Westhaven House, Arleston Way, Shirley, Solihull, B90 4LH Tel: (0121) 704 7430 Fax: (0121) 704 7439 www.hsholdings.com Hill & Smith Holdings PLC Annual Report and Accounts for the period ended 31 December 2007 H i l l & S m l i i t h H o d n g s P L C A n n u a l R e p o r t a n d A c c o u n t s f o r t h e p e r i o d e n d e d 3 1 D e c e m b e r 2 0 0 7 INNOVATIVE SOLUTIONS Pipe supports used on an LNG plant in Milford Haven CONTENTS PAGES CONTENTS PAGES 2007 HIGHLIGHTS CHAIRMAN’S STATEMENT BUSINESS REVIEW Introduction Strategy Operational Performance Financial Performance Group Key Performance Indicators Risks and Uncertainties Financial Risks Corporate Social Responsibility Acquisitions and Disposals Market Outlook REPORTS Directors and Committees Directors’ Report Corporate Governance Directors’ Remuneration Report Statement of Directors’Responsibilities Independent Auditors’ Report 02 - 03 04 - 05 07 - 21 43 - 97 FINANCIAL STATEMENTS Consolidated Income Statement Consolidated Statement of Recognised Income and Expense Consolidated Balance Sheet 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 SHAREHOLDER INFORMATION FINANCIAL CALENDAR 23 - 41 98 99 PRINCIPAL GROUP BUSINESSES 100 - 103 CONTACTS & ADVISERS 104 Cautionary Statement This Annual Report contains forward looking statements which are made in good faith based on the information available at the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ from those currently anticipated. 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 Hill & Smith Holdings PLC Annual Report and Accounts 2007 www.hsholdings.com Stock Code: HILS INNOVATIVE SOLUTIONS HILL & SMITH HOLDINGS PLC is an industrial Group focused on the infrastructure, galvanizing, building and construction markets. Its business is conducted primarily through subsidiaries in the United Kingdom, France, Benelux, the USA and Thailand. The Group's operations are organised into three business segments: • Infrastructure Products Group (IPG) • Galvanizing Services • Building and Construction All Group companies are well established within their respective business sectors and hold strong market shares. Driven from the centre, there is a focus on innovation, new product development and capital investment. www.hsholdings.com Stock Code: HILS 1 Highlights 2007 Revenue Underlying Operating Profit* Return on Revenue* (cid:3) 31.4% (cid:3) 70.5% (cid:3) 2.2% £402.1m 2006: £306.0m £38.7m 2006: £22.7m 9.6% 2006: 7.4% (cid:3) Record revenue and profits (cid:3) Continued strong market demand and organic growth (cid:3) Banking Facilities renewed through to 2012 (cid:3) Acquisition of controlling interest in Zinkinvent GmbH 2 Hill & Smith Holdings PLC Annual Report 2007 i H g h l l i g h t s Underlying Pre-tax Profit* Underlying EPS* Dividends per share (cid:3) 77.8% (cid:3) 34.3% (cid:3) 20.8% £32.9m 2006: £18.5m 27.8p 2006: 20.7p 8.7p 2006: 7.2p *excludes the effect of business reorganisation costs, property items and amortisation of acquisition intangibles Revenue £ million Underlying Operating Profit £ million * Dividends per share pence . 1 2 0 4 . 0 6 0 3 . 7 8 6 2 . 3 7 7 2 . 7 1 4 2 1 . 5 6 1 . 2 1 . 7 8 3 0 7 8 . 0 2 7 . 0 0 6 . . 0 0 0 5 6 . 4 . 7 2 6 2 9 1 . 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 Performance 2003 - 2007 Performance 2003 - 2007 Performance 2003 - 2007 www.hsholdings.com Stock Code: HILS 3 “It is worth noting that the Group has increased its underlying earnings per share by an average of 28% per annum compound over the last three years.” Chairman’s Statement David Grove I congratulate the Hill & Smith team, which now spans three continents, on delivering an excellent performance in 2007. Our core businesses achieved record levels of profit from strong organic growth and improved profit margins. The product development programme continues to drive growth and we enhanced our potential for overseas earnings by increasing our shareholding in Zinkinvent GmbH, in July 2007, to 68.2% (previously 33.3%). From that date Zinkinvent GmbH has been treated as a subsidiary and not as an associate, as was the case in the first half of 2007. Financial Overview Revenue from continuing operations in the year to 31 December 2007 increased by 31.4% to £402.1 million (2006: £306.0 million). Profit before taxation in the period increased by 87.3% to £32.4 million (2006: £17.3 million). The Group regards its underlying results, which exclude business reorganisation costs, property items and amortisation of acquisition intangibles, as a more consistent and appropriate measure of its financial performance. Underlying profit before taxation increased by 77.8% to £32.9 million (2006: £18.5 million). Basic earnings per share increased by 49.0% to 29.5p (2006: 19.8p) whereas underlying earnings per share were 34.3% ahead of last year at 27.8p (2006: 20.7p). It is worth noting that the Group has increased its underlying earnings per share by an average of 28% per annum compound over the last three years. Dividends The directors are proposing a final dividend of 5.1p (2006: 4.2p) making a total dividend for the year of 8.7p (2006: 7.2p). This continues our progressive dividend policy under which the dividend has been increased by 20% in each of the last three years. The dividend is covered 3.2 times by underlying earnings per share. Operations Following the acquisition of the additional shareholding in Zinkinvent, the Group is now organised into three business segments, namely the Infrastructure Products Group, Galvanizing Services and Building and Construction Products. The Review of 2007 deals with the details of individual business units. However, the following significant events are worthy of mention. The Infrastructure Products Group powered ahead in the year benefiting from our focused investment in previous years in capital projects and product development. Also, our pipe supports Company in Thailand successfully Valley & Gulliner VGAN bridge parapet at Palm Island Dubai 4 Hill & Smith Holdings PLC Annual Report 2007 “The current year has started well with strong demand from our core markets and the benefits arising from our organic growth.” C h a i r m a n ’ s S t a t e m e n t Pipe Supports factory in Thailand executed a number of overseas contracts which were won as a result of our new low cost factory supplying components for a number of large LNG (Liquid Natural Gas) plants being built across the world. Profits in Galvanizing Services were also significantly ahead with a first full year contribution from Metnor Galvanizing (acquired November 2006). As from July 2007, when we acquired a majority interest in Zinkinvent, there was a further contribution from the galvanizing plants within this Group. The volatile zinc price during the year was well managed and we are already improving efficiencies by benchmarking best practice between plants in the UK, mainland Europe and the USA. In the Building and Construction Products division there was a flat performance. On the plus side it is pleasing to report that our reinforcing bar business continued its improved performance and produced a satisfactory operating profit during the year. On the minus side there were one-off losses at Ash & Lacy Perforators which were a direct result of the rationalisation of our two production facilities onto a single site. The benefits of a single site operation will be evidenced in the future. Finance In June 2007, we successfully restructured our financing arrangements for a further five years based on a new multicurrency facility, which together with our other sources of finance, provides us with total funding facilities in excess of £200 million. Acquisitions The only significant acquisition during the year was of a further 34.9% of the shares in Zinkinvent GmbH for €26 million in July. Disposals During 2007, we continued to review our non- core businesses and Ash & Lacy Pressings was sold in August. In February 2008, we also disposed of D&J Steels. Both sales were concluded at a small discount to net asset value. Board Changes There have been a number of planned changes to the Board composition during the year and our succession planning process has been well executed. David Winterbottom retired as our Chairman in May 2007 after ten years’ service and it is sad to report that he unexpectedly passed away in November. His valuable contribution to where the Group is today should not be underestimated. In May 2007, Derek Muir was promoted to Group Chief Executive after twenty years’ service in many roles within the Group and I was appointed Chairman. Also in May 2007, I was pleased to welcome Clive Snowdon to the Board as a Non- Executive Director. He has already made a valuable contribution to the Group. Chris Burr will be retiring from the Board today. Chris has been the Group Finance Director since November 2000, and, including his role as Group Finance Director of Ash & Lacy PLC, has been with the Group for 17 years. I would like to personally thank Chris for the part he has played in the success of the Group and for his unstinting support during my period as Chief Executive, and more recently, as Chairman. Our best wishes go to Chris for a long and happy retirement. Mark Pegler is a very experienced Finance Director and I welcome him to the Board as our new Group Finance Director. We now have young but very experienced executive teams at both Group and subsidiary levels. The future development of the Group on a global basis is in good hands. Employees The Group has faced many challenges during the year and it is a credit to our employees that these exceptional financial results have been achieved. Outlook The current year has started well with strong demand from our core markets and the benefits arising from our organic growth strategy. Our product development incubator is a vital part of the future growth of the Group together with some targeted acquisitions which are always under evaluation. I look forward to reporting another year of progress in 2008. David Grove Chairman 11 March 2008 www.hsholdings.com Stock Code: HILS 5 LNG plant at Milford Haven — see inside cover 6 Hill & Smith Holdings PLC Annual Report 2007 “2007 was another successful year for the Group during which we were able to deliver our strategy of growth.” BUSINESS REVIEW INTRODUCTION STRATEGY OPERATIONAL PERFORMANCE FINANCIAL PERFORMANCE GROUP KEY PERFORMANCE INDICATORS RISKS AND UNCERTAINTIES FINANCIAL RISKS CORPORATE SOCIAL RESPONSIBILITY ACQUISITIONS AND DISPOSALS MARKET OUTLOOK www.hsholdings.com Stock Code: HILS 7 i B u s n e s s R e v e w i Divisional Highlights 2007 Infrastructure Products Galvanizing Services Building & Construction Products All of the companies within the Infrastructure Products Group (IPG) aim to be market leaders in their specialist fields. The teams are focused on being the lowest cost producers and are driven by the Our diverse range of galvanizing Companies within the Building and operations, comprising 35 plants across Construction Products Group are in four countries and two continents, specialist sectors and work closely enables us to service all sectors and with architects and designers to spread the risk of any peaks and provide unique solutions. A proportion troughs of demand within any particular of their products are steel based and desire for continuous improvement. area of the market. The Group’s key objective is to provide a progressive and continuous improvement in working methods, quality of work, skill levels, health and safety and environmental awareness. IPG is committed to providing levels of excellence to all customers, which we believe to be unparalleled within the civil engineering supplier chain. require to be galvanized at their own plants. The Group is dedicated to providing award winning standards of service and has “Best in Class” manufacturing sites. Revenues £145.2m Revenues £84.8m Revenues £172.1m Underlying Operating Profit* £18.6m Underlying Operating Profit** £15.4m Underlying Operating Profit* £4.7m * includes share of associate investment income from Zinkinvent of £3.1m (2006: £3.2m) *excludes the effect of business reorganisation costs, property items and amortisation of acquisition intangibles 8 Hill & Smith Holdings PLC Annual Report 2007 “The Group was reorganised into three business segments: Infrastructure Products, Galvanizing Services and Building and Construction Products.” Hill & Smith’s “Flexbeam” crash barrier Hot dip galvanizing Business Review Derek Muir Introduction Hill & Smith is an industrial Group focused on the infrastructure, galvanizing, building and construction markets. Its business is conducted primarily through its operating subsidiaries in the United Kingdom, France, Benelux, the USA and Thailand. In order to maximise the business growth and profit opportunities, subsidiaries are given a high degree of autonomy, subject to overall central control. All subsidiaries have their own management teams and boards of directors which meet regularly, usually monthly, with members of the central executive team. The role of the head office is principally to monitor and control subsidiary company performance, provide strategic and financial direction, including financing and other Group-wide issues and to set and enforce policy and standards on matters such as corporate governance, risk management, health & safety and corporate social responsibility The Group’s operations are organised into three business segments. • The Infrastructure Products Group (“IPG”) provides services and products to the infrastructure road and rail industries, notably permanent and temporary highway crash barriers, bridge parapets, lighting columns and fencing. The majority of its operations are in the United Kingdom with others being based in the USA and France. • Galvanizing Services provides jobbing galvanizing services to a wide range of industrial and commercial markets in the United Kingdom, Europe, USA and a significant amount of business with other Group operations. • The Building and Construction Products businesses are for the most part engaged in the fabrication of steel and composite products for United Kingdom construction and industrial end users, as well as the manufacture of products for the UK house building market. Essentially all Group companies are well established within their respective business sectors and hold strong market shares. Driven from the centre, there is a focus on innovation, new product development and capital investment. Strategy The Company’s basic objective is to provide a growing stream of earnings, dividends and shareholder value. In line with this objective, the Company has in recent years maintained, as a matter of policy, a relatively high level of borrowings. This has enabled it to leverage acquisition and internal development opportunities which it would otherwise not have been able to exploit and to grow the business to achieve the fundamental objective. Our growth strategy focuses on expansion in growing markets through product development and selective bolt-on acquisitions. We are confident that this development programme will broaden the range of products and services we offer enabling us to generate additional revenue, increased profitability and greater penetration of the US market. For the highways infrastructure market we have developed products to satisfy the demand created by government spending. We will also continue to build upon initiatives we have taken to partner our customers in this dynamic market. Operational Performance 2007 was another successful year for the Group during which we were able to deliver our strategy of growth. Expanding our overseas operations and commitment has enabled us to develop as an international Group. Following the acquisition of Zinkinvent in July, and the consequent increased activity in galvanizing, the Group was reorganised into three business segments: Infrastructure Products, Galvanizing Services and Building and Construction Products. Annualised Group revenue is made up approximately as follows: 35% infrastructure products, 28% galvanizing services and 37% building and construction. Infrastructure Products Group (IPG) Revenue increased by 41.9% to £145.2 million in 2007 (2006: £102.3 million) and underlying operating profit, which excludes business reorganisation costs, property items and amortisation of acquisition intangibles, improved by 56.3% to £18.6 million (2006: £11.9 million). Hill & Smith Ltd delivered an excellent performance with its strong position in the highway maintenance and road widening sectors into which it supplied the new range of “Flexbeam” vehicle restraint systems. During the year we continued to increase our Varioguard rental fleet and demand remains strong for 2008. The integrated approach of Varley & Gulliver, providing a fully tested parapet and crash- barrier system, enhanced our market leadership and we were able to maximise our cross-selling opportunities. The steel and aluminium parapet divisions had a successful year and a number of large contracts were won in 2007, including the parapets on the palm island in Dubai. We enter the current year in good shape. Berry Systems continued to develop innovative solutions for its off-highway customers with the www.hsholdings.com Stock Code: HILS 9 i B u s n e s s R e v e w i Infrastructure Products 10 Hill & Smith Holdings PLC Annual Report 2007 i B u s n e s s R e v e w i Innovation — pictured below are examples of our product development 1 Barkers Engineering “Interceptor” security gate 2 “Lite Speed” sewage system from Asset International 3 “Top Deck” demountable car parking system 1 2 3 Business Review continued launch of our rental fleet of “TopDeck”, a temporary modular parking solution to cope with congestion at airports, railway stations, hospitals and retail developments. Interest in this product has been very encouraging and early success in 2008 has confirmed this will be a growth market for the future. We anticipate “TopDeck” will have a similar business model to Varioguard with a combination of sales and rentals. In the year we completed a number of rail tunnel structures in corrugated steel and won our first project with the concrete Bebo Arch System, emphasising our success in providing solutions in a variety of materials. The IPG technology division continued to concentrate on developing prototypes for the large Highways Agency Variable Message Signage contract won during the year. Initial orders under this contract have now been received and this will significantly improve the performance of the Techspan operation in 2008. CA Traffic (Counters & Accessories) commenced development of an Automatic Number Plate Recognition System to target the Department of Transport requirement for information on journey times. We are positioning our products in this division in line with the Highways Agency’s strategy of “getting the best from the network” and “informing drivers”. Barkers Engineering again performed strongly in its traditional fencing markets and also made significant progress in developing its products for the growing homeland security market. Mallatite’s relocation was completed in March and the benefits of improved and more efficient production facilities were reflected in the performance in the second half of the year. During the year we won the Derby PFI contract for the supply of lighting columns for the next five years. Conimast International joined IPG as part of the Zinkinvent acquisition. It is the second largest manufacturer in France of tapered decorative lighting columns for the French market and fits our production strategy of having galvanizing and manufacturing on one site. Its performance in 2007 was above our expectations. Asset International was awarded its largest ever contract for the supply of feeder pipes to the Glendoe Hydro Electric Scheme in Scotland. This, together with the legislative requirement for additional storage within drainage systems to prevent flooding, proved an excellent market for our storm water attenuation tanks. Envirotanks successfully completed a number of large contracts including an order for 32 vertical tanks for a company relocating off the site to accommodate the 2012 Olympics. Pipe Supports’ profit achievement was one of the highlights of 2007. Its success in supplying pipe supports for the growing number of Liquid Natural Gas (LNG) plants around the world was a major contributor to an outstanding performance. This market will be strong for the foreseeable future as the requirement for the supply of gas increases in the developing countries of India and China. We are also looking to expand our presence in the USA in 2008. V&S Utilities, part of the Zinkinvent acquisition, has three businesses in the US energy market, supplying transmission poles, substation structures and components. There is currently a significant replacement programme for the ageing energy infrastructure in the US leaving us in a position to extract enhanced profitability from the combined benefits these three businesses provide. Galvanizing Services Revenue increased by 173.5% to £84.8 million in 2007 (2006: £31.0 million) and underlying operating profit improved by 126.5% to £15.4 million (2006: £6.8 million). Tonnages in all the three divisions increased year on year: UK by 26.8%; France by 3.1%; USA by 14.0%. The UK plants performed well with the full benefits of the Metnor Galvanizing acquisition being realised. We secured a number of large contracts for structural steel for LNG plants where the long bath facility at Metnor was an influential factor. France Galva had an excellent performance with record profits. The V&S Inc. operation located in the Mid West and East Coast of the USA produced an outstanding result. In 2008 we will be building a new plant that will further increase our available capacity. The V&S management team are working well with the IPG in developing manufacturing opportunities for our range of highway safety products for the US market. Building and Construction Revenue fell by 0.3% to £172.1 million in 2007 (2006: £172.7 million) and underlying operating profit improved by 17.5% to £4.7 million (2006: £4.0 million). The industrial flooring division of Redman Fisher, Lionweld Kennedy and Access Engineering continued to trade well, producing another record performance. The new composite product range made an increased profit contribution and shows great potential for growth. Other growth markets in 2007 were in the AMP4 water treatment, power, rail and LNG sectors. Express, our concrete reinforcing and mesh business, achieved an impressive profit turnaround despite lower volumes. We enter 2008 with a good order book and with measures in place to manage any volatility in the steel prices. Profitability improved in the steel lintel and residential doors division of Birtley Building Products, which services the UK housing market. The bolt-on acquisition of HM Doors will further strengthen the competitive position of this division. Ash & Lacy Building Systems increased turnover and profitability particularly for the Ashtech range of rainscreen cladding products. National coverage was increased with the expansion of its depot network. The Ash & Lacy Perforators operation at Hayle, Cornwall, was closed during the year and www.hsholdings.com Stock Code: HILS 11 Galvanizing Services 12 Hill & Smith Holdings PLC Annual Report 2007 “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.” Business Review continued Voigt & Schweitzer, Inc’s galvanizing services in use on a major project Hot dip galvanizing in operation production transferred to the Smethwick site. This relocation hampered the overall performance in the year, but will provide a solid base to improve the profits in 2008 as a result of the reduced overhead. Bromford Iron & Steel, our specialist steel rolling mill, had a steady performance in 2007. It now exports over 25% of its products around the world. Overview 2007 was another successful year for the Group in which we again achieved, from our continuing operations, record levels of revenue and profitability. Revenue increased by 31.4% to £402.1 million (2006: £306.0 million), underlying profit before taxation grew by 77.8% to £32.9 million (2006: £18.5 million) and underlying earnings per share were 34.3% higher at 27.8p (2006: 20.7p). Financial Performance Basis of consolidation These accounts cover the twelve months to 31 December 2007. The Group acquired an additional 34.9% stake in Zinkinvent GmbH on 2 July and so had a controlling 68.2% stake from that date on. For the six months prior to this additional investment the results of Zinkinvent had been equity accounted as an associate. Subsequent to the acquistion of the further 34.9% shareholding the results have been fully consolidated as a subsidiary. The Articles of Association of Zinkinvent GmbH contain a “put option” which gives all Zinkinvent shareholders the right to require Zinkinvent to repurchase their shares for market value. Under International Financial Reporting Standards (IFRS) the Group is therefore required to treat this “put option” as a liability and account for Zinkinvent as if it owned 100%, rather than its actual 68.2% holding. In our Interim report last September we reported that we were reviewing our options for increasing our investment in Zinkinvent. One of the conclusions arising from the review, which we completed later that month, was that we did not wish to retain its Benelux and German trading operations and that we would actively seek a purchaser for this part of the business. Potential purchasers were identified and discussions are continuing. As set out more fully in note 3 to the accounts, we have classified the assets and liabilities of the operations as held for resale since acquisition and their results have been accounted for as a discontinued operation. Finance costs Net financing costs increased by £1.6 million, reflecting the additional borrowings taken on in connection with the Zinkinvent acquisition. Net interest cover based upon underlying profits increased to 6.7 times (2006: 5.4 times). Tax The effective tax rate on both underlying and total profit was higher than the standard UK rate of 30% reflecting the higher rates applicable to our new overseas operations. Full details are set out in note 8. 