TT Electronics
Annual Report 2008

Plain-text annual report

213447_TT_REPORT_COVER:213447_TT_REPORT_COVER 2/4/09 10:38 Page 1 T T e l e c t r o n i c s p l c A n n u a l R e p o r t 2 0 0 8 Building for the future TT electronics plc Clive House 12 – 18 Queens Road Weybridge Surrey KT13 9XB Reg No 87249 Tel +44(0) 1932 841310 Fax +44(0) 1932 836450 TT electronics plc Annual Report 2008 213447_TT_REPORT_COVER:213447_TT_REPORT_COVER 2/4/09 10:38 Page 2 TT electronics is a world leader in sensor and electronic component technology Shareholder information Our intention is to achieve growth by Annual General Meeting Share dealing services Shareholder enquiries (cid:127) Concentrating on highly-engineered, bespoke electronic components for niche growth markets, offering good margins (cid:127) Restructuring our sensor business to reduce our automotive exposure from approximately 40% to 25 – 30% of Group sales (cid:127) Investing in our Secure Power and Integrated Manufacturing Services businesses to realise growth and value potential (cid:127) Implementing a new operating structure to improve execution, facilitate cross divisional co-operation and drive sales (cid:127) Withdrawing from low growth, unprofitable areas Results Group accounts Company accounts Highlights and financial summary Chairman’s statement Summary of sectors The way forward Business review Directors and Company Secretary Directors’ report Governance Directors’ report on corporate governance Directors’ remuneration report 1 2 3 4 10 21 22 26 31 Report of the Independent Auditors on Report of the Independent Auditors the consolidated financial statements Consolidated income statement Consolidated balance sheet Consolidated statement of recognised income and expense Consolidated cash flow statement Accounting policies for the consolidated financial statements Notes to the consolidated financial statements 37 38 39 40 41 42 45 on the Company financial statements Company balance sheet Accounting policies for the Company financial statements Notes to the 66 67 68 Company financial statements 69 Historical record and Shareholder information 76 Shareview Dealing is a telephone and internet service provided by Equiniti and provides a simple and convenient way of buying and selling TT electronics plc shares. Equiniti maintain the register of members of the Company. If you have any queries concerning your shareholding, or if any of your details change, please contact the Registrars: Log on to www.shareview.co.uk/dealing or call 08456 037037 between 8.30am and 4.30pm, Monday to Friday, for more information about this service and for details of the rates and charges. A weekly postal dealing service is also available and a form together with terms and conditions can be obtained by calling 0871 384 2248*. Commission is 1 per cent with a minimum of £10. ShareGift ShareGift is a charity share donation scheme for shareholders, administered by The Orr Mackintosh Foundation. It is especially for those who may wish to dispose of a small parcel of shares whose value makes it uneconomical to sell on a commission basis. Further information can be obtained at www.sharegift.org or from Equiniti. Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone 0871 384 2396* Fax 0871 384 2100* Textphone for shareholders with hearing difficulties 0871 384 2255* Equiniti also offer a range of shareholder information on-line at www.shareview.co.uk. * Calls to this number are charged at 8p per minute from a BT landline. Other telephony provider costs may vary. Website Information on the Group’s financial performance, activities and share price is available at www.ttelectronics.com. The Annual General Meeting will be held on 13 May 2009 at 12 noon at the Ironmongers’ Hall, Shaftesbury Place, Barbican, London EC2Y 8AA. Results Announcement of 2009 half year results – late August 2009. Preliminary announcement of 2009 results – late March 2010. Annual report 2009 – to be posted mid April 2010. Dividends For the year ending 31 December 2008, the Board has not recommended a final dividend. An interim dividend of 3.69p per share was paid on 23 October, making the total dividend for the year 3.69p per share (2007: 10.05p). Multiple accounts on the shareholder register If you have received two or more copies of this document, this means that there is more than one account in your name on the shareholder register. This may be caused by either your name or address appearing on each account in a slightly different way. For security reasons, the Registrars will not amalgamate the accounts without your written consent, so if you would like any multiple accounts combined into one account, please write to Equiniti Limited at the address given below. This report is printed on Hello Silk which is made up of virgin pulp which has been FSC (Forest Stewardship Council) certified. It is 100% recyclable and biodegradable and has been printed by CTD using an alcohol free process; the printing inks are made from vegetable oil and are non-hazardous from renewable sources. Over 90% of solvents and developers are recycled for further use and recycling initiatives are in place for all other waste associated with this production. CTD are FSC and ISO 14001 certified with strict procedures in place to safeguard the environment through all our processes Designed and produced by Linnett Webb Jenkins. 