6,157 7,867 (39) (1,707) 49,048 27,493 31,785 45,115 102,829 14,300 (952) (3,555) 112,622 16,363 11,807 170 (2,191) 138,771 39,673 8,087 (264) (2,599) 44,897 6,157 9,252 (29) (1,783) 58,494 63,156 67,725 80,277 Included in freehold land and buildings is land with a cost of £2,952,000 (2006 – £2,952,000) which is not depreciated relating to the Group and £1,210,000 (2006 – £1,210,000) relating to the Company. The cost of freehold land and buildings includes £538,000 (2006 – £538,000) in respect of capitalised interest. £nil of interest was capitalised during the year (2006 – £71,000). 50 Notes to the accounts Company Cost At 31 March 2005 Additions At 31 March 2006 Transfers from other group companies Additions At 31 March 2007 Depreciation At 31 March 2005 Charge for the year At 31 March 2006 Transfers from other group companies Charge for the year At 31 March 2007 Net book amounts At 31 March 2005 At 31 March 2006 At 31 March 2007 14. Investment in subsidiary undertakings Company Shares at cost At 31 March 2005 Additions in year At 31 March 2006 Additions in year At 31 March 2007 Freehold land and buildings Plant and machinery Total £’000 £’000 £’000 2,431 - 2,431 - - 2,431 89 21 110 - 21 131 2,342 2,321 2,300 - 51 51 18 3 72 - 4 4 15 14 33 - 47 39 2,431 51 2,482 18 3 2,503 89 25 114 15 35 164 2,342 2,368 2,339 £’000 137,211 20 137,231 18,199 155,430 Delico Limited was acquired on 1 November 2006 and has been accounted for as an acquisition from that date. The fair values of the assets acquired are the same as the book values and are detailed below: Property, plant and equipment Inventories Cash and short term deposits Trade and other receivables Trade and other payables Deferred taxation Net assets Goodwill arising on acquisition Cost of acquisition Discharged by: Cash consideration Issue of new shares (478,766 shares at £7.52) Acquisition costs Fair value £’000 10,206 742 1,168 3,248 (1,570) (1,134) 12,660 5,539 18,199 14,272 3,600 327 18,199 51 Cranswick plc – Report & Accounts 2007 The fair values on acquisition of Delico Limited can be restated within one year of acquisition. From the date of acquisition to 31 March 2007, Delico Limited has contributed £181,000 to the proﬁt of the Group. If the combination had taken place at the beginning of the year, the consolidated proﬁt of the Group would have been £22,851,000 and the revenue from continuing operations would have been £536,503,000. Included in the £5,539,000 of goodwill recognised above are certain intangible assets that cannot be individually separated and reliably measured from the acquiree due to their nature. These items include capacity and an assembled workforce. The principal subsidiary undertakings are: Food Cranswick Country Foods plc Studleigh-Royd Limited Brookﬁeld Foods Limited The Sandwich Factory Group Limited (registered in Scotland) Cranswick Gourmet Bacon Company Limited (85% ownership, holding via Cranswick Country Foods plc) Cranswick Mill Limited Delico Limited Pet Cranswick Pet & Aquatics plc Except where stated otherwise, each of the companies is registered in England and Wales and Cranswick plc holds directly 100 per cent of the shares and voting rights of each subsidiary undertaking. 15. Inventories (including biological assets) Group Raw materials Finished goods and goods for resale Biological assets (see below) 2007 £’000 20,334 4,155 137 24,626 2006 £’000 13,672 4,726 157 18,555 The Group breeds and imports tropical marine ﬁsh and other invertebrates for supply to specialist aquatic retailers. At 31 March 2007 marine stock represented approximately 56,000 ﬁsh (2006 - approximately 57,000 ﬁsh). The fair value of tropical marine ﬁsh is determined from retail selling price less a margin and reduced by £4,000 in the year. 16. Trade and other receivables Trade receivables Amounts owed by group undertakings Other receivables Prepayments and accrued income Group Company 2007 £’000 58,585 - 3,457 4,374 66,416 2006 £’000 46,909 - 1,971 5,147 54,027 2007 £’000 - 25,602 58 - 2006 £’000 - 30,640 154 - 25,660 30,794 52 Notes to the accounts 17. Other ﬁnancial assets – Current Forward currency contracts Interest rate swaps Group Company 2007 £’000 24 306 330 2006 £’000 106 - 106 2007 £’000 - 306 306 2006 £’000 - - - Forward currency contracts are used to hedge a proportion of anticipated purchases denominated in foreign currencies and are held at fair value in the balance sheet. To the extent that these forward contracts represent effective hedges, movements in fair value are taken directly to equity and are then recycled through the income statement in the period during which the hedged item impacts the income statement. A description of amounts and maturities is contained in note 22. Under the terms of the interest rate swap the Group receives LIBOR interest and pays ﬁxed interest of 4.98 per cent. The notional principal amount stands at £27,000,000 as at 31 March 2007 and reduces in equal semi-annual amounts to £nil by January 2010. 18. Non-current assets classiﬁed as held for sale Group At 1 April 2005 Additional costs Transfer from property, plant and equipment Sold in the year At 31 March 2006 Additional costs Transfer to property, plant and equipment Sold in the year At 31 March 2007 £’000 891 5 688 (896) 688 35 (199) (524) - Following the rationalisation of small animal feed production on to a single site in 2006 a factory became vacant and was reclassiﬁed as a non-current asset held for sale as at 31 March 2006. The property, with a carrying value of £489,000, was sold in September 2006 for gross consideration of £805,000 realising a proﬁt of £281,000 after associated costs, but before taxation. This proﬁt has been treated as an exceptional item as described in note 5 and relates to the pet segment. 19. Trade and other payables Current Trade payables Amounts owed to group undertakings Other payables Non-current Deferred income Group Company 2007 £’000 43,882 - 21,191 65,073 2006 £’000 36,489 - 16,887 53,376 2007 £’000 - 36,541 5,113 41,654 2006 £’000 - 28,922 2,450 31,372 37 76 - - 53 Cranswick plc – Report & Accounts 2007 20. Financial liabilities Current Bank overdrafts Amounts outstanding under revolving credit facility Current instalments due on bank loan Loan notes Interest rate swaps Non-current Group Company 2007 £’000 2,756 2,000 11,250 927 - 16,933 2006 £’000 4,954 2,000 11,250 1,072 146 19,422 2007 £’000 2,102 2,000 11,250 927 - 16,279 2006 £’000 4,480 2,000 11,250 1,072 146 18,948 Non-current instalments due on bank loan 61,544 62,720 61,544 62,720 A bank overdraft facility of £10 million (2006 – £10m) is in place until December 2009, of which £2,756,000 (2006 – £4,954,000) was utilised at 31 March 2007. Interest is payable at a margin over base rate. A revolving credit facility of £20 million is in place of which £2 million was utilised as at 31 March 2007 (2006 – facility of £20 million of which £2 million was utilised). This facility expires in December 2009. Interest is payable on the loan at a margin between 0.5 and 0.8 per cent above LIBOR. The maturity proﬁle of bank loans is as follows: In one year or less Between one year and two years Between two and ﬁve years Unamortised issue costs Group Company 2007 £’000 11,250 11,250 50,625 73,125 (331) 72,794 2006 £’000 11,250 11,250 51,875 74,375 (405) 73,970 2007 £’000 11,250 11,250 50,625 73,125 (331) 72,794 2006 £’000 11,250 11,250 51,875 74,375 (405) 73,970 The balance outstanding on the bank loan is repayable in 5 semi-annual instalments of £5,625,000 from September 2007, followed by a single payment of £45,000,000 in December 2009. Interest is payable on the loan at a margin between 0.5 and 0.8 per cent above LIBOR. The loan is unsecured. The loan is subject to normal bank covenant arrangements. Under the terms of the interest rate swap the Group receives LIBOR interest and pays ﬁxed interest of 4.98 per cent. Loan notes bear interest based on base rate and are repayable on demand at six-monthly intervals. 54 Notes to the accounts 21. Provisions Group At 1 April 2006 Utilisation in the year Unwinding of discount At 31 March 2007 Analysed as: Current liabilities Non-current liabilities Lease provisions £’000 2,211 (238) 52 2,025 2006 £’000 334 1,877 2,211 Group 2007 £’000 289 1,736 2,025 Lease provisions are held against dilapidations obligations on leased properties and for the costs of onerous leases for property and plant and machinery. These provisions are expected to be utilised over the next six years. There are no provisions held by the Company. 