building & construction infrastructure industrial Innovative solutions provider Hill & Smith Holdings PLC Annual Report 2006 Hill & Smith Holdings PLC We are a decentralised group serving the transport infrastructure, construction and building products markets. Our success has been driven by a focused and effective management culture supported by innovative product development. Contents 2006 Highlights Investments, Major Projects and New Products in 2006 Chairman’s Statement Operational Review Financial Review Directors Advisers Contacts and Committees 01 02 04 06 10 12 12 13 Directors’ Report Corporate Governance Directors’ Remuneration Report Statement of Directors’ Responsibilities Independent Auditors’ Report Consolidated Income Statement Consolidated Statement of Recognised Income and Expense Consolidated Balance Sheet 14 20 24 28 29 30 31 32 Consolidated Statement of Cash Flows Group Accounting Policies Notes to the Consolidated Financial Statements Company Balance Sheet Company Principal Accounting Policies Notes to the Company Financial Statements Five Year Summary Principal Group Businesses Financial Calendar 33 34 39 60 61 63 69 70 72 www.hsholdings.co.uk 2006 2005 2004 2003 2002 Revenue up 10.4% Underlying profit before taxation* up 17.6% Underlying earnings per share* up 15.3% to £306.0m (2005: £277.3m) to £18.5m (2005: £15.7m) to 20.7p (2005: 17.9p) Dividends per share up 20.0% Profit before taxation up 9.4% Basic earnings per share down 11.9% to 7.2p (2005: 6.0p) to £17.3m (2005: £15.8m) to 19.8p (2005: 22.5p) (cid:2) Record revenue, profits and dividends (cid:2) Acquisition of Counters & Accessories Limited (cid:2) Acquisition of Metnor Galvanizing Limited (cid:2) Disposal of two non-core businesses (cid:2) Successful share issue to support development plans * Before reorganisation and property items. 2006 Highlights Revenue – £000 Underlying Operating Profit* – £000 Dividends per share – pence 2 4 0 , 6 0 3 6 9 2 , 7 7 2 2 5 6 , 8 6 2 5 5 6 , 2 2 0 7 5 , 9 1 8 0 0 , 4 1 2 9 5 , 2 1 4 8 0 , 5 1 p 0 2 . 7 p 0 0 . 6 p 0 0 . 5 p 0 5 . 4 p 0 6 . 4 5 6 6 , 1 4 2 0 4 7 , 2 1 2 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 Hill & Smith Holdings PLC Annual Report 2006 1 Mallatite re-located on Metnor galvanizing village. Investments, Major Projects and New Products in 2006 Development of Brifen cable guardrail for USA market. 2 www.hsholdings.co.uk Asset Weholite storm water retention tanks for Arbury Camp. Highways Agency and UTMC contract success. Pipe Supports’ new expanded facility in Thailand. Asset Varioguard emergency crossing points on Humber Bridge. SPECIALISATIONS Topdeck temporary parking solution developed in 2006, to be launched in 2007. Hill & Smith Holdings PLC Annual Report 2006 3 Chairman’s Statement General I am pleased to be able to report another year of increased profitability and progress for the Group. In the year ended 31 December 2006 revenue increased by 10.4% to £306.0 million (2005: £277.3 million) and profit before taxation increased by 9.4% to £17.3 million (2005: £15.8 million). In the absence of last year’s one- off tax benefits, earnings per share fell by 11.9% to 19.8p (2005: 22.5p) The Group regards its underlying results, which exclude the effects of business reorganisation and property items, as the most appropriate measure of its financial performance. Underlying operating profit increased by 15.8% to £22.7 million (2005: £19.6 million) on revenue of £306.0 million (2005: £277.3 million). Underlying profit before taxation increased by 17.6% to £18.5 million (2005: £15.7 million). There was a further improvement in underlying earnings per share to 20.7p in 2006 (2005: 17.9p), representing an increase of 15.3%. Dividends If approved by shareholders, the proposed final dividend of 4.2p per share will result in a total dividend for the year of 7.2p, which is 20.0% ahead of last year (2005: 6.0p). Our progressive policy leaves the dividend covered 2.9 times by underlying earnings. David Winterbottom Chairman Operations Our focus on investing in more value-added products and services led to a further improvement in the Group’s underlying operating margin to 7.4% (2005: 7.1%). The performance of the Infrastructure Products division was excellent, with underlying operating profit increasing by 24.9%. This division has been the main beneficiary of our investment programme in recent years and it continues to provide excellent returns. The Building Products division was hit by losses in our Express concrete reinforcement business which led to a fall in the division’s underlying operating profit of 20.4% compared to 2005. Losses have now been eliminated at this operation, which returned to profitability in the last quarter of the year. Underlying operating profit in the small Industrial Products division moved ahead by 47.3%. This performance was primarily attributable to the increasing profitability of our expanding Pipe Supports operation in Thailand. Funding To help finance our acquisition and organic growth plans, in October 2006 the Group raised some £26.8 million, net of expenses, by means of a Placing and Open Offer of new ordinary shares. This was well supported by existing shareholders and also introduced some new institutional holders. We will continue our strategy of growth by investing in our existing businesses and by acquisition in our core competences where above average growth can be anticipated. 4 www.hsholdings.co.uk Acquisitions In February 2006 we acquired Counters & Accessories Limited. This business designs and supplies traffic data recording equipment primarily for the public sector and complements our existing Techspan business in the growing transport information technology sector. In October, we also acquired Metnor Galvanizing Limited, together with its freehold property. This acquisition will give our existing galvanizing businesses access to a long bath facility which will strengthen our market position. Disposals In line with our established corporate strategy, in October two of our non-core activities, W&S Allely Limited and Eden Material Services (UK) Limited, were sold at approximately net asset value. Zinkinvent The Group has owned 33.3% of this company since May 2005. As we announced on 1 March 2007, we have entered into an agreement with one of the other principal shareholders to acquire further shares in Zinkinvent, subject to approval by Hill & Smith’s shareholders. If approved, this transaction will result in Zinkinvent becoming a subsidiary of the Group, trading through Vista NV, a leading galvanizer with facilities in mainland Europe and the USA. competitive challenges we face and I would like to thank all our employees for their support and efforts in meeting these challenges during the year. Board Changes As I announced last year, and following ten years as your Chairman, I will be retiring at the close of the 2007 AGM. I am proud to have made a contribution to the substantial progress achieved by the Group during my tenure and would like to thank my colleagues for all their support during this period. The Group is in a healthy position and I wish the new Chairman, David Grove, and his team, every success in the future. I would also like to congratulate Derek Muir, who will take over the position of Chief Executive from David Grove, following a career spanning nearly 20 years with the Group. I would also like to extend a warm welcome to Clive Snowdon who will join the Board as a Non-Executive Director in May 2007. Outlook The current trading period has started in line with our expectations and, subject to market conditions remaining favourable, I look forward to another progressive performance in 2007. Employees Our innovative and entrepreneurial culture represents a calculated response to the David Winterbottom Chairman 6 March 2007 INNOVATIVE PRODUCTS Hill & Smith Holdings PLC Annual Report 2006 5 Operational Review Overview 2006 was another successful year for the Group during which we achieved all of our key strategic objectives, with further additions to our ever growing product portfolio supplying expanding markets both in the UK and, more recently, overseas. Infrastructure Products Group (‘IPG’) Our largest division continues to be the main engine for profit growth with its active product development programme generating organic growth, complemented by selected acquisitions. Revenue increased to £117.4 million, 9.3% higher than in the previous year. The underlying operating profit increased by 24.9% to £16.2 million (2005: £13.0 million). Hill & Smith’s new range of vehicle restraint systems continued to enhance its market leadership with increased demand for its Flexbeam crash barrier range of products. The Brifen wire rope brand made further progress in the USA where it is now used in 25 states as the system of choice to prevent cross-over accidents. During the year we were awarded various contracts on the M1 widening scheme. We anticipate these will generate sales for our Flexbeam, Varioguard and Multiplate products over the next three years. Berry Systems also had another very successful year as it continued to provide innovative solutions for our off-highway customers. A new technology division within IPG has been created following the recent acquisitions of Techspan Systems and Counters & Accessories. We are now able to offer a range of electronic highway information and vehicle logging and detection systems to complement our more traditional metal-based products, to the same customer base. In December Techspan was one of three successful bidders for a contract with the Highways Agency worth in total approximately £180 million over four years from 2007, for the supply and installation of variable message signs. Counters & Accessories has now been successfully integrated into the Group and a new management team has been created following the retirement of the previous owner. We are combining these excellent engineering teams to provide new solutions to help reduce congestion on the nation’s roads. Varley & Gulliver again delivered an excellent performance despite a downturn in exports. Further new products, including our fully tested high containment parapet system, are now available to the market. David Grove Chief Executive 6 www.hsholdings.co.uk Barkers Engineering made further progress in its fencing and security products markets with the development of the Inceptor range of access control gates for the Homeland security market. Mallatite was relocated to a single site within our new Metnor ‘galvanizing village’. The latest technology for manufacturing and finishing has been installed to allow us to follow our strategy of being the lowest cost producer. This world class facility will secure our status as a market leader in the UK lighting column market. Disruption arising from the relocation hampered the performance in 2006 but with recent contract wins in Portsmouth, Ealing and Dorset, the single site operation should not disappoint. Asset International continued to win new approvals for its Weholite product and its record performance in 2006 included the completion of its largest ever single contract of nearly £1 million. In order to support the expansion of this business, further investment has now been committed to acquire a fourth extruding line. Our galvanizing operations made considerable progress in the year despite having to contend with the unprecedented increase in zinc raw material prices. The acquisition of Metnor Galvanizing Limited late in the year has given Joseph Ash the advantage of a long bath facility in its portfolio. CULTURE AND VALUES Our management teams remain very focused on delivering high-quality innovative products to our customers and providing value-for-money solutions. Hill & Smith Holdings PLC Annual Report 2006 7 Operational Review continued Joseph Ash’s Envirotanks division had another excellent year and has secured a strong order book to carry forward into 2007. Building and Construction Products Revenue increased by 10.9% to £146.2 million in 2006 (2005: £131.8 million) although underlying operating profit at £3.8 million fell by 20.4% (2005: £4.8 million). The losses made in the Express reinforcing bar and mesh business more than offset the progress made in the remainder of the division. Express was adversely affected by major steel price increases and margin erosion in the year. However, the business returned to profitability in the last quarter of the year and this trend is expected to continue in 2007. Further growth and gains in market share led to another increase in profitability for Ash & Lacy Building Systems. Highlights in the year include the relocation of its depot in the South to larger premises and the opening of a new depot in Leeds to serve the North of England. Birtley Building Products continued to grow its product portfolio and improve efficiencies as a result of the investment in the site infrastructure. The industrial flooring and related products of Access Engineering, Redman Fisher and Lionweld Kennedy produced an excellent performance and we continue to invest in new products for the future. The record level of profits in 2006 clearly indicates that the Group’s investment strategy continues to deliver shareholder value. 8 www.hsholdings.co.uk Industrial Products Revenue increased to £42.5 million which was an 11.6% improvement on the 2005 figure (£38.1 million). Underlying operating profits also increased by 47.3% to £2.6 million (2005: £1.8 million). Benefiting from recent capital expenditure, there was a significant expansion of our pipe supports operations in Thailand during the year, as they take advantage of the current activity in the building of liquid natural gas plants around the world. The other smaller companies in this division traded adequately in difficult market conditions. Two of the smaller non-core metal stockholding businesses were sold during the year. Zinkinvent Our associated company, Zinkinvent GmbH, which we acquired in May 2005, had an excellent year. As explained in the Chairman’s Statement, we have recently entered into a conditional agreement to acquire control of Zinkinvent. If approved by the shareholders, this acquisition will greatly expand the scope of our galvanizing and lighting column manufacturing operations and provide us with a platform for international expansion. Acquisitions In February 2006 we acquired Counters & Accessories and in October 2006 we acquired Metnor Galvanizing. As mentioned above, Counters & Accessories will work closely with Techspan Systems to form the core of our new technology division within IPG. Metnor Galvanizing is located near Chesterfield, an area which is not well served by our existing galvanizing activities. It also has a longer bath facility than any of the other plants, thus enabling us to process longer lengths of poles and structured steel. This plant is now the fourth galvanizing facility situated adjacent to one of our major manufacturing units. The Future Our infrastructure and construction markets remain buoyant and demand in the UK for our continually expanding product portfolio, aimed at health and safety, security and the environment, will continue to drive the Company’s performance. The acquisition of Zinkinvent and our planned expansion into overseas markets will diversify our future earnings and provide further opportunities to develop the Group on an international basis. David Grove Chief Executive 6 March 2007 MARKET LEADERSHIP Hill & Smith Holdings PLC Annual Report 2006 9 Financial Review Chris Burr Finance Director Basis of Consolidation The results cover the twelve months to 31 December 2006. They include for the first time the results of Counters & Accessories Limited, which we acquired in February, and Metnor Galvanizing Limited, which we acquired in October, as well as a first full year contribution from our associated company, Zinkinvent GmbH, which was acquired in 2005. They also include the results of W&S Allely Limited and Eden Material Services (UK) Limited, both of which we disposed of in October 2006. Summary of Results The Group regards its underlying results, which exclude the effects of business reorganisation and property items, as the most appropriate measure of its financial performance. The Group’s 2006 results represent another record year with revenue and profit before tax at their highest ever levels. This performance was achieved despite major increases in energy and commodity prices, particularly zinc, which is used in our galvanizing operations, and some steel products. Although we were able in many instances to pass on these cost increases, they had the effect of reducing our overall trading profit margin. However, the higher full year contribution from Zinkinvent enabled us to maintain the growth in our underlying operating margin and profit before tax. Revenue and Operating Profit Revenue increased by 10.4% to £306.0 million (2005: £277.3 million). Adjusting for the effect of acquisitions and disposals, the like-for-like increase was 9.6%, with growth in all divisions. Revenue in our core Infrastructure Products Group division (IPG) increased by 9.3% due in part to the effects of the increase in the price of zinc. The Building and Construction division increased revenue by 10.9%, reflecting the passing on of the increased cost of raw materials and the continued expansion in our Ash & Lacy Building Systems operation. Growth in the Industrial Products division was due almost entirely to our Pipe Supports businesses which increased revenue significantly on the back of the surging worldwide demand for power generation, in particular in the liquid natural gas market. Underlying operating margins in IPG increased from 12.1% to 13.8% and underlying operating profit grew by 24.9%, fuelled by new product launches, strong market demand, both domestically and abroad, and the two acquisitions of Counters & Accessories Limited and Metnor Galvanizing Limited. Our Joseph Ash galvanizing operations benefited from the cost reductions arising from the closure of their Digbeth factory in 2005 and the Asset International plastic pipe business increased profits substantially, due to strong demand from the house building sector. In the Building and Construction division profit advances in most businesses were offset by a substantially reduced performance from our concrete reinforcement operation, Express Reinforcements Limited, which was adversely affected by a rapid rise in the cost of raw materials in the first half of the year, which squeezed margins. Sales prices are now back at much more satisfactory levels and we look forward to a significantly improved performance from this business in 2007. The improved results in the Industrial Products division were due primarily to the substantially increased contribution from our Pipe Supports Underlying earnings per share amounted to 20.7p, an increase of 15.3% over last year and the highest ever achieved by the Group. 10 www.hsholdings.co.uk deficit. The year end financing position benefited from the proceeds of the successful Placing and Open Offer in October 2006 which raised a total, net of costs, of £26.8 million. We also generated £3.1 million from the sale of properties and plant and equipment. £10.5 million was spent in making the acquisitions of Counters & Accessories Limited and Metnor Galvanizing Limited. Pensions Our year end net retirement obligation reduced by £3.4 million. Net investment returns during the year exceeded expectations and long-term bond rates increased, although these benefits were partially negated by the effect of new mortality assumptions. As noted above, we made additional contributions on account of the deficit amounting to £1.5 million. Further information is given in note 23 to the Financial Statements. Chris Burr Finance Director 6 March 2007 operations where operating profit nearly doubled due to strong customer demand. There was also an increased contribution from our associated company, Zinkinvent GmbH, where our share of its post-tax profits increased by £2.5 million. Although this is due in part to it being a full year contribution, rather than only seven months in 2005, there was nevertheless a substantial improvement in its underlying full year performance with higher volumes and operating margins. Group operating profit increased by 9.2% to £21.5 million (2005: £19.7 million) whilst underlying operating profit increased by 15.8% to £22.7 million (2005: £19.6 million). Net reorganisation and property items at operating profit level amounted to £1.2 million. These include the cost of relocating our Mallatite lighting column operations to a new site at Chesterfield, which involved the closures of the existing factories in Levenshulme and Cresswell. These costs were partially offset by gains on the sale of two vacant sites in Glasgow and Hartlepool. Financing Costs Net financing costs increased by £0.3 million, primarily as a result of the higher average borrowings during the year and the base rate increases later in the year. Based on underlying profit, net interest cover was 5.4 times (2005: 5.1 times). Profit Before Taxation Underlying profit before taxation rose by 17.6% to a record £18.5 million (2005: £15.7 million). Including the effect of the net reorganisation and property items, profit before taxation increased by 9.4% to £17.3 million (2005: £15.8 million). Taxation The effective tax rate on both underlying and overall profits was lower than the standard rate of 30%. This was due mainly to the inclusion of the Zinkinvent post-tax profits at the pre-tax level as required by International Accounting Standards. The overall tax rate of 24.6% was higher than the previous year, which benefited additionally from the release of a deferred tax provision arising from property transactions. Earnings per Share Underlying earnings per share amounted to 20.7p, representing an increase of 15.3% over last year (2005: 17.9p) and the highest ever achieved by the Group. However, because of the higher tax charge, the year’s basic earnings per share fell by 11.9% to 19.8p (2005: 22.5p). Dividends We again propose to increase the level of the distribution to shareholders. The recommended final dividend, together with the interim dividend already paid, makes a total for the year of 7.2p per share, an increase of 20.0% over last year. This level of dividend is covered 2.8 times by basic earnings per share. Based on underlying earnings per share, dividend cover is 2.9 times. Financing and Investment Year end net borrowings decreased slightly to £46.1 million (2005: £47.3 million). We continued our vigorous programme of capital expenditure and product development, investing a total of £19.0 million, £12.2 million in excess of the depreciation charge. Working capital increased by £13.5 million during the year primarily to support the higher costs of raw materials and the growth in revenue. We also made additional contributions totalling £1.5 million towards the Group’s pension SUSTAINABILITY Hill & Smith Holdings PLC Annual Report 2006 11 Directors 1. D S Winterbottom FCA, FCT Non-Executive Chairman 3. D W Muir BSc, CEng, MICE Executive Director (Chief Executive designate) 5. R E Richardson FCMI Senior Non-Executive Director David, aged 70, joined the Board on 1 October 1997. He was more recently Chairman of Shiloh PLC, CPL Industries Limited and Wightlink Shipping Limited and a non-executive director of Electrocomponents PLC. 2. D L Grove BA, FCA Deputy Chairman and Chief Executive David, aged 58, joined the Board on 20 March 1998. He is a shareholder and non-executive director of a number of private manufacturing, distribution and investment companies. He is Chairman of the West Midlands Industrial Development Board. Derek, aged 46, joined the Board on 21 August 2006. He has been a senior manager within the Hill & Smith Group for many years. He was appointed Managing Director of Hill & Smith Limited, one of the Group’s principal subsidiaries, in 1998. Since 2001 he has been Managing Director of the core Infrastructure Products Group division. 