Company Balance Sheet Hill & Smith Holdings PLC Annual Report 2003 Hill & Smith Holdings PLC Annual Report 2003 1 Group Activities Highway and off-highway safety barriers Highway parapets, gantries and pedestrian guardrails Fencing systems Large diameter plastic drainage and water pipes Street and highway lighting columns Corrugated steel structures Temporary highway and general workzone protection systems Galvanizing and powder coating Steel storage tanks Residential steel lintels and doors Steel reinforcement products Industrial flooring, handrail systems and structures Metal cladding building systems and ancillary products Metal stockholding Steel products Contents Financial Highlights Chairman’s Statement Operational Review Financial Review Directors, Advisers and Committees Directors’ Report Corporate Governance Directors’ Remuneration Report Statement of Directors’ Responsibilities Independent Auditor’s Report to the Members of Hill & Smith Holdings PLC Group Profit and Loss Account Group Balance Sheet Company Balance Sheet Group Cash Flow Statement Other Primary Statements Principal Accounting Policies Notes to the Financial Statements Principal Group Businesses Five Year Summary Financial Calendar Hill & Smith Holdings PLC Annual Report 2003 2 4 6 10 12 14 16 18 23 24 25 26 27 28 29 30 32 50 52 52 Front cover images Left to right: 1. Mass road workzone protection system 2. Crash testing of the Brifen wire rope safety system 3. Multiplate road tunnel 4. Ashtech architectural aluminium wall cladding system 5. Lintels and doors for the UK housing market Company Balance Sheet Hill & Smith is a decentralised group with specialisations primarily serving the infrastructure, building and construction industries. Channel Tunnel Rail Link, Medway Crossing and A2/M2 Upgrade. Vehicle parapets and pedestrian guardrail panels supplied by Varley & Gulliver, noise barriers supplied by Barkers Engineering, crash barrier, Multiplate and Varioguard supplied by Hill & Smith Hill & Smith Holdings PLC Annual Report 2003 Hill & Smith Holdings PLC Annual Report 2003 1 1 Financial Highlights ❚ Turnover up 13.6% ❚ Profit before exceptional items and goodwill amortisation down £0.2m after absorption of £1.0m of additional pension costs ❚ Dividend increased by 2.2% ❚ Continuation of strong capital investment and product development programme 2003 Year 2002 Year Turnover £241.7m £212.7m Operating profit* Profit before taxation* Earnings per share* Dividend per share £13.6m £9.8m 11.54p 4.6p £14.0m £10.0m 11.79p 4.5p * Before exceptional items and goodwill amortisation. Major Projects in 2003 2 Hill & Smith Holdings PLC Annual Report 2003 32 4 1 2 3 4 6 M25, Varioguard M6/M6 Toll Road approach, Aluminium gantry fascias supplied by Varley & Gulliver Railway tunnel at Stockton-on-Tees, East Coast Mainline. Super.Cor supplied by Asset International New world headquarters for the Royal Bank of Scotland Group in Edinburgh, reinforcing bar supplied by Express Reinforcements. 5 6 7 Channel Tunnel Rail Link, products supplied by various Group companies to this major infrastructure project M8 Scotland, Junction 10. Abcite® coated high mast lighting columns supplied by Mallatite Terminal 5 at Heathrow Airport, reinforcing bar supplied by Express Reinforcements. Hill & Smith Holdings PLC Annual Report 2003 3 5 7 Chairman’s Statement General Cash Flow and Gearing I am pleased to report another year of improvement in our The Company’s ability to generate healthy cash flow underlying businesses in 2003. Turnover at £241.7 million continued and the net debt at December 2003 was £36.5 was 13.6% ahead of the previous year which represented million (2002: £44.9 million) representing gearing of 96% a mix of real organic growth and inflation due to rising (2002: 125%). steel prices. Operations Operating profit before goodwill amortisation and Our infrastructure products businesses continued to exceptional items was £13.6 million compared with £14.0 million in the previous year representing a fall of 3.0%. make progress against a background of public expenditure programmes and our galvanizing plants However, if the additional pension scheme costs of £1.0 achieved a record throughput in the year. The acquisitions million are taken into account, the underlying figure of Brifen and Mallatite Limited made in 2002 have now improved by 4.3%. Profit before taxation increased from been fully integrated into our Group. Overall, the Building £6.5 million to £7.0 million. Following a further reduction in and Construction Products division contributed 92% of interest charges in 2003 the profit before exceptional our adjusted operating profit. Our progress during the items and goodwill amortisation was £9.8 million (2002: year, however, was restrained by costs associated with £10.0 million) representing a 1.9% fall but again, if the the launch of new products and expenditure relating to additional pension scheme costs are taken into account, our ongoing product development programme, which will the underlying performance improved by 8.5%. provide enhanced contributions in the future. Adjusted earnings per share for the year were 11.54p The Industrial Products division contributed 8% of our (2002: 11.79p). This was adversely affected by the adjusted operating profit and we continue to manage pension costs and represented a decline of 2.1%. these non-core businesses in an appropriate manner. Excluding the pension effect, adjusted earnings per share During the year the loss-making Wombwell Foundry grew by 7.9%. Limited was closed and the SI Pressure Instruments business was sold to a strategic purchaser. Terminal 5 complex at Heathrow airport, projected to open in 2008 4 Hill & Smith Holdings PLC Annual Report 2003 “Our infrastructure products businesses continued to make progress against a background of public expenditure programmes and our galvanizing plants achieved a record throughput in the year.” Permanent installation of Varioguard protecting a weak railway bridge parapet in Northamptonshire Dividends The Board is recommending a further increase in our dividend payment in line with our policy since 2001. A final dividend of 2.45p will be paid subject to shareholder approval (2002: 2.40p) making a total for the year of 4.6p (2002: 4.5p). The dividend is covered 2.5 times by adjusted earnings. Pensions As mentioned previously, the Group has absorbed additional pension costs in 2003. At 31 December 2003 our FRS17 deficit after tax was £2.6 million which was similar to the December 2002 figure. Employees The business environment in which we operate becomes ever more demanding and competitive and I would like to thank all our employees for their significant contribution to our financial performance during the year. Our best wishes go to Howard Everett who was an Executive Director and Company Secretary. He left the Company at the end of the year having been with Hill & Smith Holdings PLC since 1990. Outlook Our strategy and focus remain unchanged and we continue to concentrate our future investment into the building and construction businesses where we have significant market shares. The current trading period has started in line with our expectations and, subject to market conditions remaining favourable, I look forward to another satisfactory performance in 2004. David Winterbottom Chairman 16 March 2004 Hill & Smith Holdings PLC Annual Report 2003 5 Operational Review Further progress was made by the majority of our We are continually improving our products and operating companies during 2003, particularly in the area developing new products to complement our present of our core competencies where we have significant range. Our product development programme is totally market shares. We continued to develop and launch new focused on the launch of new innovative solutions to products to complement our current portfolio in response enhance the safety of our roads and improve traffic flows to our perceived requirements from the markets we wherever possible. It is a sad fact that approximately ten supply. Some examples can be seen from illustrations on people per day are killed on our roads in the UK and many the pages of this report. Our new and improved product more suffer serious injury. The problems with traffic development pipeline will be the engine for further growth the together with strategic acquisitions when congestion are well documented and opportunities represent for our product development and opportunities arise. acquisition strategy. These challenges will continue to test our resourceful and innovative approach as the number of Building and Construction Products road vehicles continues to increase in both our domestic Turnover was substantially ahead during the year at and export markets. We have entered into a number of £203.4 million (2002: £162.7 million) as sales prices were term maintenance agreements with major contractors in increased in response to rising raw material input costs. In order to respond to their servicing requirements. Our addition, there was a full year contribution from the two temporary crash barrier rental fleet of Varioguard acquisitions made in 2002 and new contract wins. products was increased further during the year in However, operating profits fell from £13.3 million in 2002 response to further demand from highways applications. to £12.5 million in 2003. If the effect of the increased Further improvements to this product were made pension contributions is taken into consideration, the including a new interlocking mechanism which enables 2003 outcome would have been similar to 2002. The lack this product to be installed at a rate of over 400 metres of progress at operating profit level was further hampered per hour. In 2002 we made two acquisitions — Brifen (wire by poor performances from two of our businesses. These rope safety restraint systems) and Mallatite (lighting issues have already been addressed and we are columns). These businesses were an excellent strategic confident that these businesses will respond positively. fit and have been fully integrated into the IPG portfolio. We The Infrastructure Products Group (“IPG”) continued licensing opportunities and we have recently successfully successfully to market its various brands and products in tested the product for the American market. Mallatite a cohesive manner to common customers and capitalise commenced the supply of lighting columns on the on its excellent reputation for service, delivery and quality. Sunderland PFI contract and two further PFI contracts at have further developed Brifen’s export potential and Sequence showing testing of the Brifen wire rope system for the US market 6 Hill & Smith Holdings PLC Annual Report 2003 Varioguard in action saving lives in crossover accidents. Highway was reopened in thirty minutes. No injuries sustained Islington and Wakefield have now been secured. Major contracts completed during the year included barrier systems on the M8 in Scotland, off-road barrier solutions for Asda and Sainsbury’s and the first installation of our new Super.Cor Multiplate product over the East Coast Main Line at Stockton-on-Tees. Our export business also increased during the year and included a contract for the supply of our crash barrier system to Jamaica. Our market leading galvanizing businesses, which now represent 26% of the UK market, had a record year and processed well in excess of 200,000 tonnes. During the year there were significant cost increases which affected the whole industry and over which we had little control. However, the continued investment programme in our major facilities is providing a solid base for servicing the market and meeting customer expectations. The UK market for galvanized components, as the following graph reflects, continues to grow and our modern facilities are well placed to take advantage of this in the future. General galvanized steel consumption Total UK Market “Our product development programme is totally focused on the launch of new innovative solutions to enhance the safety of our roads and improve traffic flows wherever possible.” s ’ 0 0 0 S E N N O T 850 800 750 700 650 600 550 500 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 YEAR Source: Galvanizers Association The remaining businesses in this division had a mixed year. Much improved performances were achieved by Birtley Building Products and Express Reinforcements against a competitive market background. Birtley is now the only producer of the technically superior post galvanized steel lintel and its residential door business made further progress in the year. Express was affected by surging demand from the Terminal 5 contract and Hill & Smith Holdings PLC Annual Report 2003 7 5 6 7 8 9 Prefabricated pile cage supplied from Express Reinforcements’ joint venture at Terminal 5, Heathrow Sologuard allowing emergency service access crossing points to opposite carriageway Super.Cor structure for rail tunnel