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 8.7p per share, an increase of 20.8% over last year. This level of dividend is covered 3.2 times by underlying earnings per share. Cash generation and financing The large increase in retained profits enabled net assets to grow during the year by £21.0 million to £98.0 million (2006: £77.0 million). Year end net borrowings increased to £117.8 million (2006: £46.1 million); £71.0 million of this increase was due to acquisitions during the year. Operating cash flow increased to £29.8 million despite an increase in working capital during the year of £12.6 million which was necessary to support the higher costs of raw materials and the growth in revenue. We again continued our programme of capital expenditure and product development, investing a total of £19.9 million, £10.0 million in excess of the depreciation and amortisation charge. We also generated £10.4 million from the sale of properties, mostly towards the end of the year. During the year we successfully reorganised our debt financing arrangements by entering into a new five year £150 million Term and Revolving Credit Facility with a Group of six leading banks. The fact that the refinancing was for the first time on an unsecured basis, on better terms than previously and oversubscribed by tendering banks, illustrates the excellent financial position and credit rating of the Company. Despite the current uncertainties in financial markets, our syndicate banks continue to express their confidence in us and our plans for the future. Along with our other sources of finance, this new facility provides us with total facilities in excess of £200 million. Pensions Our year end retirement obligation reduced by £0.8 million, despite the inclusion for the first time of obligations relating to Zinkinvent. The deficit on the UK pension schemes reduced by £1.9 million as lower than expected net investment returns were more than offset by higher long term bond rates and £0.7 million of additional deficit contributions. Balance Sheet At the year end total equity was £98.0 million (2006: £77.0 million). With closing net debt of £117.8 million (2006: £46.1 million), gearing at the year end was 120.2% (2006: 59.9%). Non-current assets were £190.9 million (2006: £118.6 million) and total assets increased from £238.9 million in 2006 to £441.9 million at the end of 2007. The most significant element of this increase was due to the investment in Zinkinvent. Group Key Performance Indicators The Board of Hill & Smith Holdings PLC has adopted certain 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, www.hsholdings.com Stock Code: HILS 13 i B u s n e s s R e v e w i Building & Construction 14 Hill & Smith Holdings PLC Annual Report 2007 “Pipe Supports’ profit achievement was one of the highlights of 2007. This market will be strong for the foreseeable future.” Business Review continued Hill & Smith ‘Brifen’ wire rope in use on the A30 both financial and non-financial, are also measured at the subsidiary level. basis for future target setting by the Group which will drive improved performance. Group KPIs — Financial Revenue Our aim is to increase revenue each year through a combination of price and volume growth, organic expansion and acquisition. In 2007, we increased our Group revenue by 31.4% to £402.1 million. Organic growth, excluding the effect of acquisitions and disposals, contributed 12.2% 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 revenue. In 2007 our operating margin was 8.9% compared to 6.4% in the previous year. This was due principally to the effects of consolidating Zinkinvent in the second half. Profitability Our main profitability KPIs are underlying profit before tax and underlying earnings per share. These measures increased in 2007 by 77.8% and 34.3% respectively compared to the previous year. Net Cash from Operating Activities The Company actively monitors working capital levels in all its operations. In 2007 Group net cash inflow from operating activities was £29.8 million compared to £10.9 million in 2006. This increase included an adverse movement in working capital of £12.6 million which was primarily due to higher costs of raw materials and the growth in revenue. Group KPIs — Non-Financial Health and Safety The safety performance of each subsidiary is monitored, reviewed and reported upon to the Board. Essential statistics on incidents and accidents have been compiled to form the Sustainability We have made progress on implementing initiatives and the measurement and reporting of our identified priorities of energy efficiency, CO2 emissions, waste management and recycling of materials. Further information on these non-financial KPIs is given in the Corporate Social Responsibility section of this report including the targets we have set ourselves. Subsidiary KPIs We continue to focus on year on year profit growth, the management of working capital, stock turnover, debtor and creditor days, and return on operating capital employed. Various other indicators relating to production efficiency and customer services levels are monitored where these are relevant to a subsidiary’s business. 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 the overseas operations, which are prepared in local currency, 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 financial performance. Other financial risks are detailed in Note 22 to the financial statements on pages 70 to 75. Raw Material Prices and Continuity of Supply In recent years there has been a significant volatility 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 V&S Clark substations, USA — part of our Zinkinvent acquisition 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 manage this volatility and 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 2007, the Group reported a deficit of £9.7 million in respect of its defined benefit pension obligations. 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 co-operation and the regulatory environment. All of these may lead to an increase in the deficit, the level of Company contributions and compliance costs. Environmental and Health & 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. www.hsholdings.com Stock Code: HILS 15 i B u s n e s s R e v e w i Conimast International (France) lighting column solutions 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 & 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 & 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. Competitor Risk As with most private sector businesses, the Group operates in a competitive environment. Its operations are 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. 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 Group is an active acquirer. Acquisitions can involve risks that might have a material impact on the Group. Although these risks are usually mitigated by extensive due diligence and, where practical, by contractual representations, warranties and indemnities from the vendors, 16 Hill & Smith Holdings PLC Annual Report 2007 i B u s n e s s R e v e w i there is nevertheless a risk that a poorly judged or badly integrated acquisition could have an adverse effect on the Group. Put Option — Zinkinvent GmbH The Articles of Association of Zinkinvent GmbH, in common with many German holding companies, provide all shareholders with the right to require Zinkinvent to buy back their shares. This constitutes a put option under International Accounting Standard 32 (IAS 32), which is recognised as a liability in the Balance Sheet rather than a minority interest. The value of the put option is based on the estimated fair market value of the shares discounted back over the period over which the option value is payable, using an appropriate discount rate based on forward EURIBOR rates of a term corresponding to the payment period. The unwinding of the discount is recorded in financing costs (note 6). Controls Failure The Group operates controls as described in the Corporate Governance report. Failures in these controls might have a material impact 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. Human Resources The ability of the Group 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. Financial Risks Hedging The Group is exposed to market risks arising from the international nature of some of its operations. These risks have increased during the year as a result of the Company’s acquisition of Zinkinvent GmbH. The main risks arise from the translation of local currency denominated results into sterling for Group consolidation purposes and from its foreign currency denominated net asset positions. The Group manages its net asset currency exposures primarily by borrowing in the relevant functional currency. There is only limited transactional exposure to currency as most businesses trade within their own domestic market. The Group has thus far decided against taking out any protection against the currency translation risk but will keep the matter under review. Derivatives are used, as deemed appropriate, to hedge against movements in exchange and interest rates and commodity prices. Any such transactions are only entered into with parties having sound credit ratings. It is the Group’s policy not to trade in financial instruments or other speculative transactions. It is estimated that a 1% change in the interest rate of each of the Group’s major financing currencies would affect the annual interest costs of its continuing businesses by approximately £0.6 million. Similarly, it is estimated that a change of 10% in the value of sterling against all other currencies would have an impact on the Group’s profit for the year of approximately £1 million and on its earnings per share of approximately 0.1p. Details of the Group’s financial instruments are given in note 22 to the accounts on pages 70 to 75. Liquidity risk The Group’s financing is managed centrally under the responsibility of the Group Finance Director. The Group’s policy is to ensure it has at all times sufficient headroom in its financing facilities to avoid any restriction in its ability to trade and develop its business in accordance with its plans. Where necessary and appropriate, these facilities will include the issue of new equity. At the year end the Group had net borrowings of £117.8 million, £120.6 million of which were of maturities of greater than one year. Its main bank borrowing facility contains covenants relating principally to the levels of net debt and interest cover as ratios to the Group’s EBITDA (earnings before interest, tax, depreciation and amortisation). The Board reviews on a regular basis the Group’s actual and forecasted compliance with these covenants. For the reasons set out above, it is the Company’s policy to maintain a relatively high level of borrowing compared to net assets (gearing). It has not established any fixed minimum or maximum level of gearing but keeps the matter under regular review. Business Review continued Most Group operations take out credit insurance against default by the large majority of their customers. No insurance is taken out against governmental, local authority and other publicly funded organisations. Corporate Social Responsibility As previously reported, the Board of Directors have implemented 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 are based upon a combination of custom and practice from around the Group and industry best practice. This report sets out details of our activities during the 2007 financial year. Responsibilities and Accountabilities The various aspects of CSR are assigned to different layers of management. The Board sets Group policies which cover the environment, equal opportunities, discrimination and diversity, training and development, supply chain and a code of business ethics. These policies are reviewed and, as and when necessary, updated to reflect changes to legislation, emerging best practice and the needs of the business. D W Muir, the Chief Executive, is the main Board director responsible for CSR in the Group. Operating company 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. In ten of the operating companies this has evolved into specific and expanded roles for individual employees who act as the CSR “champion”. 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 standards that apply to the 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. Key Performance Indicators (KPIs) The Group is continuing its work in establishing and developing KPI’s for the CSR policies and www.hsholdings.com Stock Code: HILS 17 “FTSE Group confirms that Hill & Smith Holdings PLC has been independently assessed according to the FTSE4Good criteria, and has satisfied the requirements to become a constituent of the FTSE4Good Index Series.” initiatives that it has implemented. To date KPIs and targets have been established for energy and fuel usage, CO2 emissions and health and safety (accident numbers). Further work is being undertaken in 2008 to expand and develop KPIs to other areas of our CSR activities, primarily in relation to the management of waste. The Environment Introduction The Board believe that its environmental policy should focus the principal operating units of the Company on managing waste and reducing greenhouse gas emissions in the light of rising concerns over climate change. This policy has been adopted by the Board and is available on the Company’s website www.hsholdings.com. The Company is also committed to responsible energy management and practices energy efficiency throughout all of its facilities, utilising its plant and equipment in the most cost- effective manner to achieve this goal. The Company’s policy is to control energy consumption in order to: • Avoid unnecessary expenditure; • Improve cost-effectiveness; • Reduce emissions to air and water in order to protect the environment. 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’) that applies to those environmental aspects over which the organisation has control and can be expected to have an influence. Accordingly, the Group is moving towards ensuring that all operations supplying the Highways Agency achieve compliance by the end of 2008. Currently we have two operations, Techspan and Hill & Smith, that are in full compliance. As the cornerstone of the EMS is its “Aspects and Impacts Register”, which identifies for each stage of every process the associated risks, allocating a severity rating depending upon the significance of each risk in terms of its impact on the business, it is the intention to adapt the EMS as a means of identifying and assessing risk for the operations within the Group. Climate Change Agreement (including KPI) 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 tax 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 a reduction in their tax charge from the date they join the scheme up until the end of March 2013. Targets, running to 2010, were based on progressive biennial usage reductions in process energy consumption and expressed as annual usage in kWh per tonne galvanized. The Joseph Ash Group of galvanizers joined the CCA scheme at its inception. By raising awareness of energy usage and by employing an effective energy management strategy, Joseph Ash has consistently met its biennial targets for reduced energy consumption and is on course to continue this achievement at the next assessment at the end of 2008. In 2007 the energy consumption level achieved by the Joseph Ash Group was 397kWh per tonne galvanized compared to 418kWh per tonne in 2006, a 5% reduction. CO2 Emissions (including KPI) As part of our ongoing programme of reducing our carbon emissions (“CO2“) we are working with energy consultant, CMR Consultancy and the Carbon Trust to improve our operational efficiencies. We have now formulated a strategic action plan and the goals are as follows: • reduce CO2 emissions and all environmental impacts arising from the use of energy; • lower energy costs by good management and purchasing practice; • make selective capital investment in energy efficiency; • train key staff in energy consumption; promote energy conservation within the Group; and • attribute responsibility and accountability for energy use on each site. During the year CMR Consultancy completed surveys identifying a further 715 tonnes of carbon saving which did not require capital investment to achieve. In 2006 our operations generated 40,000 tonnes of CO2 and in 2007 the same operations recorded 37,500 tonnes of CO2, a reduction of 6% at a time when our manufacturing and galvanizing activity had increased. We have set targets for further CO2 emission reductions of 5% per annum for each of the next three years (2008 to 2010). Smart meters have been fitted to provide realtime data for the higher carbon generating businesses with the objective of enabling our plant managers to run the facilities with greater energy efficiency and at a lower cost. The initial findings are encouraging and we anticipate reporting positive results in 2008. In addition to the above we have invested in improving the efficiencies of our heating systems and the consequent energy savings have offset the cost. The pay back has been less than a year, delivering lower CO2 emissions equal to 299 tonnes. Group Company Car Policy Our Group company car policy has been developed to encourage employees to select cars with lower CO2 emissions, which will also reduce running costs. Currently 88% of the fleet use diesel engines. We are also investigating methods of improving the “cleanliness” of our commercial vehicles which will have the benefit of reducing CO2 emissions and running costs. Health and Safety (including KPI) The Board approves policies and procedures 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 the health and safety policies and practices in addition to meeting requirements specific to their businesses and customers’ expectations. The Board is committed to ensuring that these principles are articulated to all employees and that they are effectively implemented. A copy of the Group’s Health and Safety Policy is displayed on the Company website (www.hsholdings.com). The Group Health and Safety Committee, made up of health and safety representatives from subsidiaries within the Group and chaired by the Company Secretary, deals with the implementation and monitoring of its policy and procedures and related issues arising from the Group’s operations. Each of our businesses maintains accident reporting systems which are primarily used to identify trends with a view to developing strategies for reducing the number of accidents 18 Hill & Smith Holdings PLC Annual Report 2007 1 Ash & Lacy Building Systems ‘Ashzip’ green roof system 2 Asset International Ltd flood relief solution using Weholite HDPE pipe Business Review continued 1 2 and near misses. An analysis of the statistics for 2006 and 2007, shows an overall improvement in the number of accidents, which fell from 880 to 764, a reduction of 13%. Our objective is to achieve a minimum 10% annual reduction in the total number of accidents for each of the next three years. Employment Policies The Group relies upon the abilities and commitment of its employees and has a clear policy objective of promoting an environment in which all employees are motivated and enabled in order to achieve their best. Employees at all levels throughout the Group are encouraged to make the fullest contribution. Fairness and equal opportunity is core to the Group’s employment policy and this applies to any job applicant or matters relating to gender, age, race, sexual preference, marital status, religion, belief or disability. The Group gives full consideration to applications for employment from disabled persons where the requirements of the job can be adequately fulfilled by a handicapped or disabled person. In the event of an existing employee becoming disabled continuing employment will be provided wherever practicable. Each operating subsidiary has employment and related policies and procedures detailed in staff handbooks or employment terms and conditions. These are reviewed and updated as necessary in the light of any legislative or employment practice changes. The Group has policies and procedures in place to comply with the appropriate requirements of the Data Protection Act 1998. and the development of centralised briefings and training programmes. The Company continues to encourage employee share ownership through the 2005 Employee Sharesave Scheme. As at the date of this report there are 560 employees participating in this and the former 1995 SAYE Scheme. Community and Social Issues The Group seeks to ensure that its operations provide a safe and controlled environment, and promote positive contributions to their local communities. During the year the Group became members of Business in the Community and started to identify and develop areas of opportunity to make a positive contribution to local communities. i B u s n e s s R e v e w i 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 a successful business. The development of individuals at all levels is encouraged with the objective of maximizing the overall performance of the business. The Group provides a range of training and development opportunities to employees, including: • induction training; • health and safety training; • programmes relating to the enhancement of knowledge/skills for each employee’s current position; • programmes relating to the provision of knowledge/skills for new procedures or standards; • programmes with a specific management or supervisory focus; and • support with programmes leading to a professional or academic qualification. The Group recognises that normally the main training method will be through each employee’s immediate line manager, with most training carried out in the workplace. In June 2007 an employee of Hill & Smith Holdings PLC was appointed as a Non Executive Director to Walsall Teaching Primary Care Trust. In addition we are working with “Conkers”, an affiliate of The National Forest, to provide a combination of appropriate products and funding to enhance and broaden the environmental work undertaken by them. In conjunction with “Conkers” and engagement with inner city schools, in the communities where our facilities operate, our intention is to reinforce the sustainability message for future generations. Code of Business Conduct and Ethics The Board has set down a Code of Business Conduct and Ethics that applies to all its directors, managers and employees. All directors, managers and employees must exercise high standards of integrity and sound ethical judgement, adhering to the letter and spirit of the Code and of all laws, rules and regulations applicable to the conduct of the Group’s business. Whistleblowing Policy The Board encourages employees to raise concerns about misconduct and malpractice and have adopted the Group Whistleblowing Policy and Procedure to ensure that such concerns can be raised and reviewed fairly and properly. Supply Chain Our policy on the management of human rights, working conditions and the environment in the supply chain is one of a series of Employee Involvement and Reward Effective communication is encouraged within the Group through the subsidiary company management, the Group’s website and intranet Centrally we funded ten training courses during the year covering such matters as personal development, customer care, presentation skills, performance appraisals and stress management. www.hsholdings.com Stock Code: HILS 19 20 Hill & Smith Holdings PLC Annual Report 2007 Ash & Lacy Building Systems ‘Ashzip’ standing seam roof system “With supportive shareholders and a committed and creative workforce, we are well positioned to take advantage of opportunities that will improve the performance of the Group.” Business Review continued governance policies that are intended to