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:28 Page 1 Highlights 2008 Operational highlights (cid:127) Group revenue increased by 7.2% to £584.3m (2007: £544.9m) due to foreign exchange and acquisitions; on an underlying basis Group revenue was down 1.7% with rapid deterioration in the last quarter (cid:127) Profit before tax and exceptional items of £21.1m (2007: £33.3m), in line with October 2008 trading update (cid:127) Strong level of operating cash flow at £46.2m (2007: £42.9m) (cid:127) Sound financial position, continuing to trade comfortably within banking facilities Financial summary Revenue Operating profit1 Profit before taxation1 Cash generated from operations Headline earnings per share from continuing activities1 Basic earnings per share from continuing operations Ordinary dividends per share 1 The above are reported before the exceptional loss in 2008. There were no exceptional items in 2007. 2008 £million 584.3 27.0 21.1 46.2 9.2p 7.5p 3.69p 2007 £million 544.9 37.7 33.3 42.9 15.5p 15.5p 10.05p 1 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:28 Page 2 Chairman’s statement TT electronics’ performance was noticeably affected by the global economic recession from mid-September. For the year, the Group’s turnover was £584.3 million (2007: £544.9 million), with the increase due to foreign exchange and acquisitions, producing operating profit before exceptional items of £27.0 million compared with £37.7 million in 2007. Finance costs were £5.9 million net (2007: £4.4 million) which comprised £4.1 million of banking and finance interest (2007: £4.5 million) and £1.8 million relating to pension fund accounting (2007: £0.1 million credit). Profit before tax and exceptional items was £21.1 million compared to £33.3 million in 2007. The underlying taxation charge of £6.8 million (2007: £9.3 million) represents an underlying rate of 32 per cent (2007: 28 per cent). Exceptional items relating to the closures of the AB Automotive factory at Cardiff and the AB Electronic facility at Romford were £3.8 million. Headline earnings per share from continuing operations were 9.2 pence compared with 15.5 pence in 2007. “ Despite the current difficulties of the market, the strengths of our worldwide activities will enable us to manage the business through this recession and give us the opportunity to come out of it as a stronger group.” We welcomed Geraint Anderson and Shatish Dasani as Group Chief Executive and Group Finance Director respectively during the year and with them undertook a fundamental assessment of the Group’s strategy. As we announced in the outcome of the review in January 2009, the Board has recognised the need to focus on improving margins and organic growth based on our strong underlying businesses, technologies and customers and to manage for value the non-core assets. During the year the Group acquired two companies supplying the aerospace and defence industries. In April 2008 we purchased New Chapel Electronics for an initial cash consideration of £4.2 million and deferred consideration capped at £1.0 million. New Chapel Electronics, based at Fairford, Gloucestershire, is a manufacturer of wiring harnesses and connectors for the aerospace and military industries. In August 2008 we acquired assets comprising the majority of the business of Semelab Limited for £9.7 million. The business, based in Lutterworth, Leicestershire, designs and produces specialised radio frequency and power modules, semiconductors, optoelectronic components and power microcircuits and modules. During the year costs were incurred in reducing our climate control activities, and closing our facility in Romford, which are reported as exceptional items. We intend to cease manufacturing electronic systems for automotive climate control products as soon as possible. The Group also announced the closure of our sensor factory in Romford, with the majority of manufacturing transferred to facilities in China and India. The Group is reducing its exposure to the automotive sector progressively. At 31 December 2008 the Group’s net indebtedness was £113.2 million compared with £75.0 million at the previous year end. The borrowings were affected by the acquisition of Semelab and New Chapel Electronics, the fall in sterling against the US dollar and the euro, and the Group’s payment of an additional £2.2 million into the pension scheme. The Group’s indebtedness remains comfortably within the terms of its committed banking facilities. With our operations and net assets overseas, principally in the US, Europe and the Far East, the adverse movement in sterling has strengthened the balance sheet. The time and effort of the pension scheme trustees, together with the benefits reaped from a change in investment strategy, has enabled the pension schemes to end the year with only a marginal additional deficit, despite the adverse movement in the stock market. The pension schemes are now 94 per cent funded on an IAS 19 basis (2007: 94 per cent). As stated in the January announcement the Board has decided not to recommend the payment of a final dividend for this year. Therefore the dividend for the year is 3.69 pence, compared with 10.05 pence in the previous year. My thanks to our employees worldwide for their continuing support and performance during these difficult times. We will work together to ensure the future success of TT electronics. Within the strategic review the Group announced my intention to become the non-executive Chairman later this year. As reported in the Interim Report, Rod Weaver and David Crowe retired as Directors during 2008. In January 2009 Jimmy Armstrong retired as the Group’s Corporate Development Director and I would like to thank him for his ten years as a Director of TT electronics and the wealth of knowledge he brought to the Board. Despite the current difficulties of the market, the strengths of our worldwide activities will enable us to manage the business through this recession and give us the opportunity to come out of it as a stronger group. John W Newman Executive Chairman 13 March 2009 2 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:28 Page 3 Summary of sectors As reported in the recent strategic review, the Group’s businesses were organised into a new divisional structure with effect from 1 January 2009.