4. C J Burr FCA Finance Director Chris, aged 57, joined the Board on 2 November 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 The Singer Company Inc. in the UK and continental Europe. Dick, aged 67, joined the Board on 1 May 1997. He is Chairman of Westech Instrument Holdings PLC. He was previously Chairman and Chief Executive of Graystone PLC, Deputy Chairman and Managing Director of Goring Kerr PLC and Tace PLC. 6. H C Marshall MSc, BSc Non-Executive Director Howard, aged 63, joined the Board on 2 November 2000. Previously Chief Executive of Ash & Lacy Plc, he is also Chairman of Imaginatik Plc and, more recently, Chairman and Chief Executive of Bullough Plc. He also holds appointments as a Governor of the University of Central England, non-executive director of Heart of England Tourist Board and Chairman of Orchestra of the Swan. 2 4 1 6 5 3 Advisers Bankers Barclays Bank PLC Royal Bank of Scotland PLC Bank of Scotland PLC Auditor KPMG Audit Plc 12 www.hsholdings.co.uk Contacts and Committees Registered Office 2 Highlands Court, Cranmore Avenue, Shirley, Solihull, B90 4LE Website www.hsholdings.co.uk Company Secretary C J Burr FCA Company Number 671474 Audit Committee Messrs Richardson (Chairman), Winterbottom and Marshall Remuneration Committee Messrs Marshall (Chairman), Winterbottom and Richardson Nominations Committee Messrs Winterbottom (Chairman), Grove, Marshall and Richardson Life President John G Silk LLB (Lond) John, aged 81, joined the Board in 1981 and was Chairman from 1983 to 1995. He retired from the Board and was appointed Life President in 1999. FOCUSED Stockbroker and Financial Adviser Arden Partners plc Pensions Advisers KPMG LLP Solicitors HBJ Gateley Wareing LLP Howes Percival LLP Silks Solicitors Wragge & Co LLP Insurance Brokers and Risk Management Advisers Jardine Lloyd Thompson Registrars Computershare Investor Services PLC PO Box 82, The Pavilions, Bridgwater Road, Bristol, BS99 7NH Hill & Smith Holdings PLC Annual Report 2006 13 Directors’ Report The Directors present their forty-sixth Annual Report together with the Financial Statements for the year ended 31 December 2006. Business Review The Company is required by Section 234ZZB of the Companies Act 1985 to set out in this report a fair review of the business of the Group during the financial year ended 31 December 2006 and of the position of the Group at the end of that financial year and a description of the principal risks and uncertainties facing the Group. The information required to be disclosed as part of this Business Review, in addition to that reported below, can be found in the Operational Review on pages 6 to 9 and the Financial Review on pages 10 and 11 and which are incorporated into this report by reference. Principal Activities The principal activities of the Group are: Infrastructure Products Building and Construction Products Industrial Products The Group profit for the year after taxation amounted to £13.1 million. Turnover and operating profit increased by 10.4% and 9.2% respectively compared to the previous year. Business segment information is given on pages 39 and 40. Dividends The Directors recommend the payment of a final dividend of 4.2p per ordinary share (2005: 3.4p per ordinary share) which, together with the interim dividend of 3.0p per share paid on 12 January 2007, makes a total distribution for the year of 7.2p per share (2005: 6.0p per share). Subject to shareholders approving this recommendation at the Annual General Meeting, the dividend will be paid on 11 July 2007 to shareholders on the register at the close of business on 8 June 2007. Risks and Uncertainties There are a number of potential risks and uncertainties which could have an adverse impact on the Group’s long-term performance. Foreign Currency Risk Several Group companies trade with overseas customers and suppliers. In addition, the results of its associated company, Zinkinvent GmbH, which are prepared in euros, are translated for the Group’s reporting purposes into sterling. Accordingly, changes in the value of sterling against other currencies, particularly the US dollar and the euro, may affect the Group’s reported financial performance. Other financial risks are detailed in note 19 to the Financial Statements on pages 51 to 53. Raw Material Prices and Continuity of Supply In the past two years, there has been a very steep rise in the price of certain of the Group’s key raw materials, particularly steel, which is used in the fabrication of many of the Group’s products, and zinc, which is used in the Group’s hot dip galvanizing operations. The Group’s financial performance is directly affected by its ability to mitigate or pass on these price increases to its customers and also to maintain continuity of supply. At times, the Group may need to hold higher stocks in order to mitigate the effects of price increases, which may increase its financial costs. Technological and Regulatory Change Any significant change in the technology or the regulatory environment affecting the markets in which the Group operates could have an adverse effect on the Group’s financial performance. Commercial Relationships The Group benefits from close commercial relationships with a number of key customers and suppliers. The loss of any of these or a significant worsening of commercial terms could have an impact on the Group’s reported results. Pensions As at 31 December 2006, the Group reported a deficit of £10.5 million in respect of its defined benefit pension obligation. The Group’s net retirement benefit obligation is calculated on the basis of actuarial assumptions. Actual experience may vary significantly from these assumptions, which are also subject to changes in various factors outside the Company’s control, including mortality rates, long-term interest and inflation rates, trustee cooperation and the regulatory environment, all of which may lead to an increase in the deficit, the level of Company contributions and its compliance costs. Environmental and Health and Safety Risks Some of the Group’s businesses operate in industries which involve the use of potentially polluting materials; they may also operate from sites affected by historical pollution. Changes in legislation and environmental standards or the Group’s failure adequately to control these risks may have an adverse effect on the Group’s financial position. Like all businesses, the Group’s operations are subject to legislation relating to the provision of a safe working environment for its employees, contractors and other third parties. A serious failure on the part of the Group adequately to control its health and safety risks could have an adverse impact on its operations and hence its financial performance. Reputational Risk Many of the Group’s products are supplied to the public sector for the benefit of members of the public. To the extent that any of the Group’s products fail, or are not manufactured to the appropriate standard, a health and safety incident could occur which could generate adverse publicity and have an adverse effect on the Group’s reputation, its financial position and its ability to win new business. 14 www.hsholdings.co.uk (cid:1) (cid:1) (cid:1) Competitor Risk As with most private sector businesses, the Group operates in a competitive environment. Its operations therefore are subject from time to time to actions taken by its competitors. These actions may be many and varied but can include aggressive pricing, new product introductions, cheap product sourcing, geographical expansion and sales and marketing campaigns. Prolonged competitive activity of this sort may adversely affect the Group’s financial performance. Human Resources The ability of the Company to mitigate those risk factors within its control depends on the skill and efforts of its employees and management teams across the Group. Future success will depend, to a large degree, on the ability of the Group to attract and retain skilled and qualified personnel. If the Group loses the services of key people or is unable to attract and retain employees with the right capabilities and experience, it could have a material impact on the Group’s business. Energy Availability and Cost In common with all manufacturing businesses, the Group’s operations are dependent on the cost and availability of energy. Any supply interruptions or increase in energy costs will have an effect on its business. Dependence on Key Facilities and Equipment The Group has a number of production sites and individual items of plant and machinery which are key to its ability to service its customers and generally to enable it to operate efficiently. Although the Group has put in place insurance, contingency planning and other measures to mitigate against potential unforeseen events, there can be no certainty that these will prove to be adequate in all situations. Acquisitions The Company is an active acquirer. Acquisitions can involve risks that might have a material impact on the Company. Although these risks are usually mitigated by extensive due diligence and, where practical, by contractual representations, warranties and indemnities from the vendors, there is nevertheless a risk that a poorly judged or unsuccessful acquisition could have an adverse effect on the Group. Inability to Supply The inability of the Group to supply against contractual commitments is a risk which could have an adverse impact on the business. The Group endeavours to mitigate this risk by good management, contingency planning and, where practicable, through business interruption insurance. Key Performance Indicators The Board of Hill & Smith Holdings PLC uses the following financial and non-financial key performance indicators (’KPIs’) to measure the strategic and operational progress of the Group. The diversified and varied nature of our operations means that these and other KPIs, both financial and non-financial, are also measured at the subsidiary level. Group KPIs Financial KPIs Turnover Our aim is to increase turnover each year through a combination of price and volume growth, organic expansion and acquisitions. In 2006, we increased our Group turnover by 10.4% to £306.0m. Organic growth, excluding the effect of acquisitions and disposals, contributed 9.6% of this growth. Operating Margin This represents the Group underlying operating profit, before property and reorganisation items and excluding our share of profits from associates, divided by group turnover. In 2006 our operating margin was 6.4% compared to 6.8% in the previous year. This reduction was due principally to the effects of the increase in the cost of our principal raw materials, higher energy costs and the poor performance in the year of Express Reinforcements Limited. Profitability Our main profitability KPIs are underlying profit before tax and underlying earnings per share. These measures increased in 2006 by 17.6% and 15.3% respectively compared to the previous year. These are discussed in more detail in the Financial Review section of this report. Net Cash from Operating Activities The Company actively monitors working capital levels in all its operations. In 2006 Group net cash inflow from operating activities was £4.3m compared to £16.5m in 2005. This reduction included an adverse movement in working capital of £13.5m which was primarily due to the effects of the expansion of the Group’s operations and higher raw material costs. Non-financial KPIs Health and Safety The safety performance of each subsidiary is tracked and reviewed and reported regularly to the Board. Essential statistics on incidents and accidents are being compiled to form the basis for future target setting by the Group which will drive improved performance. Periodic reviews of insurance claims data are also made to identify underlying problems and trends which in turn will help the monitoring of our management and reduction of risks. Sustainability Our sustainability strategy is being developed and will include a set of non-financial KPIs. In doing so we will prioritise the measurement of energy efficiency, CO2 emissions, the use of recycled material, the management of waste and the quality of water that leaves our sites. Further information on these non-financial KPIs is given in the Corporate Social Responsibility section of this report. Subsidiary KPIs At a subsidiary level, in addition to a focus on year on year profit growth, attention is directed towards working capital management, including stock turnover rates, debtor and creditor days, and return on operating capital employed. Hill & Smith Holdings PLC Annual Report 2006 15 Directors’ Report Various other indicators relating to production efficiency and customer service levels are monitored where these are relevant to a subsidiary’s business. Corporate Social Responsibility Our Philosophy and Approach We take seriously our responsibilities to the environment and the communities in which we operate (commonly referred to as Corporate Social Responsibility or ‘CSR’). We believe that these responsibilities can have a positive impact on profitability and therefore on shareholder returns as well as on our reputation and growth prospects. We further believe that neither business growth nor efficiency need be compromised by striving to achieve high standards of social and environmental responsibility. During 2006, the Board embarked upon a project to implement a suite of policies dealing with the Group’s responsibilities to the environment and relationships with its various stakeholder groups, including its employees. These policies, which were adopted by the Board of Hill & Smith Holdings PLC in March 2007, are based upon a combination of custom and practice from around the Group and industry best practice. The policies are being progressively implemented across all our major manufacturing sites. Accordingly, what follows should be regarded as work in progress as it is the Board’s intention that in 2007 work will continue to extend and broaden the reporting of environmental performance at all the Group’s major operating facilities. This report sets out details of our CSR activities during the 2006 financial year during which the Group began the work of developing systems and processes for gathering and analysing performance data which will enable us to measure more effectively the cost and benefits of addressing our regulatory obligations. In preparing this report, consideration has been given to the Association of British Insurers’ disclosure guidelines on socially responsible investment. These guidelines were developed to help provide a basic benchmark for companies wishing to develop best practice in this area. Responsibilities and Accountabilities At a corporate level, the various aspects of CSR are assigned to different layers of management. The Board of Hill & Smith Holdings PLC sets Group policies. These include the environment, equal opportunities, discrimination and diversity, training and development, supply chain and a code of business ethics, all of which are published on the corporate website. These policies are reviewed within the normal business planning cycle and, as and when necessary, updated to reflect changes to legislation, emerging best practice and the needs of the business. D W Muir is the main Board Director responsible for CSR in the Group. Operating entity managing directors are responsible for the implementation of these policies, their communication across the business units and compliance with the policies and supporting principles, delegating as appropriate to designated individuals in their part of the business. Implementation of the policies is effected at each facility in order to ensure that the overall activities of each site are compatible with, and conform to, the policies and international standards as these apply to individual businesses. All our employees have a responsibility to be aware of, and to comply with, the Group’s policies and processes which have been developed for their guidance and in order to regulate the conduct of the day-to-day operations of the business. Employees are encouraged to make suggestions to improve these policies and procedures. CCA Targets v Achieved 550 e n n o T i d e z n v a G l i r e p h W k 500 450 400 350 Process for Identifying and Assessing Risks The Group is a major supplier to the Highways Agency. The Agency encourages its suppliers to comply with ISO14001, which specifies the actual requirements for an Environmental Management System (‘EMS’) and applies to those environmental aspects over which the organisation has control and can be expected to have an influence. At the time of writing, only Techspan Systems is ISO14001-compliant. Accordingly, the Group is moving towards ensuring that all subsidiaries supplying the Highways Agency work towards achieving compliance by the end of 2008. The cornerstone of each manufacturing facility’s EMS will be its Aspects and Impacts Register, identifying in respect of each stage of every process the associated risks and allocating a severity rating depending upon the significance of each risk in terms of its impact on the business. The allocation of a severity rating will be the starting point in determining how best to address each risk in turn. The Environment 1. Mallatite Limited Pursuant to the Group’s strategic objective of reducing the transport of product between sites, Mallatite’s Levenshulme and Cresswell manufacturing plants have been relocated to a new site adjacent to our Chesterfield galvanizing plant. This project was completed in January 2007. Target Achieved 2002 2004 2006 Milestone Target Year 16 www.hsholdings.co.uk Lighting columns were formerly transported by road from Levenshulme to Chesterfield for galvanizing. By relocating the manufacturing plant to a site adjacent to the Chesterfield galvanizing plant, Mallatite is able to reduce the number of road journeys by 500 per annum (65,000 miles) resulting in a 6,000 tonnes per annum reduction in the volume of product transported by road. This plant is now our fourth galvanizing facility to be located on a site adjacent to its own manufacturing unit. 2. Company Car Policy A company car policy is being developed, the objective of which is to encourage employees to select cars with lower CO2 emissions, thereby also reducing running costs to the Group. 3. Climate Change Agreement The UK Climate Change Programme was published on 17 November 2000, setting out the Government’s proposals for meeting the UK’s legally binding target of a 12.5% reduction in greenhouse gas emissions (Kyoto Protocol) and for moving towards the Government’s domestic goal of a 20% reduction in carbon dioxide emissions. The Climate Change Levy is a tax on the use of energy in industry, commerce and the public sector, with offsetting cuts in employers’ National Insurance Contributions and additional support for energy efficiency schemes and renewable sources of energy. The levy forms a key part of the Government’s overall Climate Change Programme. Companies participating in the Climate Change Agreement (‘CCA’) have this charge reduced by up to 80%. By meeting energy usage reduction targets and meeting responsibilities set out in the CCA, sites are able to claim this reduction from the date they join the scheme up until the end of March 2013. The Joseph Ash group of galvanizers joined the scheme at its inception. Targets, which were based on progressive biennial reductions in process energy consumption of 1%, 2%, 3%, 5% and 6%, were agreed and set by Defra for milestone target years against a base year for the industry (1998). These targets were expressed as annual usage in kWh per tonne galvanized and they extend to 2010. Since that time, by raising awareness of energy usage and by employing an effective energy management strategy, Joseph Ash has consistently met its biennial targets. Furthermore, those savings have translated into a CO2 surplus that currently stands at 3,396 tonnes and which may be traded under the UK Greenhouse Gas Emissions Trading Scheme. For the future, by employing ever more effective means of process control and by adopting more rigorous management of energy consumption, Joseph Ash believes it will achieve its consumption reduction targets for the remainder of the CCA. On the facing page is a graphical illustration of Joseph Ash’s CCA performance to date. It should be noted that in galvanizing there are a number of factors that affect overall performance, not least of which is product mix and output. For this reason, 2006 saw an increase in energy consumption over 2004 although it was still well below the 495 kWh per tonne target. Health and Safety The Board endeavours to ensure that Hill & Smith’s activities do not result in injury or illness to any employee, contractor or member of the public. The Board approves policies designed to achieve high standards of health and safety and these are regularly reviewed to monitor their continued suitability and effectiveness. All Hill & Smith subsidiaries must comply with our health and safety policies in addition to meeting requirements specific to their businesses, for example, ISO14001 and the Control of Substances Hazardous to Health (‘COSHH’) as well as customers’ expectations. The Board is committed to ensuring that these principles are articulated to all employees and that they are effectively implemented. The Group has engaged health and safety consultants to audit its existing systems and health and safety performance, and implement a new health and safety management system. This system is now fully operational and is providing the anticipated benefits. The system is supported by the Group Health and Safety Committee that met twice during the year under review. Each of our businesses maintains accident reporting systems. These systems are used to identify trends with a view to developing strategies for reducing the number of reportable as well as non-reportable accidents and near misses. Employment The value of the contribution of all employees is recognised by the Board and this is reflected in the high levels of involvement, autonomy and accountability that are encouraged throughout the Group. Subsidiary companies are made aware of the financial, economic and other performance objectives through good communications and employee relations across all the operations. Each company in the Group is therefore encouraged to implement comprehensive employment policies designed to involve employees in its achievements and to determine ways in which their knowledge and skills can best contribute towards its success. It is the Company’s policy to operate share plans to involve, motivate and reward Directors and employees and to align their interests with those of the shareholders. To this end, the Company operates an Executive Share Option Scheme and a Sharesave Scheme. Employee involvement and communication programmes continue to be developed, providing equal opportunities to all, irrespective of age, sex, race, religion or colour. All employees are encouraged to raise genuine concerns about possible improprieties in the conduct of our business, whether in matters of financial reporting or other malpractices, at the earliest opportunity and in an appropriate way. Accordingly, the Group adopted a whistleblowing policy in October 2004. Hill & Smith Holdings PLC Annual Report 2006 17 Directors’ Report Disabled Persons Each company in the Group endeavours to provide equality of opportunity in recruiting, training, promoting and developing the careers of disabled persons. It is also Group practice, wherever possible, to continue the employment of any employees who become disabled during the course of their employment. Training and Development Our businesses are increasingly knowledge- based. Employing the right people and encouraging the continuous development of the skills of our employees is key to developing a successful business. Accordingly, the development of individuals at all levels is encouraged with the objective of maximising the overall performance of the business. This is achieved through a combination of work-based learning together with the provision of development opportunities, supported by a formal programme of coaching and mentoring. Share Capital Information concerning the issued share capital of the Company is set out in note 20 to the Financial Statements on pages 53 and 54. Directors’ Interests In October 2006, the Group raised approximately £28.0 million before expenses by means of a Placing and Open Offer of 12,280,702 new ordinary shares at 228p per share. The net proceeds are being utilised to strengthen the Group’s capital base, thereby enabling it to take advantage of suitable acquisition opportunities and provide funding for the organic expansion of the Group’s existing businesses. During the year, 69,554 new ordinary shares were issued under employee share schemes, 13,554 under the 1995 Save As You Earn Scheme and 56,000 under the 1999 Executive Share Options Scheme. Directors and Directors’ Interests The Directors who served during the year ended 31 December 2006 and to the current date are as follows: Name D S Winterbottom D L Grove D W Muir C J Burr H C Marshall R E Richardson Date of Appointment 1 October 1997 20 March 1998 21 August 2006 2 November 2000 2 November 2000 1 May 1997 Biographical details of the Directors are shown on page 12. The Director retiring by rotation at the forthcoming Annual General Meeting is H C Marshall who, being eligible, offers himself for re-election. D W Muir was appointed as a Director by the Board on 21 August 2006 and, pursuant to the Company’s Articles of Association, will retire and offer himself for election at the Annual General Meeting. As recommended by the Combined Code, Non-Executive Directors who have been in office for more than nine years will stand for re- election at the next Annual General Meeting. On this basis, R E Richardson will be seeking re-election at the Annual General Meeting. The interests of the Directors and their families in the ordinary share capital of the Company (excluding the share options detailed in the Directors’ Remuneration Report on page 27) at the beginning and end of the financial year were as follows: C J Burr D L Grove H C Marshall D W Muir (appointed 21 August 2006) R E Richardson D S Winterbottom All interests are beneficial. Number of Ordinary Shares at 31 December 2006 137,628 1,259,969* 71,930* 9,714* 3,859* 17,213* Number of Ordinary Shares at 31 December 2005 (or on appointment) 137,628 1,210,945 68,601 8,855 3,518 15,690 There have been no changes in the above figures between the year end and the present date. * The Directors’ increased shareholdings arose from their taking up some or all of their entitlement under the terms of the Company’s Placing and Open offer on 16 October 2006 at a price of 228p per ordinary share. No Director had any interest in any material contract or arrangement in relation to the business of the Company and any of its subsidiaries during the year. Details of the Directors’ service contracts are set out in the Directors’ Remuneration Report on page 25. Substantial Shareholdings As at 6 March 2007, the Company had been notified under Rule 9.8.6R(2) of the Listing Rules as follows: J P Morgan Asset Management (UK) Limited Legal & General Group Plc Aviva plc Number of Voting Rights Percentage of Issued Voting Rights Direct — 2,421,200 2,386,740 Indirect 6,761,196 — — Direct — 3.20 3.16 Indirect 8.95 — — 18 www.hsholdings.co.uk Research and Development During the year, the Group spent a total of £1,591,000 (2005: £1,490,000) on research and development. Political and Charitable Donations Charitable donations amounting to £9,000 (2005: £11,000) were made in the year. There were no political contributions. Supplier Payment Policy Individual operating companies within the Group are responsible for establishing and adhering to appropriate policies for the payment of their suppliers. The companies agree terms and conditions under which business transactions with suppliers are conducted. The Group does not follow any code or standard on payment practice but it is the Group’s policy that, provided a supplier is complying with the relevant terms and conditions, including the prompt and complete submission of all required documentation, payment will be made in accordance with the agreed terms. It is the Group’s policy to ensure that suppliers know the terms on which payments will take place when transactions are agreed. The average credit period was 90 days (2005: 87 days). The Company’s average credit period was 32 days (2005: 30 days). Directors’ and Officers’ Liability Insurance The Company purchases and maintains liability insurance for its Directors and officers and those of the subsidiaries of the Group, as permitted by Sections 309A, B and C and Section 337A of the Companies Act 1985. Capital Gains Tax For capital gains tax purposes, the price of the Company’s ordinary shares of 25p each at 31 March 1982 was 12p. Independent Auditors In accordance with Section 385 of the Companies Act 1985, a resolution for the reappointment of KPMG Audit Plc as auditors of the Company will be proposed at the forthcoming Annual General Meeting. Disclosure of Information to Auditors In accordance with Section 234ZA of the Companies Act 1985, the Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware; and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Special Business of the Annual General Meeting The Annual General Meeting of the Company will be held at 10.30 a.m. on Friday 11 May 2007 at The Balcony Suite, The National Motorcycle Museum, Solihull. Notice is sent to shareholders separately with this Report together with an explanation of the special business to be considered at the meeting. By order of the Board C J Burr Company Secretary 6 March 2007 Hill & Smith Holdings PLC Annual Report 2006 19 Corporate Governance Introduction The Board continues to review the governance requirements in the context of the size, organisational structure and commercial strengths of the Group. During this review process, the purpose of good governance has remained paramount, namely, to provide the framework of business principles, structures and controls within the Group which enable the Directors, management and shareholders to ensure: accountability transparency of responsibility the appropriate management of conflicts of interest effective relationships between the Board, its committees and shareholders All of the above support the overall objective of creating shareholder value through the delivery of the Group’s strategy, the reduction of risks and the protection of the long-term interests of shareholders. Statement of Compliance With the exception of the following matters, the Company has throughout 2006 fully complied with the principles set out in Section 1 of the UK Financial Reporting Council’s Combined Code on Corporate Governance adopted in July 2003: Code Requirement (Code A.2) — The roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board. At the Group’s Annual General Meeting to be held on 11 May 2007, D L Grove is to become Executive Chairman following the retirement of the present Chairman, D S Winterbottom. The Code requires an explanation in cases where an individual who was previously chief executive officer of a company is appointed chairman of the board. As required by the Code, this appointment has been discussed in advance with major shareholders. In reaching its decision to appoint Mr Grove, the Board considered the significant benefits of continuity as well as the leadership that he will bring to the role of Chairman. Code Requirement (Code A.3) — The board is to assess the non-executive directors’ independence. R E Richardson, Senior Independent Director, was appointed to the Board on 1 May 1997. His length of service on the Board exceeds the nine years referred to in the Combined Code, which provides that an explanation be made to shareholders concerning his continued independence. The Board considers that Mr Richardson maintains an independent and rigorous approach to the Group’s business. Mr Richardson’s length of service is not considered to impair his independence but rather to provide a depth of knowledge, insight into the business and commitment to the Group which enables him more fully to carry out his non- executive duties. In accordance with the Code, he is standing for re-election at the forthcoming AGM. D S Winterbottom, Non-Executive Chairman, joined the Board on 1 October 1997. His length of service therefore exceeds nine years. As stated above, Mr Winterbottom will be retiring at the forthcoming Annual General Meeting. Code Requirement (Code A.4) — For the appointment of a chairman, the nominations committee should prepare a job specification including an assessment of the time commitment expected. The appointment of D L Grove as Executive Chairman was made in accordance with Code principles. A description of the role, responsibilities and expected time commitment has been prepared subject to final approval by the Nominations Committee. The Directors and the Board The Board comprises the Chairman, three Executive Directors and two Non-Executive Directors. The Chairman is D S Winterbottom, the Chief Executive is D L Grove and R E Richardson is the Senior Independent Director. Biographical details of all the Directors are set out on page 12. D W Muir was appointed an executive Director during the year ended 31 December 2006 and will take over the position of Chief Executive from D L Grove following the latter’s appointment as Executive Chairman when D S Winterbottom retires at the Annual General Meeting. A description of the role of Chief Executive has been approved by the Nominations Committee. On 6 March 2007, it was announced that Clive John Snowdon will join the Board as a Non- Executive Director immediately following the Annual General Meeting to be held on 11 May 2007. Mr Snowdon, a chartered accountant, has been the Chief Executive of Umeco plc, a publicly quoted company, since 1997. Following these changes, the Board considers that it has the correct balance of executive and non-executive Directors to comply with the spirit of the Code. For the months of November and December, C J Burr combined the roles of Finance Director and Company Secretary as an interim measure following the departure of the previous Company Secretary. An appointment has been made since the year end of a permanent replacement who will take office on joining the Company. The Company Secretary is responsible for assisting the Chairman in all matters relating to corporate governance. Details of the terms of appointment of both the executive and non-executive Directors are set out on page 25 of the Directors’ Remuneration Report, which refers to executive service contracts and non-executive letters of appointment, copies of which are available for inspection at the Company’s registered office and which will be available for inspection at the forthcoming Annual General Meeting to be held on 11 May 2007. Board Effectiveness The Directors ensure the effectiveness of the Board through regular Board meetings and by having open lines of communication between Board members. During the period under review, the Board met fourteen times for main Board meetings. Details of attendances at these meetings are set out below: D S Winterbottom D L Grove C J Burr H C Marshall D W Muir (appointed 21 August 2006) R E Richardson 13 out of 14 attended 14 out of 14 attended 14 out of 14 attended 12 out of 14 attended 5 out of 6 attended 14 out of 14 attended The Board is responsible to the Company’s shareholders for strategic direction, financial performance, resource allocation, risk management, governance and internal controls. The schedule of matters reserved to the Board for its own and its Committees’ decisions ensures exclusive decision-making powers over these responsibilities as well as such matters as 20 www.hsholdings.co.uk (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) remuneration policies, accounting policies, capital expenditure, acquisitions, disposals and financing. The Board is supplied in a timely manner with the appropriate information to enable it to discharge its duties, including providing constructive challenge to, and scrutiny of, management. Further information is obtained by the Board from the executive Directors and other relevant senior executives as the Board, particularly its non-executive members, considers appropriate. Procedures are in place for Directors to take independent professional advice, when necessary, at the Company’s expense. The Board is supported by the Company Secretary who, under the direction of the Chairman, ensures good communication and information flows within the Board, including between executive and non-executive Directors and between the Board and its Committees. Board Balance and Independence The Board has assessed the three non- executive Directors against the criteria set out in the Combined Code and considers them to be independent. All three non-executive Directors are independent of management and free from any business or other relationship that would materially interfere with the exercise of their independent judgement. Whilst it is recognised that H C Marshall used to be the Chief Executive of one of the Group’s subsidiaries, Ash & Lacy Plc, prior to its acquisition by the Group in 2000, his membership of the Hill & Smith Board has always been as a non-executive Director and his Board colleagues have consistently recognised him as being independent in his approach to the role and in his judgement and character. Furthermore, he has no interests or relationships that alter his independent status. Re-election of Directors In accordance with the Company’s Articles, not more than one-third of the Directors are required to be re-elected at each Annual General Meeting of the Company, the Directors so doing being those who have been longest in office since their last appointment or re- election. Every Director must in any event be re-elected at least every three years. H C Marshall is the Director retiring by rotation at the forthcoming Annual General Meeting of the Company and, being eligible, offers himself for reappointment. As well as recognising the importance of an individual’s contribution, the Board is also mindful of the value of an appropriate level of continuity on Board and Committee memberships. The Board and the Nominations Committee support H C Marshall’s reappointment having assessed his performance, value to the Board and its Committees and his ability to continue to operate as an independent Director. As recommended by the Combined Code, Non-Executive Directors who have been in office for more than nine years will stand for re- election at the next Annual General Meeting. On this basis, R E Richardson will be seeking re-election at the Annual General Meeting. Election of a Director D W Muir was appointed as a Director by the Board on 21 August 2006 and, pursuant to the Company’s Articles, will retire and offer himself for election at the Annual General Meeting. Board Development The Board believes that the benefit of its collective experience is a valuable asset but accepts that Directors need to keep their professional knowledge up to date from time to time. Consequently, the Board has agreed guidelines for meeting their own training needs. The Board has also adopted a procedure to enable directors to take professional advice at the Company’s expense. During the year under review, the Board and each of the Audit, Nominations and Remuneration Committees initiated a process of undertaking performance evaluations. A questionnaire has been circulated to Directors concerning the performance of the Board as a whole and its main committees. Once all questionnaires have been completed, the results will be compiled and summarised by the Company Secretary and the Chairman will report the collective findings to the Board and agree any actions required. The areas covered include effectiveness of individual contributions, relationships, communication and development. Committees of the Board The Board has three Committees, as follows: Audit Committee The Audit Committee consists of the three non- executive Directors and is chaired by R E Richardson. Following the retirement of D S Winterbottom at the forthcoming Annual General Meeting, C J Snowdon will join the Audit Committee. Mr Snowdon is a chartered accountant and is deemed to have recent and relevant financial experience. The Company Secretary acts as secretary to the Committee.The objectives of the Audit Committee have been confirmed in the terms of reference as: ensuring the integrity of the Financial Statements of the Company; reviewing and monitoring the Group’s internal control systems; overseeing the effectiveness of the Group’s internal audit activity; overseeing the Group’s relationship with its external auditors; and ensuring that Group reporting complies in all respects with relevant statutory and required financial reporting standards, including corporate governance disclosures. A copy of the terms of reference is available on the Company’s website. Financial Reporting: A procedure setting out responsibilities for the preparation of the Group’s Financial Statements and their review by the external auditor and the Audit Committee has been documented. This also sets out the basis on which the Board make its statement on ‘Going Concern’. The Audit Committee reviewed the preliminary and interim statements prior to their approval by the Board. The Committee has also considered the external auditor’s management letter and the assumptions underlying the Financial Statements prior to recommending their approval to the Board. External Reporting: The Audit Committee has an agreed procedure setting out the basis upon which the Committee will consider and make recommendations as appropriate concerning the appointment, reappointment or removal of the external auditor. The Committee assesses the qualification, expertise, independence and objectivity of the auditor on an annual basis and has set down a timetable and criteria for making those assessments. Policies concerning the employment of former employees of the external auditor and the use of the external auditor to perform non-audit services have been adopted. In regard to the latter, the Committee believes that there are certain non-audit services where it is cost- Hill & Smith Holdings PLC Annual Report 2006 21 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Corporate Governance effective for the external auditor to be used. These primarily include merger and acquisition due diligence work and tax advisory services. A number of activities are prohibited including work on accounting records, internal audit, IT consultancy and advice to the Remuneration Committee. The policy is consistent with the ethical standards recommended by the Accounting Practices Board. The Committee approves the scope and terms of engagement of each audit, and then reviews the performance of the auditor following the completion of each audit. The Audit Committee met three times during the period under review and there was a hundred per cent attendance on each occasion. Remuneration Committee The membership of the Remuneration Committee comprises the three non-executive Directors and is chaired by H C Marshall, who also acts as its secretary. Following the retirement of D S Winterbottom at the forthcoming Annual General Meeting, C J Snowdon will join the Remuneration Committee. D L Grove is invited to attend meetings as necessary. Under its terms of reference, the Remuneration Committee is responsible for: ensuring that the Company’s executive Directors and certain other agreed senior executives are fairly rewarded for their individual contributions to the Company’s overall performance; demonstrating to shareholders and other interested parties that the remuneration (including all benefits and terms of employment) of the executive Directors of the Company are set by a committee of Board members who have no personal interest in the outcome of their decisions and who will give due regard to the interests of the shareholders and to the financial and commercial health of the Company; and assessing how the Company should comply with established best practice in Directors’ remuneration. the Remuneration Committee are set out in the Directors’ Remuneration Report on pages 24 to 27. The Remuneration Committee met once during the period and all members were present. Nominations Committee The Nominations Committee comprises the three non-executive Directors and D L Grove (Chief Executive). The Chairman of the Committee is D S Winterbottom and the Company Secretary acts as the secretary of the Committee. The Board understands the necessity to refresh its membership and, to that end, has established a Nominations Committee whose objectives are: ensuring that the size and composition of the Board is appropriate to the needs of the Group; selecting the most suitable candidate or candidates for appointment to the Board; and overseeing succession planning for the Board. The terms of reference for the Nominations Committee are available on the Company’s website. The Nominations Committee will agree a formal process for making Board appointments, including a decision on whether external assistance would be appropriate, when it deems it necessary to make new appointments. During the year, using external consultants, the Committee conducted a search for an independent Director. This reached a successful conclusion early in 2007 with the appointment of C J Snowdon immediately following this year’s Annual General Meeting. The search process involved members of the Committee interviewing a number of candidates and making their final recommendation to the Board. The terms of reference of the Nominations Committee make it clear that the appointment of the Chairman of the Board is a matter for the Board as a whole to consider. A copy of the terms of reference is available on the Company’s website. Full details of the role, policies and activities of The Board has also approved a standard letter for future non-executive appointments to the Board (including expected time commitments), a fee structure and a standard programme for the induction of new Directors. Internal Controls The Directors have overall responsibility for ensuring that the Group maintains a sound system of internal control to provide them with reasonable assurance that all information used within the business and for external publication is adequate. This includes financial, operational and compliance control and risk management, ensuring that assets are safeguarded and shareholders’ investments protected. In line with past practice, the Board has reviewed the internal control system in place during the year and until the date of the approval of this report, which through internal consultation led by the Board, ensures