55 Cranswick plc – Report & Accounts 2007 22. Financial instruments An explanation of the Company and Group’s ﬁnancial instruments risk management strategy is set out on page 23 in the Financial Review. Interest rate risk proﬁle of ﬁnancial assets and liabilities The interest rate proﬁle of the interest earning ﬁnancial assets and interest bearing liabilities of the Group as at 31 March 2007 and their weighted average interest rates is set out below: Group As at 31 March 2007 Weighted average effective interest rate % Total At ﬂoating interest rates 1 year or less Fixed interest 1-2 years 2-3 years 3-4 years £’000 £’000 £’000 £’000 £’000 £’000 Financial liabilities: Bank overdrafts 6.25% (2,756) (2,756) Revolving credit facility 6.05% (2,000) (2,000) Bank loan (including the effect of interest rate swaps) 5.50% (73,125) (46,125) (9,000) (9,000) (9,000) Loan notes 5.25% (927) (927) (78,808) (51,808) (9,000) (9,000) (9,000) - (27,000) 9,000 9,000 9,000 Less: effect of interest rate swaps Total ﬁnancial liabilities excluding the effect of interest rate swaps Financial assets: Cash at bank 4.25% 2,262 2,262 (76,546) (76,546) (78,808) (78,808) - - - - - - - - - - - - - - - As at 31 March 2006 Weighted average effective interest rate % Total At ﬂoating interest rates 1 year or less Fixed interest 1-2 years 2-3 years 3-4 years £’000 £’000 £’000 £’000 £’000 £’000 Financial liabilities: Bank overdrafts 5.50% (4,954) (4,954) Revolving credit facility 5.30% (2,000) (2,000) Bank loan (including the effect of interest rate swaps) 5.50% (74,375) (38,375) (9,000) (9,000) (9,000) (9,000) Loan notes 4.50% (1,072) (1,072) (82,401) (46,401) (9,000) (9,000) (9,000) (9,000) - (36,000) 9,000 9,000 9,000 9,000 Less: effect of interest rate swaps Total ﬁnancial liabilities excluding the effect of interest rate swaps (82,401) (82,401) Financial assets: Cash at bank 3.50% 5,000 5,000 (77,401) (77,401) The maturity proﬁle of bank loans is set out in note 20. - - - - - - - - - - - - The interest rate proﬁle of the interest earning ﬁnancial assets and interest bearing liabilities of the Company as at 31 March 2007 and their weighted average interest rates is set out on the following page: 56 Notes to the accounts Company As at 31 March 2007 Weighted average effective interest rate % Total At ﬂoating interest Rates 1 year or less Fixed interest 1-2 years 2-3 years 3-4 years £’000 £’000 £’000 £’000 £’000 £’000 Financial liabilities: Bank overdrafts 6.25% (2,102) (2,102) Revolving credit facility 6.05% (2,000) (2,000) Bank loan (including the effect of interest rate swaps) 5.50% (73,125) (46,125) (9,000) (9,000) (9,000) Loan notes 5.25% (927) (927) (78,154) (51,154) Less: effect of interest rate swaps Total ﬁnancial liabilities excluding the effect of interest rate swaps Financial assets: Cash at bank - (27,000) 9,000 9,000 9,000 (78,154) (78,154) - - (78,154) (78,154) - - - - - - - - - - - - - As at 31 March 2006 Weighted average effective interest rate % Total At ﬂoating interest Rates 1 year or less Fixed interest 1-2 years 2-3 years 3-4 years £’000 £’000 £’000 £’000 £’000 £’000 Financial liabilities: Bank overdrafts 5.50% (4,480) (4,480) Revolving credit facility 5.30% (2,000) (2,000) - - - - - - - - Bank loan (including the effect of interest rate swaps) 5.50% (74,375) (38,375) (9,000) (9,000) (9,000) (9,000) Loan notes 4.50% (1,072) (1,072) - - - - Less: effect of interest rate swaps Total ﬁnancial liabilities excluding the effect of interest rate swaps Financial assets: Cash at bank (81,927) (45,927) (9,000) (9,000) (9,000) (9,000) - (36,000) 9,000 9,000 9,000 9,000 (81,927) (81,927) - - (81,927) (81,927) - - - - - - - - - - - - Currency proﬁle The Group’s ﬁnancial assets at 31 March 2007 include sterling denominated cash balances of £894,000 (2006 – £2,315,000), Danish Krona £195,000 (2006 – £342,000), Euro £902,000 (2006 – £1,792,000) and US Dollar £271,000 (2006 – £551,000), all of which are held in the UK with the exception of Danish Krona £83,000 (2006 – £88,000) and Euro £218,000 (2006 – £271,000). The Group’s ﬁnancial liabilities are denominated in sterling. The proportion of the Group’s net assets denominated in foreign currencies is immaterial. The Company’s ﬁnancial assets and liabilities are denominated in sterling. 57 Cranswick plc – Report & Accounts 2007 Credit risk The Group makes a signiﬁcant proportion of its sales to the major UK supermarket groups, which correspondingly represent a signiﬁcant proportion of the Group’s trade receivables at any one time. Based on the ﬁnancial strength of these customers, the directors do not consider that the Group faces a signiﬁcant credit risk in this regard. All cash ﬁnancial assets are held by UK ﬁnancial institutions. The maximum credit exposure relating to ﬁnancial assets is represented by their carrying values as at the balance sheet date. Fair value of ﬁnancial instruments Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties on an arm’s length basis. Fair value is determined by reference to market prices where an active market exists or from discounting future cash ﬂows based on market yield curves. All derivative ﬁnancial instruments are shown on the balance sheet at fair value. The fair value of ﬂoating rate assets and liabilities is estimated to be equivalent to book value. Group 2007 2006 Financial assets Cash Forward currency contracts Interest rate swap Financial liabilities Bank overdraft Amounts outstanding under revolving credit facility Bank loan, gross of issue costs Loan notes Interest rate swap Book value £’000 2,262 24 306 2,592 (2,756) (2,000) (73,125) (927) - Fair value £’000 2,262 24 306 2,592 (2,756) (2,000) (73,125) (927) - (78,808) (78,808) Book value £’000 5,000 106 - 5,106 (4,954) (2,000) (74,375) (1,072) (146) (82,547) Fair value £’000 5,000 106 - 5,106 (4,954) (2,000) (74,375) (1,072) (146) (82,547) At 31 March (76,216) (76,216) (77,441) (77,441) Company Financial asset Interest rate swap Financial liabilities Bank overdraft Amounts outstanding under revolving credit facility Bank loan, gross of issue costs Loan notes Interest rate swap 2007 Book value £’000 Fair value £’000 2006 Book value £’000 Fair value £’000 306 306 - - (2,102) (2,000) (73,125) (927) - (2,102) (2,000) (73,125) (927) - (78,154) (78,154) (4,480) (2,000) (74,375) (1,072) (146) (82,073) (4,480) (2,000) (74,375) (1,072) (146) (82,073) At 31 March (77,848) (77,848) (82,073) (82,073) The book value of trade and other receivables and trade and other payables equates to fair value for the Group and Company. Details of these ﬁnancial assets are included in notes 16 to 19. 58 Notes to the accounts Hedges Financial instruments designated as cash ﬂow hedges are held at fair value in the balance sheet. The Group hedges two types of cash ﬂows: Forward contracts to hedge expected future purchases The Group hedges a proportion of its near-term expected purchases denominated in overseas currencies. Where these hedges meet the hedge criteria of IAS 39 changes in fair value are posted directly to equity and subsequently recycled through the income statement at the time that the hedged item affects proﬁt and loss. Group Dollars Euros Amount Maturities Exchange rates $5,550,000 €14,350,000 2 April 2007 to 4 December 2007 26 April 2007 to 21 April 2008 $1.90-$1.97 €1.4563 -€1.503 Fair value £’000 32 (8) These contracts were effective cash ﬂow hedges under the criteria set out in IAS 39 and therefore these fair value gains were recognised directly in equity. The Company does not hold any forward contracts. Interest rate swap The Group hedges a proportion of the interest cash ﬂows payable in respect of bank loans. Under the terms of the interest rate swap the Group receives LIBOR interest and pays ﬁxed interest of 4.98 per cent. The notional principal amount of the swap stands at £27,000,000 as at 31 March 2007 and reduces in equal semi-annual amounts to £nil by January 2010. The swap was an effective cash ﬂow hedge under the criteria set out in IAS 39 and therefore movements in fair value have been posted directly to equity. 23. Called-up share capital Group and Company Authorised 2007 Number 2006 Number Ordinary shares of 10p each 63,600,000 53,000,000 Allotted, called-up and fully paid Ordinary shares of 10p each 2007 Number 2006 Number 2007 £’000 6,360 2007 £’000 2006 £’000 5,300 2006 £’000 At 1 April On exercise of share options Scrip dividends Issues on acquisition of subsidiary At 31 March 44,669,630 44,051,460 4,467 4,405 653,694 152,236 478,766 468,349 149,821 - 65 15 48 47 15 - 45,954,326 44,669,630 4,595 4,467 On 6 September 2006, 61,081 ordinary shares were issued at 714.8p as a result of shareholders exercising the scrip dividend option in lieu of the cash payment for the 2006 ﬁnal dividend. On 26 January 2007, 91,155 ordinary shares were issued at 792.9p as a result of shareholders exercising the scrip dividend option in lieu of the cash payment for the 2007 interim dividend. During the course of the year, 243,694 ordinary shares were issued to employees exercising SAYE options at prices between 255p and 415p, 215,000 ordinary shares were issued to directors and employees exercising executive share options at a price of 518.5p per ordinary share and 195,000 ordinary shares were allotted at par to Cranswick 59 Cranswick plc – Report & Accounts 2007 Trustees Limited in respect of the Cranswick plc Long Term Incentive Plan approved at last year’s Annual General Meeting. On 1 November 2006, 478,766 ordinary shares were issued at £7.52 each as part of the consideration for Delico Limited. Of the unissued ordinary share capital £114,087 is reserved for allotment under the Savings Related and Executive Share Option Schemes. The options are exercisable as follows: Savings related Savings related Savings related Savings related Savings related Savings related Executive Number 26,443 34,117 80,328 167,269 144,735 152,978 535,000 Exercise price Exercise period 264p 415p 255p 375p 471p 679p 601p March 2007 to October 2009 March 2008 to October 2010 March 2007 to October 2011 March 2008 to October 2012 March 2009 to October 2013 March 2010 to October 2014 July 2008 to July 2015 On 9 September 2005, 68,119 ordinary shares were issued at 648p as a result of shareholders exercising the scrip dividend option in lieu of the cash payment for the 2005 ﬁnal dividend. On 27 January 2006, 81,702 ordinary shares were issued at 584p as a result of shareholders exercising the scrip dividend option in lieu of the cash payment for the 2006 interim dividend. During the course of the previous year, 38,349 ordinary shares were issued to employees exercising SAYE options at prices between 121p and 415p, and 430,000 ordinary shares were issued to directors and employees exercising executive share options at a price of 362p per ordinary share. 