underpin the Group’s values. The Group sources components, materials and services for its manufacturing processes from a number of countries. Whilst there are local and national differences in standards in relation to many aspects of the manufacturing and wider business environment, there are a number of minimum standards that must be achieved by all. It is the policy of the Group that it will only trade with suppliers who: • meet or exceed these minimum standards; or • demonstrate progression towards these standards over an agreed and suitable timescale. Each operation of the Group is required to have appropriate systems in place to ensure that suppliers comply with or exceed the following requirements: • compliance with appropriate legislative requirements; • provision of a safe and competent workforce employed in accordance with industry best practice; • timely submission of tenders and delivery to the agreed specification, on time and at the agreed price; • co-operation with the Group and the rest of its supply chain. The boards of each subsidiary of the Group are responsible for the detailed oversight of the operation of the above within their business, reporting to the Board of Hill & Smith Holdings PLC as and when appropriate matters arise, and are subject to annual review. Acquisitions and Disposals Zinkinvent GmbH was the major acquisition of the year. In July we increased our shareholding to 68.2%, having previously held 33.3%. We subsequently took the opportunity to acquire minority shareholdings of certain Zinkinvent subsidiary operations, namely: the 10% shareholding in Voigt & Schweitzer Inc for $5 million and after the year end holdings in V&S Schuler Engineering Inc, V&S Clark Substations LLC and V&S Schuler Tubular LLC all for a total consideration of $4 million. We continued our programme of divestment of non-core businesses with the sale of Ash & Lacy Pressings Ltd in August 2007 and in February 2008 we sold D&J Steels Ltd, both at a small discount to their net asset value. Market Outlook Government commitment to maintain and improve an ageing infrastructure, increasing legislation, health and safety and regulatory requirements, along with the effects of climate change, combine to offer us exciting opportunities within global infrastructure markets. We will continue to develop our market presence and products to benefit from such opportunities. Our diverse range of galvanizing operations, comprising 35 plants across four countries and two continents, enables us to service all sectors and spread the risk of any peaks and troughs of demand within any particular area of the market. Our building and construction companies operate in specialist sectors often working closely with designers to provide unique cost- saving solutions. Many of our products are also supplied into the building infrastructure market; these include safety products, water treatment schemes, and railway platforms, generally areas of essential spend. With supportive shareholders and a committed and creative workforce, we are well positioned to take advantage of opportunities that will improve the performance of the Group. Derek Muir BSc, CEng, MICE Chief Executive 11 March 2008 www.hsholdings.com Stock Code: HILS 21 i B u s n e s s R e v e w i JA Envirotanks chemical tank installation 22 Hill & Smith Holdings PLC Annual Report 2007 REPORTS DIRECTORS AND COMMITTEES DIRECTORS’ REPORT CORPORATE GOVERNANCE DIRECTORS’ REMUNERATION REPORT STATEMENT OF DIRECTORS’ RESPONSIBILITIES INDEPENDENT AUDITORS’ REPORT R e p o r t s www.hsholdings.com Stock Code: HILS 23 Directors and Committees Directors D L Grove BA, FCA Chairman D W Muir BSc, C Eng, MICE Chief Executive David, aged 59, 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 and Non-Executive Director of Headlam Group plc. Derek, aged 47, 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. From 2001 to 2007, he was the Managing Director of the core Infrastructure Products Group. M Pegler BCom, ACA Group Finance Director (appointed as a Director on 11 March 2008) Mark, aged 39, joined the Company as Finance Director designate on 7 January 2008 and was appointed to the Board on 11 March 2008. Mark has extensive experience on an international level having been Group Finance Director of Whittan Group Limited between 2002 and 2007. He also spent seven years at Wagon plc, initially as Group Financial Controller and later as Divisional Finance Director for its storage systems business. C J Burr FCA (Retired 11 March 2008) Chris, aged 58, joined the Board as the Group Finance Director 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. 24 Hill & Smith Holdings PLC Annual Report 2007 H C Marshall MSc, BSc Non-Executive Director C J Snowdon, BA, FCA Non-Executive Director R E Richardson FCMI Senior Non-Executive Director Howard, aged 64, joined the Board on 2 November 2000. Previously Chief Executive of Ash & Lacy plc and Chairman and Chief Executive of Bullough plc and is currently Chairman of Imagintik 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. Clive, aged 54, joined the Board in May 2007. Since 1997, he has held the position of Chief Executive of Umeco plc, a leading provider of outsourcing services and advanced composite materials to the aerospace industry. He joined Umeco after a career which included senior roles with Vickers plc, BTR plc, Hawker Siddeley PLC and Burnfield plc. Dick, aged 68, 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. R e p o r t s Committees Audit Committee Messrs Richardson (Chairman), Marshall and Snowdon Remuneration Committee Messrs Marshall (Chairman), Richardson and Snowdon Nominations Committee Messrs Grove (Chairman), Muir (Chief Executive), Marshall, Richardson and Snowdon www.hsholdings.com Stock Code: HILS 25 Directors’ Report The directors present their forty-seventh Annual Report together with the Financial Statements for the year ended 31 December 2007. Principal Activities During 2007 the principal activities of the Group were re-classified and now comprise the manufacture and supply of: — Infrastructure Products — Galvanizing Services — Building and Construction Products The subsidiaries operating within these three areas of business are detailed on pages 100 to 103 inclusive. Business Review The Company is required to set out in this report a fair review of the business of the Group during the financial year ended 31 December 2007, its position at the end of that financial year and its prospects. The information required to be disclosed, in addition to that reported below and which is incorporated into this report by reference can be found in the Business Review, but excludes the section entitled ‘Corporate Social Responsibility’, with the exception of the two sections relating to employment policies and employee involvement and reward on page 19. Results The Group profit for the year after taxation amounted to £32.4 million. Revenue and operating profit increased by 31.4% and 77.7% respectively compared to the previous year. Details of the results for the year are shown on the Consolidated Income Statement on page 44 and the business segment information is given on pages 53 and 54. Dividends The directors recommend the payment of a final dividend of 5.1p per ordinary share (2006: 4.2p per ordinary share) which, together with the interim dividend of 3.6p per share paid on 14 January 2008, makes a total distribution for the year of 8.7p per share (2006: 7.2p per share). Subject to shareholders approving this recommendation at the Annual General Meeting, the dividend will be paid on 11 July 2008 to shareholders on the register at the close of business on 6 June 2008. Articles of Association The rules relating to amendment of the Company’s Articles of Association are that any change must be authorised by a Special Resolution of the Company in a general meeting. Share Capital The Company’s issued share capital comprised a single class of share capital which is divided into ordinary shares of 25 pence each. Information concerning the issued share capital of the Company is set out in note 23 to the Financial Statements on pages 76 and 77. During the year, 32,369 new ordinary shares were issued under employee share schemes, 17,723 under the 1995 Save As You Earn Scheme and 14,646 under the 2005 Executive Share Option Scheme. All of the Company’s shares are ordinary shares ranking equally and the rights and obligations attaching to the Company’s shares are set out in the Company’s Articles of Association, copies of which can be obtained from Company’s House in England and Wales or by writing to the Company Secretary. There are no restrictions on the transfer of shares in the Company provided they are fully paid up and the Company does not hold any lien over them and as the shares rank equally none of them carry any special rights with regards to control of the Company. Such equal rights apply to shares acquired through any of the Company’s employee share schemes and those shares so acquired carry no lesser or greater rights than shares acquired in the Company in any other way. Accordingly there are no restrictions on voting rights attaching to any shares, whether relating to the level of shareholding or otherwise. The Company is not aware of any arrangements between Shareholders of the Company that may result in restrictions on the transfer of ordinary shares or voting rights. In relation to the purchase by the Company of its own shares the rules relating thereto are set out in the Company’s Articles of Association which state that the directors’ powers to authorise such purchase by the Company are subject to the provisions of the relevant statutes and also the UKLA requirements, as the Company’s shares are listed on the Stock Exchange. Accordingly a Resolution is put to the members of the Company at the Company’s Annual General Meeting in each year and currently the authority is limited by the Resolution of the 2007 Annual General Meeting and will be limited by the Resolution to be put to the 2008 General Meeting to market purchases not exceeding 5% of the Company’s then issued share capital. The prices to be paid must be a minimum price of 25 pence per ordinary share (the nominal value) and a maximum price of 5% above the average of the middle market quotations for ordinary shares derived from the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which any such purchase takes place. Substantial Shareholdings As at 11 March 2008, the Company had been notified under Rule 9.8.6R(2) of the Listing Rules as follows: BlackRock Inc Standard Life Investments JP Morgan Asset Management (UK) Limited Legal & General Group PLC Number of voting rights Direct 1,891,331 3,237,071 Indirect 3,379,150 400,000 4,408,731 206,452 26 Hill & Smith Holdings PLC Annual Report 2007 Percentage of Issued voting rights Direct Indirect 4.47 0.53 5.83 0.27 2.50 4.28 Directors The directors who served during the year ended 31 December 2007 and to the current date are as follows: Name D S Winterbottom (retired 11 May 2007) D L Grove D W Muir C J Burr (retired 11 March 2008) H C Marshall* R E Richardson* C J Snowdon* Date of Appointment 1 October 1997 20 March 1998 21 August 2006 2 November 2000 2 November 2000 1 May 1997 11 May 2007 * Non-Executive Directors Biographical details of the directors are shown on pages 24 and 25. The director retiring by rotation at the forthcoming Annual General Meeting is D L Grove who, being eligible, offers himself for re-election. C J Snowdon was appointed as a director by the Board on 11 May 2007 and, pursuant to the Company’s Articles of Association, will retire and offer himself for election at the Annual General Meeting as will M Pegler who was appointed on 11 March 2008 to replace C J Burr as the Group Finance Director who retired on that date. 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. 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 pages 35 to 39. C J Burr D L Grove H C Marshall D W Muir R E Richardson C J Snowdon (appointed 11 May 2007) D S Winterbottom (retired 11 May 2007) All interests are beneficial. There have been no changes in the above figures between the year end and the present date. Financial Instruments For financial risk management objectives and policies please see note 22 on pages 70 to 75. Significant Agreements The Group has a Multicurrency Revolving Facility which includes a change of control provision. Under this provision, a change in ownership/control of the Company could result in withdrawal of these facilities. Research and Development During the year, the Group spent a total of £1.1 million (2006: £1.5 million) on research and development. Political and Charitable Donations Charitable donations amounting to £12k (2006: £9k) 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 Directors are appointed pursuant to the Articles of Association either by the directors, to fill a vacancy, or by the members in general meeting subject to the maximum number of directors being 10. Any director appointed by the directors will be subject to election by the members in general meeting at the next following Annual General Meeting. Each director is subject to re-election at least once in every 3 years and any non-executive director serving 9 years or more is subject to annual re- election. Directors’ Interests The interests of the directors and their families in the ordinary share capital of the Company (excluding the share options and LTIP’s detailed in the Directors’ Remuneration Report on pages 35 to 39) at the beginning and end of the financial year were as follows: Number of Ordinary Shares at 31 December 2007 130,000 669,969 71,930 9,714 3,859 7,500 Nil Number of Ordinary Shares at 31 December 2006 (or on appointment) 137,628 1,259,969 71,930 9,714 3,859 Nil 17,213 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 93 days (2006: 90 days). The Company’s average credit period was 37 days (2006: 32 days). www.hsholdings.com Stock Code: HILS 27 R e p o r t s 28 Hill & Smith Holdings PLC Annual Report 2007 CA Traffic’s Automatic Number Plate Recognition (ANPR) camera 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. Subsequent Events On 1 January 2008, the Group acquired the following minority shareholding in the USA fabrication operations: V&S Schuler Engineering Inc. (25.0%); V&S Clark Substations LLC (25.0%); and V&S Schuler Tubular LLC (23.3%) for a consideration of $4.0 million from Prism Enterprises Inc, which is controlled by Anthony Codispoti who is considered a related party to these businesses. The Group also disposed of another of its non-core activities, D&J Steels Limited, on 28 February 2008. The assets and liabilities of the company have been transferred into the held for sale categories on the Balance Sheet as at 31 December 2007 and a loss on remeasurement of £0.3 million has been provided in this year’s results. 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 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. This confirmation is given and should be interpreted in accordance with the provisions of section 2342A of the Companies Act 1985. Annual General Meeting The Annual General Meeting of the Company will be held at 11.00 a.m. on Friday 9 May 2008 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. 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. By order of the Board J C Humphreys Company Secretary 11 March 2008 Directors’ Report continued R e p o r t s www.hsholdings.com Stock Code: HILS 29 30 Hill & Smith Holdings PLC Annual Report 2007 “Techspan” manufacturing and assembly plant, Aylesbury 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 2007 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 and as amended in 2006. 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 held on 11 May 2007, D L Grove became Executive Chairman following the retirement of 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. The appointment of D L Grove had been discussed in advance with major shareholders who continue to be supportive of the rationale behind it. In reaching its decision to appoint him, the Board considered the significant benefits of continuity as well as the leadership that D L Grove would bring to the role of Chairman and is satisfied that this continues to be the case. D L Grove has a clearly defined role and responsibilities as Chairman including the time commitment, all of which have been set out in writing and agreed by the Nominations Committee and the Board. 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 and his length of service is not considered an impairment to his independence. Futhermore his depth of knowledge and insight into the business and commitment to the Group enables him to discharge his non-executive duties to maximum effect. In accordance with the Code, he is standing for re-election at the forthcoming AGM. 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 recognised, and continue to recognise, him as being independent in his approach to the role and in his judgement and character. Furthermore, he has no interests or relationships that have altered his independent status. The Directors and the Board The Board comprises the Chairman who is also an executive director, two more executive directors and three non-executive directors. The Chairman is D L Grove, the Chief Executive is D W Muir and R E Richardson is the Senior Independent Director. The Chairman, D L Grove, has primary responsibility for leadership of the Board, sets its agenda and devotes such time to his role as is necessary to properly discharge his duties. He facilitates the effective engagement of the non-executive directors. He is responsible, jointly with the Chief Executive, for communication with the Company’s shareholders, and representation of the Group externally. The Chief Executive, D W Muir, has executive responsibility for executing the Group’s strategy and development. He leads the management of the Group in order to optimise long-term shareholder value by meeting key strategic and financial objectives. C S Snowdon was appointed as a non- executive director during the year ended 31 December 2007. Biographical details of all the directors are set out on pages 24 and 25. An appointment has been made during the year of a permanent replacement Company Secretary. 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 pages 36 and 37 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 9 May 2008. The Role of the Board and its Effectiveness 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 remuneration policies, accounting policies, capital expenditure, acquisitions, disposals and financing. www.hsholdings.com Stock Code: HILS 31 R e p o r t s (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 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 eleven times for main Board meetings. Details of attendances at these meetings are set out below: D S Winterbottom (retired 11 May 2007) D L Grove C J Burr H C Marshall D W Muir R E Richardson C S Snowdon (appointed 11 May 2007) 5 out of 5 attended 11 out of 11 attended 11 out of 11 attended 11 out of 11 attended 11 out of 11 attended 11 out of 11 attended 6 out of 7 attended 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 Having assessed the three non-executive directors against the criteria set out in the Combined Code the Board continues to consider them to be independent. All three non-executive directors remain independent of management and free from any business or other relationship that would materially interfere with the exercise of their independent judgement. The Board membership and that of its Committees is designed to ensure that no one individual or Group dominates proceedings and that the wide variety of skills allows effective leadership across the business activities of the Group. 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. D L Grove is the director retiring by rotation at the forthcoming Annual General Meeting of the Company and, being eligible, offers himself for reappointment. The Board and the Nominations Committee support D L Grove’s re-appointment having assessed his performance, value to the Board and its Committees and his ability to continue to operate as a 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 Directors C S Snowdon and M Pegler were appointed as directors by the Board on 11 May 2007 and 11 March 2008 respectively. Pursuant to the Company’s Articles, both C S Snowdon and M Pegler will retire and offer themselves for election at the forthcoming 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. The Board and each of the Audit, Nominations and Remuneration Committees undertake performance evaluations. A questionnaire is circulated to directors concerning the performance of the Board as a whole and its main committees. Once all questionnaires have been completed, the results are 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. During the year the directors have, amongst other matters, received appropriate guidance on the material provisions of the Companies Act 2006 and the implications for periodic financial reporting under the Transparency Directive. 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. The Company Secretary acts as its secretary. Following the retirement of D S Winterbottom, C J Snowdon was appointed to the Audit Committee. Mr Snowdon is a chartered accountant and is deemed to have recent and relevant financial experience. The objectives of the Audit Committee have been confirmed in its 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 makes 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 32 Hill & Smith Holdings PLC Annual Report 2007 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 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 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. The Company Secretary acts as its secretary. Following the retirement of D S Winterbottom, C J Snowdon was appointed to the Remuneration Committee. D L Grove and D W Muir are 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. A copy of the terms of reference is available on the Company’s website. Full details of the role, policies and activities of the Remuneration Committee are set out in the Directors’ Remuneration Report on pages 35 to 39. The Remuneration Committee met five times during the period and all members were present. Nominations Committee The Nominations Committee comprises the three non-executive directors and D L Grove (Chairman) and D W Muir (Chief Executive). The Chairman of the Committee is D L Grove 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, including a decision on whether external assistance would be appropriate, when it deems it necessary to make new appointments. Using external consultants, the Committee conducted a search for an independent director and a Group Finance Director. Both searches reached successful conclusions with the appointment of C J Snowdon and M Pegler respectively. The search processes involved members of the Committee interviewing a number of candidates Corporate Governance continued 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. 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, to ensure 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 up to the date of the approval of this report. This review, along with which, through internal consultation led by the Board, ensures that the system of internal control remains 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 www.hsholdings.com Stock Code: HILS 33 R e p o r t s (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Corporate Governance continued 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 authority to a small number of subsidiary company directors and managers, all of whom are accountable to the Board. The application of rigorous annual budgeting processes and presentations. 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. 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, it’s 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 be undertaken. Shareholder Communications and Relations The Board recognises the importance of good clear communications with shareholders and steps have been taken to invite shareholders to meet with more Board members. There is continuing dialogue with institutional investors to discuss the progress of the business and deal with a wide range of enquiries. This includes one-on-one meetings, presentations after the preliminary announcement for the year and the results for the half year and specific analyst presentations with feedback from the Company’s brokers as necessary. Directors regularly receive copies of analyst reports and reports on movement in major shareholdings as well as key broker comments. The Chairman and 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. 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. 34 Hill & Smith Holdings PLC Annual Report 2007 (cid:1) (cid:1) (cid:1) (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 9 May 2008. 