applications supplied by Asset International Ashzip standing seam roofing system Brifen wire rope safety Slope Fence, specially developed for the Swedish market 3 6 4 0 0 2 / 3 0 / 5 2 — 2 0 F O O R P — 5 3 9 6 B O J New Products 1 2 Juliet balconies supplied by Birtley Building Products for housing developments nationwide Group Balance Sheet Storm water attenuation tank designed and manufactured by Asset International to reduce installation time by 80% 3 4 Quick Joints, new Interlocking joints by Varioguard for quicker installation Rollmat, introduced by Express Reinforcements during the year to speed up on-site installation of reinforcing bar 1 4 7 8 2 5 9 8 Hill & Smith Holdings PLC Annual Report 2003 Operational Review continued managing this level of activity challenged the management team to new highs. The new Rollmat reinforcing bar product was launched by Express during the year and has been extensively utilised on the Terminal 5 project where this product has speeded up the traditional process for laying down reinforcing bar. Redman Fisher had a difficult year which necessitated restructuring and management changes. The new management team has now been installed and it is starting to deliver an improved performance. Ash & Lacy School building refurbished using Ashzip (standing seam roof), Ashjack (over roof conversion system), Ashfab (fabrications), Ashgrid (spacer support system), Ashflow (rainwater goods), and Ashfix (fasteners), all products supplied by Ash & Lacy Building Systems Building Systems had a buoyant year in its traditional operation, Pipe Supports returned to profitability during the markets but its profits were adversely affected by the year and we are now actively expanding our low cost start-up costs of a new product range which, however, Thailand operation. Our stockholding and other offers the prospect of substantially larger market and commodity-based operations continued to generate cash profit opportunities in the future. although profitability was limited by poor market conditions. All the companies in the Building and Construction The other smaller businesses in this division continue to Products division were affected by steel price increases exploit niche market opportunities and, following a during the year and the necessity to pass these increases significant marketing effort, Bromford Iron and Steel on to our customers. We have managed these problems outperformed our expectations. In general terms this extremely well and further steel price increases are in the division, although not core to the Group’s activities, pipeline during 2004 owing to unprecedented increases continues to generate good cash flows. in demand from China and the capacity constraints of the declining European steel industry. Conclusion The whole of this division continues to cross sell our continue to win new business at a healthy rate. Many of various products and services on major projects in the our products are cross sold on both major infrastructure UK. These included the M8/A8 upgrade in Scotland, projects and smaller more localised construction sites. A2/M2 Medway Bridge in Kent, the Channel Tunnel Rail Wherever possible, our new products aim to be Link and Terminal 5 at Heathrow Airport. technically superior to our competition and also offer cost Our construction and building products businesses Industrial Products saving opportunities to our customers. We remain disciples of the philosophy ‘innovate or die’ and look In 2003 sales of £38.3 million (2002: £50.0 million) were forward to delivering an improved performance in 2004 achieved, resulting in profits of £1.1 million (2002: £0.7 from our robust and ever strengthening business units. million). This division performed with considerable credit against a background of poor market conditions. As indicated in last year’s review, Wombwell Foundry was closed in 2003 and the majority of exceptional costs relate to the termination of this loss-making business. On a more positive note SI Pressure Instruments was disposed of during the year to a strategic purchaser for a price equivalent to turnover. Also, following the closure of its US David Grove Chief Executive 16 March 2004 Hill & Smith Holdings PLC Annual Report 2003 9 Financial Review “The year saw a further strengthening in our financial position.” These results cover the twelve months to 31 December 2003. They include for the first time a full year’s increased by 25.0% to £203.4 million (2002: £162.7 million). Most of this increase was due to further expansion of our infrastructure product and steel reinforcing operations, including the Heathrow Terminal 5 project. In contrast, sales by the Industrial Products division fell 23.5% to £38.3 million (2002: £50.0 million). £7.6 million and 15.2% of this decrease was attributable to SI Pressure Instruments and Wombwell Foundry, as mentioned above. Excluding this effect, the underlying like for like decline was £4.1 million or 8.3% which reflects the continuing difficult market conditions for these contribution from Mallatite which we acquired in August businesses. 2002 and only minor contributions from SI Pressure Instruments and Wombwell Foundry which were respectively sold and closed during the year. Summary of Results The year’s results were characterised by a strong growth in sales but with a reduction in gross margins and higher overheads, including a substantial increase in net pension and social security costs. Operating cash flow remained strong. Group turnover increased by 13.6% to £241.7 million (2002: £212.7 million). This growth arose from our core Building and Construction Products division where sales The higher overheads include an increase in net pension costs of £1.0 million arising from the new actuarial valuations of our two Group schemes. Overall, Group adjusted operating profit before exceptional items and goodwill amortisation fell marginally to £13.6 million (2002: £14.0 million). However, adjusting for the effects of the higher net pension costs, underlying adjusted operating profits grew by 4.3%. Net exceptional charges amounted to £1.2 million. This included a charge of £1.8 million in respect of the termination of operations, primarily the costs of closing Wombwell Foundry Limited which we advised in last year’s report. We also completed the sale of the SI Pressure Instruments business which gave rise to a gain of £0.5 million and we generated a further profit of £0.1 million from the sale of surplus properties. Combined sewer and storm water overflow tank, Bradford. AMP3 project for Yorkshire Water. 10 Hill & Smith Holdings PLC Annual Report 2003 Work in progress at Terminal 5, Heathrow Airport Interest Interest costs fell 5.9% to £3.8 million (2002: £4.0 million) During the year we reorganised our borrowing mainly as a result of lower average net borrowings, with arrangements through a new £67.5 million five year term adjusted interest cover improving to 3.6 times. and revolving credit facility with a group of leading banks. Taxation With additional overdraft and hire purchase facilities, we have substantial financing resources to support our The effective tax rate on profits before exceptional items programme of organic growth and corporate and goodwill amortisation was 27.6% compared to the development. standard rate of 30%, mainly as a result of adjustments relating to prior years. Earnings per share Adjusted earnings per share before exceptional items and goodwill amortisation amounted to 11.54p, a reduction of 2.1% compared to last year. Excluding the effects of the increase in pension costs, underlying adjusted earnings per share grew by 7.9%. Dividends In line with our progressive dividend policy, we again propose to increase the level of the distribution to shareholders. The proposed final dividend, together with the interim dividend already paid, makes a total for the year of 4.6p per share and represents an increase of 2.2% from last year. Based on adjusted earnings, this level of dividend is covered 2.5 times. Financing and borrowings The year saw a further strengthening in our financial position. Year end net borrowings fell to £36.5 million (2002: £44.9 million) and net assets increased to £38.0 million (2002: £35.9 million) resulting in year end gearing of 96% (2002: 125%). The year end borrowing position was boosted by strong seasonal cash flow effects and by some special one-off factors, in particular £5.2 million of advance payments received in connection with our Terminal 5 Joint Venture. Despite the large increase in turnover, we again reduced working capital. We also maintained our programme of capital expenditure, investing a total of £6.5 million, £0.9 million in excess of depreciation. Pensions Increases in inflation expectations offset most of the beneficial effects from the partial recovery in equity asset values. As a result our year end net FRS17 funding deficit remained at £2.6 million. Further information is given in note 23 to the Financial Statements. International Financial Reporting Standards European listed groups are required to adopt International Financial Reporting Standards (“IFRS”) for their financial statements from 2005, including comparative information for 2004. The Group is assessing the impact of IFRS on its published financial statements on an ongoing basis, as the standards are themselves evolving. Chris Burr Finance Director 16 March 2004 Hill & Smith Holdings PLC Annual Report 2003 11 Directors, Advisers and Committees Executive Directors Non-executive Directors D L Grove BA, FCA Deputy Chairman and Chief Executive David, aged 55, joined the Board in 1998. He is a Non- Executive Director of a number of private manufacturing, distribution and investment companies. He is President of the Birmingham Chamber of Commerce and Industry and the Chairman of the West Midlands Industrial Development Board. C J Burr FCA Finance Director Chris, aged 54, joined the Board in 2000. He was previously Group Finance Director of Ash & Lacy Plc, whom he joined in 1990 from European Home Products plc having previously held a variety of positions with Singer Company Inc. in the UK and Continental Europe. D S Winterbottom FCA, FCT Chairman David, aged 67, joined the Board in 1997. He is Chairman of CPL Industries Limited and Wightlink Shipping Limited. He is also Non-Executive Director of Electrocomponents PLC. H C Marshall MSc, BSc Howard, aged 60, joined the Board in 2000. He was previously Chief Executive of Ash & Lacy Plc. He is currently Vice-Chairman of West Midlands CBI, Board Member of West Midlands Industrial Development Board, Member of West Midlands Chamber of Commerce Council and Governor of the University of Central England. R E Richardson FCMI Dick, aged 64, joined the Board in 1997. He is Chairman of an industrial investment company, GW 685 Limited. He was previously Chairman and Chief Executive of Graystone PLC, Deputy Chairman and Managing Director of Goring Kerr PLC and Managing Director of Tace PLC. Executive Directors Chris Burr, left; David Grove, right Non-executive Directors from left: David Winterbottom, Howard Marshall, Dick Richardson 12 Hill & Smith Holdings PLC Annual Report 2003 Life President John G Silk LLB (Lond.) John, aged 79, joined the Board in 1981 and was Chairman from 1983 to 1995. He retired from the Board and was appointed Life President in 1999. Audit Committee Messrs Winterbottom, Marshall and Richardson (Chairman). Remuneration Committee Messrs Winterbottom, Marshall (Chairman) and Richardson. Registered Office 2 Highlands Court, Cranmore Avenue, Shirley, Solihull, B90 4LE Company Number 671474 Registrars Computershare Investor Services PLC PO Box 82, Bridgwater Road, The Pavilions, Bristol, BS99 7NH Auditor KPMG Audit Plc 2 Cornwall Street, Birmingham, B3 2DL Bankers Barclays Bank PLC Colmore Row, Birmingham, B3 2WN Solicitors Silks, Oldbury, West Midlands Wragge & Co, Birmingham Howes Percival, Northampton Stockbrokers Arbuthnot, Birmingham Financial Adviser Stafford Corporate Consulting Limited, London Hill & Smith Holdings PLC Annual Report 2003 13 Directors’ Report The Directors present their forty-third annual report Directors and Directors’ interests together with the financial statements for the year ended The names and biographical details of the Directors 31 December 2003. Trading review holding office at the date of this report are shown on page 12. H C Everett resigned with effect from 31 December 2003. The Directors retiring by rotation are C J The Chairman’s Statement on pages 4 and 5 and the Burr and H C Marshall who, being eligible, offer Operational and Financial Reviews on pages 6 to 11 themselves for re-election. contain a review of the trading for the year, a statement as to the current trading position and an indication of the The interests of the Directors in office at the year end and outlook for the future. Principal activities The principal activities of the Group companies are: their families in the ordinary shares of the Company according to the register required to be kept by the Companies Act 1985, and their options, are disclosed on pages 19 and 21. Building and Construction Products No Director had any interest in any material contract or Industrial Products arrangement in relation to the business of the Company or any of its subsidiaries during the year. Dividends The Directors recommend a final dividend of 2.45p per Donations share to be paid on 13 July 2004 (2002: 2.4p), which, Charitable donations amounting to £6,000 (2002: £3,000) together with the interim dividend of 2.15p paid on were made in the year. There were no political 9 January 2004, makes a total distribution for the year of contributions. 