24. Share based payments Executive Share Options The Company operates two executive share option schemes, a Revenue approved scheme and an unapproved scheme both of which are equity settled. Share options are granted periodically to promote the involvement of senior management in the longer term success of the Company. Options can only be exercised if certain performance conditions are met by the Company. These conditions are based on total shareholder return over the performance period and require the Company to be in the top half of a basket of food companies quoted on the London Stock Exchange selected by the Remuneration Committee. Options have a contractual life of ten years. Directors may also apply for SAYE options on the same terms as apply to all other employees. The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the year. 60 Notes to the accounts Group Outstanding as at 1 April Granted during the year Forfeited during the year Exercised during the year (note i) Expired during the year Outstanding as at 31 March Exercisable at 31 March Company Outstanding as at 1 April Granted during the year Forfeited during the year Exercised during the year (note i) Expired during the year Outstanding as at 31 March Exercisable at 31 March 2007 Number 795,000 - (45,000) (215,000) - 535,000 - 2007 Number 400,000 - - (135,000) 265,000 - 2007 WAEP £ 5.79 - 6.01 5.19 6.01 - 2007 WAEP £ 5.79 5.19 6.01 - 2006 Number 645,000 610,000 (30,000) (430,000) - 795,000 - 2006 Number 405,000 265,000 - (270,000) - 400,000 - 2006 WAEP £ 4.14 6.01 6.01 3.62 - 5.79 - 2006 WAEP £ 4.14 6.01 - 3.62 - 5.79 - i. The weighted average share price at the date of the exercise for the options exercised is £9.50 (2005 – £6.21). For the share options outstanding as at 31 March 2007, the weighted average remaining contractual life is 1.6 years. (2006 – 2.6 years). There were no options granted during the year. The weighted average fair value of options granted during the previous year was £6.01. The range of exercise prices for options outstanding at the end of the year was £6.01. Long Term Incentive Plan The Long Term Incentive Plan was approved at last year’s Annual General Meeting. During the course of the year 195,000 options were granted to directors and senior executives. There is a three year performance period at the end of which half the options will be measured against earnings per share targets and the other half measured against total shareholder return targets. The EPS target allows 25 per cent of the shares subject to the target to be issued at nil cost at an outperformance of 3 per cent and 100 per cent of the shares at an outperformance of 7 per cent with outperformance between 3 and 7 per cent rewarded pro-rata. The TSR target allows 50 per cent of the shares subject to the target to be issued at nil cost at the 50th percentile and 100 per cent at the 75th percentile with performance between the 50th and 75th percentiles rewarded pro-rata. The comparison companies are Carrs Milling Industries plc, Dairy Crest Group plc, Devro plc, Arla Foods plc, Glanbia plc, Greencore Group plc, Northern Foods plc, Robert Wiseman Dairies plc, Premier Foods plc, RHM plc and Uniq plc. The options have a contractual life of ten years. 5,000 options were forfeited during the year leaving 190,000 outstanding. All Employee Share Options (SAYE scheme) All employees are entitled to a grant of options once they have been in service for two years or more. The exercise price is equal to the market price of the shares less 20 per cent on the date of the grant. The contractual life of the options is 3, 5 or 7 years. The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the year. 61 Cranswick plc – Report & Accounts 2007 Group Outstanding as at 1 April Granted during the year (note i) Forfeited during the year Exercised during the year (note ii) Expired during the year Outstanding as at 31 March (note iii) Exercisable at 31 March Company Outstanding as at 1 April Granted during the year (note i) Forfeited during the year Exercised during the year (note ii) Expired during the year Outstanding as at 31 March Exercisable at 31 March 2007 Number 739,063 153,033 (42,532) (243,694) - 605,870 1,736 2007 Number 24,542 1,069 - (9,224) - 16,387 - 2007 WAEP £ 4.15 6.79 3.71 2.75 4.42 2.55 2007 WAEP £ 3.50 6.79 - 2.64 - 4.20 - 2006 Number 645,337 162,586 (28,381) (40,479) - 739,063 3,536 2006 Number 23,381 2,071 - (910) - 24,542 - 2006 WAEP £ 3.19 4.71 3.15 3.63 - 4.15 4.15 2006 WAEP £ 3.42 4.71 - 4.15 3.50 - i. The share options granted during the year were at 679p, representing a 20 per cent discount on the price at the relevant date. ii. The weighted average share price at the date of the exercise for the options exercised is £9.68 (2006 – £5.95). iii. Included within this balance are options over 26,444 shares (2006 – 147,412 shares) that have not been recognised in accordance with IFRS 2 as options were granted on or before 7 November 2002. These options have not been subsequently modiﬁed and therefore do not need to be accounted for in accordance with IFRS 2. For the share options outstanding as at 31 March 2007 the weighted average remaining contractual life is 2.70 years (2006 – 3.05 years). The weighted average fair value of options granted during the year was £6.79 (2006 – £1.67). The range of exercise prices for options outstanding at the end of the year was £2.55-£6.79 (2006 – £2.55-£4.71). The fair value of both Executive and All Employee equity settled options granted is estimated as at the date of grant using the Black-Scholes option pricing model, taking into account the terms and conditions upon which the options were granted. The following table lists the inputs to the model used for the years ended 31 March 2007 and 31 March 2006. Group and Company Dividend yield Expected share price volatility Risk free interest rate Expected life of option (years) Exercise prices 2007 1.9%-4.1% 24.5%-31% 4.29%-5.0% 3, 5, 7 years £nil - £6.79 2006 2.41% - 2.6% 31% 4.51% - 4.81% 3, 5, 7 years £4.71 - £6.01 The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reﬂects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. The initial fair value of executive options is adjusted to take into account the market-based performance condition. 62 Notes to the accounts 25. Reconciliation of movements in equity Group Attributable to equity holders of the parent Minority Total Share capital Share premium (Note 1) (Note 2) Share based payments (Note 3) Hedging reserve Translation reserve Retained earnings Total Interest Equity (Note 4) (Note 5) £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 At 1 April 2005 4,405 38,250 247 Impact of adoption of IAS 32 and IAS 39 Cash ﬂow hedges Exchange differences Proﬁt for the year Exercise of options Scrip dividends Share based payments Deferred tax recognised directly in equity Corporation tax recognised directly in equity Dividends - - - - - - - - 47 15 1,644 903 - - - - - - - - - - - - - - 284 - - - - 45 (85) - - - - - - - - 21 49,922 92,845 (14) 31 - - (85) 6 - - - - 92,845 31 (85) 6 22,784 22,784 36 22,820 - - - 1,691 918 284 124 124 529 529 (6,741) (6,741) - - - - - - 1,691 918 284 124 529 (6,741) - - 6 - - - - - - - At 1 April 2006 4,467 40,797 531 (40) 27 66,604 112,386 36 112,422 Cash ﬂow hedges Exchange differences Proﬁt for the year Exercise of options Scrip dividends - - - 65 15 - - - 1,711 1,144 Share issues 48 3,552 Share based payments Deferred tax recognised directly in equity Corporation tax recognised directly in equity Purchase of minority interest Dividends - - - - - - - - - - - - - - - - 487 - - - - 369 - - - - - - - - - - - (5) - - - - - - - - - 369 - 369 - (5) (5) 22,574 22,574 80 22,654 - - - - 1,776 1,159 3,600 487 300 300 712 712 - - - - - - 1,776 1,159 3,600 487 300 712 - - (13) (13) (7,626) (7,626) - (7,626) At 31 March 2007 4,595 47,204 1,018 329 22 82,564 135,732 103 135,835 63 Cranswick plc – Report & Accounts 2007 Company Share capital Share premium Share based payments Hedging reserve Merger reserve General reserve Retained earnings Total (Note 1) (Note 2) (Note 3) (Note 4) (Note 6) (Note 7) £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 At 1 April 2005 4,405 38,250 72 - 1,806 4,000 2,068 50,601 Impact of adoption of IAS 32 and IAS 39 Cash ﬂow hedges Proﬁt for the year Exercise of options Scrip dividends Share based payments Deferred tax recognised directly in equity Corporation tax recognised directly in equity Dividends - - - 47 15 - - - - - - - 1,644 903 - - - - - - - - - 70 - - - 45 (191) - - - - - - - - - - - - - - - - - - - - - - - - - (14) 31 - (191) 10,160 10,160 - - - 1,691 918 70 100 100 529 529 (6,741) (6,741) At 1 April 2006 4,467 40,797 142 (146) 1,806 4,000 6,102 57,168 Cash ﬂow hedges Proﬁt for the year Exercise of options Scrip dividends Share issues Share based payments Deferred tax recognised directly in equity Corporation tax recognised directly in equity Dividends - - 65 15 - - 1,711 1,144 48 3,552 - - - - - - - - - - - - - 68 - - - 452 - - - - - - - - - - - - - - - - - - 452 6,665 6,665 - - - - 1,776 1,159 3,600 68 (118) (118) 712 712 (7,626) (7,626) - - - - - - - - At 31 March 2007 4,595 47,204 210 306 1,806 4,000 5,735 63,856 Notes: 1. Share capital The balance classiﬁed as share capital represents the nominal value of ordinary 10p shares issued. 2. Share premium The balance classiﬁed as share premium includes the net proceeds in excess of nominal value on issue of the company’s equity share capital, comprising 10p ordinary shares. 3. Share based payments reserve This reserves records the fair value of share based payments expensed in the income statement. 64 Notes to the accounts 4. Hedging reserve This reserve includes the portion of the gain or loss on a hedging instrument in a cash ﬂow hedge that is determined to be an effective hedge. 5. Translation reserve This reserve records exchange differences arising from the translation of the ﬁnancial statements of foreign subsidiaries. 6. Merger reserve Where shares have been issued as consideration for acquisitions, the value of shares issued in excess of nominal value has been credited to the merger reserve rather than to the share premium account. 7. General reserve This reserve arose in 1993 when the High Court of Justice granted permission to reduce the Company’s share premium account by £4,000,000 which was credited to a separate reserve named the general reserve. 26. Additional cash ﬂow information Analysis of Group net debt Cash and cash equivalents Overdrafts Other ﬁnancial assets Other ﬁnancial liabilities Revolving credit Bank loans Loan notes Net debt At 31 March 2006 £’000 5,000 (4,954) 46 - 46 (146) (2,000) (73,970) (1,072) (77,142) Cash ﬂow £’000 (2,728) 2,198 (530) - (530) - - 1,290 145 905 Other non cash changes £’000 At 31 March 2007 £’000 (10) - (10) 306 296 146 - (114) - 328 2,262 (2,756) (494) 306 (188) - (2,000) (72,794) (927) (75,909) Net debt is deﬁned as cash and cash equivalents and derivatives at fair value less interest bearing liabilities (net of unamortised issue costs). At 31 March 2005 Cash ﬂow Other non cash changes At 31 March 2006 £’000 £’000 £’000 £’000 Cash and cash equivalents Overdrafts Other ﬁnancial liabilities Revolving credit Bank loans Loan notes Net debt 5,025 (1,734) 3,291 - (5,000) (89,487) (1,200) (92,396) (34) (3,220) (3,254) - 3,000 15,625 128 15,499 9 - 9 (146) - (108) - (245) 5,000 (4,954) 46 (146) (2,000) (73,970) (1,072) (77,142) 65 Cranswick plc – Report & Accounts 2007 Analysis of Company net debt Cash and cash equivalents Overdrafts Other ﬁnancial assets Other ﬁnancial liabilities Revolving credit Bank loans Loan notes Net debt Cash Overdrafts Other ﬁnancial liabilities Revolving credit Bank loans Loan notes Net debt 27. Contingent liabilities At 31 March 2006 Cash ﬂow Other non cash changes At 31 March 2007 £’000 £’000 £’000 £’000 - (4,480) (4,480) - (4,480) (146) (2,000) (73,970) (1,072) (81,668) At 31 March 2005 £’000 - (1,093) (1,093) (5,000) (89,487) (1,200) (96,780) - 2,378 2,378 - 2,378 - - 1,290 145 3,813 Cash ﬂow £’000 - (3,387) (3,387) 3,000 15,625 128 15,366 - - - 306 306 146 - (114) - 338 Other non cash changes £’000 - - - (146) - (108) - (254) - (2,102) (2,102) 306 (1,796) - (2000) (72,794) (927) (77,517) At 31 March 2006 £’000 - (4,480) (4,480) (146) (2,000) (73,970) (1,072) (81,668) The Company, together with its subsidiary undertakings, has entered into a guarantee with Lloyds TSB Bank plc and The Royal Bank of Scotland plc in respect of the Group’s facilities with those banks. Drawn down amounts totalled £78,808,000 as at 31 March 2007 (2006 – £82,401,000). 28. Commitments a. The Directors have contracted for future capital expenditure for property, plant and equipment totalling £475,000 (2006 – £531,000). b. The Group’s future minimum rentals payable under non-cancellable operating leases are as follows: Not later than one year After one year but not more than ﬁve years After ﬁve years Group Company 2007 £’000 1,345 6,178 21,824 29,347 2006 £’000 1,147 5,535 22,510 29,192 2007 £’000 2006 £’000 - - - - - - - - 66 Notes to the accounts 29. Pension commitments The Group operates a number of deﬁned contribution pension schemes whereby contributions are made to schemes operated by major insurance companies. Contributions to these schemes are determined as a percentage of employees’ earnings and the amount charged to the proﬁt and loss account is disclosed in note 4. Contributions owing to the insurance companies at the year-end, included in trade and other payables, amounted to £218,000 (2006 – £196,000). 30. Related party transactions During the year the Group and Company entered into transactions, in the ordinary course of business, with related parties, including transactions between the Company and its subsidiary undertakings. In the Group accounts transactions between the Company and its subsidiaries are eliminated on consolidation but these transactions are reported for the Company below: Company only Related party Subsidiaries 2007 2006 Services rendered to the related party Dividends received from related party £’000 13,640 8,000 £’000 6,467 11,503 Amounts owed by or to subsidiary undertakings are disclosed in the Company balance sheet on page 35. Any such amounts are unsecured and repayable on demand. Remuneration of key management personnel Short-term employee beneﬁts Post-employment beneﬁts Share-based payments 31. Events since the Balance sheet date 2007 £’000 3,211 383 170 3,764 2006 £’000 2,376 337 114 2,827 On 18 May 2007, the Group disposed of its feed milling business. Sale proceeds of £3.0m in respect of certain ﬁxed assets and goodwill were received with a further £1.0m for other ﬁxed assets in 12 months time. The net book value of these assets was £2.7m at the Balance Sheet date. Further cash of approximately £3.0m will be received as working capital is realised. No adjustment has been made in these ﬁnancial statements for the proﬁt on disposal. 67 Cranswick plc – Report & Accounts 2007 Corporate governance statement Statement by the Directors on compliance with the provisions of the Combined Code. Principles of good governance The Board is committed to high standards of corporate governance. The adoption and maintenance of good governance is the responsibility of the Board as a whole. This report, together with the Directors’ Remuneration Report on pages 73 to 76, describes how the Board applies the principles of good governance and best practice as set out in the Combined Code on Corporate Governance (the “Combined Code”) which came into effect for reporting years commencing after 30 November 2003 and therefore applies to the full year under review. A statement of compliance can be found at the end of this report. The Board The Board consists of an Executive Chairman, two Chief Executives, two other executive directors and three non- executives, two of whom are deemed to be independent. Noel Taylor is not deemed to be independent due to his long association with the Company. The Combined Code recommends that the board of directors of a UK public company should include a balance of executive and non-executive directors (including independent non-executives) such that no individual or small group of individuals can dominate the board’s decision-making. The Board is conﬁdent that it meets the requirements of the Combined Code in full that apply to a company the size of Cranswick. The Board meets each month throughout the year to direct and control the overall strategy and operating performance of the Group. To enable them to carry out these responsibilities all directors have full and timely access to all relevant information. A formal schedule of matters reserved for decision by the Board covers key areas of the Group’s affairs including acquisition and divestment policy, approval of budgets, major capital expenditure