that it remains effective. Where weaknesses are identified as a result of the reviews, new procedures are put in place to strengthen controls and these are reviewed at regular intervals. The Board has in place risk assessment processes within all the Group’s operations, and procedures have been established to implement the guidance from the Turnbull Report and more recently the Smith Report. There is a process for identifying, managing and reviewing any changes in the risks faced by the business. This process, which is kept under continual review and improvement, has been in place during the year under review and remains in place as at the date of approval of this report. The process operates under the direction of the Board and is reviewed by the Audit Committee. The key procedures that the Directors have established and which are designed to provide effective internal control for the Group are: Regular Board meetings to consider a schedule of matters reserved for the Directors’ consideration. The Audit Committee of the Board considers significant financial control matters as appropriate. Monitoring of the financial performance of operating companies and divisions through analysis of regular financial and management reports together with continuous direct contact with operating company and divisional management. Consolidated reports and independent commentaries are prepared and submitted to the Board for review at formal monthly Board meetings. Maintenance of local operating boards and divisional management teams, enabling the Board to delegate appropriate levels of 22 www.hsholdings.co.uk (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Senior Independent Director are available to meet with shareholders concerning corporate governance issues, if so required. Copies of all major press releases and interim and annual reports are posted on the Company’s website together with additional detail on major contracts and projects, key financial information, company products, structure and background. The Board wishes to encourage the constructive use of the Company’s Annual General Meeting for shareholder communication. Each of the chairmen of the Audit, Nomination and Remuneration Committees will be in attendance at the forthcoming Annual General Meeting, which will be convened on at least 20 working days’ notice. The Board has again considered whether to make more use of electronic facilities for communication with shareholders and has concluded, in view of the costs involved, that any further steps would not warrant the time or expense. As with previous practice, the level of proxies cast for each resolution will be communicated following approval of each resolution at the forthcoming Annual General Meeting. Going Concern After making enquiries, the Directors have a reasonable expectation that the Company and its subsidiaries have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Financial Statements. authority to a small number of subsidiary company directors and managers, all of whom are accountable to the Board. The application of a rigorous annual budgeting process. All budgets are subject to approval at Group Board level. The review and comparison of detailed monthly management reports, received from each business unit, against budgets and forecasts. Adoption of a group risk management framework that identifies responsibilities at both Group and subsidiary level for the ongoing management of risk across the business. Programming internal audit work to take account of the risk assessment results and processes. The use of external professional advisers to carry out due diligence for potential acquisitions. The Board is satisfied with the effectiveness of the Group’s current system of internal control. Internal Audit The Audit Committee has set down the criteria by which it will assess the effectiveness of the internal audit function on an annual basis. In addition to the above areas of activity set out in its terms of reference, the Committee has also approved arrangements by which staff may raise concerns about possible improprieties in matters of financial reporting. This whistleblowing policy has been communicated to subsidiary companies and employees along with the Group’s new disciplinary and grievance procedures. Group Treasury Management The Group’s financial instruments comprise borrowing, cash and liquid resources and various items such as trade receivables and trade payables that arise directly from, and finance, operations. It is, and has been throughout the period under review and up to the date of approval of this report, the Group’s policy that no speculative trading in financial instruments shall be undertaken. Shareholder Communications and Relations The Board recognises the importance of good communications with shareholders and steps have been taken to invite shareholders to meet with more Board members. The Chairman and Hill & Smith Holdings PLC Annual Report 2006 23 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Directors’ Remuneration Report The Directors’ Remuneration Report covers all Directors, both executive and non-executive. The report has been approved by the Board and signed on its behalf by the Chairman of the Remuneration Committee. A resolution to approve this report will be proposed at the Company’s Annual General Meeting to be held on 11 May 2007. This report has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002 (‘DRRR’), which set out statutory requirements for the disclosure of Directors’ remuneration. DRRR requires the auditor to report to the Company’s shareholders on the auditable parts of the Remuneration Committee report and to state whether, in their opinion, those parts of the report have been properly prepared in accordance with the Companies Act 1985. INFORMATION NOT SUBJECT TO AUDIT Remuneration Committee and Advisers The Remuneration Committee (the ‘Committee’) determines on behalf of the Board the Company’s policy on the remuneration and terms of engagement of the executive Directors and senior executives. The Committee comprises the non-executive Directors of the Company. The members of the Remuneration Committee during the year were: H C Marshall (Chairman) D S Winterbottom R E Richardson The Committee members have no personal financial interest, other than as shareholders, in the matters to be decided. They have no conflicts of interest arising from cross- directorships with the executive Directors nor from being involved in the day-to-day business of the Company. They do not participate in any bonus, share option or pension arrangements. The Committee operates under clear written terms of reference, confirms that its constitution and operation comply with the principles set out in the Combined Code on Corporate Governance, and has applied the principles in Section 1 of the Code throughout the year. The Committee met once in the period under review and was fully attended. The Committee used the external services of Buck Consultants as its principal external adviser during 2006 on matters of executive Directors’ remuneration. The Committee will also, as necessary, consult with the Chief Executive. Remuneration Policy Main Principles The Hill & Smith Holdings PLC Group of companies operates in highly competitive environments. For the Group to continue to compete successfully, it is essential that the level of remuneration and benefits offered achieve the objectives of attracting, retaining, motivating and rewarding the necessary high calibre of individuals at all levels across the Group. The Group therefore sets out to provide competitive remuneration to all its employees, appropriate to the business environment in the markets in which it operates. To achieve this, the remuneration package is based upon the following principles: Total rewards should be set to provide a fair and attractive remuneration package. Appropriate elements of the remuneration package should be designed to reinforce the link between performance and reward. Executive Directors’ incentives should be aligned with the interests of shareholders. The remuneration strategy is designed to be in line with the Company’s fundamental values of fairness, competitiveness and equity and also to support the Company’s corporate strategy. A cohesive reward structure, consistently applied and with links to corporate performance, is seen as critical in ensuring attainment of the Company’s strategic goals. The Company also seeks to align the interests of shareholders and employees at all levels by giving employees opportunities and encouragement to build up a shareholding interest in the Company through the 2005 Executive Share Option Scheme and the 2005 Sharesave Scheme. Remuneration of Executive Directors Elements of Remuneration The executive Directors’ total remuneration currently consists of: Fixed elements, comprising basic salary, benefits and pensions; and Performance-related elements comprising performance-related bonus and long- term performance arrangements satisfied by share options. Each of the above elements of remuneration is explained below. Basic Salary Basic annual salaries for executive Directors and key senior executives are reviewed annually on 1 January or when a material change of responsibility occurs. The level of salary is determined with reference to individual performance and the rates of salary offered for similar roles. Due account is also taken of the responsibilities, skills and experience required to fulfil the executive’s role within the Company. Benefits in Kind These principally comprise car benefits, life assurance, membership of the Group’s healthcare insurance scheme and accident insurance. These benefits do not form part of pensionable earnings. Performance-related Cash Bonuses Under his service agreement D L Grove receives an annual performance-related cash bonus dependent upon the increase in the Group earnings per share (as therein defined) in accordance with the formula set out in that agreement. This bonus is capped at 75% of basic annual salary. Bonuses for C J Burr and D W Muir are awarded on the basis of the Group’s achievement of internal cash and profit targets, and, where deemed appropriate by the Committee, supplementary discretionary bonuses that take into account their individual performances and responsibilities in their roles as executive Directors. 2005 Executive Share Option Scheme The 2005 Executive Share Option Scheme was approved by shareholders at the AGM held on 13 May 2005. Under this Scheme, options may be awarded at the discretion of the Committee to acquire ordinary shares at an exercise price no lower than the market value (as determined in accordance with the Scheme rules) of a share at the date of grant, subject to an overall limit of grant in any calendar year of one times base salary. The options can only be exercised between three and ten years after the date of grant and following the attainment of a performance condition. The criterion for the performance condition, currently set by the Committee under the Scheme, is that options may only be exercised if the growth in earnings per share of the Group before exceptional items and goodwill amortisation over a three year period is not less than the increase in the Retail Price Index plus nine per cent, over the same period. The criterion was set to ensure that earnings attributable to the shareholders increased at a rate in excess of inflation prior to any exercise of options. There is no re-testing of the attainment of the performance condition. The Committee may also grant options subject to performance conditions which are significantly more stretching than those ordinarily applied by the Committee on the grant of options. These options, referred to as ‘High Performance Options’, may be subject to 24 www.hsholdings.co.uk (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) a condition requiring top quartile performance by reference to a predetermined measure within a predeterminded peer group over a measurement period of not less than three years, before full vesting is permitted. For options outstanding under this Scheme see the table on page 27. 2005 Sharesave Scheme The 2005 Sharesave Scheme is open to all employees (including executive Directors) who have completed six months’ continuous service. Under this Scheme the Company can, if it thinks fit, grant options at a price up to twenty per cent below the market price. Exercise of options under the Sharesave Scheme are not subject to any performance condition. No options have been granted under this Scheme. Long-term Incentive Plan (‘LTIP’) The Remuneration Committee believes that, in addition to the provision of share options, it is appropriate to operate an LTIP to encourage executive Directors and a small number of senior personnel to meet the Group’s long-term strategic and financial objectives set by the Board. Buck Consultants has been commissioned to design an LTIP for which shareholder approval is sought at the forthcoming Annual General Meeting. The terms of the proposed LTIP are set out in the circular accompanying this report. A consequential change is required to the 2005 Executive Share Option Scheme as set out in the circular accompanying this report. Directors’ Pension Provision C J Burr and D W Muir participate in the Hill & Smith Executive Pension Scheme, a defined benefit arrangement, which provides pensions and other benefits within Inland Revenue limits. The Scheme provides, at normal retirement age, a maximum pension of two-thirds of final pensionable salary, subject to completion of a sufficient number of years’ service. Bonus is excluded from the definition of pensionable salary. There are no pension arrangements in place for other Directors and no change took place in C J Burr’s or D W Muir’s arrangements during the year. Remuneration Policy for Non-Executive Directors The remuneration of the Chairman is determined by the Board after recommendations made by the other members of the Remuneration Committee. The remuneration of the two other non-executive Directors is determined by the Board following recommendations made by the Chairman. The non-executives do not participate in any bonus, share option or pension arrangements. Service Agreements The three executive Directors have service agreements with the Company. The agreements provide for twelve months’ notice if terminated by the Company. D L Grove’s service agreement is terminable by either party on twelve months’ notice. During the period of ninety days following a change in control the period of notice required to be given by the Company to D L Grove is twelve months and the period of notice required to be given by D L Grove to the Company is reduced from twelve months to ninety days. If, during the period of ninety days immediately following a change in control, the service agreement is terminated by D L Grove or is terminated by the Company without prior notice, D L Grove is entitled to a sum equal to twelve months’ salary. C J Burr may terminate his service agreement with the Company by giving six months’ notice. The Company may terminate the agreement by giving twelve months’ notice. If the notice is given within the period of twelve months immediately following a change in control the notice to be given by the Company is also twelve months. On termination of the service agreement by the Company without prior notice C J Burr is under a duty to mitigate any loss unless such termination is effected within the period of twelve months following a change in control. D W Muir may terminate his service agreement with the Company by giving six months’ notice. The Company may terminate the agreement by giving twelve months’ notice. There are no change in control provisions in D W Muir’s service agreement. Apart from the above, there are no special provisions in the executive Directors’ contracts for compensation for loss of office. The Committee would consider the circumstances of any individual case of early termination and would determine compensation payments accordingly. A fair but robust principle of mitigation would be applied to the payment of compensation in the context of professional advice received as to contractual entitlement. The dates of the contracts are as follows: D L Grove C J Burr D W Muir 9 July 1999 20 June 2001 2 June 1999 Non-Executive Appointments The Chairman has a service agreement with the Company. 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. The date of the Chairman’s contract is 4 March 1999. Neither H C Marshall nor R E Richardson has a Service Agreement; their appointments are governed by letters of engagement. Under the terms of their engagement, the notice period to be given by both H C Marshall and R E Richardson to the Company is three months and the Company is obliged to give the same length of notice to either H C Marshall or R E Richardson to terminate the engagement. Total Shareholder Return Under Statutory Instrument 2002 Number 1986, we are required to show the total shareholder return over 5 years in graphical form against a broad equity index. Overleaf are two graphs showing the Total Shareholder Return on both an annual and cumulative basis over the five year period from 2002 to 2006 inclusive. The comparable 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 Annual Report 2006 25 Directors’ Remuneration Report Total Shareholder Return — Annual Performance Hill & Smith Holdings PLC FTSE All Share EX. INV. Trusts FTSE Small Cap EX. INV. Trusts 2002 2003 2004 2005 2006 Source: Thompson One Banker Total Shareholder Return — Cumulative Performance % 100 80 60 40 20 0 -20 -40 600.00 500.00 400.00 300.00 200.00 100.00 0.00 01/01/02 29/12/06 Hill & Smith Holdings PLC FTSE ALL SHARE EX.INV.TRUSTS FTSE SMALL CAP EX.INV.TSTS. INFORMATION SUBJECT TO AUDIT Directors’ Remuneration Executive D L Grove C J Burr D W Muir (appointed 21 August 2006) Non executive D S Winterbottom H C Marshall R E Richardson Total Basic Salary/ Fees £’000 Value of Benefits £’000 Performance Related Bonus £’000 Total for Year to 31.12.06 £’000 Total for Year to 31.12.05 £’000 400 184 73 72 34 36 799 17 12 8 — — — 37 276 55 34 — — — 365 693 251 115 72 34 36 1,201 649 281 — 65 30 32 1,057 26 www.hsholdings.co.uk Directors’ Share Options — Options Outstanding C J Burr D L Grove D W Muir (appointed 21 August 2006) * 2005 Executive Share Option Scheme † 2005 Non-Approved Executive Share Option Scheme ‡ 1995 Savings Related Share Option Scheme No of shares at 31 December 2005 and 2006 12,360‡ 12,360‡ 12,360‡ 14,646* 63,468† Exercise price (p) 100 100 100 205 205 Date first exercisable 1 Oct 2010 1 Oct 2010 1 Oct 2010 4 Oct 2008 4 Oct 2008 Expiry date 1 Oct 2010 1 Oct 2010 1 Oct 2010 4 Oct 2015 4 Oct 2015 No options were granted to Directors during the year and no options were exercised by the Directors. Variations in the terms and conditions of options shown in the above tables were made. At 31 December 2006 the mid-market price of the Company’s shares was 271.0p. During the year, the Company’s mid-market share price ranged between a low of 193.5p and a high of 272.5p. Directors’ Pensions Pension benefits earned by the Directors Age at year end Accrued benefit at 31 December 2006 Increase in accrued benefits excluding inflation Increase in accrued benefits including inflation Directors’ contributions Transfer value of accrued benefits at 1 January 2006 Transfer value of accrued benefits at 31 December 2006 D W Muir 46 £68,783 p.a. £8,037 p.a. £10,148 p.a. £10,257 £379,194 £616,532 C J Burr 57 £58,523 p.a. £3,214 p.a. £5,136 p.a. £10,785 £975,235 £1,136,308 The pension entitlement is that which would be paid annually on retirement based on service to the period end. The individual has the option to pay Additional Voluntary Contributions; neither the contributions nor the resulting benefits are included in the above table. The transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11. The following is additional information relating to D W Muir’s pension: (a) Normal Retirement Age: (b) Spouse’s pension: (c) Early retirement rights: (d) Pension increases: 60 (prior to appointment as a main Board Director, this was 65) 2/3 pension on death after retirement None — post-April 1997 pension — pre-April 1997 pension (e) Discretionary benefits: Increase in line with RPI, limited to 5% per annum, subject to a minimum of 3% per annum on pension accrued post-1 October 1998 nil None 1 2 3 4 5 The following is additional information relating to C J Burr’s pension: (a) Normal Retirement Age: (b) Spouse’s pension: (c) Pension increases: 60 2/3 pension on death after retirement Pension increase in line with RPI, limited to 5% per annum, subject to a minimum of 3% per annum None (d) Discretionary benefits: D L Grove does not have any pension benefits. Howard Marshall Chairman, Remuneration Committee 6 March 2007 Hill & Smith Holdings PLC Annual Report 2006 27 Statement of Directors’ Responsibilities in Respect of the Annual Report and the Financial Statements The Directors are responsible for preparing the Annual Report and the Group and Parent Company Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company Financial Statements for each financial year. Under that law they are required to prepare the Group Financial Statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Parent Company Financial Statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). The Group Financial Statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and the performance of the Group; the Companies Act 1985 provides in relation to such Financial Statements that references in the relevant part of that Act to Financial Statements giving a true and fair view are references to their achieving a fair presentation. The Parent Company Financial Statements are required by law to give a true and fair view of the state of affairs of the Parent Company and of the profit or loss of the Parent Company for that period. In preparing each of the Group and Parent Company Financial Statements, the Directors are required to: 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. Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions. select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; for the Group Financial Statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; for the Parent Company Financial Statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Parent Company Financial Statements; and prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its Financial Statements comply with the Companies Act 1985. They 28 www.hsholdings.co.uk (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Independent Auditors’ Report to the Members of Hill & Smith Holdings PLC We have audited the Group and Parent Company Financial Statements (the ‘Financial Statements’) of Hill & Smith Holdings PLC for the year ended 31 December 2006 which comprise the Group Income Statement, the Group and Parent Company Balance Sheets, the Group Cash Flow Statement, the Group Statement of Recognised Income and Expense and the related notes. These Financial Statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an 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’ responsibilities for preparing the Annual Report and the Group Financial Statements in accordance with applicable law and International Financial Reporting Standards (‘IFRSs’) as adopted by the EU, and for preparing the Parent Company Financial Statements and the Directors’ Remuneration Report in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities on page 28. Our responsibility is to audit the Financial Statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Financial Statements give a true and fair view and whether the Financial Statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group Financial Statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the Financial Statements. The information given in the Directors’ Report includes that specific information presented in the Operational Review and the Financial Review that is cross- referenced from the Business Review section of the Directors’ Report. In addition, we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the 2003 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report and consider whether it is consistent with the audited Financial Statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Financial Statements. Our responsibilities do not extend to any other information. Basis of Audit Opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Financial Statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the Financial Statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Financial Statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the Financial Statements and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: the Group Financial Statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at 31 December 2006 and of its profit for the year then ended; the Group Financial Statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; the Parent Company Financial Statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the Parent Company’s affairs as at 31 December 2006; the Parent Company Financial Statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors’ Report is consistent with the Financial Statements. KPMG Audit Plc Chartered Accountants Registered Auditor 2 Cornwall Street Birmingham B3 2DL 6 March 2007 Hill & Smith Holdings PLC Annual Report 2006 29 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Consolidated Income Statement Year ended 31 December 2006 Year ended 31 December 2006 Year ended 31 December 2005 Reorganisation Underlying and property items £000 results £000 Notes Total £000 Revenue Trading profit Share of profits from associate Business reorganisation costs Profit on sale of properties Operating profit Financial income Financial expense Profit before taxation Taxation Profit for the year Attributable to: Equity holders of the parent Minority interest Profit for the year Basic earnings per share Diluted earnings per share Dividend per share — Interim Dividend per share — Final proposed Total 1,2 12 3 3 1,2 5 5 7 8 8 9 9 9 306,042 — 306,042 19,464 3,191 — — 22,655 4,413 (8,602) 18,466 (4,861) 13,605 — — (2,175) 1,025 (1,150) — — (1,150) 605 19,464 3,191 (2,175) 1,025 21,505 4,413 (8,602) 17,316 (4,256) (545) 13,060 13,056 4 13,060 19.8p 19.3p 3.0p 4.2p 7.2p Underlying results £000 277,296 18,893 677 — — 19,570 4,294 (8,166) 15,698 (4,397) 11,301 Reorganisation and property items £000 Total £000 — 277,296 — — (4,260) 4,389 129 — — 129 2,766 2,895 18,893 677 (4,260) 4,389 19,699 4,294 (8,166) 15,827 (1,631) 14,196 14,176 20 14,196 22.5p 21.8p 2.6p 3.4p 6.0p 30 www.hsholdings.co.uk Consolidated Statement of Recognised Income and Expenses Year ended 31 December 2006 Exchange differences on translation of foreign operations Share of exchange differences on translation of foreign operations from associate Actuarial gain/(loss) on defined benefit pension schemes Taxation on items taken directly to equity Notes 12 23 7 Net income/(expense) recognised directly in equity Profit for the year Total recognised income and expense for the year Attributable to: Equity holders of the parent Minority interest Total recognised income and expense for the year 21 Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 110 (275) 1,522 (318) 1,039 13,060 14,099 14,095 4 14,099 18 — (8,094) 2,491 (5,585) 14,196 8,611 8,591 20 8,611 Hill & Smith Holdings PLC Annual Report 2006 31 Consolidated Balance Sheet As at 31 December 2006 Non-current assets Intangible assets Property, plant and equipment Investment in associate Deferred tax asset Current assets Assets held for sale — freehold land Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other liabilities Current tax liabilities Interest bearing borrowings Net current assets Non-current liabilities Other liabilities Provisions for liabilities and charges Retirement benefit obligation Interest bearing borrowings Total liabilities Net assets Equity Share capital Share premium Capital redemption reserve Other reserves Translation reserve Equity reserves Equity attributable to equity holders of the parent Minority interest Total equity Approved by the Board of Directors on 6 March 2007 and signed on its behalf by: D L Grove Director C J Burr Director 32 www.hsholdings.co.uk Notes 10 11 12 13 14 15 16,18 1 17 16–19 18 18 23 16,18,19 1 1 20 21 21 21 21 21 21 31 December 2006 £000 31 December 2005 £000 39,845 51,007 27,163 572 118,587 — 33,248 72,935 14,176 120,359 238,946 (87,142) (2,798) (7,893) (97,833) 22,526 (420) (810) (10,503) (52,341) (64,074) (161,907) 77,039 18,887 27,803 238 4,313 (203) 25,989 77,027 12 77,039 29,727 40,972 24,832 2,407 97,938 631 24,804 61,057 16,313 102,805 200,743 (79,528) (2,088) (8,162) (89,778) 13,027 (427) (833) (13,885) (55,408) (70,553) (160,331) 40,412 15,799 4,036 238 4,313 (38) 15,994 40,342 70 40,412 Consolidated Statement of Cash Flows Year ended 31 December 2006 Year ended 31 December 2006 Year ended 31 December 2005 Notes £000 Profit before tax Add back net financing costs Operating profit Adjusted for non-cash items Income from associated company Share-based payments Fair value of forward contracts Loss on disposal of subsidiaries Gain on disposal of property, plant and equipment Depreciation Amortisation of intangible assets 5 1, 2 12 4 6 3 6 6 6 Operating cash flow before movement in working capital (Increase)/decrease in inventories Increase in receivables Increase in payables Decrease in provisions and employee benefits (3,191) 152 145 144 (1,137) 6,404 395 (8,406) (11,351) 7,783 (1,549) £000 17,316 4,189 21,505 2,912 24,417 Net movement in working capital (13,523) 10,894 Income taxes paid Interest paid Net cash from operating activities Interest received Proceeds on disposal of property, plant and equipment Purchase of property, plant and equipment Purchase of intangible assets Disposal of subsidiaries Acquisitions of minority interests Acquisitions of subsidiaries and associates 3 10 Net cash used in investing activities Issue of new shares Dividends paid New loans raised Repayments of loans Repayment of loan notes Repayment of obligations under finance leases Net cash from financing activities Net (decrease)/increase in cash Cash at the beginning of the year Cash at the end of the year 16 1 Cash generated by operations 23,933 684 3,129 (17,456) (1,559) 359 (59) (10,452) 26,855 (3,793) 4,812 (7,250) (40) (1,693) (2,720) (3,848) 4,326 (25,354) 18,891 (2,137) 16,313 14,176 £000 (677) 100 — — (4,396) 6,012 183 2,616 (2,195) 3,460 (869) 455 13,788 (10,776) (1,506) — — (25,219) 797 (3,134) 25,516 (7,750) (1,030) (1,259) £000 15,827 3,872 19,699 1,222 20,921 3,012 (2,727) (4,676) 16,530 (23,258) 13,140 6,412 9,901 16,313 Hill & Smith Holdings PLC Annual Report 2006 33 Group Accounting Policies Hill & Smith Holdings PLC is a company incorporated in the UK. The Group considers a company a subsidiary when it holds more than 50% of the shares and voting rights, so that it has the power to govern the operating and financial policies of that entity so as to obtain benefits from its activities. The Group considers a company to be an associate when it holds more than 20% of the shares and voting rights, so that it can significantly influence the decisions of that entity. The Group Financial Statements consolidate the Company, its subsidiaries and any jointly controlled entities together and equity account the Group’s interest in associates. The Parent Company Financial Statements present information about the Company as a separate entity and not about the Group. The Group Financial Statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards, as adopted by the EU (‘Adopted IFRSs’). The Company has elected to prepare its Parent Company Financial Statements in accordance with UK GAAP; these are presented on pages 60 to 68. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group Financial Statements. Judgements made by the Directors in the application of these accounting policies that have significant effect on the Financial Statements and estimates with a significant risk of material adjustment in the next year are discussed in note 24. New IFRS standards and interpretations adopted during 2006 In 2006 the following standards became effective and were adopted by the Group: IAS 21 Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates — Net Investment in a Foreign Operation IAS 39 Amendment to IAS 39 and IFRS 4 — Financial Guarantee Contracts IFRIC 4 Determining whether an arrangement contains a lease IFRIC 6 Liabilities arising from participating in a specific market — Waste Electrical and Electronic Equipment The adoption of these standards has not had a significant impact on the results of the Group in 2006. New IFRS standards and interpretations not adopted The IASB and IFRIC have issued additional standards and interpretations which are effective for periods starting after the date of these Financial Statements. The following standards and interpretations have yet to be adopted by the Group, all of which are effective from 1 January 2007. IFRS 7 Financial Instruments: Disclosure IAS 1 Amendment to IAS 1 — Presentation of Financial Statements: Capital Disclosures IFRIC 8 Scope of IFRS 2 The Group does not anticipate that the adoption of these standards and interpretations will have a material effect on its Financial Statements on initial adoption. Upon adoption of IFRS 7, the Group will be required to disclose additional information about its financial instruments, their significance and the nature and extent of the risks to which they give rise, together with greater detail as to the fair value of its financial instruments and its risk exposure. There will be no effect on reported income or net assets. Apart from IFRS 7 and the IAS 1 Amendment, all the new standards and interpretations identified have yet to be adopted by the EU and the Group assumes they will be adopted in their current form, in line with the published timetable. Measurement convention The Financial Statements are prepared on the historical cost basis except where the measurement of balances at fair value is required as explained below. Intangible assets In respect of subsidiaries, jointly controlled entities and associated companies, goodwill on acquisition comprises the excess of the fair value of the purchase consideration and any associated acquisition costs for the investment over the Group’s share of the fair value of the net identifiable assets acquired. The Group has elected not to apply IFRS 3 retrospectively. Goodwill prior to 1 October 1998 was written off to reserves. Goodwill from 1 October 1998 to 31 December 2003 was amortised in line with UK GAAP. From 1 January 2004, goodwill is subject to annual impairment testing. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Customer lists have been valued on acquisition and are amortised over their estimated useful life on an item by item basis. 34 www.hsholdings.co.uk (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Expenditure on development activities is capitalised if the product or process is considered to be technically and commercially viable and the Group has sufficient resources to complete development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the Income Statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. Amortisation is provided equally over the estimated useful economic life of the assets concerned, currently up to 7 years. Trade licences are amortised over the specific term granted to each individual licence. Property, plant and equipment and depreciation Depreciation is provided to write off the cost, deemed cost or fair value less the estimated residual value of property, plant and equipment by equal instalments over their estimated useful economic lives as follows: Freehold buildings Leasehold land and buildings Plant, machinery and vehicles 20 to 50 years life of the lease 4 to 20 years No depreciation is provided on freehold land. Hill & Smith Holdings PLC has chosen to take the first time adoption exemption available under IFRS 1 to use a previous revaluation for certain land and buildings as its deemed cost at the transition date. All other items of property plant and equipment are stated at cost unless it is felt that this value should be impaired. Investments In these Financial Statements investments are stated at cost, less amounts written off for impairment. Assets held for resale Resale properties are valued at the lower of fair value less cost to sell and their carrying amount. Any surplus, deficit or impairment arising is credited or charged to the Income Statement for the period. These assets are classed as current assets in line with IFRS 5. Financial Instruments Financial assets and liabilities are recognised on the Group’s Balance Sheet when the Group becomes a party to the contractual provisions of the instrument. Trade receivables and trade payables are initially measured at fair value. Subsequent to initial recognition, they are carried at amortised cost using the effective interest method, less any impairment losses. The Group’s investment in unlisted ordinary shares is held at cost less provision for impairment, as its fair value cannot be reliably measured. Derivative financial instruments of the Group are used to hedge its exposure to interest rate and foreign currency risks arising from operational, financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the Income Statement. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the Balance Sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of foreign exchange contracts is the estimated amount that the Group would receive or pay to terminate such contracts at the Balance Sheet date, taking into account the forwards exchange rates prevailing at that date. Interest bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the Income Statement over the period of the borrowings on an effective interest basis. Where there is any significant foreign currency asset or liability, a corresponding liability or asset is set up in the same currency in order to minimise any exchange risk to the Group. Hill & Smith Holdings PLC Annual Report 2006 35 Cash and cash equivalents For the purposes of the Consolidated Statement of Cash Flows, cash and cash equivalents are current assets and liabilities that are cash in hand, cash at bank or bank overdrafts. Foreign currencies Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Any gain or loss on translation of monetary foreign currency assets and liabilities arising from a movement in exchange rates subsequent to initial measurement is included as an exchange gain or loss in the Income Statement. The assets and liabilities of overseas subsidiary undertakings are translated at the closing exchange rate. Income Statements of such undertakings are consolidated at the average exchange rate during the period and the adjustment to period end rates is taken to the cumulative translation reserve in equity and reported in the Statement Of Recognised Income and Expense. The effective portion of exchange differences arising on the retranslation of the opening net assets of foreign subsidiaries is offset in the cumulative translation reserve in equity against the exchange differences on foreign currency loans designated to fund them. The ineffective portion of the hedge is recognised in the Income Statement for the period. The Group has hedged the investment in its overseas associated company with a fixed rate loan in euros. Income from the associated company is recognised in the Income Statement, translated at the rate in force at the end of each relevant month, which is deemed a reasonable estimate of the average rate over the period of ownership in the financial year. The Group has not taken advantage of the option to zero the exchange differences arising on translation of foreign operations as allowed in IFRS 1 First time adoption of International Accounting Standards. Inventories Inventories are stated at the lower of cost and net realisable value. In determining the cost of raw materials, consumables and goods purchased for resale, the FIFO or average cost method is used. Cost for work in progress and finished goods comprises direct materials, direct labour and an appropriate proportion of attributable overheads. Provisions A provision is recognised in the Balance Sheet when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre tax rate that reflects current market assessments of the time value of money and, when appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. In accordance with the Group’s environmental policy and applicable legal requirements, a provision for site restoration in respect of contaminated land is recognised as an obligation arises. The estimated cost of returning properties held under leases to their original condition in accordance with the terms of specific lease contracts is recognised as soon as such costs are able to be reliably estimated. Impairment of assets The carrying amount of the Group’s assets is reviewed at each Balance Sheet date to determine whether there is an indication of impairment. Impairment reviews are undertaken at the level of each significant cash generating unit, which the Group generally considers to be each of its subsidiaries. If such an indication exists, the relevant assets are written down to their estimated recoverable amount. The recoverable amount of an asset or cash generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a post tax discount rate based on an internally assessed weighted average cost of capital which accounts for the time value of money and the risks specific to the asset. For goodwill and other assets that have an indefinite life, the recoverable amount is assessed at each Balance Sheet date and an impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Impairment losses are recognised in the Income Statement. 36 www.hsholdings.co.uk Leases Leases for which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are classified as operating leases and the leased assets are not recognised on the Group’s Balance Sheet. Payments made under operating leases are recognised in the Income Statement on a straight line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Rental income from operating leases is recognised as revenue in the Income Statement on an accruals basis. Revenue Revenue represents the amount (excluding value added tax) invoiced to third party customers following the delivery of goods or provision of services, adjusted by accruals and provisions where they are deemed necessary as described elsewhere in these accounting policies. Segmental reporting The primary segmental analysis provided represents the whole of the Group’s operations. The secondary geographical analysis is provided for turnover, but further geographical analysis is regarded by the management as immaterial as substantially all of the Group’s operations are performed in the UK. Government grants Government grants are recognised as a liability in the Balance Sheet and credited to operating profit over the estimated useful economic life or the length of employment specified in the grant. Guarantees The Group has no external guarantees. Retirement benefits The Group operates pension schemes under which contributions by employees and by the sponsoring companies are held in trust funds separated from the Group’s finances. Obligations for contributions to defined contribution pension schemes are recognised as an expense in the Income Statement as incurred. The Group’s net obligation in respect of defined benefit pension schemes is calculated separately for each scheme by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. This benefit is discounted to determine its present value, and the fair value of any scheme assets is deducted. The discount rate is the yield at the Balance Sheet date on AA rated bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit method. Scheme assets are valued at bid price. Current and past service costs are recognised in operating profit within the Income Statement. Also in the Income Statement, the expected return on pension scheme assets is included in financial income and the expected costs on pension scheme liabilities in financial expense. All actuarial gains and losses in calculating the Group’s obligation in respect of defined benefit schemes are recognised annually in reserves and reported in the Statement Of Recognised Income and Expense. Borrowing costs Borrowing costs are recognised in the Income Statement as they are incurred. Hill & Smith Holdings PLC Annual Report 2006 37 Group Accounting Policies Share-based payment transactions The fair value of shares/options granted is recognised as an employee expense, with a corresponding increase in equity reserves. The fair value is recognised at the grant date and spread over the period during which the employees become unconditionally entitled to the shares/options. The Black-Scholes model has been adopted as the method of evaluating the fair value of the options, with the amount recognised as an expense being adjusted to reflect the actual number of options that vest. In accordance with IFRS 2 transitional arrangements, no expense is recorded for equity settled options granted prior to 7 November 2002 or vested before 1 January 2005. Income tax Income tax on the profit or loss for the year represents the sum of the tax currently payable and deferred tax. Income tax is recognised in the Income Statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable profit for the year. Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expense that are taxable or deductible. The Group’s liability for current tax is calculated using tax rates enacted or substantially enacted at the Balance Sheet date, and any adjustments to tax payable in respect of previous years. Deferred taxation Deferred tax is provided in full using the Balance Sheet liability method and represents the tax expected to be payable or recoverable on the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets and liabilities not resulting from a business combination that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the Balance Sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. The carrying amount of deferred tax assets is reviewed at each Balance Sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Ordinary dividends Dividends are accounted for in the Financial Statements when the Group is committed to the payment of the dividend. 38 www.hsholdings.co.uk Notes to the Consolidated Financial Statements 1. Segmental information The Group is currently organised into three main operating segments which represent its primary segmental information. All operations are continuing. Income Statement Year ended 31 December 2006 Year ended 31 December 2005 Infrastructure Products† Building and Construction Products Industrial Products Total Group Net financing costs Profit before taxation Taxation Profit after taxation Segment revenue £000 117,370 146,171 42,501 306,042 Segment result £000 Underlying segment result* £000 15,171 3,544 2,790 21,505 (4,189) 17,316 (4,256) 13,060 16,241 3,835 2,579 22,655 (4,189) 18,466 (4,861) 13,605 Segment revenue £000 107,414 131,797 38,085 277,296 * Underlying segment result is stated before reorganisation and property items. † Includes £3,191,000 (2005: £677,000) share of profits from associate (net of tax). 