4.6p (2002: 4.5p). Employees Supplier payment policy Individual operating companies within the Group are The Group aims to give a high level of autonomy to its responsible for establishing and adhering to appropriate subsidiary undertakings and to make its employees policies with regard to the payment of their suppliers. The aware of the financial and economic factors affecting the companies agree terms and conditions under which performance of the employing company. This is achieved business transactions with suppliers are conducted. The by consultative policies such as the issue of newsletters Group does not follow any code or standard on payment and management briefings. practice but it is the Group’s policy that, provided a supplier is complying with the relevant terms and The Group has a consistent policy which ensures equal conditions, including the prompt and complete consideration to applications for employment from any submission of all specified documentation, payment will persons including disabled persons. The same equal be made in accordance with agreed terms. It is Group consideration for training and career development is policy to ensure that suppliers know the terms on which maintained within the Group. payment will take place when business is agreed. The average credit period was 81 days (2002: 92 days). The Company’s average credit period was 35 days (2002: 39 days). 14 Hill & Smith Holdings PLC Annual Report 2003 Research and Development Auditor During the year the Group spent a total of £60,000 (2002: In accordance with Section 385 of the Companies Act £133,000) on research and development. 1985, a resolution for the reappointment of KPMG Audit Plc as auditor of the Company is to be proposed at the Substantial shareholders forthcoming Annual General Meeting. The Company has been notified of the following substantial shareholdings of 3% or more of the issued Capital gains tax share capital on 16 March 2004: For capital gains tax purposes the price of the Company’s % of issued Ordinary shares share capital Special business of the Annual General Meeting ordinary shares of 25p each at 31 March 1982 was 12p. The Annual General Meeting will be held on 18 May 2004 at 10.30 a.m. in the Balcony Suite, at The National Motorcycle Museum, Solihull. Notice is sent to shareholders separately with this Report together with an explanation of special business to be considered at the meeting. By order of the Board Chris Burr Company Secretary 16 March 2004 G Hampson Silk P J Hampson Silk 4,178,501 4,183,502 Funds managed by: Close Securities Limited Caledonia Investments plc 7,176,733 5,155,738 ISIS Asset Management plc 2,970,664 6.77 6.78 11.63 8.36 4.79 Close Securities Limited has granted an option to D L Grove (see page 21). Of G Hampson Silk’s ordinary shares, 3,340,959 are either registered in his own name or his wife’s name. Of P J Hampson Silk’s ordinary shares, 3,340,960 are registered in his own name or his wife’s name and 5,000 are held for him in the name of a nominee company. Of the remaining ordinary shares of both G Hampson Silk and P J Hampson Silk, 730,876 are registered in the name of a private limited company of which they are both directors and of which they each have control of more than one-third of the voting power at general meetings of that company and a further 106,666 are held in two discretionary trusts of which they are both trustees. The Directors have not received notification of other substantial shareholdings according to the Company’s share register on 16 March 2004. Hill & Smith Holdings PLC Annual Report 2003 15 Corporate Governance The Board is pleased to report that the Company Directors may also be invited to attend meetings. The complies, except where stated otherwise, with Section 1 Company’s auditor is invited to attend at least two of The Combined Code (“the Code”) issued by the UK meetings during the year. Listing Authority and has done so in all material respects throughout the year. Remuneration Committee The Remuneration Committee comprises the Chairman With effect from 1 January 2004 a new Combined Code and the Non-Executive Directors and meets as and when issued by the Financial Reporting Council became required. It is responsible for determining the applicable to the Group. The Board is considering the remuneration packages of the Executive Directors and for additional requirements of the new Code and wherever advising on remuneration policy for senior executives. In practicable will seek to comply during 2004. addition, it also administers the Company’s 1995 and The Board and Board committees The Board 1999 executive share option schemes. Remuneration policy The Board of Directors meets at least nine times a year Details of the Company’s remuneration policy is provided and has a list of matters specifically reserved for its in the Directors’ Remuneration Report on pages 18 to 22. decision. Relations with shareholders All Directors are required to stand for re-election at the Members of the Board meet regularly with institutional first Annual General Meeting following their appointment shareholders, mainly in the periods following the and at least every three years by rotation thereafter. announcement of the interim and final results, but also at other times during the year. The Board also encourages The Company has experienced Non-Executive Directors the attendance of all shareholders at its Annual General who represent a source of strong independent advice and Meeting, which is held at a convenient location and time. judgement. Their remuneration is set by the Board in line with market levels. Non-Executive Directors are not The Company arranges for the notices of the Annual appointed for specified terms as required by the Code. General Meeting and related papers to be sent to The senior independent Non-Executive Director is R E shareholders and gives at least twenty working days’ Richardson. notice in advance of the meeting. At general meetings, the Company counts all proxy votes and, except where a A procedure is in place to allow Directors to take poll is called, indicates the level of proxies lodged on independent professional advice if necessary at the each resolution giving the balance for and against the Company’s expense. All Directors have free access to the resolution, after it has been dealt with on a show of hands. advice and services of the Company Secretary. Nomination Committee The Board has overall responsibility for the Group’s Owing to the small size of the Board a Nomination system of internal control, which is designed to manage Committee, as required by the Code, is not deemed rather than eliminate risk and can provide only reasonable Internal control appropriate. Audit Committee assurance against material misstatement or loss. The Board confirms that the system of internal control accords with the guidance issued in September 1999 by the The Audit Committee meets at least three times a year Institute of Chartered Accountants in England and Wales and comprises the Chairman and the Non-Executive (the “Turnbull Committee Guidance”). There is an ongoing Directors, with written terms of reference. The Executive process for identifying, evaluating and managing risks. 16 Hill & Smith Holdings PLC Annual Report 2003 In order to discharge its responsibility in a manner which The Directors report that they have undertaken during the ensures compliance with laws and regulations and year a formal review of the effectiveness of the Group’s promotes effective and efficient operations, the Board of Directors has established an organisational structure with clear operating procedures, lines of responsibility and delegated authority. system of internal controls, including strategic, operational, legal and compliance, risk management and financial controls. The review revealed nothing which, in the opinion of the Board, indicated that the system was inappropriate or unsatisfactory. In particular, there are clear procedures for: — capital investments, with detailed appraisal and authorisation — financial reporting, within a comprehensive financial planning and accounting framework — monitoring of business risks, with key risks identified Responsibility for monitoring the system of internal financial control is delegated by the Board to the Audit Committee which has the following processes to discharge its responsibility: — whilst there is no formal internal audit function, reports covering financial control weaknesses at specific operations are produced on an ad hoc basis and reported to the Board and Audit Committee and are reviewed by the Audit Committee In addition, the Executive Directors maintain close and frequent contact with the management of each operating company, including regular performance review meetings. The Chairman of the Audit Committee reports the outcome of its meetings to the Board and the Board receives the minutes of all Audit Committee meetings. — recommendations made by the external auditor as a result of the annual audit process are reviewed by the Audit Committee — issues identified internally and by the external audit process are discussed with management and action plans put in place to address the issues The Board has considered the need for a formal internal audit function and an appropriate appointment has During the year the Board undertook a formal risk review recently been made. to address the wider non-financial issues facing the Group. This was based on each operation producing or Going concern updating a register identifying their key risks, the After making enquiries, the Directors have a reasonable probability of those risks occurring, their impact if they do expectation that the Company and its subsidiaries have occur and the actions being taken to manage those risks 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. to the desired level. This information was then passed up on a filter basis culminating in the production of a Group risk register. This identifies the key risks facing the Group across all its businesses under a number of generic risk areas. These risks are discussed at executive meetings and a reporting routine has been established for regular reviews and reporting to the Audit Committee. The Board reviews the Group risk register and receives regular reports from the Executive Directors on any major problems that have occurred and how the risks have changed since their initial identification. Hill & Smith Holdings PLC Annual Report 2003 17 Directors’ Remuneration Report The Remuneration Committee The Remuneration Committee comprises the Chairman, Performance-related cash bonuses D S Winterbottom, and the two Non-Executive Directors, H Under his service agreement D L Grove receives an C Marshall, who chairs the Committee, and R E annual performance-related cash bonus dependent upon Richardson. It is responsible for determining all aspects of the increase in the Group earnings per share (as therein the remuneration packages of Executive Directors and defined) in accordance with the formula set out in that key senior executives and consults with the Chief agreement. This bonus is capped at 75% of basic annual Executive on its proposals. The Committee used the salary. Bonuses for C J Burr are awarded on the basis of services of Mellon Resources and Investor Solutions who the Group’s achievement of internal cash and profit were appointed by the Committee to advise whether targets and, where deemed appropriate by the remuneration paid is appropriate. Mellon Resources and Committee, supplementary discretionary bonuses. Investor Solutions provide no other services to the Company. The members of the Committee have no Share options personal financial interest, other than as shareholders, in The Company has three share option schemes under the matters to be decided, no potential conflicts of interest which options can be granted to Executive Directors and arising from cross-directorships and no day-to-day senior executives. Two of those schemes are executive involvement in running the business. share option schemes (“the 1995 Executive Share Option Remuneration policy Scheme” and “the 1999 Non-Approved Executive Share Option Scheme”) which are administered