projects, proﬁt and cashﬂow performance and general treasury and risk management policies. Responsibility for the Group’s day-to-day operations is delegated to the Chief Executives of the two divisions who, supported by the executive directors and executive management, implement the Board’s strategy and manage the Group’s business. Upon appointment, all directors undertake a formal introduction to all the Group’s activities and are also provided with the opportunity for on-going training to ensure that they are kept up-to-date on changes in relevant legislation and the general business environment. Procedures are in place for directors to seek both independent advice at the expense of the Company and the advice and services of the Company Secretary in order to fulﬁl their duties. The Company Secretary is responsible to the Board for ensuring that Board procedures are complied with and for advising the Board, through the Chairman, on all governance matters. The appointment and removal of the Company Secretary is determined by the Board as a whole. The Chairman carries out a performance appraisal of the Board, its committees and directors and meets with the non-executive directors at least once a year to consider his conclusions. In addition, the non-executive directors meet, without the Chairman present, in order to appraise his performance. The Company’s Articles of Association provide that one third (but not more than one third) of the Directors retire by rotation each year and with the proviso that each Director shall seek re-election at the Annual General Meeting every three years. All new directors are subject to election by shareholders at the ﬁrst opportunity following their appointment. Directors’ biographies and membership of the various committees are shown on page 25. The formal terms of reference for the main Board Committees together with the terms and conditions of appointment of non-executive directors are available for inspection at the Company’s Registered Ofﬁce and at the Annual General Meeting. Board Committees Audit Committee The Audit Committee comprises the three non-executives, John Worby, Patrick Farnsworth and Noel Taylor. The Committee is chaired by John Worby, the Company’s Senior Independent Director, who is a Chartered Accountant and has considerable recent relevant ﬁnancial experience. It is a requirement of the Combined Code that the Audit Committee should comprise all independent non-executive directors. The Board is conﬁdent that the Company complies with this requirement, with the exception of Noel Taylor as outlined on page 71. 68 The Chairman, the Finance Director and the Group Financial Controller, who is responsible for assessing the Group’s internal ﬁnancial controls, together with the external auditors attend the meetings as appropriate. The external auditors have the opportunity for direct access to the Committee without the Executive Directors being present and the Committee formally meets at least once a year without the Executive Directors being present. The Committee reviews the Group’s accounting policies and internal reports on accounting and internal ﬁnancial control matters together with reports from the external auditors. The Audit Committee has overall responsibility for monitoring the integrity of ﬁnancial statements and related announcements and for all aspects of internal control and meets at least three times a year, two of which involve a review of the Group’s interim and full year statements together with the fourth quarter update. The Audit Committee considers annually the extent and effectiveness of the work of the internal audit function. The Audit Committee is also responsible for recommendations for the appointment, reappointment or removal of the external auditors and for reviewing their effectiveness. It also approves the terms of engagement and remuneration of the external auditors, and monitors their independence including the nature and levels of non-audit services. There is a whistleblowing policy in place which includes arrangement by which staff can, in conﬁdence, raise concerns about possible improprieties in matters of ﬁnancial reporting and other matters. The Chairman of the Audit Committee will be available at the Annual General Meeting to respond to any shareholder questions that might be raised on the Committee’s activities. Remuneration Committee The Remuneration Committee comprises Patrick Farnsworth (Chairman), Noel Taylor and John Worby. It is a requirement of the Combined Code that the Remuneration Committee should, in the case of smaller companies, consist of at least two members who are considered by the Combined Code to be independent. It is a requirement of the Combined Code that the Remuneration Committee should comprise all independent non-executive directors. The Board is conﬁdent that the Company complies with this requirement, with the exception of Noel Taylor as outlined on page 71. Martin Davey, Chairman, attends meetings of the Remuneration Committee by invitation and in an advisory capacity. No director attends any part of a meeting at which his own remuneration is discussed. The executive directors determine the remuneration of the non-executive directors. The Committee recommends to the Board the policy for executive remuneration and determines, on behalf of the Board, the other terms and conditions of service for each executive director. It determines appropriate performance conditions for the annual cash bonus and long term incentive schemes and approves awards and the issue of options in accordance with the terms of those schemes. The Remuneration Committee also recommends and monitors the level and structure of remuneration of senior management below that of main board director. The Remuneration Committee has access to advice from the Company Secretary and to detailed analysis of executive remuneration in comparable companies. Details of the Committee’s current remuneration policies are given in the Directors’ Remuneration Report on pages 73 to 76. The Chairman of the Remuneration Committee attends the Annual General Meeting to respond to any shareholder questions that might be raised on the Committee’s activities. Nomination Committee The Nomination Committee comprises Martin Davey, Executive Chairman, who also acts as the Committee’s Chairman, Patrick Farnsworth, independent non-executive, and John Worby, independent non-executive. It is a requirement of the Combined Code that a majority of the members of the Nomination Committee should be non- executive directors, and the Chairman should be either the chairman of the board or a non-executive director. The Board is conﬁdent that it fully complies with these requirements of the Combined Code. Due to the size of the Company and the stability of the Board the Chairman’s time commitment to the Committee is not anticipated to be heavy. 69 Cranswick plc – Report & Accounts 2007 The Committee meets as required and is authorised to propose to the Board new appointments of executive and non-executive directors. The Chairman of the Nomination Committee will attend the Annual General meeting to respond to any shareholder questions that might be raised on the Committee’s activities. Meetings attendance Details of the number of meetings of, and members’ attendance at, the Board, Audit, Remuneration and Nomination Committees during the year are set out in the table below. Board Audit Committee Remuneration Committee Nomination No. of meetings DJ Black AH Couch MTP Davey B Hoggarth JD Lindop RN Taylor PW Farnsworth JG Worby 12 11 12 12 11 12 11 12 12 3 2 3 3 5 - 5 5 5 Shareholders The views of shareholders expressed during meetings with them are communicated by the Chairman to the Board as a whole, and through this process of communication the Board’s executive and non-executive directors are able to gain a sound understanding of the views and concerns of the major shareholders. The Chairman discusses governance and strategy with major shareholders. Other directors are available to meet the company’s major shareholders if requested. The Senior Independent Director is available to listen to the views of shareholders, particularly if they have concerns which contact with the Chairman has failed to resolve or for which such contact is inappropriate. Principles of corporate governance and voting guidelines issued by the Company’s institutional shareholders and their representative bodies are circulated to and considered by the Board. The Board also welcomes the attendance and questions of shareholders at the Annual General Meeting which is also attended by the Chairmen of the Audit, Remuneration and Nominations Committees. Going Concern The Directors have prepared the accounts on a going concern basis, having satisﬁed themselves from a review of internal budgets and forecasts and current bank facilities that the Group has adequate resources to continue in operational existence for the foreseeable future. Internal Control The Board of Directors has overall responsibility for the Group’s