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. The Remuneration report is divided into two parts. The first part contains commentary on remuneration policy, which is not required to be audited. The second part contains the remuneration tables that have been audited in accordance with the relevant statutory requirements. PART ONE 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 certain 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 (retired 11 May 2007) R E Richardson C J Snowdon (appointed 11 May 2007) 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 any involvement 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 five times in the period under review and was fully attended on each occasion. The Company Secretary acts as secretary to the Committee. The Chairman and the Chief Executive also attend meetings of the Committee by invitation. No executive director or other attendee is present when his or her own remuneration is under consideration. The Committee used the external services of Buck Consultants and Deloitte & Touche LLP as its principal external advisers during 2007 on matters of executive Directors’ remuneration. The Committee also consult, as necessary, with the Chief Executive and the Chairman. Remuneration Policy Main Principles The Group operate in highly competitive environments and for it to continue to compete successfully, it is essential that the level of remuneration and benefits offered achieve the objectives of attraction, retention, motivation and reward of high calibre individuals. The Group 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 be fair and attractive. Appropriate elements of the remuneration package should be designed to reinforce the link between performance and reward. Executive directors’ and senior executives’ 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, the 2005 Sharesave Scheme and the 2007 Long Term Incentive Plan (“LTIP”) approved at the AGM on 11 May 2007. Remuneration of Executive Directors Elements of Remuneration The executive directors’ and certain senior executives’ 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 or LTIPs. 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 fulfill the executive’s role within the Company. Benefits in Kind These principally comprise car benefits, life assurance, membership of the Group’s healthcare assurance schemes and accident insurance. These benefits do not form part of pensionable earnings. Performance-related Cash Bonuses D W Muir and M Pegler receive 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 their scheme. This bonus is capped at 100% of basic annual salary for D W Muir and 75% for M Pegler. Under his service agreement D L Grove received 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 arrangement no longer applies after 31 December 2007. From that date D L Grove will cease to have any bonus entitlements. Bonuses for C J Burr were 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 individual performance and responsibilities. www.hsholdings.co.uk Stock Code: HILS 35 R e p o r t s (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 2007 Long Term Incentive Plan (“LTIP”) The 2007 LTIP was approved by shareholders at the AGM held on 11 May 2007. Under this plan shares can be awarded at the discretion of the Committee conditional upon achievement of stated earnings per share growth (as therein defined) set against absolute and relative measures over a three year period. Fifty per cent of any award is conditional upon achievement of the absolute growth measure and fifty per cent on achievement of the relative growth measure. Awards only vest after three years and lapse in the event of failure to achieve the performance conditions. In the event that the award holder is no longer employed at the end of the vesting period of three years the awards lapse. Awards are limited to 100% of base salary. For awards issued under the LTIP please see page 76. The Company has established an employee benefit trust on 2 July 2007 primarily to satisfy awards under the 2007 Long Term Incentive Plan. The Trustees, appointed by the Company, are D L Grove, D W Muir and J C Humphreys. No shares are currently held by the Trust as the current intention is to satisfy awards under the 2007 LTIP through the issue of new shares if and when they vest. 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 allowing any exercise of options. There is no re- testing of the attainment of the performance condition. At the AGM held on 11 May 2007 approval was given to exclude any awards made under the 2007 LTIP when calculating the overall limits imposed for the grant of all options under the 2005 Executive Option Scheme. The Committee may also grant options subject to performance conditions which are significantly more stretching than those ordinarily applied by the Committee. These options, referred to as ‘High Performance Options’, may be subject to a condition requiring top quartile performance by reference to a predetermined measure within a predetermined peer Group over a measurement period of not less than three years, before full vesting is permitted. For options outstanding under the 2005 Executive Scheme see the table on page 76. 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. In the year the Company launched an offer to all employees under the terms of the Scheme at a price discounted by 20% and with the option of three or five year saving contracts. The discounted price was 318 pence, determined in accordance with the Scheme rules, and the total number of shares over which options were granted was 782,682 (541,048 over a five year term and 241,634 over a three year term) 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. M Pegler receives a payment of 25% of his base salary as a contribution to his own private pension arrangements. There are no other pension arrangements in place for directors. Remuneration Policy for Non-Executive Directors The remuneration of the three 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. By an Agreement dated 6 December 2007 D L Grove’s Service Agreement was varied so that as from 31 December 2007 all entitlement to future cash performance-related bonus payments was removed. In return, subsequent to the year end, D L Grove received a one-off compensation payment of £600,000 (less PAYE and National Insurance) subject to the net cash received being used wholly to purchase and hold shares in the Company. Such shares have been so acquired and, subject to certain conditions, will be held by D L Grove until 1 January 2009. On 4 June 2007 D W Muir entered into a new service agreement following his appointment as Chief Executive. The service agreement provides for D W Muir to receive 12 months notice and for D W Muir to give the Company 12 months notice of termination. His previous service agreement dated 2 June 1999 provided for D W Muir to give 6 months notice of termination and to receive 12 months notice from the Company. Under the terms of the new service agreement, during the period of ninety days following a change of control, the notice period to be given by the Company to D W Muir is 12 months and by D W Muir to the Company is reduced from 12 months to ninety days. If during the period of ninety days following a change of control, the service agreement is terminated by D W Muir or is terminated by the Company without prior notice, D W Muir is entitled to a sum equal to twelve month’s basic salary. M Pegler has a service agreement which entitles him to receive 12 months notice of termination by the Company. In the event that M Pegler terminates the service agreement he is due to give the Company 6 months notice. During the period of ninety days following a 36 Hill & Smith Holdings PLC Annual Report 2007 Directors’ Remuneration Report continued 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. Below are two graphs showing the Total Shareholder Return on both an annual and cumulative basis over the five year period from 2003 to 2007 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 Total Return on Investment 700 600 500 400 300 200 100 0 100 80 40 20 0 -20 -40 01/01 03 31/12/2007 Hill & Smith Holdings PLC FTSE All Share EX.INV.Trusts FTSE Small Cap EX.INV.TSTS. Hill & Smith Holdings 5 Year relative performance R e p o r t s 03 04 05 06 07 Hill & Smith Holdings PLC FTSE All Share EX.INV.Trusts FTSE Small Cap EX.INV.TSTS. change of control the notice period to be given by the Company to M Pegler is 12 months and by M Pegler to the Company is reduced from 6 months to ninety days. If during the period of ninety days following a change of control, the service agreement is terminated by M Pegler or is terminated by the Company without prior notice, M Pegler is entitled to a sum equal to twelve months’ basic salary. C J Burr’s service agreement terminated following his retirement from the Board on the 11 March 2008. 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 service agreements referred to above are as follows: D L Grove D W Muir M Pegler C J Burr 9 July 1999 (varied 6 December 2007) 4 June 2007 28 November 2007 20 June 2001 Non-Executive Appointments The appointments of R E Richardson, H C Marshall and C J Snowdon are governed by letters of engagement. Under the terms of their engagement, the notice period to be given by R E Richardson, H C Marshall and C J Snowdon to the Company is three months and the Company is obliged to give the same length of notice to R E Richardson, H C Marshall and C J Snowdon to terminate the engagement. Following his retirement from the Board on 11 May 2007 as Non-Executive Chairman, the Service Agreement (dated 4 March 1999) for D S Winterbottom was terminated on that date. An ex-gratia payment was subsequently made to D S Winterbottom in recognition of his contribution to the Group’s development. www.hsholdings.com Stock Code: HILS 37 PART TWO Directors’ remuneration Executive D L Grove C J Burr D W Muir Non-Executive D S Winterbottom (retired 11 May 2007) H C Marshall R E Richardson C J Snowdon (appointed 11 May 2007) Total Basic salary/ fees £000 Value of Performance- related bonus benefits £000 £000 310 196 240 29 36 38 22 871 15 11 25 — — — — 51 232 90 240 — — — — 562 Total for year to Other 31 December 2007 £000 payments £000 Total for year to 31 December 2006 £000 — — — 40* — — — 40 557 297 505 69 36 38 22 1,524 693 251 115 72 34 36 — 1,201 * Ex gratia payment made to D S Winterbottom upon his retirement and in recognition of his contribution to the Group’s development. Directors’ Share Options — Options Outstanding C J Burr D L Grove D W Muir No of shares at 31 December 2005 and 2006 12,360‡ 12,360‡ 12,360‡ 14,646* 63,468† 67,791§ Exercise price (p) 100 100 100 205 205 Nil Date first exercisable/ vested 1 Jan 2010 1 Jan 2010 1 Jan 2010 4 Oct 2008 4 Oct 2008 1 Jan 2010 Expiry date 1 Jul 2010 1 Jul 2010 1 Jul 2010 4 Oct 2015 4 Oct 2015 1 Jan 2010 * 2005 Executive Share Option Scheme (Approved Section) † 2005 Executive Share Option Scheme (Non-approved Section) ‡ 1995 Savings Related Share Option Scheme § 2007 Long Term Incentive Plan (No exercise price applies to the conditional award of nil cost shares under the terms of this Plan) Apart from the award to D W Muir of 67,791 shares under the 2007 Long Term Incentive Plan, no options were granted to Directors during the year and no options were exercised by the Directors. No variations in the terms and conditions of options shown in the above tables were made. At 31 December 2007 the mid-market price of the Company’s shares was 332.5p. During the year, the Company’s mid-market share price ranged between a low of 265.75p and a high of 410.0p. 38 Hill & Smith Holdings PLC Annual Report 2007 Directors’ Pensions Pension benefits earned by the Directors Age at year end Accrued benefit at 31 December 2007 Increase in accrued benefits excluding inflation Increase in accrued benefits including inflation Directors’ contributions Transfer value of accrued benefits at 1 January 2007 Transfer value of accrued benefits at 31 December 2007 Directors’ Remuneration Report continued D W Muir 47 £81,169 p.a. £9,703 p.a. £12,386 p.a. £11,175 £616,532 £782,930 C J Burr 58 £64,547 p.a. £3,742 p.a. £6,024 p.a. £11,175 £1,136,308 £1,242,621 1 2 3 4 5 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 following is additional information relating to D W Muir’s pension: (a) Normal Retirement Age: (b) Spouse’s pension: (c) Pension increases: 60 2/3 pension on death after retirement — post-April 1997 pension — pre-April 1997 pension (d) Discretionary benefits: The following is additional information relating to C J Burr’s pension: (a) Normal Retirement Age: (b) Spouse’s pension: (c) Pension increases: 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 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: The transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11. Howard Marshall Chairman, Remuneration Committee 11 March 2008 R e p o r t s www.hsholdings.com Stock Code: HILS 39 Statement of Directors’ Responsibilities in Respect of the Annual Report and the Financial Statements 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. 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. In preparing each of the Group and Parent Company Financial Statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgments 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 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. 40 Hill & Smith Holdings PLC Annual Report 2007 (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 2007 which comprise the Consolidated Income Statement, the Consolidated and Company Balance Sheets, the Consolidated Statement of Cash Flows, the Consolidated 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 number 40. 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 Business Review Report 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 2006 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 judgments made by the directors in the preparation of the Financial Statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Financial Statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: the Group Financial Statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at 31 December 2007 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 2007; 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 11 March 2008 www.hsholdings.com Stock Code: HILS 41 R e p o r t s (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 42 Hill & Smith Holdings PLC Annual Report 2007 FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE CONSOLIDATED BALANCE SHEET 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 FINANCIAL CALENDAR www.hsholdings.com Stock Code: HILS 43 S t a t e m e n t s i F n a n c a i l Consolidated Income Statement Year ended 31 December 2007 Year ended 31 December 2007 Year ended 31 December 2006 Underlying £m 402.1 35.6 3.1 — — — 38.7 6.1 (11.9) 32.9 (11.6) 21.3 Non- Underlying* £m — — — (0.4) (3.2) 3.1 (0.5) — — (0.5) 1.2 0.7 Revenue Trading profit Share of profits from associate Amortisation of acquisition intangibles Business reorganisation costs Profit on sale of properties Operating profit Financial income Financial expense Profit before taxation Notes 1,2 13 7 4 4 1,2 6 6 Taxation Profit for the year from continuing operations 8 Discontinued operations Profit for the year Attributable to: Equity holders of the parent Minority interest Profit for the year Continuing basic earnings per share Basic earnings per share Continuing diluted earnings per share Diluted earnings per share Dividend per share — Interim Dividend per share — Final proposed Total 3 24 9 9 9 9 10 10 10 Underlying Underlying* Non- £m 306.0 19.5 3.2 — — — 22.7 4.4 (8.6) 18.5 (4.9) 13.6 £m — — — — (2.2) 1.0 (1.2) — — (1.2) 0.6 (0.6) Total £m 402.1 35.6 3.1 (0.4) (3.2) 3.1 38.2 6.1 (11.9) 32.4 (10.4) 22.0 0.6 22.6 22.3 0.3 22.6 28.7p 29.5p 28.3p 29.1p 3.6p 5.1p 8.7p Total £m 306.0 19.5 3.2 — (2.2) 1.0 21.5 4.4 (8.6) 17.3 (4.3) 13.0 — 13.0 13.0 — 13.0 19.8p 19.8p 19.3p 19.3p 3.0p 4.2p 7.2p * Represents business reorganisation, property items and amortisation of acquisition intangibles. 44 Hill & Smith Holdings PLC Annual Report 2007 Consolidated Statement of Recognised Income and Expense Year ended 31 December 2007 Exchange differences on translation of foreign operations Share of exchange differences on translation of foreign operations in associate Actuarial gain on defined benefit pension schemes Taxation on items taken directly to equity Net income recognised directly in equity Profit for the year Total recognised income and expense for the year Attributable to: Equity holders of the parent Minority interest Total recognised income and expense for the year Year ended Year ended 31 December 31 December 2007 £m 2.5 (0.1) 0.5 (0.1) 2.8 22.6 25.4 25.1 0.3 25.4 2006 £m 0.1 (0.3) 1.5 (0.3) 1.0 13.0 14.0 14.0 — 14.0 Notes 24 24 26 8 24 www.hsholdings.com Stock Code: HILS 45 S t a t e m e n t s i F n a n c a i l Consolidated Balance Sheet As at 31 December 2007 Non-current assets Intangible assets Property, plant and equipment Investment in associate Available for sale financial assets Deferred tax asset Current assets Assets held for sale Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Liabilities held for sale Trade and other liabilities Current tax liabilities Interest bearing borrowings Net current assets Non-current liabilities Other liabilities Provisions for liabilities and charges Deferred tax liability Retirement benefit obligation Interest bearing borrowings Total liabilities Net assets Equity Share capital Share premium Capital redemption reserve Other reserves Translation reserve Retained earnings Equity attributable to equity holders of the parent Minority interest Total equity Approved by the Board of Directors on 11 March 2008 and signed on its behalf by: D W Muir Director D L Grove Director 46 Hill & Smith Holdings PLC Annual Report 2007 31 December 31 December 2007 £m 92.7 92.5 — 5.7 — 2006 £m 39.8 51.0 27.2 — 0.6 190.9 118.6 51.8 55.7 102.2 41.3 251.0 441.9 (32.1) (104.2) (8.1) (38.5) (182.9) 68.1 (15.2) (4.8) (10.7) (9.7) (120.6) (161.0) (343.9) 98.0 18.9 27.8 0.2 4.3 2.2 43.1 96.5 1.5 98.0 — 33.2 72.9 14.2 120.3 238.9 — (87.1) (2.8) (7.9) (97.8) 22.5 (0.4) (0.8) — (10.5) (52.4) (64.1) (161.9) 77.0 18.9 27.8 0.2 4.3 (0.2) 26.0 77.0 — 77.0 Notes 11 12 13 14 15 3 16 17 18 1 3 19 18,19 20 21 15 26 18 1 1 23 24 24 24 24 24 24 Consolidated Statement of Cash Flows Year ended 31 December 2007 Year ended Year ended 31 December 2007 31 December 2006 Profit before tax Add back net financing costs Operating profit Adjusted for non-cash items Share of profits from associate company Share-based payment Fair value of forward contracts Loss on disposal of subsidiaries Loss on remeasurement as held for sale Gain on disposal of property, plant and equipment Depreciation Amortisation of intangible assets Operating cash flow before movement in working capital Increase in inventories Decrease/(Increase) in receivables (Decrease)/Increase in payables Decrease in provisions and employee benefits Net movement in working capital Cash generated by operations 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 Deferred consideration received in respect of disposals Deferred consideration paid in respect of acquisitions Acquisitions of minority interests Acquisitions of subsidiaries and associates 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 increase/(decrease) in cash from continuing operations Cashflow from discontinued operations Net increase/(decrease) in cash Cash at the beginning of the year Effect of exchange rate fluctuations Cash at the end of the year £m (3.2) 0.2 0.1 0.1 — (1.1) 6.4 0.4 (8.4) (11.4) 7.8 (1.5) 0.6 3.0 (17.5) (1.5) 0.4 — — (0.1) (10.4) 26.9 (3.8) 4.8 (7.2) — (1.7) Notes £m (3.1) 0.3 (0.1) 0.1 0.3 (3.2) 8.8 1.1 (0.9) 1.2 (11.7) (1.2) 1.6 10.4 (14.5) (1.4) 0.4 0.2 (0.7) (2.6) (9.4) — (5.4) 147.4 (113.0) (0.1) (2.5) 6 1,2 13 5,23 7 4 3 7 7,12 7,11 11 4 11 10 18 £m 32.4 5.8 38.2 4.2 42.4 (12.6) 29.8 (8.2) (7.5) 14.1 (16.0) 26.4 24.5 1.2 25.7 14.2 1.4 41.3 www.hsholdings.com Stock Code: HILS Financial Statements £m 17.3 4.2 21.5 2.9 24.4 (13.5) 10.9 (2.7) (3.8) 4.4 (25.5) 19.0 (2.1) — (2.1) 16.3 — 14.2 47 i F n a n c a i l S t a t e m e n t s 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 and is able to significantly influence the decisions of that entity. The Group Financial Statements consolidate the Company and its subsidiaries, proportionately consolidate any jointly controlled entities 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 88 to 96. 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 a significant effect on the Financial Statements and estimates with a significant risk of material adjustment in the next year are discussed in note 27. New IFRS standards and interpretations adopted during 2007 In 2007 the following standards became effective and were adopted by the Group: IFRS 7 Financial Instruments: Disclosure IAS 1 Amendment to IAS 1 – Presentation of Financial Statements: Capital Disclosures IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment. The adoption of these standards has not had a significant impact on the results of the Group in 2007, but additional disclosures have been provided in compliance with IFRS 7 and IAS 1. 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 not yet been adopted by the Group. IFRS 8 Operating Segments IFRIC 11 IFRS 2 – Group and Treasury Share Transactions 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 8, the Group will be required to disclose segment information based on the internal reports regularly reviewed by the Group’s Chief Executive in order to assess each segments’ performance and to allocate resources to them. Currently the Group presents segment information in respect of business and geographical segments (note 1). Under the management approach, the Group will continue to report its existing three operating segments as these form the basis of internal reporting. 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 identifiable assets and liabilities acquired. On an ongoing basis the goodwill is measured at cost less impairment losses (see accounting policy “Impairment of assets”). Fair value adjustments are always considered to be provisional at the first Balance Sheet date after the acquisition to allow the maximum time to elapse for management to make a reliable estimate. 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 this 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. Goodwill arising on the acquisition of a minority interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the net assets acquired at the date of exchange. 48 Hill & Smith Holdings PLC Annual Report 2007 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Brands and customer lists that are acquired by the Group as part of a business combination are stated at cost less accumulated amortisation and impairment losses (see accounting policy “Impairment of assets”). Cost reflects management’s judgement of the fair value of the individual intangible asset calculated by reference to the net present value of future benefits accruing to the Group from the utilisation of the asset, discounted at an appropriate discount rate. The US Brand is considered to have an indefinite life and therefore is subject to annual impairment testing (see accounting policy “Impairment of assets”). For other Brands and customer lists amortisation is provided equally over the estimated useful economic life of the assets concerned, currently up to 20 years. 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 or deemed cost less the estimated residual value of property, plant and equipment by equal instalments over their estimated useful economic lives as follows: Freehold buildings Leasehold buildings Plant, machinery and vehicles No depreciation is provided on freehold land. 5 to 50 years life of the lease 4 to 20 years 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. Assets and liabilities held for sale Assets and liabilities reclassified as held for sale Non-current assets (or disposal Groups comprising assets and liabilities) that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. Immediately before classification as held for sale, these assets are remeasured in accordance with the Group’s accounting policies. Thereafter generally these assets are measured at the lower of their carrying amount and fair value less cost to sell. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognised in the Income Statement. Gains are not recognised in excess of any cumulative loss. Operations held exclusively with a view to resale Operations acquired exclusively with a view to subsequent disposal are classified as assets and liabilities held for sale at the acquisition date only where all criteria set out in IFRS 5 are satisfied within a short period following the acquisition. When acquired as part of a business combination, operations acquired exclusively with a view to subsequent disposal are initially measured at fair value less costs to sell. Subsequently, these operations are measured at the lower of their current carrying value and current fair value less costs to sell. Subsequent gains or losses on remeasurement are recognised in the Income Statement. Gains are not recognised in excess of any cumulative loss. Discontinued operations A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations that has been disposed of, held for sale, or represents operations acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria as a discontinued operation, the comparative Income Statement is re-presented as if the operation had been discontinued from the start of the comparative period. Properties 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. All of the above assets and liabilities held for sale are classed as current in line with IFRS 5. www.hsholdings.com Stock Code: HILS 49 i F n a n c a i l S t a t e m e n t s 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. The Group’s investments in equity securities and certain debt securities are classified as available for sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes, other than impairment losses and foreign exchange gains or losses on available for sale monetary items, are recognised directly in equity. When an investment is derecognised, the cumulative gain or loss in equity is transferred to profit or loss. 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. 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. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the Consolidated Statement of Cash Flows. 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, including goodwill and fair value adjustments arising on acquisition, are translated at the closing exchange rate. Income Statements of such undertakings are consolidated at the average exchange rate during the period. The adjustments to period end rates are taken to the cumulative translation reserve in equity and reported in the Statement of Recognised Income and Expense. When an overseas operation is disposed of, in part or in full, the relevant amount in the translation reserve is transferred to profit or loss. Income from associates is recognised in the Income Statement, translated at the average exchange rate during the period. Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognised directly in equity and reported in the Statement of Recognised Income and Expense, to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognised in the Income Statement. When the hedged part of a net investment is disposed of, the associated cumulative amount in the translation reserve is transferred to profit or loss as an adjustment to the profit or loss on disposal. 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 50 Hill & Smith Holdings PLC Annual Report 2007 Group Accounting Policies continued 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. Put option in respect of a minority interest in a subsidiary Where the Group has through a put option an obligation to purchase shares in a subsidiary from a minority interest, a financial liability is recognised for the present value of the estimated consideration payable under the put option and the minority interest is not recognised. In this case the fair value of the liability is estimated based on the market value for the shares in the subsidiary discounted over the period over which the consideration is payable, using a discount rate based on borrowing rates for a term corresponding to the payment period and reflecting local borrowing costs. At each reporting date, changes in the carrying amount of the liability arising from variations in the estimated fair value of the purchase consideration (excluding the effect of the unwinding of the discount, which is accounted for as a finance expense) are recognised by adjusting the carrying amount of the goodwill recognised on initial recognition of the business combination. Impairment of assets The carrying amounts of the Group’s non-financial assets, other than inventories (see accounting policy “Inventories”) and deferred tax balances (see accounting policy “Deferred taxation”), are 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 in the case of the UK and then regionally in the case of France and the USA. If such an indication exists, the relevant assets recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of the asset or its cash generating unit exceeds its recoverable amount. For goodwill and intangible 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. 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. 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 from the sale of goods represents the amount (excluding value added tax) invoiced to third party customers, net of returns, trade discounts and volume rebates. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer and the amount of revenue can be measured reliably. No revenue is recognised where the recovery of the consideration is not probable or there are significant uncertainties regarding associated costs or the possible return of goods. www.hsholdings.com Stock Code: HILS 51 i F n a n c a i l S t a t e m e n t s Group Accounting Policies continued Government grants Government grants are recognised as a liability in the Balance Sheet and credited to operating profit over the estimated useful economic life of the relevant assets 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. 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 calculated 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 except where forfeiture is due only to share prices not achieving the threshold for vesting. 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. Finance income and expense Finance income comprises interest income on funds invested, expected returns on pension scheme assets and gains on the fair value of financial assets and liabilities at fair value through profit or loss. Interest income is recognised as it accrues in the Income Statement using the effective interest method. Finance expense comprises interest expense on borrowings, expected interest cost on pension scheme obligations, unwinding of discounts, losses on the fair value of financial assets and liabilities at fair value through profit or loss and the interest expense component of finance lease payments. All borrowing costs are recognised in the Income Statement using the effective interest method. 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 not 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 or 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. 52 Hill & Smith Holdings PLC Annual Report 2007 Notes to the Consolidated Financial Statements 1. Segmental information Business segment analysis During the year the Group acquired a controlling stake in Zinkinvent GmbH. This acquisition has resulted in a fundamental change in the focus and scope of the Group’s operations. The basis of the Group’s segmental information has been revised to reflect this change and to provide the most relevant analysis of the Group’s operational performance. The main segmental changes are the introduction of a new Galvanizing Services segment (previously included within Infrastructure Products) and the inclusion of the former Industrial Products segment into the Building and Construction Products segment. In addition, the Pipe Supports division has been transferred to the Infrastructure Products segment. Comparatives have been restated accordingly. Details of the new segmental classification are shown on pages 100 to 103 inclusive. All the information given below is based on continuing operations. The discontinued operations are subsidiaries held exclusively with a view to resale and only relates to the current year (note 3). Were these continuing operations they would have been included in the Galvanizing Services and the Rest of Europe segments. Income Statement Infrastructure Products Galvanizing Services† Building and Construction Products‡ Total Group Net financing costs Continuing operations profit before taxation Taxation Continuing operations profit after taxation Segment revenue £m 145.2 84.8 172.1 402.1 Year ended 31 December 2007 Underlying segment result* £m 18.6 15.4 4.7 38.7 (5.8) 32.9 (11.6) 21.3 Segment result £m 18.4 15.5 4.3 38.2 (5.8) 32.4 (10.4) 22.0 Segment revenue £m 102.3 31.0 172.7 306.0 Year ended 31 December 2006 Underlying segment result* £m 11.9 6.8 4.0 22.7 (4.2) 18.5 (4.9) 13.6 Segment result £m 10.1 7.1 4.3 21.5 (4.2) 17.3 (4.3) 13.0 * Underlying segment result is stated before business reorganisation, property items and amortisation of acquisition intangibles. † Includes £3.1 million (2006: £3.2 million) share of profits from associate (net of tax). ‡ Includes loss on remeasurement as held for sale £0.3 million (2006: £nil). Galvanizing Services provided £6.4 million revenues to Infrastructure Products (2006: £5.3 million) and £1.3 million (2006: £1.1 million) revenues to Building and Construction Products. Building and Construction Products provided £1.3 million (2006: £1.1 million) revenues to Infrastructure Products. These internal revenues, along with revenues generated from within their own segments, have been eliminated on consolidation. Balance Sheet Infrastructure Products Galvanizing Services† Building and Construction Products Total segment assets/(liabilities) Tax and dividends Provisions and retirement benefits Net debt Assets and liabilities held for sale (note 3) Total Group Net assets † 2006 includes £27.2 million investment in associate. 31 December 2007 Total Total liabilities assets £m £m (14.9) 95.3 (78.6) 187.6 (23.2) 65.9 (116.7) 348.8 (21.5) — (14.5) — (159.1) 41.3 (311.8) 390.1 (32.1) 51.8 (343.9) 441.9 98.0 Total assets £m 65.1 75.1 83.9 224.1 0.6 — 14.2 238.9 — 238.9 31 December 2006 Total liabilities £m (16.6) (11.4) (57.3) (85.3) (5.0) (11.3) (60.3) (161.9) — (161.9) 77.0 www.hsholdings.com Stock Code: HILS 53 i F n a n c a i l S t a t e m e n t s Notes to the Consolidated Financial Statements continued 1. Segmental information continued Capital expenditure and amortisation/depreciation Infrastructure Products Galvanizing Services Building and Construction Products Total Group Property, plant and equipment (Note 12) Intangible assets (Note 11) Total Group Geographical segment analysis Capital Year ended 31 December 2007 Amortisation and expenditure depreciation £m 3.8 3.2 2.9 9.9 8.8 1.1 9.9 £m 12.1 4.6 3.2 19.9 18.5 1.4 19.9 Detailed below is the analysis of continuing operations revenue by geographical market, irrespective of origin. Revenues UK Rest of Europe USA Asia Rest of World Total Below are tables showing total assets and capital expenditure by major geographical segment. Total assets UK* Rest of Europe USA Asia Assets and liabilities held for sale (Note 3) Total Group * 2006 includes £27.2 million investment in associate. Capital expenditure UK Rest of Europe USA Asia Total Group 54 Hill & Smith Holdings PLC Annual Report 2007 Year ended 31 December 2006 Amortisation and depreciation £m 3.7 2.1 1.0 6.8 6.4 0.4 6.8 Capital expenditure £m 10.1 5.3 3.6 19.0 17.5 1.5 19.0 Year ended Year ended 31 December 31 December 2007 £m 302.9 55.4 24.7 15.4 3.7 402.1 2006 £m 276.6 17.5 0.8 8.4 2.7 306.0 Year ended Year ended 31 December 31 December 2007 £m 231.4 118.2 35.3 5.2 390.1 51.8 441.9 2006 £m 234.9 1.2 — 2.8 238.9 — 238.9 Year ended Year ended 31 December 2007 31 December 2006 £m 15.4 3.3 0.6 0.6 19.9 £m 18.7 — — 0.3 19.0 2. Operating profit Revenue Cost of sales Gross profit Share of profits from associate Distribution costs Administrative expenses Profit on sale of fixed assets Other operating income Operating profit Continuing Discontinued £m 28.5 (20.7) 7.8 — (0.7) (5.4) — — 1.7 £m 402.1 (298.0) 104.1 3.1 (25.2) (47.3) 3.2 0.3 38.2 Year ended Year ended 31 December 31 December 2006 £m 306.0 (232.5) 73.5 3.2 (22.6) (33.9) 1.1 0.2 21.5 2007 £m 430.6 (318.7) 111.9 3.1 (25.9) (52.7) 3.2 0.3 39.9 3. Discontinued operations and assets held for sale Discontinued operations Following the acquisition on 2 July 2007 of Zinkinvent GmbH the Group decided that it did not wish to retain the Benelux and German trading operations of that Company. Since that time the Group has been actively seeking a purchaser of these businesses and discussions with a potential purchaser are continuing. It is anticipated that the sale will be completed in the near future. Accordingly, these businesses have been accounted for as discontinued operations from the date of acquisition. Their assets and liabilities have been separately included in the Balance Sheet as held exclusively with a view to resale. The results of the discontinued operations are as follows: Income Statement Operating profit (note 2) Net financing charges (note 6) Profit before taxation Taxation (note 8) Discontinued operations profit for the year Period ended 31 December 2007 £m 1.7 (0.2) 1.5 (0.9) 0.6 Assets held for sale Subsequent to the year end, the Group sold one of its non-core activities, D & J Steels Limited. This business does not meet the criteria of a discontinued operation and its results are included in continuing operations. In the Balance Sheet the assets and liabilities have been reclassified into assets held for sale at the lower of their carrying amount and their estimated fair value. This has resulted in a loss on remeasurement as held for sale which is included in non-underlying items (note 4), as follows: Assets and liabilities reclassified as held for sale Property, plant and equipment Inventories Current assets Current liabilities Net Assets Fair value less cost to sell Loss on remeasurement as held for sale Year ended 31 December 2007 £m 0.5 0.5 0.8 (0.8) 1.0 (0.7) 0.3 www.hsholdings.com Stock Code: HILS 55 i F n a n c a i l S t a t e m e n t s Notes to the Consolidated Financial Statements continued 3. Discontinued operations and assets held for sale continued The fair value of the assets and liabilities of these disposal Groups are shown below: Operations held exclusively with a view to resale D & J Steels held for sale Total assets Operations held exclusively with a view to resale D & J Steels held for sale Total liabilities 31 December 2007 £m 50.0 1.8 51.8 (31.0) (1.1) (32.1) At acquisition on 2 July 2007, the Directors estimated the fair value of the operations of Zinkinvent GmbH acquired exclusively with a view to resale to be £16.9 million (note 11). The profit for the period of these discontinued operations of £0.6 million and the favourable translation difference arising on the assets of £1.6 million have been added to assets and liabilities held for sale, resulting in a net year end carrying value of £19.1 million. In accordance with the Group’s accounting policy for such assets and liabilities, the Directors compared this carrying value to the fair value of these net assets as at 31 December 2007 to assess whether any impairment was required, which concluded no such impairment was necessary. 4. Non-underlying items Business reorganisation costs The 2007 costs include £1.0 million relating to the relocation and factory closures of the production facilities of Ash & Lacy Perforators Limited and the newly acquired H M Doors business. Also included is £0.4 million in respect of losses incurred on the disposal of Ash & Lacy Pressings Limited (detailed table below) and loss on remeasurement as held for sale on D & J Steels Limited (note 3), two non-core Group businesses. A further £0.7 million relates to relocation costs of other Group operations. There is also a charge of £1.1 million relating to the changes in the contractual agreement of Directors. Disposal of subsidiaries Property, plant and equipment Inventories Current assets Cash and cash equivalents Current liabilities Net Assets Consideration: Cash consideration Deferred consideration Expenses Total net proceeds Loss on sale Cash flow effect Cash consideration Cash left in the business Net cash consideration in the Consolidated Statement of Cash Flows Year ended 31 December 2007 £m 0.2 0.2 0.6 — (0.4) 0.6 Year ended 31 December 2006 £m — 1.4 2.1 0.1 (2.9) 0.7 0.4 0.1 — 0.5 (0.1) 0.4 — 0.4 0.5 0.2 (0.1) 0.6 (0.1) 0.5 (0.1) 0.4 The 2006 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. Also included is £0.1 million in respect of losses on disposal of W&S Allely Limited and Eden Material Services (UK) Limited (detailed table above), two non-core Group businesses. Profit on sale of properties The profit in 2007 relates to the sale of two properties located in Hayle and Levenshulme and the sale and leasebacks of one operating property. In 2006 the profit relates to the sale of two vacant properties located in Glasgow and Hartlepool 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. 56 Hill & Smith Holdings PLC Annual Report 2007 5. Employees The average number of people employed by the Group during the year Continuing Discontinued Year ended Year ended 31 December 31 December 2006 2007 Infrastructure Products Galvanizing Services Building and Construction Products The aggregate remuneration for the year Wages and salaries Share-based payments Social security costs Pension cost 1,140 1,288 1,009 3,437 £m 67.7 0.3 9.2 2.7 79.9 — 472 — 472 £m 5.3 — 1.9 — 7.2 1,140 1,780 1,009 3,909 £m 73.0 0.3 11.1 2.7 87.1 784 601 1,122 2,507 £m 53.7 0.2 5.4 1.8 61.1 Details of the Directors’ remuneration and share interests are given on pages 27 to 38. 6. Net financing costs Continuing Discontinued Year ended Year ended 31 December 31 December 2006 2007 Interest on bank deposits Interest on other loans Total interest income Expected return on pension scheme assets (note 26) Financial income Interest on bank loans and overdrafts Interest on finance leases and hire purchase contracts Interest on other loans Total interest expense Net change in fair value of financial assets and liabilities (note 22) Put option discount unwind Expected interest cost on pension scheme obligations (note 26) Total other expense Financial expense Net financing costs £m 0.7 1.0 1.7 4.4 6.1 6.9 0.4 0.1 7.4 0.3 0.4 3.8 4.5 11.9 5.8 £m 0.1 0.5 0.6 — 0.6 0.1 — 0.7 0.8 — — — — 0.8 0.2 £m 0.8 1.5 2.3 4.4 6.7 7.0 0.4 0.8 8.2 0.3 0.4 3.8 4.5 12.7 6.0 www.hsholdings.com Stock Code: HILS £m 0.7 — 0.7 3.7 4.4 4.8 0.3 0.1 5.2 — — 3.4 3.4 8.6 4.2 57 i F n a n c a i l S t a t e m e n t s Notes to the Consolidated Financial Statements continued 7. Expenses and auditor’s remuneration Income Statement charges Depreciation of property, plant and equipment: Owned Leased Operating lease rentals: Plant and machinery Other Research and development expenditure Amortisation of acquisition intangibles Amortisation of development costs Amortisation of other intangible assets 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 Fair value gain on forward exchange contracts Foreign exchange gain Continuing Discontinued £m £m Year ended Year ended 31 December 31 December 2006 £m 2007 £m 7.5 1.3 1.5 4.3 — 0.4 0.6 0.1 — — 3.1 0.1 0.1 4.0 0.1 0.1 — — — 0.2 0.1 — — — — — — — 0.1 — — — 7.5 1.3 1.5 4.5 0.1 0.4 0.6 0.1 — — 3.1 0.1 0.2 4.0 0.1 0.1 5.4 1.0 1.3 4.4 — — 0.4 — 0.1 0.1 1.0 0.1 0.1 3.8 — — A detailed analysis of the auditor’s remuneration worldwide is as follows: Continuing Discontinued £m £m Year ended Year ended 31 December 31 December 2006 £m 2007 £m 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 0.1 0.3 0.4 0.1 0.2 — 1.1 0.3 0.3 0.6 — — — — — — — — — — 0.1 0.3 0.4 0.1 0.2 — 1.1 0.3 0.3 0.6 0.1 0.2 0.2 — 0.1 0.9 1.5 0.2 0.3 0.5 * Relates principally to the work as reporting accountants to corporate transactions, the costs of which are capitalised. Includes amounts charged to the share premium reserve as this related to the Placing and Open Offer £Nil (2006: £0.1 million) † Represents primarily to due diligence services provided in connection with the acquisition of Zinkinvent GmbH. A description of the work of the Audit Committee is set out in the Corporate Governance Report on pages 32 and 33 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. 58 Hill & Smith Holdings PLC Annual Report 2007 8. Taxation Current tax UK corporation tax at 30% Adjustments in respect of prior periods Foreign tax at prevailing local rates Deferred tax (note 15) Current year Adjustments in respect of prior periods Foreign tax at prevailing local rates Tax on profit in the Income Statement Current tax Relating to defined benefit pension schemes Deferred tax (note 15) Relating to defined benefit pension schemes Relating to share based payments Tax on items taken directly to equity Continuing Discontinued £m £m Year ended Year ended 31 December 31 December 2006 £m 2007 £m 4.3 — 5.0 9.3 0.6 0.1 0.4 10.4 — — 0.8 0.8 — — 0.1 0.9 4.3 — 5.8 10.1 0.6 0.1 0.5 11.3 3.3 (0.2) 0.2 3.3 1.0 — — 4.3 Year ended 31 December 2007 £m Year ended 31 December 2006 £m (0.4) 0.7 (0.2) 0.5 0.1 (0.6) 1.0 (0.1) 0.9 0.3 The tax charge in the Income Statement for the period is higher (2006: lower) than the standard rate of corporation tax in the UK. The differences are explained below: Profit from continuing operations before tax Profit from discontinued operations before tax 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 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 higher/(lower) rates Overseas losses not relieved Deferred tax benefit of future reductions in UK corporation tax rates Adjustments in respect of previous periods Tax charge Tax charge on continuing operations Tax charge on discontinued operations Tax charge Year ended 31 December 2007 £m 32.4 1.5 33.9 10.2 0.8 (0.5) (0.8) (0.3) 0.9 1.0 (0.1) 0.1 11.3 10.4 0.9 11.3 Year ended 31 December 2006 £m 17.3 - 17.3 5.2 0.3 (0.7) (0.3) — (0.1) — — (0.1) 4.3 4.3 — 4.3 www.hsholdings.com Stock Code: HILS 59 i F n a n c a i l S t a t e m e n t s Notes to the Consolidated Financial Statements continued 9. Earnings per share The weighted average number of ordinary shares in issue during the year was 75,565,565 (2006: 65,834,026), diluted for the effects of outstanding dilutive share options 76,550,467 (2006: 67,604,552). 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 Discontinued business Continuing basic earnings per share Reorganisation, property items and amortisation of acquisition intangibles Underlying earnings Diluted earnings Discontinued business Continuing diluted earnings per share Reorganisation, property items and amortisation of acquisition intangibles Underlying diluted earnings Year ended Year ended 31 December 2007 31 December 2006 Pence per share 29.5 (0.8) 28.7 (0.9) 27.8 29.1 (0.8) 28.3 (0.9) 27.4 £m 22.3 (0.6) 21.7 (0.7) 21.0 22.3 (0.6) 21.7 (0.7) 21.0 Pence per share 19.8 0.0 19.8 0.9 20.7 19.3 0.0 19.3 0.8 20.1 £m 13.0 — 13.0 0.6 13.6 13.0 — 13.0 0.6 13.6 10. Dividends Dividends paid in the year were the prior year’s interim dividend of £2.2 million (2006: £1.6 million) and the final dividend of £3.2 million (2006: £2.2 million). 