* During 2008 the business comprised the following divisions: Sensors and electronic systems Electronic components This division has two distinct areas of operation: The sensors business consists primarily of sales into the German automotive market and includes products to monitor pedal position, engine and wheel speed, temperature and pressure, and chassis position. There is increasing use of sensors on vehicles due to tighter legislation on vehicle emissions and increasingly sophisticated engines and electronic systems. The automotive electronic systems business includes climate control panels and infotainment modules destined largely for the European and North American automotive industry. This business made a significant operating loss during 2008 and the decision has been taken to withdraw from it as quickly as practicable. Electronic manufacturing services Our electronic manufacturing services operations are based in the UK, USA, China and Malaysia. These specialise in providing high quality manufacturing support for customers in the defence, aerospace, telecom and premium industrial sectors. We have a broad capability from board assembly to full systems integration, design for manufacturing and logistics support. Our business strategy is to become an integral part of our customers’ manufacturing supply chain by meeting their demands for increasingly complex manufacturing solutions, often for integrated assemblies, in both established and emerging markets. The focus of the Electronic components division is on delivering highly engineered, bespoke components. These are custom designed for specific customer applications by our global network of application sales engineers who support our customers’ own design centres. The business has strong market positions in a number of product segments including fixed and variable resistors and is continuing to invest in new product development in growth segments such as visible optical, power semiconductors and radio frequency semiconductors. Key drivers are the increased use of complex control electronics in defence, aerospace and industrial applications where high reliability is vital, the need for electronics to operate in harsh environments, and the increased circuit speeds required by modern electronic solutions. Secure power and industrial TT electronics operates in the secure power market through Dale Power Solutions in the UK and Ottomotores in Mexico. Both companies provide secure power solutions for customers’ critical power needs in selected markets worldwide. The interconnection business operates from two facilities in the UK and one facility in the US, and specialises in the manufacture of specialist connectors for harsh environments and interconnection systems for use by the defence, aerospace and traction markets. In addition, the division includes businesses involved in the manufacture of electrical fusegear, specialist compounds and fine wire. * More detail is provided in the Business review on pages 10 to 20. 3 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:28 Page 4 The way forward – building on a solid foundation Our business is built on world class engineering skills, an enviable customer base and sound finance. Through the recent strategic review we have identified clear priorities to significantly improve performance. Clear Priorities We have clarified our priorities and simplified our organisation. We have identified the market segments which we believe will deliver the greatest returns and these are where we are investing our resources. We have categorised each of our businesses into the following groups and they will be managed accordingly: Strategic Focus; Development; and General Industrial. 1 We will focus on markets where we believe we can obtain higher returns. These include the defence, aerospace and medical markets where we are already working with leading companies on advanced technology projects. We are looking to better utilise our capabilities and global customer base across the divisions. 2 The strategic review identified growth opportunities in the technologies of fixed and variable resistors, optoelectronics, semiconductors, connectors and microelectronics. Our design engineering teams work closely with customers on complex applications to meet the requirements of ever changing markets. 4 TT electronics plc Annual Report 2008 Results 1 2 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:29 Page 5 Strategic Focus Our focus is on the design and manufacture of highly engineered bespoke electronic components. We will continue to invest in areas where we have a leading position today and focus on developing new technologies and markets which provide the greatest opportunities to deliver revenue and profit growth. 1 We manufacture a unique range of multi-chip arrays for global government-sponsored aerospace applications. This growing and sustainable market demands the very highest standards in design, manufacture, testing and screening. 