by the The remuneration policy is set by the Board as a whole Remuneration Committee, and the other scheme is a with the Remuneration Committee then working within the savings related share option scheme (“the 1995 Savings policy to set individual executive remuneration. Related Share Option Scheme”). The basic object of the policy is to ensure that the Options granted under the two executive share option remuneration packages offered are designed to attract schemes cannot be granted at less than market value and retain Executive Directors and key senior executives and, subject to limited exceptions, can only be exercised of the right calibre and motivate them to make the if specified performance criteria are met. The maximum possible contribution to the Group and to performance criterion currently set by the Remuneration increase shareholder value. The remuneration packages Committee under both executive share option schemes is consist of a basic salary and certain benefits in kind, that options may only be exercised if the growth in performance related cash bonuses, share options and earnings per share of the Group before exceptional items pension benefits. In framing its remuneration policies, full and goodwill amortisation over a 3 year period is not less consideration has been given to Schedule A of the than the increase in the Retail Price Index plus 6 per cent Combined Code. over the same period. The criterion was set to ensure that earnings attributable to the shareholders increased at a Remuneration of Executive Directors rate in excess of inflation prior to any exercise of options. The main elements of the remuneration package for Executive Directors are: Options granted under the 1995 Executive Share Option Scheme must be exercised between 3 and 10 years after Basic salaries and benefits in kind the date of grant and options granted under the 1999 Basic salaries are determined by the Remuneration Non-Approved Executive Share Option Scheme must be Committee, taking into account the performance of each exercised between 3 and 7 years after the date of grant. individual and the rates of salary for similar positions in In granting options under the two executive share option comparable companies. The salaries are reviewed annually schemes, the Remuneration Committee takes into as at 1 January or when a change of responsibilities occurs. account the salary grade of that individual. Benefits in kind provided are in the main a company car and fuel and private health care insurance. 18 Hill & Smith Holdings PLC Annual Report 2003 The 1995 Savings Related Share Option Scheme is open C J Burr may terminate his service agreement with the to all employees, including Executive Directors, who have Company by giving six months’ notice. The Company may completed 6 months’ continuous service. Under this terminate the agreement by giving twelve months’ notice scheme the Company can, if it thinks fit, grant options at but if the notice is given within the period of twelve months a price up to 20 per cent below the market price. immediately following a Change in Control the notice to be Directors’ pension entitlement given by the Company must not be less than eighteen months. On termination of the service agreement by the C J Burr participates in the Hill & Smith Executive Pension Company without proper notice Mr Burr is under a duty to Scheme which provides pensions and other benefits mitigate any loss unless such termination is effected within within Inland Revenue limits. The scheme provides, at the period of twelve months following a Change in Control. normal retirement age, a maximum pension of two-thirds D L Grove’s service agreement is terminable by either of the final pensionable salary, subject to completion of a sufficient number of years’ service. Bonus is excluded party on twelve months’ notice but during the period of ninety days following a Change in Control the period of from the definition of pensionable salary. H C Everett, who notice required to be given by the Company to Mr Grove resigned with effect from 31 December 2003, also is increased from twelve months to eighteen months and participated in this scheme during the year. There are no the period of notice required to be given by Mr Grove to pension arrangements in place for other directors. the Company is reduced from twelve months to ninety Remuneration of Chairman and Non-Executive Directors following a Change in Control, the service agreement is The remuneration of the Chairman is determined by the terminated by Mr Grove or is terminated by the Company Board after recommendations made by the other without proper notice, Mr Grove is entitled to a sum equal days. If, during the period of ninety days immediately members of the Remuneration Committee. The to eighteen months’ salary. remuneration of the two other Non-Executive Directors is determined by the Board following recommendations The dates of the contracts are as follows: made by the Chairman. Service agreements D S Winterbottom D L Grove The Chairman and the two Executive Directors have C J Burr service agreements with the Company. The Company policy on contracts is that twelve months’ notice is due if Directors’ interests 4 March 1999 9 July 1999 20 June 2001 terminated by the Company except after a Change in Directors’ shareholdings at the end of the financial year Control when the period is eighteen months. were as follows: The Chairman’s service agreement is terminable by either party on twelve months’ notice but if a Change in Control of the Company takes place the Chairman may at any time within the twelve month period immediately following such Change in Control terminate the agreement by ninety days’ notice instead of twelve months’ notice. In the event of the service agreement being terminated by either party within the twelve month period immediately following such Change in Control the terms of the contract are payable in full without mitigation. D S Winterbottom D L Grove R E Richardson C J Burr H C Marshall 31 December 2003 31 December 2002 15,690 540,945 3,518 62,628 68,601 15,690 540,945 — 62,628 68,601 There have been no changes in the above figures between the year end and the present date. Hill & Smith Holdings PLC Annual Report 2003 19 Directors’ Remuneration Report continued Total Shareholder Return Under Statutory Instrument 2002 Number 1986, we are now required to show the total shareholder return over 5 years in graphical form against a broad equity index; the graph is shown below. The indices selected are the FTSE All Share Index and the FTSE Small Capitalisation Index, which are broadly based indices of shareholder return. Hill & Smith Holdings PLC 5 Year relative performance n r u t e R % 60 40 20 0 -20 -40 1999 2000 2002 2003 2001 Year Hill & Smith FTSE All Share FTSE Small Cap The graph shows that the Company has matched or outperformed both comparator indices in four of the past five years. 20 Hill & Smith Holdings PLC Annual Report 2003 The individual aspects of remuneration for each Director The auditor is required to report on the information contained in this section of the report. Directors’ remuneration The remuneration in respect of each Director who held office during the year ended 31 December 2003 was as follows: Compensation Fees/ Salary £000 Performance- Benefits related bonus £000 £000 for loss of office £’000 Total for Year to 31/12/03 £000 Total for Year to 31/12/02 £000 300 145 85 50 25 25 630 10 18 15 — — — 43 138 43 — — — — 181 — — 30 — — — 30 448 206 130 50 25 25 884 440 179 94 50 22 22 807 31 December Exercise price Date first 2002 and 2003 (pence) exercisable Expiry date 42,000* 158,000† 16,259# 17,600* 10,000* 20,000† 500,000† 70.3 70.3 41.3 2/07/04 2/07/04 1/03/04 113.6 20/02/99 68.5 68.5 67.1 4/08/02 4/08/02 9/07/02 2/07/11 2/07/08 30/06/04 20/02/06 4/08/09 30/06/04 9/07/06 Executive: D L Grove C J Burr H C Everett Non-executive: D S Winterbottom H C Marshall R E Richardson Total Directors’ share options C J Burr H C Everett D L Grove * † # 1995 Executive Share Option Scheme 1999 Non-Approved Executive Share Option Scheme 1995 Savings Related Share Option Scheme D L Grove also holds options granted by Close Securities Limited in respect of 2,294,183 shares (2002: 2,294,183 shares) at prices between 40p and 55p per share which are all exercisable and expire on various dates between 6 March 2005 and 25 August 2008. At 31 December 2003 the mid-market price of the Company’s shares was 109.5p. During the year the Company’s mid- market share price ranged between a low of 66.5p and a high of 113.0p. Hill & Smith Holdings PLC Annual Report 2003 21 Directors’ Remuneration Report continued Directors’ pensions Pension benefits earned by the Directors Age at year end Accrued benefit at 31 December 2003 Increase in accrued benefits excluding inflation Increase in accrued benefits including inflation Directors’ contributions Transfer value of accrued benefits at 1 January 2003 Transfer value of accrued benefits at 31 December 2003 C J Burr 54 43,450 2,926 4,030 4,928 418,649 557,086 H C Everett 59 36,342 3,634 4,525 4,025 329,542 490,774 1 The accrued pension benefit is that which would be paid annually on retirement based on service to the year end. 2 Members of the scheme have the option to pay Additional Voluntary Contributions; neither the contributions nor the resulting benefits are included in the above table. 3 The following is additional information relating to Directors’ pensions: (a) Normal Retirement Age: (b) Spouse’s pensions: (c) Early retirement rights: CJ Burr 60, HC Everett 65 2/3 pension on death after retirement C J Burr: None (d) Pension increases: C J Burr: Pensions increase in line with RPI, limited to 5% per H C Everett: Benefits may be taken from age 60 without requiring consent. The benefits earned after April 2001 would be payable without reduction, whilst prior benefits would be reduced. annum on all pensions, subject to a minimum of 3% per annum. H C Everett: Pension accrued prior to April 1997 increases at 3% per annum; pension accrued post-April 1997 increases in line with RPI, limited to 5% per annum, subject to a minimum of 3% per annum. (e) Other discretionary benefits: None 4 Additional benefits have been granted to H C Everett in connection with his termination agreement, represented by an additional pension of £1,575 per annum assessed as the additional benefits that would otherwise have been earned up to 31 July 2004. Howard Marshall Chairman, Remuneration Committee 16 March 2004 22 Hill & Smith Holdings PLC Annual Report 2003 Statement of Directors’ Responsibilities Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and Group and of the profit or loss for that period. In preparing those financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently make judgements and estimates that are reasonable and prudent state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Hill & Smith Holdings PLC Annual Report 2003 23 (cid:3) (cid:3) (cid:3) (cid:3) Independent Auditor’s Report to the Members of Hill & Smith Holdings PLC We have audited the financial statements on pages 25 to 49. 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 auditor’s 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 The Directors are responsible for preparing the Annual Report and the Directors’ Remuneration Report. As described on page 23, this includes responsibility for preparing the financial statements in accordance with law and accounting applicable United Kingdom standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority, and by our profession’s ethical guidance. 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. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if 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 transactions with the Group is not disclosed. We review whether the statement on pages 16 and 17 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, 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. 