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 Year ended Year ended 31 December 2007 31 December 2006 Pence per share 3.6 5.1 8.7 Pence per share 3.0 4.2 7.2 £m 2.7 3.9 6.6 £m 2.2 3.2 5.4 60 Hill & Smith Holdings PLC Annual Report 2007 11. Intangible fixed assets Cost At 1 January 2006 Acquisitions Additions internal Additions external At 31 December 2006 Acquisitions Acquisition of minority interest Additions internal Additions external Disposals Exchange gains/(losses) At 31 December 2007 Amortisation and impairment losses At 1 January 2006 Amortisation charge for the year At 31 December 2006 Amortisation charge for the year At 31 December 2007 Carrying values At 1 January 2006 At 31 December 2006 At 31 December 2007 Capitalised Customer development Goodwill £m Brands £m lists £m costs £m Licences £m Total £m 27.8 9.0 — — 36.8 37.5 0.7 — — (0.1) 2.6 77.5 — — — — — 27.8 36.8 77.5 — — — — — 9.0 — — — — 0.8 9.8 — — — 0.2 0.2 — — 9.6 0.1 — — — 0.1 1.6 — — — — 0.2 1.9 — — — 0.2 0.2 0.1 0.1 1.7 2.0 — 0.1 1.4 3.5 — — 0.1 1.0 — — 4.6 0.2 0.4 0.6 0.6 1.2 1.8 2.9 3.4 — — — — — 0.3 — — 0.3 — — 0.6 — — — 0.1 0.1 — — 0.5 29.9 9.0 0.1 1.4 40.4 48.4 0.7 0.1 1.3 (0.1) 3.6 94.4 0.2 0.4 0.6 1.1 1.7 29.7 39.8 92.7 In July 2007 the Group invested a further €26.0 million (£17.6 million) to acquire an additional 34.9% in Zinkinvent GmbH. The original investment representing 33.3% of the ordinary shares was made in May 2005 at a cost of €25.0 million. At the same time the Group advanced to Zinkinvent a €10.0 million loan. Zinkinvent is a German holding company which owns 100% of Vista NV, a Belgian company with galvanizing and fabrication businesses in Benelux, Germany, France and the United States of America. The acquisition will provide an important strategic and geographical extension of the Group’s galvanizing and fabrication activities and will enable it to improve its service to its customers. Various specific intangible assets have been recognised as a result of the acquisition, notably brand names, trademarks and customer relationships, as set out above. The remaining goodwill is mainly represented by the geographical advantages afforded to the Group through this acquisition. In December 2007 Birtley Building Products Limited acquired the assets and business of H M Doors Limited, a manufacturer of doors for the UK housing market. The intangible assets arising have all been classed as Customer Lists as the key factor influencing this acquisition was the customer base. The acquisition of minority interest represents the goodwill arising on the purchase of the outstanding 10% shareholding in V&S Inc., the USA holding company within the Zinkinvent Group. The £0.7 million goodwill represents the excess of consideration over the carrying value of the minority interest held within reserves (note 24). The final 1.5% minority interest in Pipe Supports Asia was also acquired during the year. i F n a n c a i l www.hsholdings.com Stock Code: HILS 61 S t a t e m e n t s Notes to the Consolidated Financial Statements continued 11. Intangible fixed assets continued Details of both acquisitions are shown below: Table of 2007 subsidiary acquisitions Intangible assets Property, plant and equipment Available for sale financial assets Subsidiaries held exclusively with a view to resale Inventories Current assets Cash and cash equivalents Current interest bearing liabilities Current liabilities Deferred tax Pension liability Non-current interest bearing liabilities Non-current liabilities Net assets Minority interest Shareholders’ equity Consideration Transfer from associate investment Cash consideration in the year Expenses Total cost Goodwill Cash flow effect Cash consideration Zinkinvent Policy pre-acquisition alignment carrying and fair value Zinkinvent amount adjustments Total HM Doors Total £m 0.3 29.7 5.3 12.5 21.4 30.7 9.0 (35.6) (24.3) (3.9) — (29.6) (0.5) 15.0 (3.1) 11.9 £m 10.6 7.5 — 4.4 (1.1) (0.4) — — (1.6) (5.6) (1.2) 6.9 (16.8) 2.7 — 2.7 £m 10.9 37.2 5.3 16.9 20.3 30.3 9.0 (35.6) (25.9) (9.5) (1.2) (22.7) (17.3) 17.7 (3.1) 14.6 29.2 17.6 5.3 52.1 37.5 17.6 (9.0) 2.1 (1.5) 9.2 4.4 £m — 0.1 — — 0.2 — — — — — — — (0.1) 0.2 — 0.2 — 0.2 — 0.2 — 0.2 — — — 0.2 — £m 10.9 37.3 5.3 16.9 20.5 30.3 9.0 (35.6) (25.9) (9.5) (1.2) (22.7) (17.4) 17.9 (3.1) 14.8 29.2 17.8 5.3 52.3 37.5 17.8 (9.0) 2.1 (1.5) 9.4 4.4 Cash and cash equivalents received in the business Expenses incurred in the year Gross return on investment Net cash consideration shown in the Consolidated Statement of Cash Flows Post acquisition profit for the year included in the Group’s Consolidated Income Statement Policy alignment and fair value adjustments principally relate to harmonisation with Group IFRS accounting policies, including the application of fair values on acquisition and the elimination of inter Group balances. Intangible assets principally represents the valuation of brands and customer lists at acquisition. As a result of the Zinkinvent GmbH acquisition, a put option arising from the Articles of Zinkinvent GmbH was recognised as a liability in the provisional fair values which replaces the remaining 31.8% minority interest in Zinkinvent GmbH (note 20). If the above acquisitions had occurred on 1 January 2007 the continuing results of the Group for the year would have shown revenue of £465.7 million and a profit for the year of £26.3 million. 62 Hill & Smith Holdings PLC Annual Report 2007 11. Intangible fixed assets continued Table of 2006 subsidiary acquisitions 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 Group’s Consolidated Income Statement Counters & Metnor Accessories Galvanizing Limited Limited Total £m 0.1 0.4 0.4 0.8 (0.7) — 1.0 5.3 — — 5.3 4.3 5.3 (0.8) — 4.5 0.4 £m 0.2 1.0 2.0 1.0 (1.4) 0.1 2.9 6.5 0.7 0.4 7.6 4.7 6.5 (1.0) 0.4 5.9 0.1 £m 0.3 1.4 2.4 1.8 (2.1) 0.1 3.9 11.8 0.7 0.4 12.9 9.0 11.8 (1.8) 0.4 10.4 0.5 Impairment tests on the carrying values of goodwill and any other indefinite life intangible asset 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 budget and forecast cash flow information for a period not exceeding five years. Based on past experience and management judgement an average growth rate of 10% is applied for revenues and associated cost growth. The cash flows are discounted at prevailing rates based on an internally measured weighted average cost of capital (7.37% gross and 6.35% net of tax). These tests have resulted in no impairments of goodwill as the payback period was less than five years in all cases. The brand name/trade mark within V&S Inc., in the USA, has been valued at £5.5 million and is considered to have an indefinite life. Goodwill analysed to significant cash generating units Continental Europe USA Joseph Ash Limited Other cash generating units with no individual significant value 31 December 31 December 2007 £m 21.3 19.4 14.3 22.5 77.5 2006 £m — — 14.3 22.5 36.8 Aside from these, none of the balance of allocations to multiple cash generating units was considered significant in relation to the total carrying value of goodwill. www.hsholdings.com Stock Code: HILS 63 i F n a n c a i l S t a t e m e n t s Notes to the Consolidated Financial Statements continued 12. Property, plant and equipment Cost At 1 January 2006 Acquisitions Disposal of subsidiaries Additions Disposals At 31 December 2006 Exchange adjustments Acquisitions Assets transferred to held for sale Disposal of subsidiaries Additions Disposals At 31 December 2007 Depreciation and impairment losses At 1 January 2006 Acquisitions Disposal of subsidiaries Disposals Charge for the year At 31 December 2006 Exchange adjustments Assets transferred to held for sale Disposals Charge for the year At 31 December 2007 Carrying values At 1 January 2006 At 31 December 2006 At 31 December 2007 Plant, Land and machinery buildings and vehicles £m 11.5 0.2 — 7.1 (0.6) 18.2 3.5 28.4 (0.5) — 2.7 (6.2) 46.1 1.1 0.2 — — 0.2 1.5 2.1 — (0.2) 1.0 4.4 10.4 16.7 41.7 £m 86.8 2.3 (1.0) 10.4 (4.0) 94.5 4.2 8.9 (0.5) (0.2) 15.8 (9.1) 113.6 56.3 2.0 (1.0) (3.3) 6.2 60.2 3.3 (0.5) (8.0) 7.8 62.8 30.5 34.3 50.8 Total £m 98.3 2.5 (1.0) 17.5 (4.6) 112.7 7.7 37.3 (1.0) (0.2) 18.5 (15.3) 159.7 57.4 2.2 (1.0) (3.3) 6.4 61.7 5.4 (0.5) (8.2) 8.8 67.2 40.9 51.0 92.5 The gross book value of land and buildings includes freehold land of £16.0 million (2006: £6.2 million). Included in the carrying value of plant, machinery and vehicles is £10.9 million (2006: £7.7 million) 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 £17.4 million (2006: £14.4 million) and accumulated depreciation of £5.1 million (2006: £3.5 million). 64 Hill & Smith Holdings PLC Annual Report 2007 13. Investment in associate Carrying values At 1 January 2006 Exchange adjustments Share of profit from associate Share of exchange differences on translation of foreign operations from associate At 31 December 2006 Exchange adjustments Share of profit from associate Share of exchange differences on translation of foreign operations from associate Net investment return Transfer to subsidiary investment At 31 December 2007 Shares £m Loan £m 17.9 (0.4) 3.2 (0.3) 20.4 0.1 3.1 (0.1) (1.1) (22.4) — 6.9 (0.1) — — 6.8 — — — — (6.8) — Total £m 24.8 (0.5) 3.2 (0.3) 27.2 0.1 3.1 (0.1) (1.1) (29.2) — An additional 34.9% of the share capital of Zinkinvent GmbH was acquired during the year, giving a total shareholding of 68.2%. The results of this company have been equity accounted into the results of the Group up to the date of acquisition, from which date the Zinkinvent Group has been fully consolidated. The Group’s share of the profit of Zinkinvent GmbH to 2 July 2007, which is stated net of local taxes, was £3.1 million (for the year ended 31 December 2006: £3.2 million). 14. Available for sale financial assets Fair and carrying value At 1 January 2006 At 31 December 2006 Acquisitions Exchange adjustments At 31 December 2007 Total £m — — 5.3 0.4 5.7 Available for sale financial assets represents the 33.3% holding and an interest bearing loan of €1.0 million held by a Group subsidiary in Neholl BV, a Dutch holding company which owns 100% of Nedcoat BV, a Dutch company with galvanizing businesses in The Netherlands and Belgium. The Group has no representation on the Board of Neholl BV nor is it able to influence commercial or dividend policy. For this reason the Board considers it does not exert significant influence over Neholl. Accordingly, the results of this company are not being equity accounted into the results of the Group and it is being held as an available for sale financial asset. The fair value of this financial asset has been derived by the Directors from their judgement as to the future profitability, cash flows and marketability of this minority holding. www.hsholdings.com Stock Code: HILS 65 S t a t e m e n t s i F n a n c a i l Notes to the Consolidated Financial Statements continued 15. Deferred taxation Intangible Property, plant and Retirement Other timing assets equipment Inventories obligation differences Total At 1 January 2006 Acquisition of subsidiaries (note 11) 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 Exchange adjustments Acquisition of subsidiaries (note 11) 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 2007 £m (0.1) — — — (0.1) — (4.0) 0.1 — (4.0) £m (2.1) 0.1 (0.7) — (2.7) — (4.1) (0.9) — (7.7) £m — — — — — (0.2) (3.1) 0.1 — (3.2) £m 4.2 — — (1.0) 3.2 — 0.3 (0.1) (0.7) 2.7 £m 0.4 — (0.3) 0.1 0.2 — 1.4 (0.3) 0.2 1.5 £m 2.4 0.1 (1.0) (0.9) 0.6 (0.2) (9.5) (1.1) (0.5) (10.7) Deferred tax assets Deferred tax liabilities Deferred tax (liability)/asset 31 December 31 December 2007 £m — (10.7) (10.7) 2006 £m 5.0 (4.4) 0.6 No deferred tax asset has been recognised in respect of tax losses of £16.1 million (2006: £10.9 million) as their future use is uncertain. There is no time limit on the carrying forward of these losses. No deferred tax liability has been recognised in respect of £32.9 million (2006: £1.5 million) of undistributed earnings of overseas subsidiaries, as the Group is able to control the timing of remittances so that any tax is not expected to arise in the foreseeable future. 16. Inventories Raw materials and consumables Work in progress Finished goods and goods for resale 31 December 31 December 2007 £m 35.6 6.8 13.3 55.7 2006 £m 16.1 4.5 12.6 33.2 The amount of inventories expensed to the Income Statement in the year was £283.6 million (2006: £230.2 million). The value of inventories written down and expensed in the Income Statement during the year amounted to £0.5 million (2006: £0.3 million). The amount of inventories held at fair value less cost to sell included in the above was £0.1 million (2006: £Nil). 66 Hill & Smith Holdings PLC Annual Report 2007 17. Trade and other receivables Trade and other current receivables Trade receivables Prepayments and accrued income Fair value derivatives (note 22) Other receivables 31 December 2007 £m 31 December 2006 £m 95.8 4.4 — 2.0 102.2 64.6 3.7 0.2 4.4 72.9 The Group maintains a substantial level of credit insurance covering the majority of its trade receivables which mitigates against possible impairment losses, as such the impairment losses are not significant. 18. Cash and borrowings 31 December 2007 £m 31 December 2006 £m Cash and cash equivalents in the Balance Sheet Cash and bank balances Call deposits Cash Interest bearing loans and borrowings (notes 19-20) Amounts due within one year Amounts due after more than one year Net debt Change in Net Debt Operating profit Non-cash items Operating cash flow before movement in working capital Net movement in working capital Operating cash flow Tax paid Net financing costs paid Capital expenditure (note 1) Sale of fixed assets Dividends paid Disposals Acquisitions (see below) Issue of new shares Net debt (increase)/decrease from continuing operations Net cash inflow from discontinued operations Net debt (increase)/decrease Roll up of accrued interest Effect of exchange rate fluctuations Net debt at the beginning of the year Net debt at the end of the year Acquisitions Deferred consideration paid in respect of acquisitions Acquisitions of minority interests Acquisitions of subsidiaries and associates Interest bearing liabilities assumed on acquisition of subsidiaries and associates (note 11) Total www.hsholdings.com Stock Code: HILS 35.7 5.6 41.3 (38.5) (120.6) (117.8) 38.2 4.2 42.4 (12.6) 29.8 (8.2) (5.9) (19.9) 10.4 6.2 (5.4) 0.6 (71.0) — (69.6) 1.2 (68.4) — (3.3) (46.1) (117.8) (0.7) (2.6) (9.4) (58.3) (71.0) 6.7 7.5 14.2 (7.9) (52.4) (46.1) 21.5 2.9 24.4 (13.5) 10.9 (2.7) (3.2) (19.0) 3.0 (11.0) (3.8) 0.4 (10.5) 26.9 2.0 — 2.0 (1.4) 0.6 (47.3) (46.1) — (0.1) (10.4) — (10.5) 67 i F n a n c a i l S t a t e m e n t s Notes to the Consolidated Financial Statements continued 19. Current liabilities Interest bearing loans and borrowings Current portion of long term borrowings Finance lease and hire purchase obligations Bills of exchange Loan notes Trade and other current liabilities Trade payables Other taxation and social security Accrued expenses Dividend Fair value derivatives (note 22) Other payables 20. Non-current liabilities Interest bearing loans and borrowings Long term borrowings Finance lease and hire purchase obligations Other non-current liabilities Deferred government grants Put option (note 22) 31 December 31 December 2007 £m 26.4 2.6 9.5 — 38.5 69.8 12.1 16.5 2.7 — 3.1 104.2 2006 £m 5.8 2.0 — 0.1 7.9 64.2 5.2 12.1 2.2 0.1 3.3 87.1 31 December 31 December 2007 £m 115.8 4.8 120.6 0.7 14.5 15.2 2006 £m 48.6 3.8 52.4 0.4 — 0.4 The Articles of Association of Zinkinvent GmbH, in common with many German holding companies, provide all shareholders the right to require Zinkinvent to buy back their shares. This constitutes a put option under IAS 32, which is recognised as a liability in the Balance Sheet, without regard to the option actually being exercised. This liability effectively replaces the 31.8% minority interest that exists in Zinkinvent GmbH. The value of this option is calculated on the basis of the fair market value for the shares discounted back over the period over which the option value is payable, using an appropriate discount rate based on forward EURIBOR rates of a term corresponding to the payment period. The unwinding of the discount is recorded in financing costs (note 6). The liability is considered to be non-current as there is no obligation to make a payment under the option within the next 12 months. 68 Hill & Smith Holdings PLC Annual Report 2007 20. Non-current liabilities continued The effective interest rates for finance leases and hire purchase obligations for the period they mature at the Balance Sheet date are detailed below. 31 December 2007 31 December 2006 Effective Minimum lease Effective interest rate payment Principal interest rate Minimum lease payment Principal Amounts due within one year Amounts due after more than one year Between one and two years Between two and five years % 5.64 5.64 5.64 Principal liability Finance charges payable on outstanding commitments % 5.68 5.68 5.68 £m 2.6 2.3 2.5 4.8 7.4 £m 3.0 3.0 2.7 5.7 8.7 7.4 1.3 £m 2.0 1.7 2.1 3.8 5.8 £m 2.3 1.9 2.3 4.2 6.5 5.8 0.7 The unsecured bank borrowings carry a rate of interest of 0.75% above LIBOR/EURIBOR as defined in the facility agreement. In the USA bank borrowings that are not fixed (note 22) are at Prime Rate less 0.5% and are secured against substantially all of the assets of V&S Inc. and its subsidiaries. Obligation under finance leases and hire purchase obligations are secured on the relevant assets. 21. Provisions for liabilities and charges At 1 January 2006 At 31 December 2006 Exchange adjustments On acquisition Provided during the year Utilised during the year At 31 December 2007 Property Other related £m regulatory £m 0.8 0.8 0.2 2.7 0.1 — 3.8 — — 0.1 0.9 — — 1.0 Other £m — — — 0.4 — (0.4) — Total £m 0.8 0.8 0.3 4.0 0.1 (0.4) 4.8 Property provisions relate to potential exposure to environmental costs of properties owned by the Group and dilapidation costs on leasehold properties. Other regulatory provisions relate in the main to employment issues. The Group has sought independent expert valuations where appropriate on these matters, although there are 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. All provisions relate to ongoing issues which are not anticipated to be resolved or result in a cash outflow within the next 12 months. www.hsholdings.com Stock Code: HILS 69 S t a t e m e n t s i F n a n c a i l Notes to the Consolidated Financial Statements continued 22. Financial instruments (a) Management of financial risks Overview The Group has exposure to the following risks from its use of financial instruments: Credit risk Liquidity risk Market risk This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Further quantitative disclosures are included throughout these consolidated Financial Statements. The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Group Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Group Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises from cash and cash equivalents, derivative financial instruments and principally from the Group’s receivables from customers. The maximum exposure to credit risk for receivables and other financial assets is represented by their carrying amount. It is the Group’s policy to insure a substantial part of the Group’s trade receivables, any residual risk is spread across a significant number of customers. As such the impairment losses are not significant. Purchase limits are established for each customer, which represents the maximum open amount without requiring approval from the Board; these limits are reviewed regularly. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a prepayment basis. The Group’s UK companies represent the majority of the trade receivable at 31 December 2007 with 69.0% (2006: 98.5%) and currently the only geographical region that does not insure their trade receivables is the USA, which represents 8.7% (2006: 0%) of the Group’s trade debt. The US operations have a policy of taking out trade references before granting credit limits. The Group’s policy is to not provide financial guarantees. At 31 December 2007 and 2006, no guarantees were outstanding. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. It is the Group’s policy to minimise its liquidity risk in terms of limiting the amounts of borrowings maturing within the next 12 months and as at 31 December 2007 all such debt was covered by cash and cash equivalents netting to £2.8 million positive current liquidity (2006: £6.3 million positive current liquidity). In pursuit of this policy, the Group during the year successfully negotiated a new multi currency £150.0 million facility consisting of fixed term and revolving credit that runs to July 2012, along with various other agreed lines of credit the Group has access to facilities of over £200.0 million. 70 Hill & Smith Holdings PLC Annual Report 2007 (cid:1) (cid:1) (cid:1) 22. Financial instruments continued Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and commodity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. The Group buys and sells derivatives in the ordinary course of business, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out within the guidelines set by the Board. Currency risk The Group is primarily UK based and publishes its consolidated Financial Statements in Sterling, but conducts business in several foreign currencies, including significant operations based in Continental Europe and the USA. This results in foreign currency exchange risk due to exchange rate movements which will affect the Group’s transaction costs and the translation of the results and underlying net assets of its foreign operations. The trading currency of each operation is predominantly in the same denomination, however, the Group uses forward exchange contracts to hedge the majority of exposures that do exist. The Group does not apply hedge accounting to these derivative financial instruments. To mitigate currency risk on subsidiary net assets of the Group it has hedged its investment in Zinkinvent by way of financing the acquisitions through like denominations through its multi currency banking facility. The Group’s investments in other subsidiaries are not hedged because fluctuations on translation of their assets into sterling are not significant to the Group. Interest rate risk The Group adopts interest rate swaps when engaging in long term specific investments or contracts in order to more reliably assess financial implications of these procurements. The Group used a Euro interest rate swap in the UK in 2006 to fix approximately 40% of its year end gross borrowings. This swap expired in May 2007, leaving no Euro swaps in place. On acquisition of Zinkinvent, the Group acquired US Dollar arrangements which are held locally and are detailed in the following table, the notional amounts representing 36% of the US Dollar year end gross borrowings. Country USA USA USA USA USA At 31 December 2007 Financial instrument Swap Swap Swap Swap Swap Maturity date 1 March 2009 1 April 2010 1 February 2011 1 July 2012 1 October 2015 Notional amounts 31 December 2007 $m 0.1 2.9 0.3 2.1 1.5 6.9 Rate % 7.80 3.11 5.72 4.22 4.79 www.hsholdings.com Stock Code: HILS 71 S t a t e m e n t s i F n a n c a i l Notes to the Consolidated Financial Statements continued 22. Financial instruments continued Insurance The Group purchases insurance for commercial, legal and contractual reasons. The Group retains insurable risk where external insurance is not commercially viable. Capital management The Board maintains a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board monitors both the demographic spread of shareholders, as well as the return on capital, which the Group defines as total shareholders’ equity and the level of dividends to ordinary shareholders. The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. There are financial covenants associated with the Group’s borrowings which are interest cover and EBITDA to net debt. The Group comfortably complied with these covenants in 2007. There were no changes in the Group’s approach to capital management during the year. (b) Total financial assets and liabilities The table below sets out the Group’s accounting classification of its financial assets and liabilities and their fair values as at 31 December. The fair values of all financial assets and liabilities are not materially different to the carrying values. Cash and cash equivalents Interest bearing loans due within one year Interest bearing loans due after one year Put option Other assets Other liabilities Total at 31 December 2007 Cash and cash equivalents Interest bearing loans due within one year Interest bearing loans due after one year Derivative assets Derivative liabilities Other assets Other liabilities Total at 31 December 2006 At fair value through the Income Statement £m — — — — — — — — — — 0.2 (0.1) — — Available for sale £m — — — — 5.7 — 5.7 — — — — — — — Amortised cost £m 41.3 (38.5) (120.6) (14.5) 97.8 (89.4) (123.9) 14.2 (7.9) (52.4) — — 69.0 (79.6) 0.1 — (56.7) Total carrying value £m 41.3 (38.5) (120.6) (14.5) 103.5 (89.4) (118.2) 14.2 (7.9) (52.4) 0.2 (0.1) 69.0 (79.6) (56.6) Fair value £m 41.3 (38.5) (120.6) (14.5) 103.5 (89.4) (118.2) 14.2 (7.9) (52.4) 0.2 (0.1) 69.0 (79.6) (56.6) The Group’s financial assets, excluding short term receivables, consist mainly of cash, call deposit accounts and available for sale financial assets (note 14), which represent a 33.3% holding in Neholl NV and 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 rate or LIBOR/EURIBOR. 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. 