2 The addition of ultraviolet LEDs to our range further enhances the wide spectrum of environmentally sound solutions we provide to our markets. Ultraviolet LEDs will drive new and innovative applications in currency detection, industrial and medical curing applications. 1 2 5 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:29 Page 6 Development We will invest in the high quality businesses we own in the Integrated Manufacturing Services and Secure Power sectors to realise their potential and value for the Group. 1 The formation of the Integrated Manufacturing Services division unites the skills and technologies of five electronic manufacturing facilities located in Europe, North America and Asia. The division continues to focus on higher mix/lower volume business, with a coordinated strategy to move towards more specialised integrated assembly. 2 2008 was another good year for our UK and Mexican secure power operations with significant growth in our generating set and uninterruptible power service business. The formation of a separate Secure Power division will bring the focus this business requires to realise its potential. 6 TT electronics plc Annual Report 2008 Results 1 2 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:29 Page 7 General Industrial We have re-categorised into this division a number of businesses which are unlikely to deliver a material increase in shareholder returns and we intend to manage these for value with limited investment. 1 Our CT06/30 product for building wire insulation offers a low smoke, halogen free (LSF) fire retardant solution to cable producers. This product has been specified in many infrastructure related projects in both the Middle East and Europe with sales approaching 1000 metric tonnes in the first year. 2 We are significantly involved in the distribution of electricity from the grid under the Self Help Project in Ghana, that is increasing access for township and rural communities. 1 2 7 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:29 Page 8 Heading For the year... Management Strength We will continue to invest in our employees, including recruiting new senior managers and investing in world class sales training to help deliver the Group’s strategic objectives. The new operating structure will improve the way we work together as a group and bring greater clarity and accountability. 1 We are increasing our focus on customers by integrating sales across the components companies in Europe. A key account programme has been established to ensure we work together across the divisions and regions, to support our strategic customers. 2 We continue to invest in our global engineering teams. They have a complete set of capabilities and work on complex customer applications covering all stages of the product cycle, from innovation, through whole-product design, to manufacture, assembly and testing. 1 2 8 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:29 Page 9 Heading For the year... 2008 2007 World Class We have a blue chip customer base and worldwide operations. We have leading technologies in many product segments and tremendous applications engineering expertise. Our goal is to utilise this foundation to be a leader in our chosen market segments. 1 HALOSENSOR™ is a highly accurate drill position locator for aircraft assembly. Designed by our engineers in the UK, it has been used to build every Airbus aircraft since 2003, including the A400M Military Transport and the A380. We are currently developing new systems for the A350 XWB. 2 Using the latest high tech materials we have developed a unique and lightweight composite carbon fibre material. Immensely strong with high impact tolerance and chemical resistance, it is currently being used for the electrical harnesses on the Eurofighter Typhoon Landing Gear. 1 2 9 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:30 Page 10 Business review 1 2 1 Geraint Anderson Group Chief Executive 2 Shatish D Dasani Group Finance Director “ The recent strategic review identified the market segments which we believe will deliver the greatest returns and these are where we are investing our resources. We are focused on delivering against identified opportunities to significantly improve business performance and drive shareholder value.” Geraint Anderson “ The Group has a sound financial position and continues to generate a strong level of operating cash flow. The target for 2009 and beyond is to reduce costs and achieve a sustainable reduction in working capital and net debt.” Shatish D Dasani (cid:127) The Secure Power and Integrated Manufacturing Services businesses now form separate global divisions with dedicated divisional directors to ensure their growth potential is supported and realised. (cid:127) The remaining businesses which are unlikely to deliver a material increase in shareholder returns have been grouped together in the General Industrial division which will be run separately and managed for value. As a result of the review, the Group’s businesses have been re-organised into the following divisions with effect from 1 January 2009: (cid:127) Components (cid:127) Sensors (cid:127) (cid:127) Secure Power (cid:127) General Industrial Integrated Manufacturing Services (‘IMS’) The primary focus of the Group is on the Components division and the delivery of highly engineered, bespoke electronic components for niche growth markets. The Sensors business, which is currently being re-structured, is expected to form part of the Components group in the future. The Group has set a