24 Hill & Smith Holdings PLC Annual Report 2003 We read the other information contained in the Annual Report, including the Corporate Governance Statement and the unaudited part of the Directors’ Remuneration Report, and consider whether it is consistent with the audited the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. financial statements. We consider Basis of audit opinion We conducted our audit in accordance with Auditing Standards 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 judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. reasonable assurance 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 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. that the Opinion In our opinion: the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2003 and of the profit of the Group for the year then ended; and the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared the Companies Act 1985. in accordance with KPMG Audit Plc Chartered Accountants Registered Auditor 16 March 2004 2 Cornwall Street Birmingham B3 2DL (cid:3) (cid:3) Group Profit and Loss Account for the year ended 31 December 2003 Year ended 31 December 2003 Year ended 31 December 2002 Before exceptional items and Before exceptional items and goodwill Excep- Goodwill goodwill Excep- Goodwill amort- isation Notes £000 1,2 241,665 Turnover Operating profit 1,2,3 13,581 Profit on sale of business Profit on sale of properties Loss on termination of operations Profit on ordinary activities before interest Net interest payable Profit on ordinary activities before taxation Tax on profit Profit on ordinary activities after taxation Minority interests 3 3 3 1 5 6 7 tional amorti- items £000 sation £000 amort- isation £000 tional items £000 amorti- sation £000 Total £000 Total £000 — (5) 540 85 — 241,665 212,740 — — 212,740 (1,630) 11,946 14,008 (916) (1,744) 11,348 — — 540 85 — — — 223 — — — 223 — — — (1,851) — (1,851) — (1,098) — (1,098) 13,581 (3,755) (1,231) — (1,630) 10,720 — (3,755) 14,008 (3,989) (1,791) — (1,744) — 10,473 (3,989) 9,826 (1,231) (1,630) 6,965 10,019 (1,791) (1,744) 6,484 (2,712) 598 16 (2,098) (2,809) 221 45 (2,543) 7,114 (633) (1,614) 4,867 7,210 (1,570) (1,699) 3,941 (3) — — (3) 3 — — 3 Profit for the year 7,111 (633) (1,614) 4,864 7,213 (1,570) (1,699) 3,944 Dividends Retained profit for the year Earnings per share Diluted earnings per share 8 21 9 9 * FRS 3 All results relate to continuing operations. (2,838) 2,026 (2,760) 1,184 11.54p (1.03p) (2.61p) 11.46p (1.02p) (2.60p) 7.90p* 7.84p* 11.79p 11.75p (2.57p) (2.56p) (2.77p) (2.77p) 6.45p* 6.42p* Hill & Smith Holdings PLC Annual Report 2003 25 Group Balance Sheet at 31 December 2003 Fixed assets Intangible assets Tangible assets Investments Current assets Properties held for resale Stocks Debtors: due after one year Debtors: due within one year Cash and deposits Creditors: amounts falling due within one year Borrowings and finance leases Other creditors Net current assets Total assets less current liabilities Creditors: amounts falling due after one year Borrowings and finance leases Notes 10 11 12 13 14 14 15 15 31 December 31 December 2003 £000 27,240 41,437 25 68,702 1,407 23,641 6,583 47,226 53,809 14,323 93,180 2002 £000 30,350 42,748 125 73,223 1,365 23,410 6,183 49,562 55,745 12,811 93,331 (10,370) (66,768) (10,377) (65,774) (77,138) (76,151) 16,042 84,744 17,180 90,403 16 (40,438) (47,304) Provisions for liabilities and charges 18,19 Net assets Share capital and reserves Called up share capital Share premium Capital redemption reserve Revaluation reserve Other reserves Profit and loss account Equity shareholders’ funds Equity minority interests 20 21 21 21 21 21 (6,318) 37,988 15,424 3,423 238 739 4,313 13,809 37,946 42 37,988 (7,208) 35,891 15,391 3,367 238 733 4,313 11,806 35,848 43 35,891 Approved by the Board of Directors on 16 March 2004 and signed on its behalf by: D L GROVE Director C J BURR Director 26 Hill & Smith Holdings PLC Annual Report 2003 Company Balance Sheet at 31 December 2003 Fixed assets Tangible assets Investments Current assets Debtors: due after one year Debtors: due within one year Cash and deposits Creditors: amounts falling due within one year Borrowings and finance leases Other creditors Net current liabilities Total assets less current liabilities Creditors: amounts falling due after one year Borrowings and finance leases Notes 11 12 14 14 15 15 31 December 31 December 2003 £000 50 97,226 97,276 2,072 19,821 21,893 30 21,923 2002 £000 68 97,315 97,383 1,644 22,846 24,490 30 24,520 (24,471) (6,163) (23,360) (6,689) (30,634) (30,049) (8,711) 88,565 (5,529) 91,854 16 (39,045) (46,476) Provisions for liabilities and charges 18,19 (645) (473) Net assets Share capital and reserves Called up share capital Share premium Capital redemption reserve Profit and loss account Equity shareholders’ funds 48,875 44,905 20 21 21 21 15,424 3,423 238 29,790 48,875 15,391 3,367 238 25,909 44,905 Approved by the Board of Directors on 16 March 2004 and signed on its behalf by: D L GROVE Director C J BURR Director Hill & Smith Holdings PLC Annual Report 2003 27 Group Cash Flow Statement for the year ended 31 December 2003 Net cash flow from operating activities Returns on investments and servicing of finance Taxation Capital expenditure and financial investment Acquisitions and disposals Equity dividends paid Cash flow before financing Financing Issue of new shares Loan advances Loan repayments Redemption of loan notes Notes £000 24a 24b 24c 24d 89 50,406 (57,539) (328) — (861) Proceeds from new finance leases secured on existing assets Repayments of capital element of finance leases Increase in cash in the year Reconciliation of net cash flow to movement in net debt Increase in cash Cash outflow from borrowings Change in net debt resulting from cash flows New finance leases Amortisation of arrangement fees Loan notes issued as part of acquisition Movement in net debt in the year Net debt at the start of the year Net debt at the end of the year 24e 24e 28 Hill & Smith Holdings PLC Annual Report 2003 Year ended 31 December Year ended 31 December 2003 £000 20,925 (4,040) (1,182) (4,230) 1,031 (2,759) 9,745 (8,233) 1,512 1,512 8,322 9,834 (1,414) (35) — 8,385 (44,870) (36,485) £000 49 5,976 (6,423) (341) 1,126 (526) 2002 £000 26,145 (4,383) (432) (5,545) (5,455) (2,044) 8,286 (139) 8,147 8,147 188 8,335 (180) — (889) 7,266 (52,136) (44,870) Other Primary Statements Statement of Group Total Recognised Gains and Losses for the year ended 31 December 2003 Profit for the year Currency translation differences on overseas net investments Total recognised gains and losses relating to the year Year ended Year ended 31 December 31 December 2003 £000 4,864 (17) 4,847 2002 £000 3,944 (84) 3,860 Note of Group Historical Cost Profits and Losses for the year ended 31 December 2003 There is no material difference between the results as shown in the profit and loss account and their historical cost equivalent. Reconciliation of movement in Shareholders’ Funds for the year ended 31 December 2003 Group Company Profit for the year Dividends Other recognised net gains and losses relating to the year New ordinary share capital issued Net increase in shareholders’ funds Shareholders’ funds at the start of the year Shareholders’ funds at the end of the year Year ended 31 December 2003 £000 4,864 (2,838) 2,026 (17) 89 2,098 35,848 37,946 Year ended Year ended 31 December 31 December 2003 2002 £000 3,944 (2,760) 1,184 (84) 400 1,500 34,348 35,848 £000 6,719 (2,838) 3,881 — 89 3,970 44,905 48,875 Year ended 31 December 2002 £000 18,342 (2,760) 15,582 — 175 15,757 29,148 44,905 Hill & Smith Holdings PLC Annual Report 2003 29 Principal Accounting Policies The following accounting policies have been applied separable net assets acquired) arising on consolidation in consistently in dealing with items which are considered respect of acquisitions since 1 October 1998 is material in relation to the Group’s financial statements. capitalised. Goodwill is amortised by equal annual Basis of preparation instalments over its estimated useful life. The Directors consider each acquisition separately for the purpose of The financial statements have been prepared in determining the amortisation period for any goodwill that accordance with applicable accounting standards and arises. under the historical cost accounting rules, modified to include the revaluation of certain land and buildings. The net assets of businesses acquired are incorporated Basis of consolidation into the consolidated financial statements at their fair value to the Group. Fair value adjustments are always The consolidated financial statements include the considered to be provisional at the first balance sheet financial statements of the Company and its subsidiary date after acquisition to allow the maximum time to elapse undertakings made up to 31 December 2003. The acquisition method of accounting has been adopted. for management to make a reliable estimate. Under this method, the results of subsidiary undertakings Investments acquired or disposed of in the year are included in the In the Company’s financial statements, investments in consolidated profit and loss account from the date of subsidiary undertakings are stated at cost, less amounts acquisition or up to the date of disposal. written off for impairment. Under Section 230(4) of the Companies Act 1985 the Foreign currencies Company is exempt from the requirement to present its Transactions in foreign currencies are recorded using the own profit and loss account. rate of exchange ruling at the date of the transaction. Any gain or loss on translation arising from a movement in Where a Group company is party to a joint arrangement exchange rates subsequent to the date of a transaction is that is not an entity, the Group accounts directly for its part included as an exchange gain or loss in the profit and loss of the income and expenditure, assets, liabilities and cash account. flows on consolidation. Such joint arrangements are effectively an extension of the Group’s activities and do The assets and liabilities of overseas subsidiary not carry on a trade or business of their own. undertakings are translated at the closing exchange rate. Goodwill and negative goodwill Profit and loss accounts of such undertakings are consolidated at the average exchange rate during the Purchased goodwill (both positive and negative) arising year and the adjustment to year end rates is taken directly on consolidation in respect of acquisitions before to reserves. Exchange differences arising on the 1 October 1998, when FRS 10, Goodwill and Intangible retranslation of the opening net assets of foreign Assets, was adopted, was written off to reserves in the subsidiaries, foreign currency loans used for overseas year of acquisition. In accordance with the transitional investment, and transactions executed solely for the rules of FRS 10, this treatment has continued to be purpose of hedging foreign currency asset exposure, are applied to such acquisitions. When a subsequent taken directly to reserves. disposal occurs, any related goodwill previously written off to reserves is written back through the profit and loss Turnover account as part of the profit or loss on disposal. Except for work completed under long term contracts (see below), turnover represents the amount (excluding Purchased goodwill (representing the excess of the fair value added tax) invoiced to third party customers value of the consideration given over the fair value of the following the delivery of goods or provision of services. 30 Hill & Smith Holdings PLC Annual Report 2003 Tangible fixed assets and depreciation consumables and goods purchased for resale, the FIFO Depreciation is provided to write off the cost or valuation method is used. Cost for work in progress and finished less the estimated residual value of tangible fixed assets goods comprises direct materials, direct labour and an by equal instalments over their estimated useful economic appropriate proportion of attributable overheads. lives as follows: Long term contracts Freehold buildings Leasehold land and buildings Plant, machinery and vehicles 50 years life of lease 4 to 20 years The profit attributable to the stage of completion of a long term contract is recognised when the outcome of the contract can be foreseen with reasonable certainty. No depreciation is provided on freehold land. Turnover for such contracts is stated as cost appropriate The Group has followed the transitional provisions of FRS amounts recognised in previous years. Provision is made 15 to retain the book value of freehold land and for losses as soon as they are foreseen. to their stage of completion plus attributable profits, less buildings, certain of which had been revalued from their historic cost. Government grants Contract work in progress is stated at costs incurred, less those transferred to the profit and loss account, after deducting foreseeable losses and payments on account Capital-based government grants are included within not matched with turnover. accruals and deferred income in the balance sheet and credited to operating profit over the estimated useful Amounts recoverable on contracts are included in economic lives of the assets to which they relate. debtors and represent turnover recognised in excess of payments on account. Leases Assets acquired under finance leases are capitalised and Research and development the outstanding future lease obligations are shown in Research and development expenditure is written off in creditors. Operating lease rentals are charged to the profit the year in which it is incurred. and loss account on a straight-line basis over the period of the lease. Pension costs Deferred taxation Deferred tax is provided, without discounting, on timing differences between the treatment of items for taxation The expected costs of pensions in respect of the Group’s and accounting purposes except as otherwise required defined benefit pension schemes is charged to the profit by FRS 19. and loss account so as to spread the cost of providing pensions over the period during which the Group benefits from employees’ services. The effects of variations from regular costs are spread over the expected average remaining service lives of members of the scheme. Contributions in respect of defined contribution schemes are charged to the profit and loss account in the period to which they relate. The Group has adopted the transitional disclosure requirements of FRS 17. Stocks Stocks are stated at the lower of cost and net realisable value. In determining the cost of raw materials, Hill & Smith Holdings PLC Annual Report 2003 31 Notes to the Financial Statements 1 Segmental information Year ended 31 December 2003 Year ended 31 December 2002 Profit before Profit before Operating interest Net Operating interest Net Turnover profit* and tax assets Turnover profit* and tax assets £000 £000 £000 £000 £000 £000 £000 £000 Building and Construction Products 203,403 12,502 10,583 39,764 162,743 13,305 12,175 38,136 Industrial Products 38,262 1,079 137 12,447 49,997 703 (1,702) 18,475 Total operations 241,665 13,581 10,720 52,211 212,740 14,008 10,473 56,611 Tax and dividends Long term debtors and other provisions Net borrowings Goodwill Total Group By geographical origin UK Rest of World Total (9,904) 4,926 (36,485) 27,240 37,988 (8,939) 2,739 (44,870) 30,350 35,891 240,448 13,443 10,673 37,304 209,230 14,072 10,524 35,203 1,217 138 47 684 3,510 (64) (51) 688 241,665 13,581 10,720 37,988 212,740 14,008 10,473 35,891 Turnover by geographical destination UK Rest of Europe Asia USA Rest of World Total 220,508 11,864 2,446 1,135 5,712 241,665 192,428 10,818 3,008 4,243 2,243 212,740 * Operating profit is stated before exceptional items and goodwill amortisation. All results relate to continuing operations. 