72 Hill & Smith Holdings PLC Annual Report 2007 22. Financial instruments continued Fixed rate financial liabilities comprise Sterling, Euro and US Dollar denominated finance leases and hire purchase agreements and bank loans. Floating rate financial liabilities comprise Sterling, Euro and US Dollar 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/EURIBOR. Each subsidiary has financial assets and liabilities which are predominately in the same denomination as that subsidiary’s functional currency. Excluding the UK parent Company, the financial assets and liabilities not denominated in the functional currency of these entities are insignificant to the Group. The UK parent Company holds Euro denominated interest bearing loans of £97.2 million (2006: £25.1 million), which is predominantly used to fund its European operations and includes £37.6 million (2006: £23.6 million) designated as a hedge of the net investment in a foreign operation. The foreign currency loss of £3.1 million (2006: £0.6 million gain) for the effective portion was recognised directly in equity netted against exchange differences on translation of foreign operations, the ineffective portion recognised in the Income Statement is insignificant. Fixed rate financial liabilities US Dollar at 31 December 2007 Euro at 31 December 2006 Weighted average interest rate % 4.0 4.4 Weighted average period for which rate is fixed years 4.2 0.4 (c) Maturity profile The table below sets out the contractual maturity of the Group’s financial liabilities, including estimated interest payments: Secured bank borrowings Unsecured bank borrowings Finance lease obligations Bills of exchange Put option Other liabilities Total at 31 December 2007 Secured bank borrowings Finance lease obligations Other liabilities Derivative liabilities Total at 31 December 2006 Carrying Contractual cash flows amount £m £m (12.5) 11.3 (158.7) 130.9 (8.7) 7.4 (9.6) 9.5 (17.5) 14.5 (89.4) 89.4 (296.4) 263.0 (58.1) 54.5 (6.5) 5.8 (79.6) 79.6 (0.1) 0.1 (144.3) 140.0 Due within one year £m (2.8) (31.5) (3.0) (9.6) — (89.4) (136.3) (8.3) (2.3) (79.6) (0.1) (90.3) Due between Due between two and five years £m (2.1) (111.4) (2.7) — (10.5) — (126.7) (0.4) (2.3) — — (2.7) one and two years £m (5.7) (15.8) (3.0) — (3.5) — (28.0) (49.4) (1.9) — — (51.3) Due after more than five years £m (1.9) — — — (3.5) — (5.4) — — — — — www.hsholdings.com Stock Code: HILS 73 S t a t e m e n t s i F n a n c a i l Notes to the Consolidated Financial Statements continued 22. Financial instruments continued 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 (d) Fair values 31 December 31 December 2007 £m 25.0 2006 £m 22.5 The loss in the year on the fixed rate interest swaps was £0.3 million (2006: £Nil) which is the result of Euro/US Dollar interest rate variations to when the derivative was taken out. The fair value of unhedged forward exchange contracts realised in the Income Statement as part of fair value derivatives amounted to a cost of £Nil (2006: £0.1 million). The value of the Group’s other financial instruments at 31 December 2007 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. (e) Credit risk Exposure to credit risk The exposure to credit risk is substantially mitigated by the credit insurance employed by the Group, however, in the absence of this insurance the maximum credit exposure on the carrying value of financial assets at the reporting date was: Carrying amount Available for sale financial assets Loans and receivables Cash at the end of the year Total At the reporting date the maximum exposure to credit risk for trade receivables, ignoring credit insurance was: Carrying value of trade receivables by geographic region UK Rest of Europe USA Asia Rest of the World Total Carrying value of trade receivables by business segment Infrastructure Products Galvanizing Services Building and Construction Products Total 31 December 31 December 2007 £m 5.7 97.8 41.3 144.8 2006 £m — 69.0 14.2 83.2 31 December 31 December 2007 £m 62.8 21.7 8.0 2.7 0.6 95.8 2006 £m 61.9 0.5 — 1.5 0.7 64.6 31 December 31 December 2007 £m 31.3 33.8 30.7 95.8 2006 £m 23.4 9.7 31.5 64.6 74 Hill & Smith Holdings PLC Annual Report 2007 22. Financial instruments continued Impairment losses The Group maintains a substantial level of credit insurance covering the majority of its trade receivables which mitigates against possible impairment losses, as such impairment losses are not significant. The ageing of trade receivables at the reporting date was: Not past due Past due 1–30 days Past due 31–120 days More than 120 days Total (f) Sensitivity analysis 31 December 31 December 2007 £m 64.1 20.2 10.7 0.8 95.8 2006 £m 40.1 16.2 7.8 0.5 64.6 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. At the end of the reporting periods, the affect of hyperthetical changes in interest and currency rates are as follows. 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 1% the positive or negative variation on the year’s result would have been £0.6 million (2006: £0.3 million), which would directly impact on the Income Statement. Based on a 10% weakening in sterling against all currencies throughout the year, the impact on the Income Statement would have been a gain of £1.1 million (2006: £0.4 million) and the impact directly in equity would have been a gain of £1.0 million (2006: £0.2 million). Based on a 10% strengthening in sterling against all currencies throughout the year, impact on the Income Statement would have been a loss of £0.9 million (2006: £0.4 million) and the impact directly in equity would have been a loss of £0.8 million (2006: £0.2 million). 23. Called up share capital Authorised 100,000,000 Ordinary shares of 25p each Allotted, called up and fully paid 75,580,028 Ordinary shares of 25p each (2006: 75,547,659) 31 December 31 December 2007 £m 25.0 18.9 2006 £m 25.0 18.9 In 2007 the Company issued 32,369 shares under its various share option schemes (2006: 69,554), realising £Nil (2006: £0.1 million). Also in 2006, the Company issued 12,280,702 ordinary shares at a price of 228 pence per share under the terms of a Placing and Open Offer. www.hsholdings.com Stock Code: HILS 75 S t a t e m e n t s i F n a n c a i l Notes to the Consolidated Financial Statements continued 23. Called up share capital continued Options outstanding over the Company’s shares 1995 Executive Share Option Scheme 2007 LTIP Award (granted July 2007)* 2005 Executive Share Option Scheme 31 December 2007 31 December 2006 Number of shares 14,000 10,000 103,045 Option price (p) 69 70 — Number of shares 14,000 10,000 — Option Date first price (p) exercisable Expiry date 69 70 — 4 Aug 2002 4 Aug 2009 2 Jul 2004 2 Jul 2011 ^ ^ (granted October 2005)* 309,310 205 353,248 205 4 Oct 2008 4 Oct 2015 2005 Non-Approved Executive Share Option Scheme (granted October 2005)* 224,857 205 229,764 205 4 Oct 2008 4 Oct 2015 2007 Executive Share Option Scheme (granted April 2007)* 2007 Non-Approved Executive Share Option Scheme (granted April 2007)* 1995 Savings Related Share Option Scheme 315,605 532,395 (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 1,065,631 2,574,843 24,000 2,550,843 2,574,843 * Subject to share-based payments under IFRS2 (see below). 350 350 100 — — 1,163,514 1,770,526 24,000 1,746,526 1,770,526 — 13 Apr 2010 13 Apr 2017 — 13 Apr 2010 13 Apr 2017 100 1 Jan 2010 1 Jul 2010 # Options may be exercised early under the terms of this scheme if people meet the criteria of ‘good leaver’, which encompasses circumstances such as retirement or redundancy. ^ Awards lapse on the earlier of the award holder ceasing their employment or the applicable performance conditions being met, the earliest possible date of exercise is 1 January 2010. The remaining weighted average life of the outstanding share options is 5 years 10 months (2006: 5 years 3 month). The movement and weighted average exercise prices of share options during the year: Outstanding at the beginning of the year Granted during the year Exercised during the year Lapsed during the year Outstanding at the end of the year Weighted average exercise Number of price (p) 2007 134 312 (148) (131) 200 options 2007 1,770,526 951,045 (32,369) (114,359) 2,574,843 Weighted average exercise price (p) 2006 129 — (73) (100) 134 Number of options 2006 2,007,639 — (69,554) (167,559) 1,770,526 The weighted average share price on the dates of exercise for the above share options in 2007 was 354p (2006: 245p). 76 Hill & Smith Holdings PLC Annual Report 2007 23. Called up share capital continued Share-based payments All option schemes marked as being subject to share-based payments (see above) have 2005 or 2007 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 Share price at grant date Exercise price Expected volatility Option life (years) Dividend yield Risk free interest rate 2007 grant of 1995 Savings 2005 grant of 2005 Share Related 2005 Share 2007 LTIP Option Share Option Option Award Schemes Scheme Schemes 328p 367p 0p 22% 3 3.7% 5.1% 59p 351p 350p 22% 3 3.7% 5.1% 37p 120p 100p 36% 5 3.7% 4.5% 34p 208p 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. Other than the LTIP, 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 Year ended 31 December 31 December 2007 £m 0.3 2006 £m 0.2 www.hsholdings.com Stock Code: HILS 77 S t a t e m e n t s i F n a n c a i l Notes to the Consolidated Financial Statements continued 24. Share premium and reserves At 1 January 2006 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 Total recognised income and expense for the year Dividends Acquisition of subsidiaries Acquisition of minorities * Credit to equity of share-based payments At 31 December 2007 Capital Share redemption Other Translation premium reserve reserves reserve Retained earnings Minority interest £m 4.0 — — — — 23.8 27.8 — — — — — 27.8 £m 0.2 — — — — — 0.2 — — — — — 0.2 £m 4.3 — — — — — 4.3 — — — — — 4.3 £m — (0.2) — — — — (0.2) 2.4 — — — — 2.2 £m 16.0 14.2 (4.4) — 0.2 — 26.0 22.7 (5.9) — — 0.3 43.1 £m 0.1 — — (0.1) — — — 0.3 — 3.1 (1.9) — 1.5 * On 31 August 2007 the 10% minority interest in Voigt & Schweitzer, Inc., the American holding Company within the Zinkinvent Group, was purchased for a consideration of $5.0 million from Werner Niehaus, President of Voigt & Schweitzer, Inc., who is considered to be a related party under the UK Listing Rules. Also the final minority interest in Pipe Supports Asia Limited, a company incorporated in Thailand, was acquired on 7 September 2007 for £Nil. 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. 78 Hill & Smith Holdings PLC Annual Report 2007 25. Guarantees and other financial commitments (a) Guarantees The Group had no financial guarantee contracts outstanding (2006: £Nil). (b) Capital commitments Contracted for but not provided in the accounts (c) Operating lease commitments 31 December 31 December 2007 £m 1.0 2006 £m 1.6 The total future minimum commitments payable under non-cancellable operating leases fall into the periods as follows: Group Within one year Between one and two years Between two and five years After five years 31 December 2007 31 December 2006 Land and buildings £m 4.3 4.2 11.7 28.7 48.9 Other £m 2.2 1.9 2.4 0.2 6.7 Land and buildings £m 4.0 3.8 10.8 25.4 44.0 Other £m 1.9 1.5 2.3 0.1 5.8 The total future minimum commitments receivable under non-cancellable operating leases fall into the periods as follows: Group Within one year Between one and five years After five years 31 December 2007 31 December 2006 Land and buildings £m 0.4 1.7 1.2 3.3 Other £m 5.7 3.7 — 9.4 Land and buildings £m 0.4 1.4 1.5 3.3 Other £m 2.4 1.0 — 3.4 www.hsholdings.com Stock Code: HILS 79 S t a t e m e n t s i F n a n c a i l Notes to the Consolidated Financial Statements continued 26. Pensions Total The total Group retirement benefit assets and obligations are detailed below, 2006 is all in the UK: Total fair value of scheme assets Present value of scheme funded obligations Present value of scheme unfunded obligations Retirement benefit obligation United Kingdom 31 December 31 December UK £m 63.6 (72.2) — (8.6) Overseas £m 0.1 (0.9) (0.3) (1.1) 2007 £m 63.7 (73.1) (0.3) (9.7) 2006 £m 62.4 (72.9) — (10.5) The Group operates two main pension schemes in the UK, the Hill & Smith Executive Pension Scheme provides benefits on a defined benefit basis, the other larger Hill & Smith Pension Scheme provides 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 £2.3 million (2006: £1.8 million), which includes the costs of the defined contribution scheme and the defined benefit scheme and which are detailed below. All actuarial gains and losses are recognised immediately in the Statement of Recognised Income and Expense. Composition of the schemes The Group operates defined benefit schemes in the UK. A full actuarial valuation of the schemes was last carried out as at 5 April 2006 and was updated to 31 December 2007 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 31 December 31 December 31 December 31 December 2007 4.80% 3.30% 5.70% 3.40% PA92YOB* 2006 4.50% 3.00% 5.20% 3.10% 2005 4.00% 2.80% 4.75% 2.90% 2004 3.90% 2.65% 5.60% 2.75% PA92YOB* PA92C2005 PA92Base * With the addition of the short cohort for the Hill & Smith Executive Pension Scheme, approximately 1.5 years is added to the life expectancies shown below: The mortality assumptions imply the following expected future lifetimes from age 65 Males currently aged 45 Females currently aged 45 Males currently aged 65 Females currently aged 65 31 December 31 December 31 December 31 December 2007 20.9 years 23.9 years 19.6 years 22.7 years 2006 20.9 years 23.9 years 19.6 years 22.7 years 2005 18.5 years 21.4 years 18.5 years 21.4 years 2004 16.9 years 19.9 years 16.9 years 19.9 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. 80 Hill & Smith Holdings PLC Annual Report 2007 26. Pensions continued Assets and liabilities One scheme holds assets and liabilities in respect of defined contribution benefits which 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: Assets Equities Bonds Gilts With profits policies Hedge funds Currency funds Cash Total fair value of scheme assets Present value of scheme funded obligations Retirement benefit obligation Assets Equities Bonds Gilts With profits policies Cash Other Total fair value of scheme assets Present value of scheme funded obligations Retirement benefit obligation Rate of return Rate of return expected Market Value expected Market Value 31 December 31 December 31 December 31 December 2007 % 8.00 5.70 4.60 5.90 8.00 8.40 4.50 6.92 2006 % 8.00 5.20 4.60 5.80 0.00 0.00 4.60 7.02 2007 £m 21.2 28.5 — 4.8 5.7 2.6 0.8 63.6 (72.2) (8.6) 2006 £m 40.0 6.8 3.5 9.1 — — 3.0 62.4 (72.9) (10.5) Rate of return Rate of return expected Market Value expected Market Value 31 December 31 December 31 December 31 December 2005 % 7.50 4.75 4.10 5.25 4.10 0.00 6.49 2004 % 8.00 5.60 4.75 6.10 4.75 8.00 7.03 2005 £m 36.1 7.0 3.4 8.8 2.2 — 57.5 (71.4) (13.9) 2004 £m 29.3 6.2 3.1 10.1 1.5 0.4 50.6 (57.2) (6.6) 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, market conditions at the Balance Sheet date and the employment of a UK active management approach with equities. 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. www.hsholdings.com Stock Code: HILS 81 i F n a n c a i l S t a t e m e n t s Notes to the Consolidated Financial Statements continued 26. Pensions continued 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. Hedge Funds — these funds invest in a range of investments including equities, bonds and alternatives to generate stable absolute returns at a level above cash. The extent to which these funds are assumed to provide higher returns than cash in the future is based on the manager’s objectives with regards to the average annual returns above cash and having regard to market conditions at the Balance Sheet date. Currency Funds — these funds incorporate gearing to generate expected returns significantly above the returns available on cash. The extent to which these funds are assumed to provide higher returns than cash in the future is estimated based on expected returns on equity investments and market conditions at the Balance Sheet date. Total expense recognised in the Income Statement Year ended 31 December 2007 Year ended 31 December 2006 Defined contribution Defined benefit Defined contribution Defined benefit schemes schemes Total schemes schemes 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 £m 1.4 — 1.4 — — 1.4 £m 0.9 — 0.9 (4.4) 3.8 0.3 £m 2.3 — 2.3 (4.4) 3.8 1.7 £m 1.2 — 1.2 — — 1.2 £m 0.8 (0.2) 0.6 (3.7) 3.4 0.3 Total £m 2.0 (0.2) 1.8 (3.7) 3.4 1.5 The majority of the current service costs of the defined benefit scheme is charged through administrative expenses. Change in the present value of the defined benefit obligations Opening defined benefit obligations Current service costs Interest cost Actuarial (gains)/losses Gain on curtailments and settlements Employee contributions Benefits paid Closing defined benefit obligations Year ended Year ended 31 December 31 December 2007 £m 72.9 0.9 3.8 (2.6) — 0.2 (3.0) 72.2 2006 £m 71.4 0.8 3.4 0.5 (0.2) 0.2 (3.2) 72.9 82 Hill & Smith Holdings PLC Annual Report 2007 26. Pensions continued Changes in fair values of scheme assets Opening fair value of assets Expected return on assets Actuarial (losses)/gains Employer contributions Employee contributions Benefits paid Closing fair value of assets Actual return on scheme assets Expected employer contributions in the following year Defined benefit schemes Defined contribution schemes Amounts recognised in the Statement of Recognised Income and Expense % of scheme Year ended Year ended 31 December 31 December 2007 £m 62.4 4.4 (2.0) 1.6 0.2 (3.0) 63.6 2.4 1.8 1.4 2006 £m 57.5 3.7 2.0 2.2 0.2 (3.2) 62.4 5.7 1.1 1.2 assets/ 31 December Year ended % of scheme assets/ Year ended 31 December Difference between actual and expected return on scheme assets Experienced (loss)/gain on scheme obligations Changes in assumptions underlying the present value of scheme obligations Annual amount recognised Total amount recognised Amounts recognised in the Statement of Recognised Income and Expense Difference between actual and expected return on scheme assets Experienced (loss)/gain on scheme obligations Changes in assumptions underlying the present value of scheme obligations Annual amount recognised Total amount recognised liabilities 2007 liabilities 2006 % (3) (1) 5 1 £m (2.0) (0.8) 3.4 0.6 (10.0) % 3 1 (2) 2 £m 2.0 0.7 (1.2) 1.5 (10.6) % of scheme Year ended % of scheme Year ended assets/ 31 December assets/ 31 December liabilities % 9 0 (18) (11) 2005 £m 5.0 (0.3) (12.8) (8.1) (12.1) liabilities % 1 (1) (9) (7) 2004 £m 0.5 0.4 (4.9) (4.0) (4.0) www.hsholdings.com Stock Code: HILS 83 S t a t e m e n t s i F n a n c a i l Notes to the Consolidated Financial Statements continued 26. Pensions continued Overseas As a result of the acquisition of Zinkinvent GmbH the Group now operates overseas pension schemes. In France the Group provides certain long term benefits and operates post employment defined benefit plans which provide lump sum benefits at retirement in accordance with collective labour agreements. Some of those plans are funded with insurance companies. In Belgium the Group provides termination benefits through a plan providing benefits on early retirement and other long term benefits through an insured defined contribution plan. As the Belgian legislation imposes minimum guaranteed rates of return on employee and employer contributions, the insured defined contribution plan qualifies as a defined benefit plan. Since those guarantees are primarily covered by the insurance company, the plan has been accounted for as a defined contribution plan. The amount contributed to this plan over the six months to 31 December 2007 was £Nil. The Group also operates defined contributions plans in the USA and The Netherlands. The amounts contributed to these plans during the six months to 31 December 2007 were £Nil and £0.1 million respectively. The Income Statement for the six months to 31 December 2007 includes a pension charge of £Nil, which includes the costs of the defined contribution scheme and the defined benefit scheme as detailed below. All actuarial gains and losses are recognised immediately in the Statement of Recognised Income and Expense. Composition of the schemes The Group operates defined benefit schemes in Belgium and France. An actuarial valuation of the schemes was carried out by an independent actuary as at 31 December 2007 and at the date of acquisition of Zinkinvent GmbH. The principal assumptions used by the actuary Rate of increase in salaries Discount rate Inflation Expected long term rate of return on plan assets Assets and liabilities 31 December 2007 2%-3% 5.25% 2.00% 4.50% 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: Assets Cash and other insured fixed interest assets Total fair value of scheme assets Present value of scheme funded obligations Present value of scheme unfunded obligations Retirement benefit obligation Rate of return expected Market Value 31 December 31 December 2007 % 4.50 4.50 2007 £m 0.1 0.1 (0.9) (0.3) (1.1) Cash and other insured fixed interest assets — where assets are held in cash or a policy with a fixed interest asset allocation, the expected long term rate of return is taken to be the yields generally prevailing on such assets as at the Balance Sheet date. 84 Hill & Smith Holdings PLC Annual Report 2007 26. Pensions continued Total expense recognised in the Income Statement Current service cost Gain on curtailments and settlements Charge/(credit) to operating profit Total charged/(credited) to profit before tax Period ended 31 December 2007 Defined contribution Defined benefit schemes schemes Total £m 0.1 — 0.1 0.1 £m 0.1 (0.2) (0.1) (0.1) £m 0.2 (0.2) — — The majority of the current service cost of the defined benefit scheme is charged through administrative expenses. Change in the present value of the defined benefit obligation Acquisition Exchange adjustments Current service costs Gain on curtailments and settlements Benefits paid Closing defined benefit obligation Changes in fair values of scheme assets Acquisition Employer contributions Benefits paid Closing fair value of assets Actual return on scheme assets Expected employer contributions in the following year Defined benefit schemes Defined contribution schemes Amounts recognised in the Statement of Recognised Income and Expense Exchange rate loss on assets and liabilities Amount recognised in the six months to 31 December 2007 Total amount recognised www.hsholdings.com Stock Code: HILS Period ended 31 December 2007 £m 1.3 0.1 0.1 (0.2) (0.1) 1.2 Period ended 31 December 2007 £m 0.1 0.1 (0.1) 0.1 — 0.1 0.2 % of scheme Period ended assets/ 31 December liabilities % 0 0 2007 £m (0.1) (0.1) (0.1) 85 i F n a n c a i l S t a t e m e n t s Notes to the Consolidated Financial Statements continued 27. 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 (note 26). 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 (note 11). Share-based payments In valuing the share-based payments charged in the Group’s accounts, the Company has used the Black-Scholes calculation model, which makes various assumptions about 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 23. Environmental and dilapidation provisions Estimated environmental and dilapidation costs have been derived on the basis of the most recent assessments of the likely cost. Certain factors concerning these costs are outside of the Group’s control. In making this assessment the Group has sought the aid of independent experts where appropriate (note 21). Deferred taxation Deferred taxation has been estimated using the best information available, including seeking the opinion of independent experts where applicable (note 15). Valuation of intangible assets The acquisition of Zinkinvent was reviewed by an independent expert, who has identified a number of intangibles including brands/trademarks and customer relationships (note 11). Goodwill, which resulted mainly from geographical benefits, market share, assembled workforce and going concern aspects of the business. Brands have been valued based on estimated royalty rates discounted over their useful lives, which was deemed to be 20 years in France and indefinite in the USA as the Voigt & Schweitzer brand has been successfully trading since 1956. Customer relationships have been valued based on relevant discounted estimated future revenue in France and the USA and are deemed to have a useful economic life of 5 years based upon an annual customer churn of 25% on a reducing balance. Operations held exclusively for sale The Benelux and German trading operations of Zinkinvent are being actively marketed as for sale and it is anticipated that the sale will be completed in the near future. Accordingly, these businesses have been accounted for as discontinued operations from the date of acquisition. Their assets and liabilities have been valued at the lower of carrying value and current fair value and identified separately in the Balance Sheet as held for sale (note 3). Minority interest The minority interest shown in reserves (note 24) represents the minorities held in the fabrication businesses in the USA and represents the proportion of profits in those businesses to which the minorities are entitled. These minorities were acquired on 1 January 2008 for a cash consideration of $4.0 million (note 29). The minority interest would also have included the 31.8% shareholding in Zinkinvent not owned by Hill & Smith; however, the Articles of Association of Zinkinvent GmbH, in common with many German holding companies, provide all shareholders the right to require Zinkinvent to buy back their shares. This constitutes a put option under IAS 32, which is recognised as a liability in the Balance Sheet (note 20) rather than a minority interest. The value of the put option is based on the estimated fair market value of the shares discounted back over the period over which the option value is payable, using an appropriate discount rate based on forward EURIBOR rates of a term corresponding to the payment period. The unwinding of the discount is recorded in financing costs (note 6). 86 Hill & Smith Holdings PLC Annual Report 2007 28. Related party transactions Transactions with associate undertakings (note 13), which are subject to exchange and translation variations include recognition of associate income £3.1 million (2006: £3.2 million) less a return that accrued on the Group’s investment which was capitalised £1.1 million (2006: £Nil). 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 35 to 39. The compensation in total for each category required by IAS 24 is as follows: Year ended Year ended Salaries and short term employee benefits Non-executive Directors’ fees Share-based payments 31 December 31 December 2007 2006 £m 2.4 0.1 0.1 2.6 £m 1.1 0.1 — 1.2 During the year the Group had some minor transactions with GIL investments Limited of which D L Grove was during the year a major shareholder. All of these transactions were undertaken on an arm’s length basis. 