target to reduce exposure to the automotive market from approximately 40 per cent of revenue in 2008 to between 25 per cent and 30 per cent in the medium term. In addition, the Group will invest in its Integrated Manufacturing Services and Secure Power businesses which it believes can deliver material increases in shareholder value over the medium term. TT electronics is a technology-based group providing components, sensors, integrated manufacturing services and secure power solutions to a broad base of customers worldwide. The Group carried out a strategic review of its business in the second half of the year, the results of which were announced on 21 January 2009. The review, which encompassed all Group businesses and assessed their markets, product segments and competitive positions, confirmed that the business is underpinned by a blue chip global customer base, good products and technologies, and world class engineering skills. Furthermore, the Group has established market leadership within certain niche markets. At the same time, the review identified significant opportunities to improve performance and increase margins in order to maximise value for shareholders. To deliver these benefits, a number of key decisions have been taken: (cid:127) New operational and organisational structures have been implemented to enable the active management of the Group’s businesses from a global perspective and bring greater focus in terms of execution. The new structures will also facilitate improved co-operation across businesses and divisions and the co-ordination of a global sales effort. (cid:127) There will be an increased focus on the Components division (which now includes the connector businesses), which the Board believes is capable of achieving good margins and growth to drive shareholder value. (cid:127) The Sensors business has been redefined and will focus on exploiting its core sensor expertise in a broader range of markets to contribute to an overall reduction in Group exposure to the automotive industry over the medium term. 10 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:30 Page 11 Sales A number of strategic actions for 2009 were outlined in January and we continue to make progress against these: A new divisional director has been recruited. IMS: restructuring Sensors and electronic systems 32% Electronic components 25% Electronic manufacturing services 18% Secure power and industrial 25% Operating profit Sensors and electronic systems 3% Electronic components 27% Electronic manufacturing services 22% Secure power and industrial 48% Components: reconfigure European sales office We are implementing the re-organisation of the sales structure in Europe to allow us to better serve our customers. In addition, we have initiated a key account management program to make sure we work together across our businesses to support our major customers. Components: restructuring The current restructuring of the UK facility in Bedlington is on track to be completed by the end of March with further headcount reductions made in February. Components: develop US aerospace and defence business Our US interconnection facility was awarded several contracts during 2008 to provide connectors for the US military totalling over $90 million. We are making good progress towards achieving military approval certification for our new range of 38999 connectors. Sensors: European restructuring We are in the process of reducing the headcount at our German facility in Werne by approximately 225 as part of the fundamental realignment of the division’s cost base which will result in an exceptional cost of up to £5.5 million spread over the remainder of the year. These actions are expected to save £5.0 million on an annualised basis. We are in a period of consultation which we expect to be completed with the reductions effective from early April. We are continuing the closure of the AB Electronic Romford facility and a further seven lines have been moved off- shore in 2009. We are on track to exit this site on or before 30 June. Headcount has been reduced by more than 100 so far in 2009 and additional actions are planned. IMS: global structure and brand We have completed the recruitment of a Global Sales Director to fill this newly created position. This individual will lead the development of the global sales structure and the IMS brand. Secure Power: develop service business We have appointed a new Service Director in the UK and opened two new service centres in Mexico as part of our plans to increase the capture and retention of service business. General Industrial The recruitment of a divisional director for this division is at an advanced stage. AB Automotive: withdraw from business The closure of the AB Automotive climate control facility in Cardiff is on track to be completed in the first half of the year. We have continued to progress our withdrawal from this business globally. Headcount reductions In the strategy review announcement in January we identified 1,295 positions to be eliminated in 2008 and 2009. More than 1,100 positions have been eliminated in 2008 and in the first two months of 2009 with approximately a further 225 underway in Germany. We are continuing to review our cost base in light of the deteriorating market conditions and we now expect total headcount reductions to be higher. 