31 December 2006 Total Total liabilities assets £000 £000 118,273 70,847 35,078 224,198 572 — 14,176 (17,068) (49,092) (19,135) (85,295) (5,065) (11,313) (60,234) Balance Sheet Infrastructure Products‡ Building and Construction Products Industrial Products Total segment assets/(liabilities) Tax and dividends Provisions and retirement benefits Net debt Total Group Net assets ‡ 2006 includes £27,163,000 (2005: £24,832,000) investment in associate. Cash flows Infrastructure Products Building and Construction Products Industrial Products Cash generated by operations § Underlying cash flow is stated before reorganisation and property items. 238,946 (161,907) 200,743 (160,331) 77,039 40,412 Year ended 31 December 2006 Underlying Cash flow £000 7,020 1,507 2,367 cash flow§ £000 8,468 1,798 2,276 10,894 12,542 Year ended 31 December 2005 Cash flow £000 10,826 10,087 3,020 23,933 Underlying cash flow§ £000 12,846 11,282 3,346 27,474 Segment result £000 11,872 4,353 3,474 19,699 (3,872) 15,827 (1,631) 14,196 Underlying segment result* £000 13,003 4,816 1,751 19,570 (3,872) 15,698 (4,397) 11,301 31 December 2005 Total Total liabilities assets £000 £000 94,598 55,653 31,772 182,023 2,407 — 16,313 (22,770) (36,676) (18,866) (78,312) (3,731) (14,718) (63,570) Hill & Smith Holdings PLC Annual Report 2006 39 Notes to the Consolidated Financial Statements 1. Segmental information continued Capital expenditure and amortisation/depreciation (excluding acquisitions) Year ended 31 December 2006 Amortisation and expenditure depreciation £000 Capital £000 Infrastructure Products Building and Construction Products Industrial Products Total Group capital expenditure Purchase of property, plant and equipment (Note 11) Purchase of intangible assets (Note 10) Total Group capital expenditure 10,138 5,251 3,626 19,015 17,456 1,559 19,015 3,716 2,133 950 6,799 6,404 395 6,799 Year ended 31 December 2005 Capital expenditure £000 Amortisation and depreciation £000 7,979 2,761 1,550 12,290 10,784 1,506 12,290 3,058 2,083 1,054 6,195 6,012 183 6,195 Geographical revenue No secondary segmental analysis is presented as substantially all of the Group’s operations are based in the UK, except the operations in Ireland and Thailand. The Group’s associated company, Zinkinvent GmbH, operates outside of the UK (see note 12). An analysis of revenue by geographical market, irrespective of the origin, is shown below. UK Rest of Europe Asia USA Rest of World Total 2. Operating profit Revenue Cost of sales Gross profit Share of profits from associate (net of tax) Distribution costs Administrative expenses Profit on sale of fixed assets Reorganisation and property items (see note 3) Rental income from properties Operating profit Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 276,606 17,538 8,351 814 2,733 306,042 249,440 18,259 7,291 686 1,620 277,296 Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 306,042 (232,517) 73,525 3,191 (22,613) (31,742) 112 (1,150) 182 21,505 277,296 (207,943) 69,353 677 (21,039) (29,538) 7 129 110 19,699 40 www.hsholdings.co.uk 3. Reorganisation and property items Business reorganisation costs In 2006 these costs relate primarily to the relocation of the production facilities of Mallatite Limited to Chesterfield and of the Kingston depot of Ash & Lacy Building Systems Limited to Chessington. In 2005 the costs related primarily to the relocation of galvanizing production from the Digbeth operation of Joseph Ash Limited and the Hartlepool operation of Birtley Building Products Limited to alternative locations, and the costs arising from the restructuring of Express Reinforcements Limited including the closure of its Rainham depot. Also in 2006, a loss was realised on the disposal of W&S Allely Limited and Eden Material Services (UK) Limited, as shown below. There were no business disposals in 2005. Disposal of subsidiaries — W&S Allely Limited and Eden Material Services (UK) Limited Year ended 31 December 2006 £000 Property, plant and equipment Inventories Current assets Cash and cash equivalents Current liabilities Deferred tax Net assets Consideration Cash consideration Deferred consideration Expenses Total net proceeds Loss on sale Cash flow effect Cash consideration Cash left in the business Expenses Net cash consideration shown in the Consolidated Statement of Cash Flows 30 1,397 2,130 54 (2,869) 15 757 503 200 (90) 613 (144) 503 (54) (90) 359 Profit on sale of properties In 2006 this relates to the sale of two vacant properties located in Glasgow and Hartlepool. The profit in 2005 relates to the sale of two vacant properties located in Barnsley and Newcastle and the sale and leasebacks of five operating properties. In both years no tax liability arose on these sales due to the availability of indexation allowances and capital losses for offset. 2005 also benefited from the release of a deferred tax provision arising from property disposals. 4. Employees The average number of people employed by the Group during the year Infrastructure Products Building and Construction Products Industrial Products The aggregate remuneration for the year Wages and salaries Share-based payments Social security costs Pension cost (see note 23) Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 1,043 904 560 2,507 £000 53,714 152 5,391 1,838 61,095 958 927 461 2,346 £000 52,772 100 5,346 1,794 60,012 Details of the Directors’ remuneration and share interests are given in the Directors’ Remuneration Report on pages 24 to 27. Hill & Smith Holdings PLC Annual Report 2006 41 Notes to the Consolidated Financial Statements 5. Net financing costs Financial income Interest on bank deposits Net change in fair value of financial assets and liabilities (see note 19) Expected return on pension scheme assets (see note 23) Financial expense Interest on bank loans and overdrafts Amortisation of arrangement fees Interest on finance leases and hire purchase contracts Net change in fair value of financial assets and liabilities (see note 19) Expected interest cost on pension scheme obligations (see note 23) Interest on other loans Net financing costs 6. Expenses and auditor’s remuneration Income Statement charges Depreciation of tangible fixed assets: Owned Leased Operating lease rentals: Plant and machinery Other Research and development expenditure Amortisation of development costs Amortisation of other intangible assets Auditor’s remuneration (see below) Fair value loss on forward exchange contracts Foreign exchange loss Income Statement credits Profit on disposal of properties Profit on disposal of other fixed assets Grants receivable Rental income Foreign exchange gain A detailed analysis of the auditor’s remuneration worldwide is as follows: Hill & Smith Holdings PLC Audit of the Company’s annual accounts Audit of the Company’s subsidiaries Other services pursuant to legislation* Tax services Valuation and actuarial services Services relating to corporate finance transactions† Hill & Smith Holdings PLC pension schemes Valuation and actuarial services Other services — pension administration Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 681 — 3,732 4,413 4,471 374 300 2 3,391 64 8,602 4,189 578 160 3,556 4,294 4,418 276 193 — 3,205 74 8,166 3,872 Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 5,415 989 1,268 4,438 44 378 17 528 145 96 1,025 112 57 3,761 — 76 209 153 41 124 939 1,542 208 270 478 4,972 1,040 1,270 4,173 — 175 8 469 — — 4,389 7 23 3,144 81 55 206 95 49 64 — 469 91 209 300 * Includes amounts charged to the share premium reserve as this related to the Placing and Open Offer £75,000 (2005: £Nil). † This amount relates to due diligence assistance, principally in respect of the investment in Zinkinvent GmbH. 42 www.hsholdings.co.uk 6. Expenses and auditor’s remuneration continued A description of the work of the Audit Committee is set out in the Corporate Governance Report on pages 21 and 22 and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditors. The Group’s jointly controlled entities are proportionately consolidated. No further disclosures are made as these entities are considered to be immaterial. 7. Taxation Current tax UK corporation tax at 30% (2005: 30%) Adjustments in respect of prior periods Foreign tax at prevailing local rates Deferred tax (see note 13) Current year Adjustments in respect of prior periods Tax on profit in the Income Statement Current tax Relating to defined benefit pension schemes Relating to share-based payments Deferred tax (see note 13) Relating to defined benefit pension schemes Relating to share-based payments Tax on items taken directly to equity Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 3,271 (174) 156 3,253 971 32 4,256 2,519 (30) 110 2,599 (980) 12 1,631 Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 (558) (2) (560) 1,015 (137) 318 (255) — (255) (2,173) (63) (2,491) The tax charge in the Income Statement for the period is lower than the standard rate of corporation tax in the UK. The differences are explained below: Profit before taxation Profit before taxation multiplied by the standard rate of corporation tax in the UK of 30% Expenses not deductible for tax purposes Deductible employee share option gains not charged against profit Share of profit from associate already taxed Capital profits less losses and write downs not subject to tax Deferred tax benefit arising from asset disposals Overseas profits taxed at lower rates Adjustments in respect of previous periods Tax charge Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 17,316 15,827 5,195 233 (31) (677) (264) — (58) (142) 4,256 4,748 360 (309) (203) (1,526) (1,363) (58) (18) 1,631 Hill & Smith Holdings PLC Annual Report 2006 43 Notes to the Consolidated Financial Statements 8. Earnings per share The weighted average number of shares in issue during the year was 65,834,026 (2005: 62,960,978), diluted for the effects of outstanding share options (see note 20) 67,604,552 (2005: 64,968,617). Underlying earnings per share have been shown because the Directors consider that this provides valuable additional information about the underlying performance of the Group. Basic earnings Effect of reorganisation and property items Underlying earnings Diluted earnings Effect of reorganisation and property items Underlying diluted earnings 9. Dividends Year ended 31 December 2006 Pence per share 19.8 0.9 20.7 19.3 0.8 20.1 £000 13,056 545 13,601 13,056 545 13,601 Year ended 31 December 2005 Pence per share £000 22.5 (4.6) 17.9 21.8 (4.4) 17.4 14,176 (2,895) 11,281 14,176 (2,895) 11,281 Dividends declared after the balance sheet date are not recognised as a liability, in accordance with IAS 10. The Directors have proposed a final dividend for the current year, subject to shareholder approval, as shown below. Equity shares Interim Final proposed Total 10. Intangible fixed assets Cost At 1 January 2005 Acquisitions Additions internal Additions external At 31 December 2005 Acquisitions Additions internal Additions external At 31 December 2006 Amortisation and impairment losses At 1 January 2005 Amortisation charge for the year At 31 December 2005 Amortisation charge for the year At 31 December 2006 Carrying values At 1 January 2005 At 31 December 2005 At 31 December 2006 Year ended 31 December 2006 Pence per share 3.0 4.2 7.2 £000 2,267 3,185 5,452 Year ended 31 December 2005 Pence per share £000 2.6 3.4 6.0 Capitalised Customer development costs £000 lists £000 Goodwill £000 Licences £000 27,588 240 — 5 27,833 8,954 — — 36,787 — — — — — 27,588 27,833 36,787 122 — — — 122 — — — 122 — 7 7 6 13 122 115 109 429 — 84 1,406 1,919 — 148 1,399 3,466 — 175 175 378 553 429 1,744 2,913 7 20 — 11 38 — — 12 50 2 1 3 11 14 5 35 36 1,643 2,150 3,793 Total £000 28,146 260 84 1,422 29,912 8,954 148 1,411 40,425 2 183 185 395 580 28,144 29,727 39,845 44 www.hsholdings.co.uk 10. Intangible fixed assets continued In February 2006 the Group acquired 100% of Counters & Accessories Limited, a manufacturer of traffic counting and classification equipment. No specific intangible assets have been recognised as the key factors influencing this acquisition were the geographical location, technological know-how and the commonality of the customer base with other subsidiaries. In October 2006 the Group acquired 100% of Metnor Galvanizing Limited. The business and assets of this company now form a division of Joseph Ash Limited. The acquisition will provide an important strategic and geographical extension of the Group’s galvanizing activities and will enable it to improve its service to its customers, particularly of long products.The other main factor for acquiring this company is the synergies that will be achieved through its location, which is adjacent to the production facilities of Mallatite Limited, another of the Group’s subsidiaries. No specific intangible assets have been recognised as a result of considering these main acquisition drivers. Table of 2006 subsidiary acquisitions (2005 acquisitions immaterial) Property, plant and equipment Inventories Current assets Cash and cash equivalents Current liabilities Deferred tax Net Assets Consideration Cash consideration Deferred consideration Expenses Total cost Goodwill Cash flow effect Cash consideration Cash received in the business Expenses Net cash consideration shown in the Consolidated Statement of Cash Flows Post acquisition profit for the year included in the Consolidated Income Statement Counters & Accessories Limited £000 167 425 481 753 (748) 5 Metnor Galvanizing Limited £000 162 1,010 1,969 1,048 (1,346) 56 1,083 2,899 5,295 — 83 5,378 4,295 5,295 (753) 83 4,625 412 6,525 683 350 7,558 4,659 6,525 (1,048) 350 5,827 109 Total £000 329 1,435 2,450 1,801 (2,094) 61 3,982 11,820 683 433 12,936 8,954 11,820 (1,801) 433 10,452 521 It is estimated that if the above acquisitions had occured on 1 January 2006, the results of the Group for the year would have been revenues of £313,787,000 and profit for the year of £14,079,000. Impairment tests on the carrying values of goodwill with an indefinite life are performed by analysing the carrying value allocated to each significant cash generating unit against its value in use. Value in use is calculated for each cash generating unit as the net present value of that unit’s discounted future cash flows. These cash flows are based on detailed budget and forecast cash flow information for the foreseeable future. Based on past experience and management judgement, a growth rate of 8.5% is applied for revenues and associated cost growth. The cash flows are discounted at prevailing rates based on internally measured weighted average cost of capital (6.99% gross and 6.11% net of tax). These tests have resulted in no impairments of goodwill as the payback period was less than five years in all cases. There are no intangible assets with indefinite lives. Goodwill analysed to significant cash generating units Joseph Ash Limited Ash & Lacy Building Systems Limited Counters & Accessories Limited Hill & Smith Limited Other cash generating units with no individual significant value 31 December 2006 £000 31 December 2005 £000 14,271 4,998 4,295 3,723 9,500 36,787 9,612 4,998 — 3,723 9,500 27,833 Hill & Smith Holdings PLC Annual Report 2006 45 Notes to the Consolidated Financial Statements 11. Property, plant and equipment Cost At 1 January 2005 Exchange adjustments Acquisitions Additions Disposals Reclassification At 31 December 2005 Exchange adjustments Acquisitions Disposal of subsidiaries Additions Disposals At 31 December 2006 Depreciation and impairment losses At 1 January 2005 Exchange adjustments Disposals Reclassification Charge for the year At 31 December 2005 Exchange adjustments Acquisitions Disposal of subsidiaries Disposals Charge for the year At 31 December 2006 Carrying values At 1 January 2005 At 31 December 2005 At 31 December 2006 Plant, Land and machinery buildings and vehicles £000 £000 Total £000 102,489 (2) 46 10,784 (14,980) — 98,337 48 2,504 (1,000) 17,456 (4,689) 83,160 (2) 46 10,123 (6,550) 7 86,784 21 2,275 (1,000) 10,378 (4,045) 94,413 112,656 56,431 (2) (5,857) 1 5,725 56,298 3 1,972 (970) (3,278) 6,219 60,244 26,729 30,486 34,169 58,058 (2) (6,703) — 6,012 57,365 3 2,175 (970) (3,328) 6,404 61,649 44,431 40,972 51,007 19,329 — — 661 (8,430) (7) 11,553 27 229 — 7,078 (644) 18,243 1,627 — (846) (1) 287 1,067 — 203 — (50) 185 1,405 17,702 10,486 16,838 The gross book value of land and buildings includes freehold land of £6,175,000 (2005: £3,921,000). Included in the carrying value of plant, machinery and vehicles is £7,726,000 (2005: £4,528,000) in respect of assets held under finance lease and hire purchase contracts. Included within plant, machinery and vehicles are assets held for hire with a cost of £14,401,000 (2005: £11,801,000) and accumulated depreciation of £3,507,000 (2005: £2,139,000). 46 www.hsholdings.co.uk 12. Investment in associate Fair value At 1 January 2005 Additions Share of profit from associate (net of tax) At 31 December 2005 Share of profits from associate (net of tax) Share of exchange differences on translation of foreign operations from associate Exchange adjustments At 31 December 2006 Carrying values At 31 December 2005 At 31 December 2006 Shares £000 — 17,254 677 17,931 3,191 (275) (418) 20,429 17,931 20,429 Loan £000 — 6,901 — 6,901 — — (167) 6,734 6,901 6,734 Total £000 — 24,155 677 24,832 3,191 (275) (585) 27,163 24,832 27,163 In May 2005 the Group invested €35,000,000 (€25,000,000 to acquire 33.3% of the ordinary shares and a €10,000,000 loan) in Zinkinvent GmbH, a German holding company, which owns 100% (2005: 86%) of Vista NV, a Belgian company with galvanizing and lighting pole fabrication businesses in Benelux, France and the United States of America. The results of this company are being equity accounted into the results of the Group. The Group’s share of the profit of Zinkinvent GmbH for the year ended 31 December 2006, which is stated net of local taxes, was £3,191,000 (2005 post-acquisition: £677,000). The summary financial information of this associate, based on 100%, is as follows: 31 December 2006 £000 31 December 2005 £000 Assets Liabilities Equity Revenue Net profit 13. Deferred taxation 154,420 (122,670) 31,750 148,279 11,842 Difference between fixed asset tax and accounts values £000 Unremitted income from Retirement Share-based payments £000 obligation £000 associate Other timing differences company £000 £000 At 1 January 2005 Credited/(charged) for the year in the Income Statement Credited for the year in the Statement of Recognised Income and Expense At 31 December 2005 Acquisition of subsidiaries (note 10) Disposal of subsidiaries (note 3) Credited/(charged) for the year in the Income Statement Credited/(charged) for the year in the Statement of Recognised Income and Expense At 31 December 2006 (3,305) 1,993 1,118 — (2,187) 61 (13) (669) — (2,808) — 2,173 4,166 — — — (1,015) 3,151 — 30 63 93 — (1) 46 137 275 — — — — — — (315) — (315) 515 (180) — 335 — (1) (65) — 269 131,192 (95,220) 35,972 114,373 4,773 Total £000 (797) 968 2,236 2,407 61 (15) (1,003) (878) 572 Hill & Smith Holdings PLC Annual Report 2006 47 Notes to the Consolidated Financial Statements 13. Deferred taxation continued Certain deferred tax assets and liabilities have been offset for financial reporting purposes, as follows: Deferred tax assets Deferred tax liabilities Deferred tax asset 31 December 2006 £000 31 December 2005 £000 4,938 (4,366) 572 5,978 (3,571) 2,407 At 31 December 2006 the Group had a deferred tax asset representing unused capital losses not recognised of £10,906,000 (2005: £12,249,000), of which £2,600,000 (2005: £2,726,000) are available for set off generally against future capital gains and £8,306,000 (2005: £9,523,000) are available for set off against certain future capital gains relating primarily to disposals of assets owned by companies when they were acquired by the Group. No deferred tax liability has been recognised in respect of tax of £262,000 (2005: £176,000) on unremitted earnings of overseas subsidiaries, because the Group is in a position to control the timing of remittances and such tax is not expected to arise in the foreseeable future. 14. Inventories Raw materials and consumables Work in progress Finished goods and goods for resale 31 December 2006 £000 31 December 2005 £000 16,142 4,456 12,650 33,248 10,910 2,752 11,142 24,804 The amount of inventories expensed to the Income Statement in the year was £230,192,000 (2005: £205,864,000). The value of inventories written down and expensed in the Income Statement during the year amounted to £301,000 (2005: £262,000). The amount of inventories held at fair value less cost to sell included in the above was £Nil (2005: £Nil). 15. Trade and other receivables Trade receivables Prepayments and accrued income Fair value derivatives (see note 19) Other receivables 31 December 2006 £000 31 December 2005 £000 64,642 3,754 158 4,381 72,935 53,785 3,673 160 3,439 61,057 The Group maintains fairly comprehensive credit insurance which renders any potential impairment losses on trade receivables immaterial. 16. Cash and borrowings Cash and cash equivalents in the balance sheet Cash and bank balances Call deposits Interest bearing loans and borrowings (see notes 17–19) Amounts due within one year Amounts due after more than one year Net debt 31 December 2006 31 December 2005 £000 6,706 7,470 14,176 (7,893) (52,341) (46,058) £000 2,271 14,042 16,313 (8,162) (55,408) (47,257) 48 www.hsholdings.co.uk 17. Current liabilities Interest bearing loans and borrowings Current portion of long term borrowings Finance lease and hire purchase obligations Loan notes Trade and other current liabilities Trade payables Other taxation and social security Accrued expenses Payments received in advance Dividend Fair value derivatives (see note 19) Other payables 18. Non-current liabilities Interest bearing loans and borrowings Long term borrowings Finance lease and hire purchase obligations Other non-current liabilities Deferred government grants 31 December 2006 £000 31 December 2005 £000 5,860 1,979 54 7,893 64,164 5,197 12,060 — 2,267 145 3,309 87,142 6,876 1,192 94 8,162 57,777 5,371 11,000 317 1,643 — 3,420 79,528 31 December 2006 £000 31 December 2005 £000 48,547 3,794 52,341 420 53,261 2,147 55,408 427 Group net indebtedness and the effective interest rates at the Balance Sheet date for 2006 are detailed below. The interest bearing loans and borrowings are also analysed into the periods in which they mature. Cash Cash and bank balances Call deposits Bank borrowings 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 31 December 2006 31 December 2005 Effective interest rate % 4.38 4.70 Amount £000 6,706 7,470 14,176 Effective interest rate % 4.16 4.48 Amount £000 2,271 14,042 16,313 6.16 5,860 5.61 6,876 4.83 6.16 48,191 356 48,547 54,407 3.97 5.61 30,261 23,000 53,261 60,137 4.23 54 3.64 94 Hill & Smith Holdings PLC Annual Report 2006 49 Notes to the Consolidated Financial Statements 18. Non-current liabilities continued 31 December 2006 31 December 2005 Effective interest rate % Minimum lease payment £000 Principal £000 Effective interest rate % Minimum lease payment £000 Principal £000 Finance leases and hire purchase obligations Amounts due within one year 5.68 2,277 1,979 5.18 1,351 1,192 Amounts due after more than one year Between one and two years Between two and five years 5.68 5.68 Principal liability Finance charges payable on outstanding commitments 5.18 5.18 1,651 2,143 3,794 5,773 1,943 2,309 4,252 6,529 5,773 756 1,062 1,085 2,147 3,339 1,204 1,231 2,435 3,786 3,339 447 The bank borrowings carry a rate of interest of up to 1.25% 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. Provisions for liabilities and charges At 1 January 2005 Provisions released during the year Utilised during the year At 31 December 2005 Utilised during the year At 31 December 2006 Total £000 1,629 (731) (65) 833 (23) 810 Provisions relate to environmental costs of properties owned by the Group and dilapidation costs on leasehold properties, which are ongoing issues anticipated to be resolved over the next few years. The Group has sought independent expert valuations where appropriate on these matters, but there are many factors outside the Group’s control that give rise to uncertainties surrounding these events. The Group does not expect to be reimbursed for any of these future costs. 