32 Hill & Smith Holdings PLC Annual Report 2003 2 Operating profit Turnover Cost of sales Gross profit Distribution costs Administrative expenses Other operating income Year ended Year ended 31 December 31 December 2003 £000 2002 £000 241,665 (184,693) 212,740 (159,740) 56,972 53,000 (20,352) (23,254) 215 (17,045) (22,227) 280 Operating profit before exceptional items and goodwill amortisation 13,581 14,008 Exceptional items Goodwill amortisation Operating profit 3 Exceptional items (5) (1,630) (916) (1,744) 11,946 11,348 Exceptional items charged to operating profit represent business reorganisation costs net of a credit of £750,000 arising from the release of provision for potential environmental costs no longer deemed necessary together with £418,000 write- back of a previous over-impairment of fixed assets. The profit on sale of business relates to the sale of the business and certain assets and liabilities of SI Pressure Instruments Limited. The loss on termination of operations relates primarily to the cost of closure of Wombwell Foundry Limited. Operating profit before exceptional items and goodwill amortisation has been shown because the Directors consider that this gives a more meaningful indication of the underlying performance of the Group. 4 Employees The average number of people employed by the Group during the year was: Building and Construction Products Industrial Products The aggregate employment cost for the year was: Wages and salaries Social security costs Pension cost/(credit) Year ended Year ended 31 December 31 December 2003 2002 1,815 527 2,342 £000 48,916 4,921 544 54,381 1,612 711 2,323 £000 46,327 4,345 (462) 50,210 Details of the Directors’ remuneration and share interests are given in the Directors’ Remuneration Report on pages 18 to 22. Hill & Smith Holdings PLC Annual Report 2003 33 Notes to the Financial Statements continued 5 Net interest payable Interest payable: Bank loans and overdrafts Interest on finance leases and hire purchase contracts Amortisation of arrangement fees Other loans Interest receivable 6 Profit on ordinary activities before taxation The profit on ordinary activities is stated after charging: Depreciation of tangible fixed assets: Owned Leased Amortisation of goodwill Operating lease rentals: Plant and machinery Other Research and development expenditure Auditor’s remuneration (including Company £33,000 (2002: £25,750)) Non-audit fees paid to the auditor and its associates: Other assurance services Taxation In relation to acquisitions and disposals Other Foreign exchange loss After crediting: Profit on disposal of fixed assets Grants receivable Rental income Year ended Year ended 31 December 31 December 2003 £000 2002 £000 3,825 4,045 154 35 158 4,172 (417) 3,755 85 — 70 4,200 (211) 3,989 Year ended Year ended 31 December 31 December 2003 £000 5,369 250 1,630 788 3,046 60 201 51 38 110 39 173 160 — 1,863 2002 £000 5,831 162 1,744 839 3,237 133 205 18 45 68 — 114 64 6 1,563 34 Hill & Smith Holdings PLC Annual Report 2003 7 Taxation UK corporation tax on profits of the year Adjustments in respect of previous periods Foreign tax Deferred taxation: origination and reversal of timing differences Current year Adjustments in respect of previous periods Year ended Year ended 31 December 31 December 2003 £000 1,315 (136) 22 1,201 1,046 (149) 2,098 2002 £000 2,330 (250) 33 2,113 514 (84) 2,543 Factors affecting the tax charge for the year The tax charge for the year has been reduced by £232,000 as a result of capital allowances in respect of industrial buildings which are no longer subject to clawback. The current tax charge for the year is lower (2002: higher) than the standard rate of corporation tax in the UK. The differences are explained below: Profit on ordinary activities before taxation Profit on ordinary activities multiplied by the standard rate of corporation tax in the UK of 30% Effect of goodwill amortisation Profit on ordinary activities before goodwill amortisation Year ended Year ended 31 December 31 December 2003 6,965 2,090 473 2002 6,484 1,945 478 multiplied by the standard rates of corporation tax in the UK of 30% 2,563 2,423 Expenses not deductible for tax purposes Capital allowances for the year in excess of depreciation Depreciation for the year in excess of capital allowances Income and expenditure timing differences Capital profits less losses and write-downs not subject to tax Overseas losses not relieved Adjustments in respect of previous periods Current tax charge 220 (681) — (597) (209) 41 (136) 185 — 186 (700) (73) 342 (250) 1,201 2,113 Hill & Smith Holdings PLC Annual Report 2003 35 Notes to the Financial Statements continued 8 Dividends Equity shares: Interim paid Final proposed Total 9 Earnings per share Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2003 2002 Pence per share 2.15 2.45 4.60 2.10 2.40 4.50 2003 £000 1,324 1,514 2,838 2002 £000 1,282 1,478 2,760 The weighted average number of shares in issue during the year was 61,608,085 (2002: 61,157,774), diluted for the effects of outstanding share options 62,076,036 (2002: 61,399,912). Earnings per share have been calculated on earnings of £4,864,000 (2002: £3,944,000) and earnings per share before exceptional items and goodwill amortisation on earnings of £7,111,000 (2002: £7,213,000). Earnings per share before exceptional items and goodwill amortisation have been shown because the Directors consider that this gives a more meaningful indication of the underlying performance of the Group. 10 Intangible fixed assets Goodwill Group At 31 December 2002 Additions in the year Disposals in the year Amortisation charge for the year At 31 December 2003 Gross Amortisation £000 34,151 70 (1,802) — 32,419 £000 (3,801) — 252 (1,630) (5,179) Net £000 30,350 70 (1,550) (1,630) 27,240 All acquisitions are being amortised over a period of twenty years. Additions in the year represent revisions to provisional fair values attributed to the acquisition of Mallatite Limited in 2002. 36 Hill & Smith Holdings PLC Annual Report 2003 11 Tangible fixed assets Cost or valuation At 31 December 2002 Exchange adjustments Additions Disposals Land and buildings Free- hold £000 Short lease- Plant and hold machinery £000 £000 Group Company Short lease- Plant and hold machinery £000 £000 Total £000 Total £000 17,509 836 84,884 103,229 — 480 — (6) 39 (55) — (39) (45) 6,022 6,541 (10,968) (11,023) (50) (1,452) Transfers to current assets (1,402) At 31 December 2003 16,587 814 79,849 97,250 Depreciation At 31 December 2002 Exchange adjustments Disposals Transfers to current assets Charge for the year At 31 December 2003 Net book value 1,356 — — (287) 241 1,310 47 (1) (12) — 14 48 59,078 60,481 (7) (8) (9,980) (9,992) — 5,364 (287) 5,619 54,455 55,813 At 31 December 2003 15,277 766 25,394 41,437 At 31 December 2002 16,153 789 25,806 42,748 Particulars relating to revalued assets are given below: Land & buildings At 1997 open market value for existing use At 1998 open market value for existing use At 1999 open market value for existing use At historic cost Cost/valuation Historical cost of revalued assets Aggregate depreciation based on historical cost Historical cost net book value 9 — — — — 9 1 — — — 1 2 7 8 102 111 — 3 — — — 3 — — 105 114 42 — — — 20 62 43 60 43 — — — 21 64 50 68 2002 £000 2,850 547 2,005 12,943 18,345 6,315 (1,567) 4,748 2003 £000 2,850 547 2,005 11,999 17,401 6,315 (1,725) 4,590 Other tangible fixed assets, including additions subsequent to the revaluation of land and buildings, are included at cost. The gross book value of land and buildings includes freehold land of £7,680,000 (2002: £8,280,000). Included in the net book value of plant, machinery and vehicles is £2,457,000 (2002: £1,985,000) in respect of assets held under finance lease and similar hire purchase contracts. Included within plant, machinery and vehicles are assets held for hire with a cost of £4,707,000 (2002: £2,589,000) and accumulated depreciation of £681,000 (2002: £420,000). Hill & Smith Holdings PLC Annual Report 2003 37 Notes to the Financial Statements continued 12 Fixed asset investments Group Cost At 31 December 2002 Repayments At 31 December 2003 Provisions At 31 December 2002 and 31 December 2003 Net book value At 31 December 2003 At 31 December 2002 Trade investments £000 915 (100) 815 790 25 125 Loans £000 250 — 250 Total £000 1,165 (100) 1,065 250 1,040 — — 25 125 As part of the arrangements for the disposal of certain subsidiary undertakings, the Company acquired certain trade investments and made loans to those companies. The Company holds 100% of the issued ‘A’ ordinary share capital of Brockhouse Forgings Limited, acquired at a cost of £750,000 and a loan amounting to £250,000 which is secured by a fixed and floating charge on all the assets of the company, which carries interest at 2% above the bank rate and is repayable at any time with the permission of that company’s bankers. The investment is accounted for as a trade investment because the Group, which has only 19.5% of the voting rights, is unable to exercise any significant influence over the company. Share in Group Loans to Group Trade undertakings undertakings investments £000 £000 £000 Company Cost At 31 December 2002 82,651 17,790 Additions Disposals 11 — — — At 31 December 2003 82,662 17,790 850 — (100) 750 Other Loans £000 250 — — 250 Total £000 101,541 11 (100) 101,452 Provisions At 31 December 2002 and 31 December 2003 Net book value At 31 December 2003 At 31 December 2002 1,910 1,316 750 250 4,226 80,752 80,741 16,474 16,474 — 100 — — 97,226 97,315 A list of the principal Group businesses is given on pages 50 and 51. All the Group’s subsidiaries are wholly owned except for Pipe Supports (Asia) Limited, a company incorporated in Thailand, in which the Group has an equity interest of 87%. Redman Fisher (Ireland) Limited is incorporated in the Republic of Ireland. The Company’s subsidiary, Express Reinforcements Limited, continues to operate a joint arrangement through Express O’Rourke JV Limited, a company in which it holds 50% of the issued share capital. Express O’Rourke JV Limited manufactures and supplies steel reinforcement products for the construction of Terminal 5, Heathrow Airport. 38 Hill & Smith Holdings PLC Annual Report 2003 13 Stocks Raw materials and consumables Work in progress Finished goods and goods for resale Group 31 December 31 December 2003 £000 12,934 2,445 8,262 23,641 2002 £000 12,623 2,810 7,977 23,410 The replacement value of stocks is not materially different from book value. 