11 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:30 Page 12 Business review continued We assess business progress using a number of key performance indicators. Orders, revenue and cash balances are reviewed on a weekly basis. Every month we review these items, and a number of additional key financial metrics including profitability, working capital and cash flow conversion, against agreed budgets and targets. Progress against key strategic initiatives for each division is reviewed at regular management meetings and by the Board on a quarterly basis. Revenue analysis under new structure The analysis of revenue for the new divisional structure is presented below. Components Sensors Integrated Manufacturing Services Secure Power General Industrial 2008 £million 2007 £million 192.1 125.9 103.4 65.9 97.0 176.3 116.1 92.2 59.9 100.4 584.3 544.9 However, the commentary and the segmental analysis that follows and the financial statements are based upon the divisional structure that was in place throughout 2008. The comparatives for revenue and operating profits are shown for continuing operations. There were no discontinued operations in 2008 but in 2007 the AEI Cables business was sold. due to foreign exchange hedges taken out in accordance with Group policy. Market conditions deteriorated progressively during the year with trading particularly difficult in the fourth quarter in our automotive markets where we saw significant declines in customer demand in both North America and Europe. In general, our other markets were more resilient but the effects of the credit crisis and global recession were felt in all of our businesses. Against this backdrop, we took steps to adjust the cost base of many of our businesses, including reducing our workforce and moving additional production to lower cost locations. We also announced the closure of two facilities in the UK serving the automotive market. During the year we completed two acquisitions – New Chapel Electronics and Semelab. New Chapel Electronics, which is based in Fairford, Gloucestershire, manufactures wiring harnesses and connectors for the aerospace and defence industries and complements our international connection systems activities. The acquisition was completed in April 2008 for an initial cash consideration of £4.2 million and deferred consideration capped at £1.0 million. We completed the purchase of Lutterworth-based Semelab in August 2008 for £9.7 million. Semelab designs and produces specialised radio frequency and power semiconductors, optoelectronic components and power microcircuits and modules, primarily for the UK and European markets. Both acquisitions have performed well and clearly fit with our strategy of focusing on delivering niche component solutions to customers worldwide. Overview of Group performance 2008 £million 2007 £million Revenue Continuing operations Electronic components 145.2 189.2 Sensors and electronic systems Electronic manufacturing services 103.4 146.5 Secure power and industrial 131.2 182.3 92.2 139.2 Operating profit1 Continuing operations Electronic components Sensors and electronic systems Electronic manufacturing services Secure power and industrial 584.3 544.9 7.3 0.8 6.0 12.9 27.0 10.0 10.0 4.1 13.6 37.7 Profit before tax and exceptional items Headline earnings per share Cash generated from operations 21.1 9.2p 46.2 33.3 15.5p 42.9 1 Throughout this review operating profit for 2008 is stated before exceptional items. There were no exceptional items in 2007. Revenue for 2008 was £584.3 million compared with £544.9 million in 2007. The increase was mainly due to favourable exchange rate movements of approximately £39 million in relation to subsidiaries based in the USA and mainland Europe. The acquisition of New Chapel Electronics and Semelab during 2008 also contributed to top line growth. However, after adjusting for these factors, there was an underlying reduction in revenue of 1.7 per cent, with falls in the Electronic components and Sensors and electronic systems operations offset by good performances from Secure power and industrial and Electronic manufacturing services. Operating profit for 2008 was down by £10.7 million at £27.0 million. This decline was the result of a downturn in volumes, especially in the automotive market, consequent pressure on margins and ongoing restructuring costs incurred to reduce the cost base in line with reduced activity levels. There was a marginal exchange rate benefit to operating profits, 12 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:30 Page 13 Our safety critical electronic systems continue to prove themselves in the most extreme conditions. Our manufacturing and development facilities in Europe and the US provide precision components and electronic modules which meet the high reliability standards required in the avionics industry. Using established thick and thin film technologies, we are increasing the number of specific product applications we can offer to leading civil aircraft manufacturers. Our microcircuits engineering team in the UK is working alongside Aero Engine Controls, a joint venture between Rolls Royce and Goodrich, to supply multi chip module technology for the Airbus A380 and the Boeing 787 Dreamliner. We are working on Aero Engine Controls’ Profit Through Partnership continuous improvement programme to develop and maintain our status as a valued supplier. 