29. Subsequent events On 1 January 2008, the Group acquired the following minority shareholding in the USA fabrication operations: V&S Schuler Engineering Inc. (25.0%); V&S Clark Substations LLC (25.0%); and V&S Schuler Tubular LLC (23.3%) for a consideration of $4.0m from Prism Enterprises Inc, which is controlled by Anthony Codispoti who is considered a related party to these businesses. The Group also divested another of its non-core activities, D & J Steels Limited, on 28 February 2008. The assets and liabilities of this company have been transferred into the held for sale categories on the Balance Sheet as at 31 December 2007 (note 3) and a loss on remeasurement of £0.3 million has been provided in this year’s results (note 4). www.hsholdings.com Stock Code: HILS 87 S t a t e m e n t s i F n a n c a i l Company Balance Sheet As at 31 December 2007 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 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 11 March 2008 and signed on its behalf by: D W Muir Director D L Grove Director 31 December 31 December Notes 4 5 6 7–8 7 8 10 11 11 11 12 2007 £m 0.2 195.5 195.7 87.8 — 87.8 (38.6) (76.1) (114.7) (26.9) 168.8 (100.8) 68.0 18.9 27.8 0.2 21.1 68.0 2006 £m — 180.7 180.7 35.1 6.9 42.0 (5.9) (86.3) (92.2) (50.2) 130.5 (48.1) 82.4 18.9 27.8 0.2 35.5 82.4 88 Hill & Smith Holdings PLC Annual Report 2007 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. Under Section 230(4) of the Companies Act 1985 the Company is exempt from the requirement to present its own Profit and Loss Account. Under FRS 1 Cash Flow Statements, the Company is exempt from the requirement to prepare a Cash Flow Statement, on the grounds that the Company is included in its own published consolidated financial statements. The Company has taken advantage of the exemptions contained in FRS 8 Related Party Disclosures and has not disclosed transactions or balances with entities which form part of the Group. In these Financial Statements the Company adopted UITF 41 Scope of FRS 20 (IFRIC 8) for the first time. 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 The Company has adopted the requirements of FRS 29 and has taken the exemption under that standard from disclosure on the grounds that the Group Financial Statements contain disclosures in compliance with IFRS 7. 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. 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. The principal financial instruments utilised by the Company are interest rate swaps. These instruments are used for hedging purposes in line with the Group’s risk management policy. Interest differentials are taken to net interest in the profit and loss account. 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. 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 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. i F n a n c a i l www.hsholdings.com Stock Code: HILS 89 S t a t e m e n t s Company Principal Accounting Policies continued 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. Where the Company grants options over its own shares to the employees of its subsidiaries it recognises an increase in the cost of investment in its subsidiaries equivalent to the equity settled share-based payment charge recognised in its subsidiary’s Financial Statements with the corresponding credit being recognised directly in equity. Amounts recharged to the subsidiaries are recognised as a reduction in the cost of investment in that subsidiary. 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 or creditor 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. 90 Hill & Smith Holdings PLC Annual Report 2007 Notes to the Company Financial Statements 1. Profit on ordinary activities before taxation The profit on ordinary activities is stated after charging Operating lease rentals — Land and buildings Year ended Year ended 31 December 31 December 2007 £m 0.1 2006 £m 0.1 Fees paid to KPMG Audit Plc and its associates for audit and non-audit services to the Company itself are not disclosed in the individual Financial Statements of Hill & Smith Holdings PLC because the Group’s consolidated Financial Statements are required to disclose such fees on a consolidated basis. 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 Year ended Year ended 31 December 31 December 2007 £m 2006 £m 14 £m 2.2 0.1 0.3 0.8 3.4 11 £m 1.6 — 0.2 1.6 3.4 Details of the Directors’ remuneration and share interests are given in the Directors’ Remuneration Report on pages 35 to 39. 3. Dividends Dividends paid in the year were the prior years’ interim dividend £2.2 million (2006: £1.6 million) and the final dividend of £3.2 million (2006: £2.2 million). Dividends declared after the Balance Sheet date are not recognised as a liability. The Directors have proposed a final dividend for the current year, subject to shareholder approval, as shown below: Year ended Year ended 31 December 2007 31 December 2006 Equity shares Interim Final proposed Total Pence per share 3.6 5.1 8.7 Pence per share 3.0 4.2 7.2 £m 2.7 3.9 6.6 www.hsholdings.com Stock Code: HILS £m 2.2 3.2 5.4 91 i F n a n c a i l S t a t e m e n t s Notes to the Company Financial Statements continued 4. Tangible fixed assets Cost or valuation At 31 December 2006 Additions At 31 December 2007 Depreciation At 31 December 2006 Charge for the year At 31 December 2007 Net book value At 31 December 2007 At 31 December 2006 5. Fixed asset investments Plant, Leasehold machinery improvements and vehicles £m — 0.1 0.1 — — — 0.1 — £m 0.1 0.1 0.2 0.1 — 0.1 0.1 — Cost At 31 December 2006 Reclassification to interests in subsidiary undertakings Reclassification of interests to loans to subsidiary undertakings Additions Disposals At 31 December 2007 Provisions At 31 December 2006 At 31 December 2007 Net book value At 31 December 2007 At 31 December 2006 Share in Loans to subsidiary subsidiary Participating Trade undertakings undertakings interests investments £m 136.2 17.1 — 22.0 (0.4) 174.9 1.9 1.9 173.0 134.3 £m 23.8 — — — — 23.8 1.3 1.3 22.5 22.5 £m 23.9 (17.1) (6.8) — — — — — — 23.9 £m 0.8 — — — — 0.8 0.8 0.8 — — Total £m 0.1 0.2 0.3 0.1 — 0.1 0.2 — Total £m 184.7 — (6.8) 22.0 (0.4) 199.5 4.0 4.0 195.5 180.7 A list of the principal businesses owned by the Company is given on pages 100 to 103 includive. All the Company’s subsidiaries are wholly owned except for Zinkinvent GmbH, a Company incorporated in Germany, in which the Company has an equity interest of 68.2%. On 2 July 2007 the Company invested a further €27.0 million in Zinkinvent GmbH to acquire an additional 34.9% interest in that Company. From that date the investment in Zinkinvent GmbH has been reclassified as a subsidiary investment. During the year the Company disposed of Ash & Lacy Pressings Limited. 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. 92 Hill & Smith Holdings PLC Annual Report 2007 6. Debtors Amounts owed by subsidiary undertakings Corporation tax Deferred tax (note 9) Fair value derivatives 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 31 December 31 December 2007 £m 82.8 4.0 0.1 — 0.7 0.2 87.8 2006 £m 29.2 2.4 — 0.2 3.2 0.1 35.1 31 December 31 December 2007 £m 14.5 24.1 — — 38.6 2.0 0.1 3.7 2.7 0.5 67.1 76.1 2006 £m — 5.6 0.2 0.1 5.9 1.9 0.1 1.1 2.2 0.8 80.2 86.3 www.hsholdings.com Stock Code: HILS 93 S t a t e m e n t s i F n a n c a i l Notes to the Company Financial Statements continued 8. Creditors: amounts falling due after one year The Company’s interest bearing loans and borrowings are detailed below, more information about the Company’s exposure to interest rate and foreign currency risk is provided in note 22 of the Group Financial Statements. Bank loans and overdrafts Long term bank loans The Company’s 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 31 December 31 December 2007 £m 2006 £m 100.8 48.1 31 December 31 December 2007 £m 38.6 10.0 90.8 100.8 139.4 — — 2006 £m 5.6 48.1 — 48.1 53.7 0.1 0.2 The bank loans are unsecured and carry a rate of interest of up to 0.75% above LIBOR/EURIBOR as defined in the facility agreement. 9. Deferred tax At 1 January (Credited)/charged for the year in the profit and loss account At 31 December Other timing differences 31 December 31 December 2006 2007 £m — (0.1) (0.1) (0.1) £m (0.1) 0.1 — — 94 Hill & Smith Holdings PLC Annual Report 2007 10. Called up share capital Authorised 100,000,000 Ordinary shares of 25p each Allotted, called up and fully paid 75,580,028 Ordinary shares of 25p each (2006: 75,547,659) 31 December 31 December 2006 2007 £m 25.0 18.9 £m 25.0 18.9 In 2007 the Company issued 32,369 shares under its various share option schemes (2006: 69,554), realising £nil (2006: £0.1 million). Also in 2006, the Company issued 12,280,702 ordinary shares at a price of 228 pence per share under the terms of a Placing and Open Offer. Details of share options and related share-based payments are disclosed in note 23 to the Group Financial Statements. 11. Share premium and reserves At 1 January 2006 Profit for the year Credit to equity of share-based payments Dividends expensed Shares issued At 31 December 2006 Loss for the year Credit to equity of share-based payments Dividends expensed At 31 December 2007 12. Movement in equity shareholders’ funds (Loss)/profit for the year Dividends expensed Retained profit Credit to equity of share-based payments Shares issued Net (decrease)/increase in shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds www.hsholdings.com Stock Code: HILS Capital Share redemption premium reserve Profit and loss account £m 4.0 — — — 23.8 27.8 — — — 27.8 £m 0.2 — — — — 0.2 — — — 0.2 £m 36.7 3.0 0.2 (4.4) — 35.5 (8.8) 0.3 (5.9) 21.1 31 December 31 December 2006 2007 £m (8.8) (5.9) (14.7) 0.3 — (14.4) 82.4 68.0 £m 3.0 (4.4) (1.4) 0.2 26.9 25.7 56.7 82.4 95 i F n a n c a i l S t a t e m e n t s Notes to the Company Financial Statements continued 13. Guarantees and other financial commitments (a) Guarantees The Company had no financial guarantee contracts outstanding (2006: £Nil). The Company guarantees the bank loans and overdrafts of certain subsidiary undertakings. The amount outstanding at 31 December 2007 was £18.4 million (2006: £7.8 million). (b) Operating lease commitments Annual commitments under non-cancellable operating leases expire in the periods as detailed below: After five years 14. Pensions 31 December 2007 31 December 2006 Land and buildings £m 0.1 Other £m — Land and buildings £m — Other £m — 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 26 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 £0.8 million (2006: £1.6 million), of which £0.7 million (2006: £1.5 million) 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 26 to the Group Financial Statements. 15. Related party transactions During the year the Group had some minor transactions with GIL investments Limited of which D L Grove was during the year a major shareholder. All of these transactions were undertaken on an arm’s length basis. 16. Post balance sheet events The Company disposed of D & J Steels Limited on 28 February 2008. 96 Hill & Smith Holdings PLC Annual Report 2007 Five-year Summary Revenue Underlying operating profit* Underlying profit before taxation* Shareholders’ funds Underlying operating cash flow* Underlying earnings per share Proposed dividends per share Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 2007 £000 402.1 38.7 32.9 96.5 31.1 pence 27.8 8.7 2006 £000 306.0 22.7 18.5 77.0 12.5 pence 20.7 7.2 2005 £000 277.3 19.6 15.7 40.3 27.5 pence 17.9 6.0 2004 £000 268.7 15.1 11.8 34.2 19.2 pence 13.3 5.0 2003 £000 241.7 12.6 9.1 32.1 21.3 pence 10.7 4.6 IFRS GAAP Basis IFRS IFRS IFRS IFRS Transition The main material adjustments that would need to be made to the year ended 2003 to make it 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 business reorganisation, property items and amortisation of acquisition intangibles. www.hsholdings.com Stock Code: HILS 97 S t a t e m e n t s i F n a n c a i l Shareholder Information Shareholder base Holdings of ordinary shares at 11 March 2008. Holdings 1–500 501–1,000 1,001–5,000 5,001–50,000 50,001–100,000 100,001–500,000 500,001–1,000,000 above 1,000,000 Totals Shareholder type Individuals Institutions Other corporate Totals Shareholders Shares Number 555 269 849 608 53 71 14 22 2,441 1,719 666 56 2,441 % 22.7 11.0 34.8 24.9 2.2 2.9 0.6 0.9 100.0 70.4 27.3 2.3 100.0 Number (million) 0.1 0.2 2.2 8.7 3.7 15.5 9.9 35.3 75.6 13.9 60.0 1.7 75.6 % 0.1 0.3 2.9 11.5 4.9 20.5 13.1 46.7 100.0 18.4 79.4 2.2 100.0 Communication with shareholders and analysts Senior management meet with major shareholders and potential investors following Interim and Final results, and at other times if requested. Presentations for analysts are also held on the day of these announcements and we keep in regular contact with analysts throughout the year. Corporate information The Annual and Interim reports are the main forms of communication with our shareholders. We have updated our website to supplement these reports with additional information. The website address is www.hsholdings.com and includes share price information, investor relations information and contact details. Annual General Meeting The AGM will be held on Friday 9 May 2008 at 11.00 a.m. at The National Motorcycle Museum, Solihull. Full details are contained within the Notice of AGM which accompanies the 2007 Report & Accounts. A proxy card is also enclosed with this statement for voting. Alternatively you can vote electronically as explained in the next paragraph. Electronic proxy voting To lodge your proxy vote via the internet, log on to www-uk.computershare.com/investor/proxy. You will need the Shareholder Reference number and PIN number printed on your Form of Proxy where you will find the full instructions. Shareholding online Computershare Investor Centre gives access to view your holdings online. To register click on Investor Centre on the Computershare home page www.computershare.com and follow the instructions. You will be able to: View all your holding details for companies registered with Computershare View the market value of your portfolio Update your contract address and personal details online Access current and historical market prices Access trading graphs Add additional shareholdings to your portfolio Shareholder helpline number There is a helpline for shareholders who have enquiries about their shareholdings. The dedicated helpline number is 0870 707 1058. Share dealing Share dealing services are available through Computershare Investor Services PLC. Log on to www.computershare.com/dealing/uk for internet share dealing and for telephone dealing ring 0870 703 0084. Dividend Reinvestment Plan “DRIP” The Company has decided to offer its shareholders the facility to re-invest their cash dividends to buy more shares in the Company. The service allows you to increase your shareholding in an easy and convenient way. On-line application process enables you to participate easily and securely; www.computershare.com/investor/uk New shares will be purchased as soon as possible on or after the dividend pay date. 98 Hill & Smith Holdings PLC Annual Report 2007 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Financial Calendar Annual General Meeting 2008 Payment of final dividend for the year ended 31 December 2007 (ex dividend date 4 June 2008) Announcement of results for period to 30 June 2008 Payment of interim dividend Preliminary announcement of results to 31 December 2008 9 May 2008 11 July 2008 August 2008 January 2009 March 2009 www.hsholdings.com Stock Code: HILS 99 S t a t e m e n t s i F n a n c a i l Principal Group Businesses Infrastructure Products Group NEW LOGO ASSET INTERNATIONAL LIMITED Large diameter plastic drainage pipes and storm water attenuation tanks Stephenson Street, Newport, Gwent, NP19 4XH Tel: +44 (0)1633 273081 Fax: +44 (0)1633 290519 sales@assetint.co.uk www.assetint.co.uk COUNTERS & ACCESSORIES LIMITED Traffic counting and classifying equipment Lodge Farm Business Centre, Castlethorpe, Milton Keynes, Bucks, MK19 7ES Tel: +44 (0)1908 511122 Fax: +44 (0)1908 511505 sales@c-a.co.uk www.c-a.co.uk BARKERS ENGINEERING LIMITED Fencing, galvanizing, powder coating and fasteners Duke Street, Fenton, Stoke-on-Trent, Staffordshire, ST4 3NS Tel: +44 (0)1782 319264 Fax: +44 (0)1782 599724 sales@barkersengineering.com www.barkersengineering.com CONIMAST INTERNATIONAL SAS Specialist highmast lighting columns Incorporated in France Z.I. La Sauniere BP70, 89600 Saint Florentin, FRANCE Tel: +33 (0)3 86 43 82 01 Fax: +33 (0)3 86 43 82 10 ci@galva.fr www.conimast.fr BERRY SYSTEMS (D) Car park and industrial barriers, spring steel barriers, protection bollards, speed ramps, Handrail panels Springvale Business & Industrial Park, Bilston, Wolverhampton, WV14 0QL Tel: +44 (0)1902 491100 Fax: +44 (0)1902) 494080 sales@berrysystems.co.uk www.berrysystems.co.uk HILL & SMITH LIMITED Highway and off-highway safety barriers, temporary highway and general workzone protection systems and corrugated steel structures Springvale Business & Industrial Park, Bilston, Wolverhampton, WV14 0QL Tel: +44 (0)1902 499400 Fax: +44 (0)1902 499419 barrier@hill-smith.co.uk www.hill-smith.co.uk BRIFEN (D) Wire rope safety barriers Springvale Business & Industrial Park. Bilston, Wolverhampton, WV14 0QL Tel: +44 (0)1902 499400 Fax: +44 (0)1902 440748 graham@brifen.co.uk www.brifen.co.uk BRISTORM (D) Anti-terrorist security fence Springvale Business & Industrial Park. Bilston, Wolverhampton, WV14 0QL Tel: +44 (0)1902 499409 Fax: +44 (0)1902 499419 michael.lawrence@hill-smith.co.uk www.barkersfencing.com/bristorm.html 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. (D) Operating divisions only, not limited companies. 100 Hill & Smith Holdings PLC Annual Report 2007 Infrastructure Products Group JA ENVIROTANKS (D) Manufacture of steel storage tanks PO Box 16, Charles Henry Street, Birmingham B12 0SP Tel: +44 (0)121 622 4661 Fax: +44 (0)121 622 1402 sales@jaenvirotanks.com www.jaenvirotanks.com TOPDECK PARKING (D) Demountable car parking system Springvale Business & Industrial Park. Bilston, Wolverhampton, WV14 0QL Tel: +44 (0)1902 499400 Fax: +44 (0)1902 494080 paul.smythe@topdeckparking.co.uk www.topdeckparking.co.uk MALLATITE LIMITED Street and highway lighting columns Hardwick View Road, Holmewood Industrial Estate, Holmewood, Chesterfield, S42 5SA Tel: +44 (0)1246 593280 Fax: +44 (0)1246 593281 sales@mallatite.co.uk www.mallatite.co.uk VARLEY & GULLIVER LIMITED Parapets, gantries and pedestrian guardrails 57–70 Alfred Street, Sparkbrook, Birmingham, B12 8JR Tel: +44 (0)121 773 2441 Fax: +44 (0) 121 766 6875 sales@v-and-g.co.uk www.v-and-g.co.uk PIPE SUPPORTS LIMITED* Constant and variable pipe support systems Salwarpe Road, Droitwich, Worcestershire, WR9 9BH Tel: +44 (0)1905 795500 Fax: +44 (0)1905 794126 psl@pipesupports.com www.pipesupports.com V & S UTILITIES** Electrical utility products and services 1000 Buckeye Park Road, Columbus, Ohio 43207, USA Tel: +1 (614) 449 8281 Fax: +1 (614) 449 8851 info@hotdipgalvanizing.com www.hotdipgalvanizing.com PIPE SUPPORTS ASIA LIMITED* Constant and variable pipe support systems 26/5 Moo 9, Soi Rattanaraj, Banga-Trad Rd. km 18.2 Banchalong, Bangplee, Samut Prakem, 10540, Thailand Tel: +662 312 7685/7 Fax: +662 312 7707/10 TECHSPAN SYSTEMS (D) Electronic information display systems Griffin House, Gatehouse Way, Aylesbury, Bucks, HP19 8BP Tel: +44 (0)1296 673000 Fax: +44 (0)1296 673002 enquiries@techspan.co.uk www.techspan.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. ** Trading name for V&S Schuler Engineering, V&S Schuler Tubular Products and V&S Clark Substations, all wholly owned and incorporated in the USA. (D) Operating divisions only, not limited companies. www.hsholdings.com Stock Code: HILS 101 i F n a n c a i l S t a t e m e n t s Principal Group Businesses Galvanizing Services FRANCE GALVA* Galvanizing, fabricators of street and highway lighting columns and powder coaters of steel. Incorporated in France Z.I. La Sauniere BP70, 89600 Saint Florentin, FRANCE Tel: +33 (0)3 86 43 82 00 Fax: +33 (0)3 86 43 41 08 conimast@conimast.fr www.galva.fr JOSEPH ASH LIMITED* Galvanizing Alcora Building 2, Mucklow Hill, Halesowen, West Midlands, B62 8DG Tel: +44 (0)121 504 2560 Fax: +44 (0)121 504 2599 sales@josephash.co.uk www.josephash.co.uk VOIGT & SCHWEITZER, INC.* Galvanizing. Incorporated in the USA 1000 Buckeye Park Road, Columbus, Ohio 43207, USA Tel: +1 (614) 449 8281 Fax: +1 (614) 449 8851 info@hotdipgalvanizing.com www.hotdipgalvanizing.com The Galva Power Group NV* galvanizing business has been classified as a discontinued operation for the purposes of these accounts. 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. 102 Hill & Smith Holdings PLC Annual Report 2007 Building and Construction Products ASH & LACY BUILDING SYSTEMS LIMITED* Metal cladding building systems and ancillary products Bromford Lane, West Bromwich, West Midlands, B70 7JJ Tel: +44 (0)121 525 1444 Fax: +44 (0)121 525 3444 sales@ashandlacy.com www.ashandlacy.com EXPRESS REINFORCEMENTS LIMITED* Steel reinforcement products Eaglesbush Works, Milland Road, Neath, South Wales, SA11 1NJ Tel: +44 (0)1639 645555 Fax: +44 (0)1639 645558 commercial@expressreinforcements.co.uk www.expressreinforcements.co.uk ASH & LACY PERFORATORS LIMITED* Perforated and expanded metal PO Box 58, Alma Street, Smethwick, West Midlands, B66 2RP Tel: +44 (0)121 558 8921 Fax: +44 (0)121 565 1354 sales@ashlacyperf.co.uk www.ashlacyperf.co.uk REDMAN FISHER ENGINEERING LIMITED* Industrial flooring, handrail systems and structures Bean Road, Birmingham New Road, Tipton, West Midlands, DY4 9AQ Tel: +44 (0)1902 880880 Fax: +44 (0)1902 880446 sales@redmanfisher.co.uk www.redmanfisher.co.uk BIRTLEY BUILDING PRODUCTS LIMITED Steel lintels, residential doors and galvanizing Mary Avenue, Birtley, County Durham, DH3 1JF Tel: +44 (0)191 410 6631 Fax: +44 (0)191 410 0650 info@birtley-building.co.uk www.birtley-building.co.uk LIONWELD KENNEDY FLOORING LIMITED Handrail and flooring structures Marsh Road, Middlesbrough, TS1 5JS Tel: +44 (0)1642) 245151 Fax: +44 (0)1642) 224710 sales@lk-uk.com www.lk-uk.com BROMFORD IRON & STEEL COMPANY LIMITED* Hot rolled steel flats, bars, sections and profiles Bromford Lane, West Bromwich, West Midlands, B70 7JJ Tel: +44 (0)121 553 6121 Fax: +44 (0)121 525 0913 enquiries@bromfordsteels.co.uk www.bromfordsteels.co.uk ACCESS DESIGN & ENGINEERING (D) Specialising in GRP steelwork and metalwork contracts Halesfield 18, Telford, Shropshire, 7FT 4JS Tel: +44 (0)1952 588788 sales@access-design.co.uk www.access-design.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. (D) Operating divisions only, not limited companies. www.hsholdings.com Stock Code: HILS 103 Contacts & Advisers Registered Office Westhaven House, Arleston Way, Shirley, Solihull, B90 4LH Pension Advisers KPMG 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 Life President John G Silk LLB (Lond) John, aged 82, joined the Board in 1981 and was Chairman from 1983 to 1995. He retired from the Board and was appointed Life President in 1999. Website www.hsholdings.com Company Secretary J C Humphreys Company Number 671474 Principal Bankers Barclays Bank PLC Auditor KPMG Audit Plc Stockbroker and Financial Adviser Arden Partners plc Solicitors HBJ Gateley Wareing LLP Silks Solicitors Wragge & Co LLP 104 Hill & Smith Holdings PLC Annual Report 2007 Pipe supports used on an LNG plant in Milford Haven CONTENTS PAGES CONTENTS PAGES 2007 HIGHLIGHTS CHAIRMAN’S STATEMENT BUSINESS REVIEW Introduction Strategy Operational Performance Financial Performance Group Key Performance Indicators Risks and Uncertainties Financial Risks Corporate Social Responsibility Acquisitions and Disposals Market Outlook REPORTS Directors and Committees Directors’ Report Corporate Governance Directors’ Remuneration Report Statement of Directors’Responsibilities Independent Auditors’ Report 02 - 03 04 - 05 07 - 21 43 - 97 FINANCIAL STATEMENTS Consolidated Income Statement Consolidated Statement of Recognised Income and Expense Consolidated Balance Sheet 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 SHAREHOLDER INFORMATION FINANCIAL CALENDAR 23 - 41 98 99 PRINCIPAL GROUP BUSINESSES 100 - 103 CONTACTS & ADVISERS 104 Cautionary Statement This Annual Report contains forward looking statements which are made in good faith based on the information available at the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ from those currently anticipated. 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 Hill & Smith Holdings PLC Annual Report and Accounts 2007 www.hsholdings.com Stock Code: HILS Westhaven House, Arleston Way, Shirley, Solihull, B90 4LH Tel: (0121) 704 7430 Fax: (0121) 704 7439 www.hsholdings.com Hill & Smith Holdings PLC Annual Report and Accounts for the period ended 31 December 2007 H i l l & S m l i i t h H o d n g s P L C A n n u a l R e p o r t a n d A c c o u n t s f o r t h e p e r i o d e n d e d 3 1 D e c e m b e r 2 0 0 7 INNOVATIVE SOLUTIONS