14 Debtors Due after one year: Trade debtors Pension fund prepayment Due within one year: Trade debtors Amounts owed by subsidiary undertakings Corporation tax Other debtors Prepayments and accrued income Total debtors Group Company 31 December 31 December 31 December 31 December 2003 £000 — 6,583 6,583 2002 £000 28 6,155 6,183 42,443 45,423 — — 434 4,349 47,226 53,809 — — 349 3,790 49,562 55,745 2003 £000 — 2,072 2,072 38 17,996 — — 1,787 19,821 21,893 2002 £000 — 1,644 1,644 2 18,791 1,635 2,346 72 22,846 24,490 Hill & Smith Holdings PLC Annual Report 2003 39 Notes to the Financial Statements continued 15 Creditors: amounts falling due within one year Borrowings and finance leases Bank loans and overdrafts Current portion of long term bank loans Finance lease and hire purchase obligations Loan notes Other creditors Trade creditors Bills of exchange Corporation tax Other taxation and social security Accruals and deferred income Payment received on account Proposed dividend Other creditors 16 Creditors: amounts falling due after one year Borrowings and finance leases Long term bank loans Finance lease and hire purchase obligations Group Company 31 December 31 December 31 December 31 December 2003 £000 — 7,612 807 1,951 2002 £000 — 7,504 594 2,279 2003 £000 14,683 7,612 225 1,951 2002 £000 13,352 7,504 225 2,279 10,370 10,377 24,471 23,360 41,366 46,329 2,037 2,488 2,217 2,405 2,553 6,816 5,412 2,838 3,161 2,202 2,416 3,533 4,921 — 2,759 3,614 66,768 65,774 — — 36 941 — 2,838 311 6,163 — — — 1,025 — 2,759 417 6,689 Group Company 31 December 31 December 31 December 31 December 2003 £000 38,369 2,069 40,438 2002 £000 45,575 1,729 47,304 2003 £000 38,369 676 39,045 2002 £000 45,575 901 46,476 40 Hill & Smith Holdings PLC Annual Report 2003 16 Creditors: amounts falling due after one year (continued) The maturity of financial liabilities entered into by the Group and the Company is as follows: Bank loans and overdraft Amounts due within one year Amounts due after more than one year: Between one and two years Between two and five years Loan notes Amounts due within one year Finance leases and hire-purchase obligations Amounts due within one year Amounts due after more than one year: Between one and two years Between two and five years Group Company 31 December 2003 £000 31 December 31 December 2003 2002 £000 £000 31 December 2002 £000 7,612 7,504 22,295 20,856 4,612 33,757 38,369 45,981 7,504 38,071 45,575 53,079 4,612 33,757 38,369 60,664 7,504 38,071 45,575 66,431 1,951 2,279 1,951 2,279 807 594 795 1,274 2,069 2,876 522 1,207 1,729 2,323 225 225 451 676 901 225 225 676 901 1,126 The bank loans carry a rate of interest of up to 1.5% above LIBOR and are secured by a first fixed and floating charge over substantially all of the Group’s assets. Obligations under finance leases and hire purchase obligations are secured on the relevant assets. Included within bank loans due in between two and five years is £3,500,000 in respect of a revolving credit facility over which refinancing is permitted, the earliest date at which the lender can require repayment being 30 June 2008. In the absence of the refinancing facility, this amount would have been repayable on 30 January 2004. 17 Financial instruments (a) Management of financial risks The Group’s major financial risks relate to movements of interest and exchange rates. Management continually review the Group’s exposure to these issues and will, if required, make appropriate use of derivative financial instruments to mitigate this exposure. Interest rate risk The Group has used an interest rate swap to fix approximately 36% of its year end gross borrowings at a base rate of 6.11%. Currency exposure The Group is subject to fluctuations in exchange rates on its net investments overseas and on transactional monetary assets and liabilities not denominated in the operating (or ‘functional’) currency of the operating unit concerned. The Group’s policy is to hedge, where practical, the net asset value of its overseas investments. This hedging is achieved through borrowings in the respective currencies. The Group is predominantly UK-based and undertakes the majority of its transactions in sterling. Consequently, it has no material transactional monetary assets or liabilities denominated in currencies other than the functional currencies of its respective geographical areas of operation. The Group uses forward exchange contracts to hedge the majority of exposures that do exist. Hill & Smith Holdings PLC Annual Report 2003 41 Notes to the Financial Statements continued 17 Financial instruments (continued) (b) Financial assets The Group’s financial assets, excluding short term debtors, consist mainly of a cash surplus held at bank in the current account and fixed asset investments as detailed in Note 12. Where cash surpluses arise in the short term, interest is earned based on a floating rate related to bank base rates or LIBOR. Where the Group’s funding requirements allow longer term investment of surplus cash, management will review available options to obtain the best possible return whilst maintaining an appropriate degree of access to the funds. (c) Financial liabilities The Group’s financial liabilities, excluding short term creditors which are all sterling denominated, are set out below. Fixed rate financial liabilities comprise sterling denominated finance leases and hire purchase agreements and bank loans. Floating rate financial liabilities comprise sterling denominated bank loans and overdrafts. The floating rate financial liabilities bear interest at rates related to bank base rates or LIBOR. Currency Sterling at 31 December 2003 Sterling at 31 December 2002 Sterling at 31 December 2003 Sterling at 31 December 2002 (d) Maturity profile Floating rate Fixed rate financial liabilities £000 financial liabilities £000 Total £000 31,927 28,984 18,881 28,697 50,808 57,681 Fixed rate financial liabilities Weighted Weighted average period average for which rate interest rate % 6.8 7.3 is fixed years 1.3 1.8 The maturity profile of the Group’s and Company’s financial liabilities, other than short term creditors such as trade creditors and accruals, is shown in note 16 to the financial statements. At 31 December 2003 the Group had the following undrawn committed facilities, in respect of which all conditions precedent had been met: Undrawn committed borrowing facilities Expiring after more than two years (e) Fair values 2003 £000 2002 £000 19,000 12,524 At 31 December 2003 the fair value of the Group’s financial instruments was not materially different to the book value of the instruments. The fair value was calculated using market rates where available, otherwise cash flows were discounted at prevailing rates. 42 Hill & Smith Holdings PLC Annual Report 2003 18 Provisions for liabilities and charges Group Company Deferred taxation £000 3,764 — 897 4,661 Other £000 3,444 (750) (1,037) 1,657 Total £000 7,208 (750) (140) 6,318 Deferred taxation £000 473 — 172 645 Total £000 473 — 172 645 At 31 December 2002 Provisions released Utilised during the year At 31 December 2003 Other provisions at 31 December 2003 relate to potential liabilities for environmental costs and dilapidations on leasehold properties. It is considered that these will not result in any material cash outflows in the near future. 19 Deferred taxation Details of amounts provided for deferred taxation and movements in the year are set out below: Group Company 31 December 31 December 31 December 31 December 2003 £000 2,927 1,734 4,661 3,764 — 897 4,661 2002 £000 2,531 1,233 3,764 3,225 109 430 3,764 2003 £000 2002 £000 (5) 650 645 473 — 172 645 (3) 476 473 318 — 155 473 Difference between accumulated depreciation, amortisation and capital allowances Other timing differences At 31 December 2002 Transferred in relation to acquisitions during the year Charge for the year At 31 December 2003 20 Called up share capital 31 December 31 December 2003 £000 2002 £000 Authorised 80,000,000 Ordinary shares of 25p each (2002: 80,000,000) 20,000 20,000 Allotted,called up and fully paid 61,697,484 Ordinary shares of 25p each (2002: 61,564,955) 15,424 15,391 During the year the Company issued 132,529 shares under its various share option schemes (2002: 80,986), realising £89,008 (2002: £52,298). Hill & Smith Holdings PLC Annual Report 2003 43 Notes to the Financial Statements continued 20 Called up share capital (continued) Options over the Company’s shares outstanding at 31 December 2003 were: Number of shares Option Date first price (p) exercisable Expiry date 1985 Executive Share Option Scheme 1995 Executive Share Option Scheme 1999 Non-Approved Executive Share Option Scheme 1995 Savings Related Share Option Scheme 21 Share premium and reserves 68,053 107,732 159,000 52,000 203,000 500,000 78,000 158,000 177,000 269,715 Capital 113 114 23 Jan 1998 23 Jan 2005 20 Feb 1999 20 Feb 2006 69 70 66 67 69 70 66 41 4 Aug 2002 4 Aug 2009 2 July 2004 2 July 2011 21 Jan 2005 21 Jan 2012 9 July 2002 9 July 2006 4 Aug 2002 4 Aug 2006 2 July 2004 2 July 2008 21 Jan 2005 21 Jan 2009 1 Mar 2004 1 Sept 2004 Share redemption Revaluation Group At 31 December 2002 Retained profit for the year Exchange differences Realised on disposal Transfer between reserves Shares issued premium £000 3,367 reserve £000 238 — — — — 56 — — — — — At 31 December 2003 3,423 238 reserve £000 733 — — 72 (66) — 739 Other reserves £000 4,313 — — — — — Profit and loss account £000 11,806 2,026 (17) (72) 66 — 4,313 13,809 Company At 31 December 2002 Retained profit for the year Shares issued At 31 December 2003 Capital Share redemption premium £000 3,367 — 56 3,423 reserve £000 238 — — 238 Profit and loss account £000 25,909 3,881 — 29,790 Other reserves represent the premium on shares issued in exchange for shares of subsidiaries acquired. The Group has taken advantage of Section 131 of the Companies Act 1985. The cumulative amount of positive goodwill resulting from acquisitions in earlier financial years which has been written off is £2,413,000 (2002: £2,413,000), which relates entirely to subsidiary undertakings. The cumulative amount of negative goodwill resulting from acquisitions in earlier financial years which has been written off is £836,000 (2002: £836,000). In accordance with Section 228 (7) of the Companies Act 1985, the Company has not presented its own profit and loss account. The Group profit for the year includes profit dealt with in the financial statements of the Company of £6,719,000 (2002: £18,342,000). 44 Hill & Smith Holdings PLC Annual Report 2003 22 Guarantees and other financial commitments (a) Guarantees The Company guarantees the bank loans and overdrafts of certain subsidiary undertakings. The amount outstanding at 31 December 2003 was £Nil (2002: £2,051,000). The Group had guarantees outstanding to a bank in respect of performance bonds of £2,919,250 (2002: £328,000) and a Customs and Excise counter-indemnity of £Nil (2002: £120,000). (b) Capital commitments Group Company 31 December 31 December 31 December 31 December 2003 £000 228 2002 £000 897 2003 £000 — 2002 £000 — Contracted for but not provided in the accounts (c) Operating lease commitments Annual commitments under non-cancellable operating leases expiring: 31 December 2003 31 December 2002 Group Within one year Between one and two years Between two and five years After five years Company Between two and five years After five years Land & buildings £000 104 — 238 2,654 2,996 — 34 34 Other £000 379 421 718 108 1,626 26 — 26 Land & buildings £000 468 91 187 1,703 2,449 — 34 34 Other £000 291 411 1,061 12 1,775 26 — 26 Hill & Smith Holdings PLC Annual Report 2003 45 Notes to the Financial Statements continued 23 Pensions The Company operates two main pension schemes; one providing benefits accruing in the future on a defined benefit basis and a second, and larger, scheme providing benefits that are on a defined contribution basis. This second scheme also contains some defined benefit liabilities. The assets of both schemes are administered by trustees and are kept entirely separate from those of the Company. Independent actuarial valuations are carried out every three years. Contribution rates are determined on the basis of advice from an independent professionally qualified actuary, with the objective of providing the funds required to meet pension obligations as they fall due. Pension costs are similarly determined and are charged to the profit and loss account so as to spread the cost over the members’ working lives with the Company. There is also a separate group personal pension plan operated by one of the Company’s subsidiaries. The most recent valuations were prepared as at 5 April 2003. The valuations assessed the funding level using the Defined Accrued Benefit Method. The assumptions which have the most significant effect on the results of the valuation are those relating to the return on investments, the rates of increase in salaries and rates of increase for pensions in deferment and payment. The principal actuarial assumptions used for calculating the contribution rates were investment growth of 8% per annum pre-retirement, 6.5% per annum post-retirement, salary increases of 5% per annum, retail price inflation of 3.5% per annum and dividend yield of 3% per annum. Adjustments were made to these assumptions to allow for market conditions in order to calculate the funding level at the valuation date. For the Hill & Smith Executive Pension Scheme, the market value of the scheme’s assets as at the valuation date was £12.9 million and comparing this value to the value of the liabilities on the funding basis revealed a funding level of 80%. For the Hill & Smith Pension Scheme, the market value of the scheme’s assets as at the valuation date was £33.4 million and comparing this value to the value of the liabilities on the funding basis revealed a funding level of 99%. The deficits identified in the schemes are to be recovered by way of additional contributions from the Company, at rates to be agreed. The profit and loss account for the year includes a net pension charge of £544,000 (2002: £462,000 credit). This is net of a variation of £865,000 (2002: £1,253,000) to allow for the funding of the schemes. This variation has reduced from last year on account of the deficits assessed, which are being amortised over the average expected future service of the current employees. The balance sheet includes a debtor of £6,583,000 (2002: £6,155,000). FRS 17 Whilst the Group continues to account for pension costs in accordance with Statement of Standard Accounting Practice 24 ‘Accounting for pension costs’, under FRS17 ‘Retirement benefits’ the following transitional disclosures are required: A full actuarial valuation of the schemes was carried out as at 5 April 2003 and updated to 31 December 2003 by a qualified actuary. The principal assumptions used by the actuary were: Rate of increase in salaries Rate of increase in pensions in payment Discount rate Inflation assumption At At At 31 December 31 December 31 December 2003 3.75% 2.50% 5.75% 2.60% 2002 3.50% 2.00% 6.00% 2.00% 2001 4.00% 2.25% 6.00% 2.50% The schemes hold assets and liabilities in respect of defined contribution benefits. As at 31 December 2003, the liabilities and matching assets have a value of £4,406,000 and are excluded from the following figures. 