50 www.hsholdings.co.uk 19. Financial instruments (a) Management of financial risks The Group’s major financial risks relate to movements of interest and exchange rates. Management continually reviews 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 used a euro interest rate swap to fix approximately 40% (2005: 40%) of its year end gross borrowings at an effective rate of 3.6% pa. This swap expires in May 2007. Credit risk It is the Group’s policy to insure substantially all of the Group’s trade debtors. Any residual risk is spread across a significant number of customers. Currency exposure The Group is subject to fluctuations in exchange rates on its net overseas investments and on transactional monetary assets and liabilities not denominated in the functional currency of the operating unit concerned. 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 main trading currencies beside sterling are euro, US dollar and Thai baht. The Group uses forward exchange contracts to hedge the majority of exposures that do exist. (b) Financial assets The Group’s financial assets, excluding short term debtors, consist mainly of cash call deposit accounts and fixed asset investments (see note 12). There is also a trade investment with a 19.5% holding in an unlisted company whose fair value cannot be accurately measured and is fully written down. 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, are set out below. Fixed rate financial liabilities comprise sterling and euro denominated finance leases and hire purchase agreements and bank loans. Floating rate financial liabilities comprise sterling and euro denominated bank loans and overdrafts, and sterling finance leases and hire purchase agreements. The floating rate financial liabilities bear interest at rates related to bank base rates or LIBOR. Hill & Smith Holdings PLC Annual Report 2006 51 Notes to the Consolidated Financial Statements 19. Financial instruments continued Currency Sterling at 31 December 2006 Euro at 31 December 2006 Total at 31 December 2006 Sterling at 31 December 2005 Euro at 31 December 2005 Total at 31 December 2005 Fixed rate financial liabilities Euro at 31 December 2006 Euro at 31 December 2005 Floating rate financial liabilities £000 Exchange rate 1.485 1.449 35,119 — 35,119 38,916 — 38,916 Fixed rate financial liabilities £000 — 25,115 25,115 — 24,654 24,654 €000 37,296 35,724 Total £000 35,119 25,115 60,234 38,916 24,654 63,570 Weighted average interest rate % 4.4 4.4 Weighted average period for which rate is fixed years 0.4 1.4 (d) Maturity profile The maturity profile of the Group’s financial liabilities, other than short term creditors such as trade creditors and accruals, is shown in note 18. At 31 December 2006 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 one year 31 December 2006 £000 31 December 2005 £000 22,500 20,500 (e) Fair values The loss in the year on the fixed rate interest swap was £2,000 (2005: gain of £160,000) which is the result of euro interest rates remaining higher than when the derivative was taken out. The fair value of unhedged forward exchange contracts realised in the Income Statement amounted to a cost of £145,000 (2005: £Nil). The value of the Group’s other financial instruments at 31 December 2006 was not materially different to the carrying value. Fair values were calculated using market rates where available, otherwise cash flows were discounted at prevailing rates. 52 www.hsholdings.co.uk 19. Financial instruments continued (f) Hedging The Group has hedged the €35,000,000 investment in Zinkinvent GmbH (see note 12) by way of a €35,000,000 fixed rate loan (see above). (g) Sensitivity analysis In managing interest rate and currency risks the Group aims to reduce the impact of short term fluctuations on the Group’s earnings. Over the longer term, however, permanent changes in foreign exchange and interest rates may have an impact on consolidated earnings. Based on average month end net debt balances that are not subject to an interest rate swap, if interest rates had varied throughout the year by 0.5% the positive or negative variation on the year’s result would have been £187,000 (2005: £159,000). 20. Called up share capital Authorised 100,000,000 Ordinary shares of 25p each (2005: 80,000,000) Allotted, called up and fully paid 75,547,659 Ordinary shares of 25p each (2005: 63,197,403) 31 December 2006 £000 31 December 2005 £000 25,000 18,887 20,000 15,799 On 16 October 2006, the Company issued 12,280,702 ordinary shares at a price of 228p per share under the terms of a Placing and Open Offer. In addition, during the year the Company issued 69,554 shares under its various share option schemes (2005: 1,122,109), realising £51,000 (2005: £798,000). Options outstanding over the Company’s shares 31 December 2006 31 December 2005 Number of shares Option price (p) Number of shares Option price (p) Date first exercisable Expiry date 1995 Executive Share Option Scheme 1999 Non-Approved Executive Share Option Scheme 2005 Executive Share Option Scheme (granted October 2005)* 2005 Non-Approved Executive Share Option Scheme (granted October 2005)* 1995 Savings Related Share Option Scheme (granted January 2005)*† Outstanding at the end of the year‡ Exercisable at the year end Not exercisable at the year end Outstanding at the end of the year‡ 14,000 10,000 — — 353,248 229,764 1,163,514 1,770,526 24,000 1,746,526 1,770,526 69 70 66 66 205 205 23,000 10,000 15,000 32,000 69 70 66 66 4 Aug 2002 2 Jul 2004 21 Jan 2005 21 Jan 2005 4 Aug 2009 2 Jul 2011 21 Jan 2012 21 Jan 2012 353,248 205 4 Oct 2008 4 Oct 2015 229,764 205 4 Oct 2008 4 Oct 2015 100 1,344,627 100 1 Jan 2010 1 Jul 2010 2,007,639 80,000 1,927,639 2,007,639 * Subject to share-based payments under IFRS2 (see below). † Options may be exercised early under the terms of this scheme if people meet the criteria of ‘good leaver’, which encompass circumstances such as retirement or redundancy. ‡ Diluting factor on earnings per share (see note 8). The remaining weighted average life of the outstanding share options is 5 years 3 months (2005: 6 years 1 month). Hill & Smith Holdings PLC Annual Report 2006 53 Notes to the Consolidated Financial Statements 20. Called up share capital continued The movement and weighted average exercise prices of share options during the year Outstanding at the beginning of the year Exercised during the year Granted during the year Lapsed during the year Outstanding at the end of the year Weighted average exercise price (p) 2006 129 (73) — (100) Number of options 2006 2,007,639 (69,554) — (167,559) 134 1,770,526 Weighted average exercise price (p) 2005 87 (71) 205 (99) 129 Number of options 2005 2,730,411 (1,122,109) 583,012 (183,675) 2,007,639 The weighted average share price on the dates of exercise for the above share options in 2006 was 245p (2005: 177p). Share-based payments All option schemes marked as being subject to share-based payments (see above) have 2005 as their first qualifying year. The fair value of services received in return for share options granted is measured by reference to the fair value of the share options granted. The estimate of the fair value of the services received is measured based on the Black-Scholes model. The contractual life is the life of the option in question and the growth in dividend yield is based on the best current estimate of future yields over the contractual period. Fair value at measurement date Exercise price Expected volatility Option life (years) Dividend yield Risk-free interest rate 1995 Savings Related Share Option Scheme 2005 Share Option Schemes 37p 100p 36% 5 3.7% 4.5% 34p 205p 36% 3 3.7% 4.5% The expected volatility is wholly based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility due to publicly available information. Share options have been granted to qualifying employees in line with either Inland Revenue approved or non-approved schemes, as indicated above. The strike price for the option is made based on the market values of shares at the date the option is offered. The total expense recognised for the period arising from share-based payments is as follows: Expensed during the year Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 152 100 54 www.hsholdings.co.uk 21. Share premium and reserves Share premium £000 Capital redemption reserve £000 Other reserves £000 Translation reserve £000 At 1 January 2005 Total recognised income and expense for the year Dividends Credit to equity of share-based payments Shares issued At 31 December 2005 Total recognised income and expense for the year Dividends Acquisition of minorities* Credit to equity of share-based payments Shares issued At 31 December 2006 3,519 — — — 517 4,036 — — — — 23,767 27,803 238 — — — — 238 — — — — — 238 4,313 — —— — — 4,313 — — — — — 4,313 (56) 18 (3,380) — — (38) (165) — — — — (203) Retained earnings £000 10,701 8,573 100 — 15,994 14,260 (4,417) — 152 — 25,989 Minority interest £000 50 20 — — — 70 4 — (62) — — 12 * The minority interest in Pipe Supports (Asia) Limited, a company incorporated in Thailand, was decreased from 13% to 1.5% on 24 February 2006. 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. 22. Guarantees and other financial commitments (a) Guarantees The Group had no financial guarantee contracts outstanding (2005: £Nil). (b) Capital commitments Contracted for but not provided in the accounts 31 December 2006 £000 31 December 2005 £000 1,588 1,410 (c) Operating lease commitments The total future minimum commitments payable under non-cancellable operating leases fall into the periods as follows: 31 December 2006 31 December 2005 Group Within one year Between one and two years Between two and five years After five years Land and buildings £000 3,982 3,821 10,836 25,434 44,073 Other £000 1,863 1,542 2,259 103 5,767 Land and buildings £000 3,306 3,095 7,692 26,254 40,347 Other £000 1,679 1,365 1,560 1 4,605 The total future minimum commitments receivable under non-cancellable operating leases fall into the periods as follows: 31 December 2006 31 December 2005 Group Within one year Between one and five years After five years Land and buildings £000 358 1,418 1,478 3,254 Other £000 2,360 1,000 — 3,360 Land and buildings £000 108 25 — 133 Other £000 1,105 — — 1,105 Hill & Smith Holdings PLC Annual Report 2006 55 Notes to the Consolidated Financial Statements 23. Pensions The Group operates two main pension schemes, one providing benefits accruing in the future on a defined benefit basis and a second, 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 Group. 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. There is also a separate Group personal pension plan operated by one of the Group’s subsidiaries. The Income Statement for the year includes a pension charge of £1,838,000 (2005: £1,794,000), which includes the costs of the defined contribution scheme and the defined benefit scheme which are detailed below. All actuarial gains and losses are recognised immediately in the Statement of Recognised Income and Expense. Composition of the scheme The Group operates defined benefit schemes in the UK. A full actuarial valuation of the schemes was last carried out as at 5 April 2003 and was updated to 31 December 2006 by a qualified actuary. The principal assumptions used by the actuary Rate of increase in salaries Rate of increase in pensions in payment Discount rate Inflation Mortality table The mortality assumptions imply the following expected future lifetimes from age of 65 Males currently aged 45 Females currently aged 45 Males currently aged 65 Females currently aged 65 31 December 2006 4.50% 3.00% 5.20% 3.10% PA92YOB 31 December 2005 4.00% 2.80% 4.75% 2.90% PA92C2005 31 December 2006 31 December 2005 20.9 years 23.9 years 19.6 years 22.7 years 18.5 years 21.4 years 18.5 years 21.4 years The assumptions have been chosen by the Directors from a range of possible actuarial assumptions which, due to the timescales covered, may not be borne out in practice. Assets and liabilities One scheme holds assets and liabilities in respect of defined contribution benefits; these are equal in value and are excluded from the following figures. The fair value of scheme assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the value of the scheme liabilities, which is derived from cash flow projections over long periods and which is therefore inherently uncertain, are as follows: Rate of return Rate of return Rate of return expected Market Value 31 December 31 December 2006 £000 2006 % expected Market Value 31 December 2005 £000 31 December 2005 % expected Market Value 31 December 2004 £000 31 December 2004 % Assets Equities Bonds Gilts With profits policies Cash Other Total fair value of scheme assets Present value of scheme funded obligations Retirement benefit obligation 8.00 5.20 4.60 5.80 4.60 — 7.02 39,994 6,815 3,486 9,066 3,012 — 62,373 (72,876) (10,503) 7.50 4.75 4.10 5.25 4.10 — 6.49 36,138 6,966 3,430 8,744 2,225 — 57,503 (71,388) (13,885) 8.00 5.60 4.75 6.10 4.75 8.00 7.03 29,229 6,220 3,117 10,122 1,501 410 50,599 (57,241) (6,642) 56 www.hsholdings.co.uk 23. Pensions continued The overall expected return on assets assumption has been calculated as an approximate weighted average of the expected returns of each asset class taking into account the asset allocation of the scheme. When setting an expected return for each asset class, the following factors have been considered: Equities — A higher long term rate of return is expected on equity investments than that which is available on bonds. The extent to which equities are assumed to provide higher returns than bonds in the future is estimated based on the returns achieved above bond returns historically and market conditions as at the Balance Sheet date. Bonds, Gilts and Cash — Where assets are held in bonds, gilts and cash, the expected long term rate of return is taken to be the yields generally prevailing on such assets as at the Balance Sheet date. With profit policies — The underlying asset allocation of the policies and the overall rate is based on the expected long term rate of return on each of the asset classes with reference to this allocation. Total expense recognised in the Income Statement Year ended 31 December 2006 Year ended 31 December 2005 Defined contribution schemes £000 Defined benefit schemes £000 Current service costs Gain on curtailments and settlements Charge to operating profit Expected return on pension scheme assets Expected interest cost on pension scheme obligations Total charged to profit before tax 1,228 — 1,228 — — 1,228 770 (160) 610 (3,732) 3,391 269 Defined contribution schemes £000 Defined benefit schemes £000 1,173 — 1,173 — — 1,173 621 — 621 (3,556) 3,205 270 Total £000 1,998 (160) 1,838 (3,732) 3,391 1,497 Total £000 1,794 — 1,794 (3,556) 3,205 1,443 The majority of the current service costs of the defined benefit scheme are charged through administrative expenses. Change in the present value of the defined benefit obligation Opening defined benefit obligation Current service costs Interest cost Actuarial losses Gain on curtailments and settlements Employee contributions Benefits paid Closing defined benefit obligation Changes in fair values of scheme assets Opening fair value of assets Expected return on assets Actuarial gains Employer contributions Employee contributions Benefits paid Assets distributed on settlements Closing fair value of assets Actual return on scheme assets Expected employer contributions in the following year Defined benefit schemes Defined contribution schemes Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 71,388 770 3,391 524 (309) 170 (3,058) 72,876 57,241 621 3,205 13,142 — 167 (2,988) 71,388 Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 57,503 3,732 2,046 2,129 170 (3,058) (149) 62,373 5,778 1,145 1,150 50,599 3,556 5,048 1,121 167 (2,988) — 57,503 8,604 1,143 1,230 Hill & Smith Holdings PLC Annual Report 2006 57 Notes to the Consolidated Financial Statements 23. Pensions continued Amounts recognised in the Statement of Recognised Income and Expense % of scheme assets/ 31 December 2006 £000 Year ended % of scheme assets/ liabilities % liabilities % Year ended % of scheme assets/ liabilities % 31 December 2005 £000 Year ended 31 December 2004 £000 Difference between actual and expected return on scheme assets Experienced gain/(loss) on scheme obligations Changes in assumptions underlying the present value of scheme obligations Annual amount recognised Total amount recognised 3 1 (2) 2 2,046 629 (1,153) 1,522 (10,492) 9 0 (18) (11) 5,048 (313) (12,829) (8,094) (12,014) 1 (1) (9) (7) 545 413 (4,878) (3,920) (3,920) 24. Accounting estimates, assumptions and judgements The principal accounting estimates, assumptions and judgements employed in the preparation of these Financial Statements which could affect the carrying amounts of assets and liabilities at the Balance Sheet date are as follows: Actuarial assumptions on pension obligations In determining the valuation of the defined benefit pension deficit, certain assumptions about the scheme have been made, notably the expected return on assets, inflation, discount rates, mortality, salary increases and pension increases. The factors affecting these assumptions are largely outside the Group’s control (see note 23). Impairment of goodwill The determination of whether goodwill should be impaired requires the estimation of future cash flows, which in itself requires judgement in terms of timing and growth factors adopted by each cash generating unit. These cash flows are discounted to a net present value using a discount rate based in part on prevailing market interest rates. These factors are all affected by prevailing market and economic factors outside the Group’s control (see note 10). Share-based payments In valuing the share-based payments realised in the Group’s accounts, the Company has used the Black-Scholes calculation model, which makes various assumptions on factors outside the Group’s control, such as share price volatility and risk-free interest rates. Details of the options and assumptions used in deriving the share-based payments are disclosed in note 20. Environmental and dilapidation provisions Estimated environmental and dilapidation costs have been derived on the basis of the most recent assessments of the likely cost. Some factors concerning these costs are outside of the Group’s control. In making these assessments, the Group has sought the aid of independent experts where appropriate (see note 18). Deferred taxation Deferred taxation has been estimated using the best information available, including seeking the opinion of independent experts where applicable (see note 13). 58 www.hsholdings.co.uk 25. Related party transactions The key management are considered to be the Board of Directors of Hill & Smith Holdings PLC, whose remuneration can be seen in the Directors’ Remuneration Report on pages 24 to 27. The compensation in total for each category required by IAS24 is as follows: Salaries and short term employee benefits Non-executive directors’ fees Post employment benefits Share-based payments There were no transactions with the associated company. Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 1,098 142 12 8 1,260 930 127 11 5 1,073 During the year the Company had the following transactions with companies of which D L Grove is or was during the year a major shareholder. All of these transactions were undertaken on an arm’s length basis. Drayparcs Limited GIL Investments Limited Tana Consultants Limited 26. Subsequent events Year ended 31 December 2006 Current liabilities £000 Purchases £000 — 41 — 41 — 3 — 3 Year ended 31 December 2005 Current liabilities £000 Purchases £000 13 12 23 48 — 2 20 22 On 28 February 2007, the Group entered into an agreement with some of the other principal shareholders of its associate company, Zinkinvent GmbH, to acquire further shares in that company, subject to Hill & Smith Holdings PLC shareholder approval. If approved, this transaction will result in Zinkinvent GmbH becoming a subsidiary of the Group. Zinkinvent GmbH is an investment company owning 100% of Vista NV, a Belgian holding company with galvanizing and lighting column manufacturing operations in Benelux, France and the USA. Hill & Smith Holdings PLC Annual Report 2006 59 Company Balance Sheet As at 31 December 2006 Fixed assets Tangible assets Investments Current assets Debtors Cash at bank and in hand Creditors: amounts falling due within one year Bank loans and overdrafts Other creditors Net current liabilities Total assets less current liabilities Creditors: amounts falling due after one year Bank loans and overdrafts Provisions for liabilities and charges Net assets Share capital and reserves Called up share capital Share premium Capital redemption reserve Profit and loss account Equity shareholders’ funds Approved by the Board of Directors on 6 March 2007 and signed on its behalf by: D L Grove Director C J Burr Director Notes 4 5 6 7–9 7 8,9 11 12 12 12 31 December 31 December 2006 £000 37 180,725 180,762 35,101 6,910 42,011 (5,886) (86,287) (92,173) (50,162) 130,600 (48,115) (38) 82,447 18,887 27,803 238 35,519 82,447 2005 £000 46 128,177 128,223 10,864 13,015 23,879 (18,809) (22,960) (41,769) (17,890) 110,333 (53,486) — 56,847 15,799 4,036 238 36,774 56,847 60 www.hsholdings.co.uk Company Principal Accounting Policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Financial Statements, except as noted below. Basis of preparation The Financial Statements have been prepared in accordance with applicable UK GAAP accounting standards and under the historical cost accounting rules, modified to include the revaluation of certain land and buildings. Under Section 230(4) of the Companies Act 1985 the Company is exempt from the requirement to present its own Profit and Loss Account. Investments in subsidiary undertakings and participating interests in associated companies In the Company’s Financial Statements, investments in subsidiary undertakings and participating interests in associated companies are stated at cost, less amounts written off for impairment. Foreign currencies Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Any gain or loss on translation arising from a movement in exchange rates subsequent to the date of a transaction is included as an exchange gain or loss in the Profit and Loss Account. Financial instruments Financial assets and liabilities are recognised on the Company’s Balance Sheet when the Company becomes a party to the contractual provisions of the instrument. Trade debtors and trade creditors are initially measured at fair value. Subsequent to initial recognition, they are carried at amortised cost using the effective interest method, less any impairment losses. The Company’s investment in unlisted ordinary shares is held at cost less provision for impairment, as its fair value cannot be reliably measured. Derivative financial instruments of the Company are used to hedge its exposure to interest rate risks arising from