systems of internal control, which safeguards the shareholders’ investment and the Group’s assets, and for reviewing its effectiveness. Such a system can only provide reasonable and not absolute assurance against material misstatement or loss, as it is designed to manage rather than eliminate the risk of failure to achieve business objectives. The Group operates within a clearly deﬁned organisational structure with established responsibilities, authorities and reporting lines to the Board. The organisational structure has been designed in order to plan, execute, monitor and control the Group’s objectives effectively and to ensure that internal control becomes embedded in the operations. The Chairman of the Audit Committee reports to the Board on issues relating to internal controls and risk management issues following each Audit Committee meeting. The Board conﬁrms that the key on- going processes and features of the Group’s internal risk based control system, which accord with the Turnbull guidance, have been fully operative throughout the year and up to the date of the Annual Report being approved. These include; a process to identify and evaluate business risk; a strong control environment; an information and 70 Corporate governance statement communication process; a monitoring system and a regular Board review for effectiveness. The Group Financial Controller is responsible for overseeing the Group’s internal controls. During the year the management of the Food and Pet businesses identiﬁed the key business risks within their operations, considered the ﬁnancial implications and assessed the effectiveness of the control processes in place to mitigate these risks. The Board reviewed a summary of the ﬁndings and this, along with direct involvement in the strategies of the businesses, investment appraisal and budgeting process, enabled the Board to report on the effectiveness of internal control. Following its review the Board determined that it was not aware of any signiﬁcant deﬁciency or material weakness in the system of internal control. Auditor Independence The Board is satisﬁed that Ernst & Young LLP has adequate policies and safeguards in place to ensure that auditor objectivity and independence is maintained. The Company meets its obligations for maintaining the appropriate relationship with the external auditors through the Audit Committee whose terms of reference include an obligation to consider and keep under review the degree of work undertaken by the external auditor, other than the statutory audit, to ensure such objectivity and independence is safeguarded. In addition, the Chairman of the Audit Committee is consulted prior to awarding to the external auditors any non audit services in excess of £20,000. During the year the Audit Committee considered the following factors in assessing the objectivity and independence of Ernst & Young LLP: i. The auditors’ procedures for maintaining and monitoring independence, including those to ensure that the partners and staff have no personal or business relationships with the Company, other than those in the normal course of business permitted by UK ethical guidance. ii. The auditors’ policies for the rotation of the lead partner and key audit personnel. iii. Adherence by management and the auditor to the Group’s policy for the procurement of non-audit services which was adopted during the year. Compliance with the Revised Combined Code The Directors consider that the Company has, during the year ended 31 March 2007, complied with the requirements of the revised Combined Code other than as set out below. i. The Board did not comply with Combined Code provisions A.7.2 and B.1.6 for the ﬁrst month of the year in that notice periods contained in the service agreements dated 1 May 2004 for M.Davey, D.Black and B. Hoggarth contain notice periods that reduced progressively to 1 year by 1 May 2006. In addition, in the case of a takeover of the Company the notice period is two years for the ﬁrst six months following takeover. Also, N. Taylor, non-executive director, does not have a ﬁxed term contract, but is employed subject to a notice period of six months. ii. The Board did not comply throughout the year with Combined Code provisions B2.1 and C3.1 regarding the composition of the Audit and Remuneration Committees as Noel Taylor is not an independent non-executive director. 71 Cranswick plc – Report & Accounts 2007 Statement of directors’ responsibilities in relation to the ﬁnancial statements The Directors are responsible for preparing the Annual Report and the ﬁnancial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards as adopted by the European Union. The Directors are required to prepare ﬁnancial statements for each ﬁnancial year which present fairly the ﬁnancial position of the Company and of the Group and the ﬁnancial performance and cash ﬂows of the Company and of the Group for that period. In preparing those ﬁnancial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and • provide additional disclosures when compliance with the speciﬁc requirements in IFRSs is insufﬁcient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s ﬁnancial position and ﬁnancial performance; and • state that the company has complied with IFRSs, subject to any material departures disclosed and explained in the ﬁnancial statements. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the ﬁnancial position of the company and of the group and enable them to ensure that the ﬁnancial statements comply with the Companies Act 1985 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 72 Directors’ remuneration report Information not subject to audit Remuneration committee The Remuneration Committee comprises the non-executive directors Patrick Farnsworth (chairman of the committee), Noel Taylor and John Worby. The Executive Chairman attends the meetings in an advisory capacity as requested. The Committee determines the remuneration of the Company’s executive directors and puts forward its recommendations for approval by the Board. The committee has not used remuneration consultants in the year, but has undertaken a review of remuneration levels at quoted companies of comparable size. The remuneration of the non-executives is determined by the executive directors and reﬂects the time, commitment and responsibility of their roles. Remuneration policy The Company’s policy is that the overall remuneration package offered by the Company should be sufﬁciently competitive to attract, retain and motivate high quality executives and to align the rewards of the executives with the progress of the Company whilst giving consideration to salary levels in similar sized quoted companies in the sector and in the region. The remuneration package includes a signiﬁcant performance related element in the form of a proﬁt related bonus and share based awards. The share based awards are granted by the Remuneration Committee and only vest on the achievement of demanding targets aligned to shareholder returns. The details of individual components of the remuneration package and service contracts are set out below: Basic salary and beneﬁts Basic salary, car allowance and beneﬁts are reviewed annually. Beneﬁts principally comprise medical insurance. Bonus scheme The bonus scheme in operation is based on the achievement of group proﬁt targets. The proﬁt targets and bonuses are the same for all executive directors. Total bonus is capped at 150 per cent of basic salary. Non-executive directors do not participate in the Company’s bonus scheme. Incentive payments and beneﬁts are not pensionable. Share options The basic salary and the bonus scheme are intended as the most signiﬁcant part of directors’ remuneration; in addition, executive share options can be proposed by the Remuneration Committee and are granted periodically to promote the involvement of senior management in the longer term success of the Company. Options can only be exercised if certain performance criteria are achieved by the Company. For executive options these criteria are based on total shareholder return over the 3 year performance period and require the Company to be in the top half against a basket of food companies quoted on the London Stock Exchange. The comparison companies are ABF, Carrs Milling, Dairy Crest, Devro, Arla Foods, Glanbia, Greencore, Northern Foods, Robert Wiseman, Richmond Foods and Uniq. For the Long Term Incentive Plan (“LTIP”) approved at the 2006 Annual General Meeting half the shares granted under the LTIP are subject to an earnings per share (”EPS”) target measured against increases in the retail price index (“RPI”) and the other half to a total shareholder return (“TSR”) target measured against a comparable group of food companies. The comparison companies are Carrs Milling Industries plc, Dairy Crest Group plc, Devro plc, Arla Foods plc, Glanbia plc, Greencore Group plc, Northern Foods plc, Robert Wiseman Dairies plc, Premier Foods plc, RHM plc and Uniq plc. The EPS target allows 25 per cent of the shares subject to the target to be issued at nil cost at an outperformance of 3 per cent and 100 per cent of the shares at an outperformance of 7 per cent with outperformance between 3 and 7 per cent rewarded pro-rata. The TSR target allows 50 per cent of the shares subject to the target to be issued at nil cost at the 50th percentile and 100 per cent at the 75th percentile with performance between the 50th and 75th percentiles rewarded pro-rata. The Remuneration Committee, who decides whether performance conditions have been met, considers these to be the most appropriate measures of the long term performance of the Company. Directors may also apply for SAYE options on the same terms as apply to all other employees. Pensions Executive Directors are members of the Company “money-purchase” pension scheme. Employer contributions are determined by the service contracts. In some cases there are payments in lieu of pension contributions at the option of the individual. 