46 Hill & Smith Holdings PLC Annual Report 2003 23 Pensions (continued) The assets in the schemes and expected rates of return were: Long term Long term Long term rate of return Market Value rate of return Market Value rate of return Market Value expected at at expected at at expected at at 31 December 31 December 31 December 31 December 31 December 31 December UK Equities Bonds Gilts With Profits policies Cash Other 2003 8.00% 5.75% 5.00% 6.25% 4.00% 8.00% Total market value of assets Present value of scheme liabilities (Deficit)/surplus in the schemes Related deferred tax asset/(liability) Net pension (liability)/asset 2003 £000 27,735 5,613 3,330 10,038 237 618 47,571 (51,241) (3,670) 1,101 (2,569) Analysis of the amount which would have been charged to operating profit Current service cost Analysis of the amount which would have been credited to other financing income Expected return on pension scheme assets Interest on pension scheme liabilities Net return Analysis of the amount which would have been recognised in the Statement of Total Recognised Gains and Losses 2002 8.00% 6.00% 4.50% 6.25% 4.00% 8.00% 2002 £000 24,682 6,280 1,795 10,321 900 897 44,875 (48,616) (3,741) 1,122 (2,619) 2001 8.00% 6.00% 5.50% 6.75% 4.00% 8.00% 2001 £000 28,864 5,884 1,659 11,150 2,350 1,050 50,957 (49,207) 1,750 (525) 1,225 31 December 31 December 2003 £000 792 2002 £000 715 31 December 31 December 2003 £000 3,068 (2,829) 239 2002 £000 3,647 (2,902) 745 31 December 31 December Actual return less expected return on pension scheme assets Experience gains and losses arising on the pension scheme liabilities Changes in assumptions underlying the present value of the scheme liabilities 2003 £000 2,923 502 (3,032) Actuarial gain /(loss) recognised in the Statement of Total Recognised Gains and Losses 393 2002 £000 (8,694) (1,204) 4,377 (5,521) Hill & Smith Holdings PLC Annual Report 2003 47 Notes to the Financial Statements continued 23 Pensions (continued) Movement in the deficit during the year (Deficit)/surplus in the schemes at the start of the year Current service cost Contributions Other financing income Actuarial gain/(loss) Deficit in the schemes at the end of the year History of experience gains and losses during the year 31 December 31 December 2003 £000 (3,741) (792) 231 239 393 (3,670) 2002 £000 1,750 (715) — 745 (5,521) (3,741) 31 December 31 December Difference between the expected return and actual return on scheme assets Amount Percentage of scheme assets Experience gains and losses on scheme liabilities Amount Percentage of present value of scheme liabilities Total amount recognised in the Statement of Total Recognised Gains and Losses Amount Percentage of present value of scheme liabilities 2003 £000 2,923 6% 502 1% 393 1% 2002 £000 (8,694) (19%) (1,204) (2%) (5,521) (11%) Had the Group adopted FRS 17 early, net assets and profit and loss reserves would have been stated as follows: Net assets Net assets excluding net pension asset Net pension liability Net assets restated Reserves Profit and loss reserve excluding net pension asset Pensions reserve Profit and loss reserve restated 31 December 31 December 2003 £000 33,380 (2,569) 30,811 9,201 (2,569) 6,632 2002 £000 31,582 (2,619) 28,963 7,497 (2,619) 4,878 The Company is a member of the Group pension schemes which provide benefits on final pensionable pay. Because the Company is unable to identify its share of the scheme assets and liabilities on a consistent and reasonable basis, as permitted by FRS 17 ‘Retirement Benefits’, the schemes will be accounted for by the Company when the accounting standard is fully adopted by the Company as if they were defined contribution schemes. 48 Hill & Smith Holdings PLC Annual Report 2003 24 Notes to the Cash Flow Statement Year ended 31 December 2003 Year ended 31 December 2002 Before exceptional items and goodwill Exceptional items and goodwill amortisation amortisation £000 £000 13,581 5,497 — — (160) (818) 3,299 (132) 2,349 21,267 (1,635) 122 1,630 — — 245 (213) (491) (459) (342) (a) Reconciliation of operating profit to net cash inflow from operating activities Operating profit Depreciation Amortisation of goodwill Payments on the termination of business Profit on sale of fixed assets Change in working capital: Stocks Debtors Creditors and provisions Net cash inflow from operating activities (b) Returns on investments and servicing of finance Interest received Interest paid Interest element of finance lease rentals (c) Capital expenditure and financial investment Purchase of fixed assets Sale of fixed assets (d) Acquisitions and disposals Purchase of subsidiary undertakings and businesses Sale of businesses (net of disposal costs) Net overdraft acquired Termination of businesses Total £000 Total £000 11,348 8,085 1,744 (193) (64) (4,696) (299) 10,220 5,225 26,145 211 (4,509) (85) (4,383) (7,146) 1,601 (5,545) (3,781) — (1,674) — (5,455) 11,946 5,619 1,630 — (160) (573) 3,086 (623) 1,890 20,925 417 (4,303) (154) (4,040) (5,442) 1,212 (4,230) — 2,882 — (1,851) 1,031 Other (e) Analysis of net debt Cash at bank and in hand Debt due within one year Debt due after one year Finance leases Net debt 31 December 2002 £000 12,811 (9,783) (45,575) (2,323) (44,870) Cash flow £000 1,512 255 7,206 861 9,834 non-cash 31 December 2003 changes £000 £000 — (35) — (1,414) (1,449) 14,323 (9,563) (38,369) (2,876) (36,485) Hill & Smith Holdings PLC Annual Report 2003 49 Principal Group Businesses Building and Construction Products Infrastructure Products Group Other businesses Asset International Limited (Large diameter plastic drainage pipes and storm water attenuation tanks) Stephenson Street, Newport, Gwent, NP9 0XH Tel: (01633) 273081 Fax: (01633) 281301 Email: postbox@assetint.co.uk Website: www.assetint.co.uk Ash & Lacy Building Systems Limited* (Metal cladding building systems and ancillary products) Bromford Lane, West Bromwich, West Midlands, B70 7JJ Tel: (0121) 525 1444 Fax: (0121) 525 3444 Email: sales@ashandlacybp.co.uk Website: www.ashandlacybp.co.uk Barkers Engineering Limited (Fencing, galvanizing, powder coating and fasteners) Etna Works, Duke Street, Fenton, Stoke-on-Trent, Staffordshire, ST4 3NS Tel: (01782) 319264 Fax: (01782) 599724 Email: sales@barkers-engineering.co.uk Website: www.barkers-engineering.co.uk Hill & Smith Limited (Highway and off-highway safety barriers, temporary highway and general workzone protection systems and corrugated steel structures) Springvale Business and Industrial Park, Bilston, Wolverhampton, West Midlands, WV14 0QL Tel: (01902) 499400 Fax: (01902) 499419 Email: info@hill-smith.co.uk Website: www.hill-smith.co.uk Mallatite Limited (Street and highway lighting columns) Sandfold Lane, Levenshulme, Manchester, M19 3FT Tel: (0161) 225 3100 Fax: (0161) 257 2625 Email: sales@mallatite.co.uk Website: www.mallatite.co.uk Varley & Gulliver Limited (Parapets, gantries and pedestrian guardrails) 57–70 Alfred Street, Sparkbrook, Birmingham, B12 8JR Tel: (0121) 773 2441 Fax: (0121) 766 6875 Email: sales@v-and-g.co.uk Website: www.v-and-g.co.uk Birtley Building Products Limited (Steel lintels, residential doors and galvanizing) Mary Avenue, Birtley, County Durham, DH3 1JF Tel: (0191) 410 6631 Fax: (0191) 410 0650 Email: info@birtley-building.co.uk Website: www.birtley-building.co.uk Express Reinforcements Limited* (Steel reinforcement products) Fordwater Trading Estate, Ford Road, Chertsey, Surrey, KT16 8HG Tel: (01932) 579600 Fax: (01932) 579601 Email: sales@expressreinforcements.co.uk Website: www.expressreinforcements.co.uk Joseph Ash Limited* (Galvanizing and the manufacture of steel storage tanks) Charles Henry Street, Birmingham, B12 0SP Tel: (0121) 622 4661 Fax: (0121) 666 6049 Email: sales@josephash.co.uk Website: www.josephash.co.uk Redman Fisher Engineering Limited* (Industrial flooring, handrail systems and structures) Birmingham New Road, Tipton, West Midlands, DY4 9AA Tel: (01902) 880880 Fax: (01902) 880446 Email: flooring@redmanfisher.co.uk Website: www.redmanfisher.co.uk 50 Hill & Smith Holdings PLC Annual Report 2003 D & J Steels Limited (Forging and engineering steel stockholding) Lambert Works, Colliery Road, Wolverhampton, West Midlands, WV1 2RD Tel: (01902) 453680 Fax: (01902) 455431 Email: sales@dandjsteels.demon.co.uk Eden Material Services (UK) Limited* (Stainless steel hollow bar, tube and pipe stockholding) Unit 42a, No. 1 Industrial Estate, Medomsley Road, Consett, County Durham, DH8 6TT Tel: (01207) 590055 Fax: (01207) 590059 Email: sales@edenmaterials.co.uk Website: www.edenmaterials.co.uk Pipe Supports Limited* (Constant and variable pipe support systems) Salwarpe Road, Droitwich, Worcestershire, WR9 9BH Tel: (01905) 795500 Fax: (01905) 794126 Email: psl@pipesupports.com Website: www.pipesupports.com Industrial Products W & S Allely Limited* (Aluminium, brass, copper and stainless steel stockholding) PO Box 58, Alma Street, Smethwick, West Midlands, B66 2RP Tel: (0121) 558 3301 Fax: (0121) 555 5194 Email: sales@allely.co.uk Website: www.allely.co.uk Ash & Lacy Perforators Limited* (Perforated and expanded metal) PO Box 58, Alma Street, Smethwick West Midlands, B66 2RP Tel: (0121) 558 8921 Fax: (0121) 565 1354 Email: sales@ashlacyperf.co.uk Website: www.ashlacyperf.co.uk Ash & Lacy Pressings Limited* (Speaker grilles and general presswork) Shenstone Works, Lynn Lane, Shenstone, Lichfield, WS14 0EB Tel: (01543) 480361 Fax: (01543) 481624 Email: enquiries@alpressings.co.uk Website: www.alpressings.co.uk Bromford Iron & Steel Company Limited* (Hot rolled steel flats, bars, sections and profiles) Bromford Lane, West Bromwich, West Midlands, B70 7JJ Tel: (0121) 553 6121 Fax: (0121) 525 0913 Email: enquiries@bromfordsteels.co.uk Website: www.bromfordsteels.co.uk The companies marked * are indirectly held. Hill & Smith Holdings PLC Annual Report 2003 51 Five Year Summary Year ended Year ended 15 months ended Year ended Year ended 31 December 31 December 31 December 30 September 30 September 2003 £000 2002 £000 2001 £000 2000 £000 1999 £000 241,665 212,740 241,849 58,858 61,940 13,581 9,826 37,946 21,267 11.54p 4.60p 14,008 10,019 35,848 24,244 11.79p 4.50p 15,696 10,085 34,348 30,244 12.01p 5.45p 4,770 4,102 4,838 4,161 23,979 23,080 4,213 8,998 7.63p 4.20p 7.20p 4.20p Turnover Operating profit * Profit before taxation * Shareholders’ funds Operating cash flow * Earnings per share * Dividends per share * Before exceptional items and goodwill amortisation. Financial Calendar Annual General Meeting 2004 Payment of final dividend for the year to 31 December 2003 (ex dividend date 9 June 2004) Announcement of results for period to 30 June 2004 Payment of interim dividend Preliminary Announcement of results to 31 December 2004 18 May 2004 13 July 2004 September 2004 January 2005 March 2005 52 Hill & Smith Holdings PLC Annual Report 2003 Designed and printed by Jones & Palmer Birmingham Group Balance Sheet Hill & Smith Holdings PLC 2 Highlands Court Cranmore Avenue Shirley Solihull B90 4LE Telephone: (0121) 704 7430 Facsimile: (0121) 704 7439 Website: www.hsholdings.co.uk 1 Hill & Smith Holdings PLC Annual Report 2003