operational, financing and investment activities. In accordance with its treasury policy, the Company does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the Profit and Loss Account. The fair value of interest rate swaps is the estimated amount that the Company would receive or pay to terminate the swap at the Balance Sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Bank loans and overdrafts are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, bank loans and overdrafts are stated at amortised cost with any difference between cost and redemption value being recognised in the Profit and Loss Account over the period of the borrowings on an effective interest basis. Where there is any significant foreign currency asset or liability, a corresponding hedge liability or asset is set up in the same currency in order to minimise any exchange risk to the Company. Tangible fixed assets and depreciation Depreciation is provided to write off the cost or valuation less the estimated residual value of tangible fixed assets by equal instalments over their estimated useful economic lives as follows: Leasehold improvements Plant, machinery and vehicles life of the lease 4 to 20 years Hill & Smith Holdings PLC Annual Report 2006 61 Company Principal Accounting Policies Leases Assets acquired under finance leases are capitalised and the outstanding future lease obligations are shown in creditors. Operating lease rentals are charged to the Profit and Loss Account on a straight line basis over the period of the lease. Dividends on shares presented within shareholders’ funds Dividends unpaid at the Balance Sheet date are only recognised as a liability at that date to the extent that they are appropriately authorised and are no longer at the discretion of the Company. Unpaid dividends that do not meet these criteria are disclosed in the notes to the Financial Statements. Pension scheme arrangements The Company participates in the Hill & Smith Executive Pension Scheme and the Hill & Smith Pension Scheme, as described in note 14. As the Company is unable to identify its share of the Group pension scheme assets in respect of the defined benefit sections on a consistent and reasonable basis, the Schemes are accounted for as if they are defined contribution schemes, as permitted by FRS 17. Contributions in respect of defined contribution schemes are charged to the Profit and Loss Account in the period to which they relate. Share-based payments The share option programme allows employees to acquire shares of the Company. The fair value of options granted after 7 November 2002 and those not yet vested by 31 December 2004 are not recognised as an employee expense. Those vested since 1 January 2005 are expensed with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using an option pricing model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. Income tax The charge for taxation on the profit or loss for the year represents the sum of the tax currently payable or recoverable and deferred tax. This charge is recognised in the Profit and Loss Account except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable or recoverable on the taxable result for the year. The taxable result differs from net profit or loss as reported in the Profit and Loss Account because it excludes items of income or expense that are not taxable or not deductible. The Company’s debtor for current tax is calculated using tax rates enacted or substantially enacted at the Balance Sheet date, and any adjustments in respect of previous years. Deferred taxation Deferred tax is provided, without discounting, on timing differences between the treatment of items for taxation and accounting purposes as required by FRS 19. Ordinary dividends Dividends payable are accounted in the Financial Statements when the Company is committed to the payment of the dividend. Dividends receivable are accounted for on a cash accounting basis. Financial guarantees Where the Company enters into financial guarantee contracts to secure the indebtedness of other companies within its Group, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. 62 www.hsholdings.co.uk Notes to the Company Financial Statements 1. Profit on ordinary activities before taxation The profit on ordinary activities is stated after charging Depreciation of owned tangible fixed assets Operating lease rentals — Land and buildings 31 December 2006 £000 31 December 2005 £000 13 50 19 50 Fees paid to KPMG Audit Plc and its associates for non-audit services to the Company itself are not disclosed in the individual Financial Statements of Hill & Smith Holdings PLC because the Company’s Consolidated Financial Statements are required to disclose such fees on a consolidated basis. A description of the work of the Audit Committee is set out in the Corporate Governance Report on pages 21 and 22 and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditors. 2. Employees The average number of people employed by the Company during the year Administrative staff The aggregate remuneration for the year Wages and salaries Share-based payments Social security costs Pension cost 31 December 2006 31 December 2005 11 £000 1,626 8 200 1,610 3,444 10 £000 1,660 11 199 607 2,477 Details of the Directors’ remuneration and share interests are given in the Directors’ Remuneration Report on pages 24 to 27. 3. Dividends The Directors have recommended a final dividend for the current year, subject to shareholder approval, as shown below. Year ended 31 December 2006 Year ended 31 December 2005 Equity shares Interim Final proposed Total 4. Tangible fixed assets Cost or valuation At 31 December 2005 Additions At 31 December 2006 Depreciation At 31 December 2005 Charge for the year At 31 December 2006 Net book value At 31 December 2006 At 31 December 2005 Pence per share 3.0 4.2 7.2 £000 2,267 3,185 5,452 Pence per share 2.6 3.4 6.0 Plant, Short leasehold machinery properties and vehicles £000 £000 10 — 10 4 1 5 5 6 137 4 141 97 12 109 32 40 £000 1,643 2,150 3,793 Total £000 147 4 151 101 13 114 37 46 Hill & Smith Holdings PLC Annual Report 2006 63 Notes to the Company Financial Statements 5. Fixed asset investments Share in subsidiary Loans to undertakings undertakings £000 £000 subsidiary Participating interests £000 Cost At 31 December 2005 Additions At 31 December 2006 Provisions At 31 December 2005 At 31 December 2006 Net book value At 31 December 2006 At 31 December 2005 83,672 52,548 136,220 1,910 1,910 134,310 81,762 23,793 — 23,793 1,316 1,316 22,477 22,477 23,938 — 23,938 — — 23,938 23,938 Trade investments £000 750 — 750 750 750 — — Total £000 132,153 52,548 184,701 3,976 3,976 180,725 128,177 A list of the principal businesses owned by the Company is given on pages 70 and 71. All the Company’s subsidiaries are wholly owned except for Pipe Supports (Asia) Limited, a company incorporated in Thailand, in which the Company has an indirect equity interest of 98.5%. Redman Fisher (Ireland) Limited is incorporated in the Republic of Ireland. During the year the Company made further investments in certain of its wholly owned subsidiaries of £47,261,000 (2005: £Nil). This investment has been reflected through intercompany balances included in current assets and liabilities and serves to show a more accurate representation of the finances of those subsidiaries. The Company also holds a trade investment of 19.5% in an unlisted company whose fair value cannot be accurately measured and is fully written down. 6. Debtors Amounts owed by subsidiary undertakings Corporation tax Deferred tax (see note 10) Fair value derivatives (see note 9) Other debtors Prepayments and accrued income 7. Creditors: amounts falling due within one year Bank loans and overdrafts Bank loans and overdrafts Current portion of long term bank loans Finance lease and hire purchase obligations Loan notes Other creditors Trade creditors Other taxation and social security Accruals and deferred income Proposed dividend Other creditors Amounts owed to subsidiary undertakings 64 www.hsholdings.co.uk 31 December 2006 £000 31 December 2005 £000 29,207 2,422 — 158 3,227 87 35,101 7,031 1,863 47 160 1,698 65 10,864 31 December 2006 £000 31 December 2005 £000 — 5,607 225 54 5,886 1,882 47 1,123 2,267 786 80,182 86,287 11,614 6,876 225 94 18,809 2,329 27 1,234 1,643 970 16,757 22,960 8. Creditors: amounts falling due after one year Bank loans and overdrafts Long term bank loans Finance lease and hire purchase obligations 31 December 2006 £000 31 December 2005 £000 48,115 — 48,115 53,261 225 53,486 Company net indebtedness and the effective interest rates at the Balance Sheet date for 2006 are detailed below. The interest bearing loans and borrowings are also analysed into the periods in which they mature. 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 31 December 2006 Effective interest rate % 6.16 4.82 6.16 4.23 5.68 5.68 Amount £000 5,607 48,115 — 48,115 53,722 54 225 — — 225 31 December 2005 Effective interest rate % Amount £000 5.61 3.97 5.61 3.64 5.18 5.18 18,490 30,261 23,000 53,261 71,751 94 225 225 225 450 The bank loans carry a rate of interest of up to 1.25% above LIBOR and are secured by a first fixed and floating charge over substantially all of the Company’s assets. Obligations under finance leases and hire purchase obligations are secured on the relevant assets. 9. Financial instruments (a) Management of financial risks The Company’s major financial risks relate to movements of interest and exchange rates. Management continually review the Company’s exposure to these issues and will, if required, make appropriate use of derivative financial instruments to mitigate this exposure. Interest rate risk The Company used a euro interest rate swap to fix approximately 45% (2005: 40%) of its year end gross borrowings at an effective rate of 3.6%. This swap expires in May 2007. Currency exposure The Company is subject to fluctuations in exchange rates on its net overseas investments and on transactional monetary assets and liabilities not denominated in the operating currency of the operating unit concerned. The Company is 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 Company uses forward exchange contracts to hedge the majority of exposures that do exist. Hill & Smith Holdings PLC Annual Report 2006 65 Notes to the Company Financial Statements 9. Financial instruments continued (b) Financial assets The Company’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 5. 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 Company’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 Company’s financial liabilities, excluding short term creditors, are set out below. Fixed rate financial liabilities comprise sterling and euro denominated finance leases and hire purchase agreements and bank loans. Floating rate financial liabilities comprise sterling and euro denominated bank loans and overdrafts, and sterling finance leases and hire purchase agreements. The floating rate financial liabilities bear interest at rates related to bank base rates or LIBOR. Currency Sterling at 31 December 2006 Euro at 31 December 2006 Total at 31 December 2006 Sterling at 31 December 2005 Euro at 31 December 2005 Total at 31 December 2005 Fixed rate financial liabilities Euro at 31 December 2006 Euro at 31 December 2005 Floating rate financial liabilities £000 Exchange rate 1.485 1.449 28,607 — 28,607 38,916 — 38,916 Fixed rate financial liabilities £000 — 25,115 25,115 — 24,654 24,654 €000 37,296 35,724 Total £000 28,607 25,115 53,722 38,916 24,654 63,570 Weighted average interest rate Weighted average period for which rate is fixed % 4.4 4.4 years 0.4 1.4 (d) Maturity profile The maturity profile of the Company’s financial liabilities other than short term creditors such as trade creditors and accruals, is shown in note 8 to the Financial Statements. At 31 December 2006, the Company had the following undrawn committed facilities in respect of which all conditions precedent had been met: Undrawn committed borrowing facilities Expiring after more than one year 31 December 2006 £000 31 December 2005 £000 22,500 20,500 (e) Fair values At 31 December 2006 the fair value of the Company’s financial instruments was not materially different to their book value. The fair value of the interest rate swap was calculated using market rates where available, otherwise cash flows were discounted at prevailing rates. 66 www.hsholdings.co.uk 10. Deferred tax At 1 January Charged/(credited) for the year in the profit and loss account At 31 December Difference between accumulated depreciation, amortisation and capital allowances Other timing differences 11. Called up share capital Authorised 100,000,000 Ordinary shares of 25p each (2005: 80,000,000) Allotted, called up and fully paid 75,547,659 Ordinary shares of 25p each (2005: 63,197,403) 31 December 2006 £000 31 December 2005 £000 (47) 85 38 (5) 43 38 (6) (41) (47) (7) (40) (47) 31 December 2006 £000 31 December 2005 £000 25,000 18,887 20,000 15,799 On 16 October 2006, the Company issued 12,280,702 ordinary shares at a price of 228p per share under the terms of a Placing and Open Offer. In addition, during the year the Company issued 69,554 shares under its various share option schemes (2005: 1,122,109), realising £51,000 (2005: £798,000). Options outstanding over the Company’s shares at 31 December 2006 1995 Executive Share Option Scheme 2005 Executive Share Option Scheme† 2005 Non-Approved Executive Share Option Scheme† 1995 Savings Related Share Option Scheme†* Number of shares 14,000 10,000 353,248 229,764 1,163,514 Option price (p) Date first exercisable Expiry date 69 70 205 205 100 4 Aug 2002 2 Jul 2004 4 Oct 2008 4 Oct 2008 1 Jan 2010 4 Aug 2009 2 Jul 2011 4 Oct 2015 4 Oct 2015 1 Jul 2010 † The credit to equity for share-based payments relate to share options held in the Company, the charge relating to the share-based payments will arise in both the Company* and in relevant subsidiary companies, dependent on where the relevant employee is paid. The total credit to equity for the year ended 31 December 2006 was £152,000 (2005: £100,000). Details of the assumptions and methodology used in calculating this credit can be seen in the notes to the Group Financial Statements. * The charge for the share-based payment in the Company for the year ended 31 December 2006 was £8,000 (2005: £11,000). Details of the assumptions and methodology used in calculating this charge can be seen in the notes to the Group Financial Statements. 12. Share premium and reserves At 1 January 2005 Loss for the year Dividends received Credit to equity of share-based payments Dividends expensed Shares issued At 31 December 2005 Loss for the year Dividends received Credit to equity of share-based payments Dividends expensed Shares issued At 31 December 2006 Share premium £000 Capital redemption reserve £000 Profit and loss account £000 3,519 — — — — 517 4,036 — — — — 23,767 27,803 238 — — — — — 238 — — — — — 238 25,154 (2,057) 16,957 100 (3,380) — 36,774 (3,990) 7,000 152 (4,417) — 35,519 Hill & Smith Holdings PLC Annual Report 2006 67 Notes to the Company Financial Statements 13. Guarantees and other financial commitments (a) Guarantees The Company had no financial guarantee contracts outstanding (2005: £Nil). The Company guarantees the bank loans and overdrafts of certain subsidiary undertakings. The amount outstanding at 31 December 2006 was £7,819,000 (2005: £2,408,000). (b) Operating lease commitments Annual commitments under non-cancellable operating leases expire in the periods as detailed below: Within one year Between one and two years Between two and five years After five years 14. Pensions 31 December 2006 31 December 2005 Land and buildings £000 — — — 37 37 Other £000 — — 25 — 25 Land and buildings £000 — — — 34 34 Other £000 22 4 — — 26 The Company contributes to two Group pension schemes: one providing benefits accruing in the future on a defined benefit basis and a second scheme providing benefits that are on a defined contribution basis. Details of the schemes and their most recent actuarial valuations are contained in note 23 to the Group Financial Statements. Because the Company is unable to identify its share of the scheme assets and liabilities on a consistent and reasonable basis, the schemes have been accounted for by the Company as if they were defined contribution schemes, as permitted by FRS 17 Retirement Benefits. The pension cost for the year represents contributions payable by the Company to the fund and amounted to £1,610,000 (2005: £607,000), of which £1,549,000 (2005: £514,000) related to additional deficit contributions. There were no outstanding or prepaid contributions at either the beginning or the end of the financial year. Full details of the Group schemes are given in note 23 to the Group Financial Statements. 15. Related party transactions During the year the Company had the following transactions with companies of which D L Grove is or was during the year a major shareholder. All of these transactions were undertaken on an arm’s length basis. 31 December 2006 31 December 2005 Drayparcs Limited GIL Investments Limited Tana Consultants Limited 16. Post balance sheet events Creditors due within one year £000 Purchases £000 — 10 — 10 — 3 — 3 Creditors due within one year £000 — 1 — 1 Purchases £000 13 11 3 27 On 28 February 2007, the Company entered into an agreement with some of the other principal shareholders of its associate company, Zinkinvent GmbH, to acquire further shares in that company, subject to Hill & Smith Holdings PLC shareholder approval. If approved, this transaction will result in Zinkinvent GmbH becoming a subsidiary undertaking. Zinkinvent GmbH is an investment company owning 100% of Vista NV, a Belgian holding company with galvanizing and lighting column manufacturing operations in Benelux, France and the USA. 68 www.hsholdings.co.uk Five Year Summary Year ended 31 December 2006 £000 Year ended 31 December 2005 £000 Year ended 31 December 2004 £000 Year ended 31 December 2003 £000 Year ended 31 December 2002 £000 Revenue Underlying operating profit* Underlying profit before taxation* Shareholders’ funds Underlying operating cash flow* Underlying earnings per share* Dividends per share 306,042 22,655 18,466 77,027 12,542 pence 20.7 7.2 277,296 19,570 15,698 40,342 27,474 pence 17.9 6.0 268,652 15,084 11,807 34,234 19,177 pence 13.3 5.0 GAAP basis IFRS IFRS IFRS 241,665 12,592 9,076 32,149 21,267 pence 10.7 4.6 IFRS Transition 212,740 14,008 10,019 35,848 24,244 pence 11.8 4.5 UK GAAP The main material adjustments that would need to be made to the years ended 2002 and 2003 to make them comply with IFRS would be the impact on pensions of IAS 19, not providing for any goodwill amortisation and not accruing for proposed dividends. * Before reorganisation and property items. Hill & Smith Holdings PLC Annual Report 2006 69 Principal Group Businesses Infrastructure Products Group ASSET INTERNATIONAL LIMITED Large diameter plastic drainage pipes and storm water attenuation tanks Stephenson Street, Newport, Gwent, NP9 4XH Tel: (01633) 273081 Fax: (01633) 281301 sales@assetint.co.uk www.assetint.co.uk JA ENVIROTANKS† Manufacture of steel storage tanks PO Box 16, Charles Henry Street, Birmingham B12 0SP Tel: (0121) 622 4661 www.jjenvirotanks.com 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 sales@barkers-engineering.co.uk www.barkers-engineering.co.uk JOSEPH ASH LIMITED* Galvanizing Alcora Building 2, Mucklow Hill, Halesowen, West Midlands, B62 8DG Tel: (0121) 504 2560 Fax: (0121) 504 2599 sales@josephash.co.uk www.josephash.co.uk BERRY Systems† Car Park & Industrial Barriers, Spring Steel Barriers, Protection Bollards, Speed Ramps, Hand Rail Panels Springvale Business & Industrial Park, Bilston, Wolverhampton, WV14 0QL Tel: (01902) 491100 Fax: (01902) 494080 sales@berrysystems.co.uk www.berrysystems.co.uk MALLATITE LIMITED Street and highway lighting columns Hardwick View Road, Holmewood Industrial Estate, Holmewood, Chesterfield, S42 5SA Tel: (01246) 593280 Fax: (01246) 593281 sales@mallatite.co.uk www.mallatite.co.uk COUNTERS & ACCESSORIES LIMITED‡ Traffic counting and classifying equipment Lodge Farm Business Centre, Castlethorpe, Milton Keynes, Bucks, MK19 7ES Tel: (01908) 511122 Fax: (01908) 511505 sales@c-a.co.uk www.c-a.co.uk TECHSPAN SYSTEMS† Electronic information display systems Griffin House, Gatehouse Way, Aylesbury, Bucks, HP19 8BP Tel: (01296) 673000 Fax: (01296) 673002 sales@techspan.co.uk www.techspan.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 info@hill-smith.co.uk www.hill-smith.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 sales@v-and-g.co.uk www.v-and-g.co.uk Notes: The above is a list of the Company’s subsidiary undertakings, except for some intermediate holding companies and certain other undertakings of minor importance which are excluded by virtue of sub-Section 231(5) of the Companies Act 1985. Except where indicated, the undertakings are subsidiaries incorporated in Great Britain. * † ‡ The Company’s effective interest is held indirectly for these undertakings. Envirotanks, Techspan and Berry are operating divisions only, not limited companies. Counters & Accessories was acquired on 16 February 2006. 70 www.hsholdings.co.uk Principal Group Businesses Building & Construction Products Industrial Products 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 sales@ashandlacy.com www.ashandlacy.com 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 sales@ashlacyperf.co.uk www.ashlacyperf.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 info@birtley-building.co.uk www.birtley-building.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 enquiries@alpressings.co.uk www.alpressings.co.uk EXPRESS REINFORCEMENTS LIMITED* Steel reinforcement products Eaglesbush Works, Midland Road, Neath, South Wales, SA11 1NJ Tel: (01639) 645555 Fax: (01639) 645558 commercial@expressreinforcements.co.uk www.expressreinforcements.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 enquiries@bromfordsteels.co.uk www.bromfordsteels.co.uk REDMAN FISHER ENGINEERING LIMITED* Industrial flooring, handrail systems and structures PO Box 12, Bean Road, Birmingham New Road, Tipton, West Midlands, DY4 9AQ Tel: (01902) 880880 Fax: (01902) 880446 sales@redmanfisher.co.uk www.redmanfisher.co.uk D & J STEELS LIMITED Forging and engineering steel stockholding Lambert Works, Colliery Road, Wolverhampton, West Midlands, WV1 2RD Tel: (01902) 453680 Fax: (01902) 455431 sales@dandjsteels.demon.co.uk LIONWELD KENNEDY FLOORING LIMITED Handrail and flooring structures Marsh Road, Middlesbrough, TS1 5JS Tel: (01642) 245151 Fax: (01642) 224710 sales@lk-uk.com www.lk-uk.com PIPE SUPPORTS LIMITED* Constant and variable pipe support systems Salwarpe Road, Droitwich, Worcestershire, WR9 9BH Tel: (01905) 795500 Fax: (01905) 794126 psl@pipesupports.com www.pipesupports.com ACCESS DESIGN & ENGINEERING LIMITED Halsefield 18 Telford, Shropshire, 7FT 4JS Tel: (01952) 588788 www.access-design.co.uk Access Design is a division of Redman Fisher Hill & Smith Holdings PLC Annual Report 2006 71 Financial Calendar Annual General Meeting 2007 Payment of final dividend for the year ended 31 December 2006 (ex dividend date 6 June 2007) Announcement of results for period to 30 June 2007 Payment of interim dividend Preliminary announcement of results to 31 December 2007 11 May 2007 11 July 2007 September 2007 January 2008 March 2008 72 www.hsholdings.co.uk This document has been produced on coated paper using 50% recovered pulp waste and 50% elemental chlorine free pulp from managed and certified sustainable forests. 2 Highlands Court Cranmore Avenue Shirley, Solihull, B90 4LE Tel: (0121) 704 7430 Fax: (0121) 704 7439 www.hsholdings.co.uk