73 Share price Pence 1150 1050 Cranswick plc – Report & Accounts 2007 Cranswick FTSE All share FTSE 350 Food producers 950 850 750 650 Service contracts 550 The service contracts for M. Davey, D. Black and B. Hoggarth ﬁrst commenced on 30 June 2004 and include notice periods which reduced to one year on 1 May 2006 except in the case of a takeover of the Company when the notice 450 period is 2 years for the ﬁrst six months following the takeover. J. Lindop and A. Couch have 1 year rolling contracts 350 which commenced on 30 June 2004 and 1 May 2006 respectively. N. Taylor has a 6 month rolling service contract, 250 which commenced on 4 September 1992, and P. Farnsworth and J. Worby have three year appointment letters from 150 1 August 2004 and 1 August 2005 respectively. The contracts for M. Davey, D. Black, B. Hoggarth and J. Lindop have special provisions relating to liquidated damages requiring that the notice period stipulated in the contract will be paid in full. For the other contracts the Remuneration Committee will consider the circumstances of an early November 2004 termination and determine compensation payments accordingly. November 2003 November 2002 November 2006 November 2005 May 2007 May 2006 May 2005 May 2002 May 2003 May 2004 50 Performance graph The graph below shows the percentage change (from a base of 100 in May 2002) in the total shareholder return (with dividends reinvested) for each of the last ﬁve years on a holding of the Company’s shares against the corresponding change in a hypothetical holding in the shares in the FTSE 350 Food Producers and Processors Price Index (“FTSE FPP”) and the FTSE All Share Index (“FTSE All Share). The FTSE FPP and the FTSE All Share were chosen as representative benchmarks for the business of the sector and the market as a whole for the business. Total shareholder return % Cranswick FTSE All share FTSE 350 Food producers 250 200 150 100 50 0 May 2002 November 2002 May 2003 November 2003 May 2004 November 2004 May 2005 November 2005 May 2006 November 2006 May 2007 Information subject to audit. Directors’ Remuneration The remuneration of directors for the year was as follows: Salary and fees Bonuses Beneﬁts Payment in lieu of pension contribution Pension contribution Aggregate notional gains made by directors on exercise of options 74 Source: Investec 2007 £’000 1,801 1,275 5 249 3,330 394 3,724 487 2006 £’000 1,827 402 6 249 2,484 348 2,832 693 Directors’ remuneration report Individual directors, including pension contributions: Salary and fees Bonus Other* Beneﬁts Total 2007 Total 2006 Pension 2007 Pension 2006 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Non-executive directors: PW Farnsworth RN Taylor JG Worby (2006 - from date of appointment) Executive directors: Dr. B Bell (to date of retirement) DJ Black MTP Davey B Hoggarth JD Lindop AH Couch 32 55 32 - 294 485 377 232 294 - - - - 255 255 255 255 255 - - - - 81 76 92 - - * Other comprises payments in lieu of pension contribution. - - - - 1 1 1 1 1 32 55 32 - 631 817 720 488 550 31 55 21 214 435 589 504 302 333 - 11 - - 55 94 71 108 55 - 11 - 3 53 84 65 84 48 The number of directors who were active members of the money purchase pension scheme during the year was 6 (2006 – 7). Beneﬁts principally comprise medical insurance. M Davey is a non-executive director of Thorntons plc. His fees in this capacity are paid to the Company; amounts receivable for the year ended 31 March 2007 were £34,458 (2006 – £31,125). J Lindop is a non-executive director of Black Sheep Brewery plc. His fees in this capacity are paid to the Company; amounts receivable for the year ended 31 March 2007 were £10,275 (2006 – £nil). Share Options The Company operates an executive share option scheme and a long term incentive plan for senior executives, including directors, and a savings related share option scheme which is available to all employees. The interests of the directors in these schemes were as follows: Executive share option scheme At 1 April 2006 Granted in the year Exercised in the year Lapsed At 31 March 2007 Exercise price Range of exercise dates No No No No p MTP Davey DJ Black AH Couch B Hoggarth JD Lindop 25,000 50,000 25,000 50,000 10,000 50,000 25,000 50,000 25,000 50,000 - - - - - - - - - - (25,000) - (25,000) - (10,000) - (25,000) - (25,000) - - - - - - - - - - - - 50,000 - 50,000 - 50,000 - 50,000 - 50,000 518.5 601.0 23 Dec 2005/22 Dec 2012 4 July 2008/3 July 2015 518.5 601.0 23 Dec 2005/12 Dec 2012 4 July 2008/3 July 2015 518.5 601.0 23 Dec 2005/22 Dec 2012 4 July 2008/3 July 2015 518.5 601.0 23 Dec 2005/22 Dec 2011 4 July 2008/3 July 2015 518.5 601.0 23 Dec 2005/22 Dec 2012 4 July 2008/3 July 2015 The executive share options of each director are exercisable subject to the attainment of performance criteria based on the total return to shareholders during the 3 year performance period being in the top half against a basket of food companies quoted on the London Stock Exchange. 75 Cranswick plc – Report & Accounts 2007 The following directors exercised executive share options during the year: MTP Davey DJ Black AH Couch B Hoggarth JD Lindop Number Date exercised Exercise price p Market price p Notional gain £’000s 25,000 25,000 10,000 25,000 25,000 8 Mar 2007 8 Mar 2007 8 Mar 2007 8 Mar 2007 8 Mar 2007 518.5 518.5 518.5 518.5 518.5 930.0 930.0 930.0 930.0 930.0 103 103 41 103 103 Long term incentive plan At 1 April 2006 Granted in the year Exercised in the year Lapsed At 31 March 2007 MTP Davey DJ Black AH Couch B Hoggarth JD Lindop No - - - - - No 25,000 25,000 25,000 25,000 25,000 No - - - - - No 25,000 25,000 25,000 25,000 25,000 - - - - - Weighted average exercise price p Range of exercise dates Nil 1 Sept 2009/1 Sept 2016 Nil 1 Sept 2009/1 Sept 2016 Nil 1 Sept 2009/1 Sept 2016 Nil 1 Sept 2009/1 Sept 2016 Nil 1 Sept 2009/1 Sept 2016 The options of each director under the Long term incentive plan are exercisable after 3 years on the attainment of certain performance criteria detailed on page 73. Savings related share option scheme At 1 April 2006 Granted in the year Exercised in the year Lapsed At 31 March 2007 MTP Davey DJ Black AH Couch B Hoggarth JD Lindop No 2,526 5,030 5,689 2,310 5,030 No - 534 - - 534 No - (2,406) - - (2,406) No 2,526 3,158 5,689 2,310 3,158 - - - - - Weighted average exercise price p Range of exercise dates 375 1 Mar 2008/1 Sept 2008 449 1 Mar 2008/1 Sept 2011 310 1 Mar 2009/1 Sept 2013 408 1 Mar 2008/1 Sept 2009 449 1 Mar 2008/1 Sept 2010 The Directors are eligible, as are other employees of the Group, to participate in the SAYE scheme, which by its nature does not have performance conditions. The following directors exercised savings related share options during the year: Number Date exercised Exercise Price p Market Price p Notional gain £’000s D J Black J D Lindop 2,406 2,406 1 March 2007 1 March 2007 264.0 264.0 985.0 985.0 17 17 The market price of the Company’s shares at 31 March 2007 was 940.0p per share. The highest and lowest market prices during the year for each share option that is unexpired at the end of the year are as follows: Options in issue throughout the year Options issued during the year: SAYE Executive Highest 1,021.0p 984.5p 1,021p Lowest 592.0p 927.0p 722.0p There have been no changes to the above interests in the period from 1 April 2007 to 11 May 2007. On behalf of the Board Patrick Farnsworth Chairman of the Remuneration Committee 21 May 2007 76 Report of the auditors to the members of Cranswick plc Independent auditor’s report to the members of Cranswick plc We have audited the Group and parent company ﬁnancial statements (the “ﬁnancial statements”) of Cranswick plc for the year ended 31 March 2007 which comprise the Group Income Statement, Group and Company Statements of Recognised Income and Expense, Group and Company Balance Sheets, Group and Company Cash Flow Statements and the related notes 1 to 31. These ﬁnancial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the ﬁnancial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the ﬁnancial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the ﬁnancial statements give a true and fair view and whether the ﬁnancial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the group ﬁnancial information, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Report of the Directors is consistent with the ﬁnancial statements. The information given in the Directors’ Report includes that speciﬁc information presented in the Operating and Financial Review that is cross referred from the Report of the Directors. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information speciﬁed by law regarding directors’ remuneration and other transactions are not disclosed. We review whether the Corporate Governance Statement reﬂects the Company’s compliance with the nine provisions of the 2003 FRC Combined Code speciﬁed for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures. We read other information contained in the Annual Report and consider whether it is consistent with the audited ﬁnancial statements. The other information comprises only the Report of the Directors, the unaudited part of the Directors’ Remuneration Report, the Statement to Shareholders, Review of Activities Food, Review of Activities Pet, the Group Operating and Financial Review, the Corporate Governance Statement and the Five Year Statement and Shareholder Information. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the ﬁnancial statements. Our responsibilities do not extend to any other information. 77 Cranswick plc – Report & Accounts 2007 Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the ﬁnancial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the signiﬁcant estimates and judgments made by the directors in the preparation of the ﬁnancial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufﬁcient evidence to give reasonable assurance that the ﬁnancial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the ﬁnancial statements and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: • the group ﬁnancial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group’s affairs as at 31 March 2007 and of its proﬁt for the year then ended; • the parent company ﬁnancial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 31 March 2007; • the ﬁnancial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and • the information given in the Report of the Directors is consistent with the ﬁnancial statements. Ernst & Young LLP Registered auditor Hull, 21 May 2007 78 Advisers Secretary John Lindop FCA Company Number 1074383 Registered Ofﬁce 74 Helsinki Road Sutton Fields Hull HU7 0YW Stockbrokers Investec Investment Banking – London Brewin Dolphin Securities – Newcastle Registrars Capita IRG plc The Registry 34 Beckenham Road Beckenham Kent, BR3 4TU Auditors Ernst & Young LLP – Hull Solicitors Rollits – Hull Bankers Lloyds TSB Bank plc The Royal Bank of Scotland plc Merchant Bankers N M Rothschild & Sons – Leeds 79 Cranswick plc – Report & Accounts 2007 Shareholder information Five year statement 2007 £’m IFRS 2006 £’m 2005 £’m Turnover 524.8 441.2 318.5 UK GAAP 2004 £’m 270.1 21.2 2003 £’m 237.7 19.8 Proﬁt before tax * Earnings per share * Dividends per share Capital expenditure (Net debt)/net funds Net assets 32.7 50.2 18.1 11.8 (75.9) 135.8 21.6 31.1 51.2 38.6p 35.8p 34.2p 16.5p 14.5p 13.2p 12.0p 14.3 (77.1) 112.4 19.1 10.0 (92.4) (13.3) 92.8 68.8 6.7 1.6 61.2 * prior to goodwill amortisation under UK GAAP; this is the principal difference between UK GAAP and IFRS. Dividends per share relate to dividends declared in respect of that year. (Net debt)/net funds is deﬁned as per note 26 to the accounts. Financial calendar Preliminary announcement of full year results Publication of Annual Report Annual General Meeting May July July Payment of ﬁnal dividend September Announcement of interim results November Payment of interim dividend January 80 Shareholder analysis at 11 May 2007 Classiﬁcation Private shareholders Corporate bodies and nominees Size of holding (shares) 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 50,000 50,001 – 100,000 Above 100,000 Share price Share price at 31 March 2006 Share price at 31 March 2007 High in the year Low in the year Number of holdings Number of shares 1,073 520 1,593 6,287,837 39,668,225 45,956,062 707 529 117 121 45 74 293,548 1,217,552 821,044 2,833,732 3,230,767 37,559,419 1,593 45,956,062 631.5p 940.0p 1,021.0p 592.0p Share price movement Cranswick’s share price movement over the ﬁve year period to May 2007 and comparison against the FTSE 350 Food Producers and Processors Price Index (“FTSE FPP”) and against the FTSE All Share Price Index (“FTSE All Share”) is shown below: 1150 1050 950 850 750 650 550 450 350 250 150 50 250 200 150 100 50 0 Share price Pence Cranswick FTSE All share FTSE 350 Food producers May 2002 November 2002 May 2003 November 2003 May 2004 November 2004 May 2005 November 2005 May 2006 November 2006 May 2007 Source: Investec Total shareholder return % Cranswick FTSE All share FTSE 350 Food producers 81 May 2002 November 2002 May 2003 November 2003 May 2004 November 2004 May 2005 November 2005 May 2006 November 2006 May 2007 Cranswick plc – Report & Accounts 2007 Some of the awards in recent years to Cranswick businesses BPEX Foodservice Pork Product of the Year Competition 2007 Gold Gold Silver Silver Best Innovative Pork Product – Pork Shanks Best Cured Product – Muscavado Sweetcure Streaky Bacon Best Cured Product – Muscavado Sweetcure Back Bacon Best Fresh Pork Cut – Hampshire Outdoor Reared Rib Roast Super Meat Awards 2007 Winner Best Pork or Bacon Product – Truly Irresistible Oak Smoked Dry Cured Back Bacon Finalist Best Pork or Bacon Product – Sainsburys Taste the Difference Slow Cook Outdoor Reared British Pork Belly Finalist Best Sausage Product – Sainsburys Taste the Difference British Pork and Caramelised Red Onion Sausages Finalist Best Organic Product – Sainsburys So Organic Dry Cured British Bacon 2005 Finalist Best Sausage Product – Aberdeen Angus Beef Sausage 2004 Winner Best Pork & Bacon Product Winner Best Product Overall – Both with Pork Rib Roast 2003 Finalist Best Beef Product – Monterey Jack Cheeseburger Meat Industry Award 2006 Winner Sausage of the Year – Sainsburys ‘Pancetta & Parmesan’ sausage Food Awards 2006 2006 Winner Best Packaging for a Product – Sainsburys Taste The Difference Dry Cured Sweet Cure Back Bacon British Turkey Awards 2006 Winner Best Ready to Eat Product award – Sainsburys Taste the Difference Free Range Turkey Breast 2003 Finalist Best Catering Product – Turkey & Pepper Kebabs Meat and Poultry News Awards 2005 Winner Manufacturer of the Year 2004 Winner Organic Meat Product of the Year – Duchy Organic Honey & Rosemary Chipolatas 2002 Winner Manufacturer of the Year Winner Organic Meat Product of the Year – Organic Pork Joint with Sage & Apple Stufﬁng Guild of Fine Food Retailers ‘Great Taste’ Awards 2005 Gold Smoked Streaky Bacon Silver Unsmoked Streaky Bacon Silver Bronze Pork Sausage Chilli and Coriander Sausage 2002 Gold Gold Silver Bronze Green Greek Olives Arista Pork Loin Chorizo Bavarian Ham 82 British Sandwich Association Awards 2005 Winner En-Route Retailer of the Year category Finalist British Sandwich Designer of the Year 2004 Winner En-Route Retailer of the Year category Winner Tuna Sandwich Designer of the Year Winner Hot & Spicy Sandwich Designer of the Year Winner British Sandwich Designer of the Year 2002 Winner En-Route Retailer of the Year category Food Development Agency Awards 2004 Winner Best Retail Product – Pork Range Yorkshire Annual Report Awards 2004 Winner Shareholder Value category 2003 Winner Shareholder Value category 2002 Winner Medium Quoted Company category Winner Shareholder Value category PFK Aquatic Awards 2004 Winner Best Test Kit – Salifert ph Proﬁ 2001 Winner Best Fish Food Product – Gamma Winner Best Test Kit – Salifert Winner Best Pond Clariﬁer – Pond Clear UV Winner Best Pump – Rio Aqua Pump Meat and Livestock Commission Awards 2003 Silver Best Catering Sausage – Smithﬁeld Sausage Pizza, Pasta and Italian Food Association Awards 2003 Winner Manufactured Pasta Product of the Year – Garlic Mushroom ﬁlled Pasta 2002 Finalist Pasta Retailer of the Year category Meat and Livestock Commission Awards 2002 Winner Retail Category – Ready to Eat/Heat to Eat – Smokey Joe Pork Wrap & Trinidad Pork Tortilla 2001 Winner Retail Category – Ready to Eat/Heat to Eat – Cajun Beef Ciabatta British Meat Awards 2002 Winner Food Service Lamb Product – Aloo Saag Lamb Chapatti Winner Retail Pork Product – Creole Pork Enchilada Wrap The London Stock Exchange PLC Awards 2002 Finalist Company of the Year 2001 Finalist Company of the Year 83 Cranswick plc – Report & Accounts 2007 Production facilities “ ...well invested quality assets ” Fresh pork Sausages Charcuterie Cooked meats 84 C r a n s w i c k p l c R e p o r t & A c c o u n t s Y e a r e n d e d 3 1 M a r c h 2 0 0 7 Registered ofﬁce: Helsinki Road, Sutton Fields, Hull HU7 0YW Tel. 01482 372000 www.cranswick.co.uk REPORT & ACCOUNTS Year ended 31 March 2007

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