13 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:30 Page 14 Business review continued The strategic review has provided clarity in terms of the market areas which we believe represent the greatest opportunities for the Group to deliver revenue and profit growth. We will continue to invest in developing new products and technologies to address these opportunities. Electronic components Revenue Operating profit Capital employed 2008 £million 2007 £million 145.2 7.3 134.4 131.2 10.0 99.4 Return on capital employed 5% 10% Number of employees 2,642 2,707 The focus of the Electronic components division is on delivering highly engineered, bespoke components. These are custom designed for specific customer applications by our global network of application sales engineers who support our customers’ own design centres. The components businesses already have strong market positions in a number of product segments including fixed and variable resistors, and the addition of Semelab’s product range broadens TT electronics’ offering considerably. The acquisition represents an excellent addition to our electronic component activities, and we will continue to invest in new product development in such growth segments as visible optical, power semiconductors and radio frequency semiconductors. During 2008, operating profit in the division fell from £10.0 million to £7.3 million due to difficult trading conditions in all markets, especially the automotive market, and additional costs being incurred as new products came on stream. During the year a number of steps were taken to adjust the cost base including moving four manufacturing lines off-shore from the UK and reducing headcount. Two new senior appointments were made during the year to lead the US operations and bring greater focus to the European sales structure, which is being reorganised to allow us to better serve our customers across a number of different Group companies. The division’s existing businesses, together with the Group’s interconnection business (previously included in the Secure power and industrial division), have been reorganised from 1 January 2009 to form the new Components division. This division will continue to refine its product portfolio placing greater emphasis on niche solutions targeted at higher growth sectors, including the medical and defence markets. Sensors and electronic systems Revenue Operating profit Capital employed 2008 £million 2007 £million 189.2 0.8 127.8 182.3 10.0 105.1 Return on capital employed 1% 10% Number of employees 2,216 2,429 This division consisted of two distinct areas of operation – automotive sensors and automotive electronic systems. Together they recorded a profit of £0.8 million in 2008 compared with a profit of £10.0 million in 2007, the reduction being due to a sharp decrease in volumes, particularly towards the end of the year, and a deterioration in margins. Automotive sensor technologies include products to monitor pedal position, engine and wheel speed, temperature and pressure, and chassis position. These products are sold primarily into the German original equipment market and are produced at our facilities in the UK and Germany, with an increasing proportion being manufactured in lower cost locations in Eastern Europe and China. The performance of the business was affected in the first half of the year by poor underlying demand from US automotive manufacturers and industrial action at a parts supplier. Demand in the second half of the year declined further in the US and in Europe with a particularly sharp reduction in demand in the fourth quarter, as all of our customers reduced their manufacturing output. In addition, deteriorating margins in poorly performing segments, such as the increasingly commoditised pedal sector, and the high cost of operations in Germany adversely affected performance. A major restructuring is underway to focus on core sensor expertise, to broaden market exposure beyond automotive and to further re-align the European cost base. The proposed closure of the AB Electronic facility in Romford, announced in October, is underway and is due to be completed by 30 June 2009. During 2008, seven production lines were transferred off-shore with a further 13 lines moving to lower cost regions in the current year. Steps were taken in 2008 to reduce our cost base in Germany including the use of short-time working. In addition, we are in the process of reducing the headcount at our facility in Germany by approximately 225. It is these businesses which, since January 2009, have constituted the new Sensors division. The automotive electronic systems business includes climate control panels and infotainment modules, largely destined for the European and North American automotive industry. The business made a substantial operating loss during 2008 as markets were adversely affected by declining volumes and 14 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:30 Page 15 Our connectors and interconnection systems operate in harsh environments where high performance and reliability are mandatory. Strong partnerships with the world's leading defence companies, combined with specialist technical engineering skills, ensure that we remain a leader in the growing defence sector. 2008 saw us consolidate technical expertise and experience and, with the acquisitions of New Chapel Electronics and Semelab, we are able to offer a broader range of applications and skills to our customers. Our growing US interconnection facility supports many of the US land based military OEMs and was awarded several contracts during the year to provide connectors for the US military totalling over $90m. Our specialist high power connectors enable various military vehicles to restart tanks and armoured vehicles when their batteries have failed. 15 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:30 Page 16 Business review continued by increasing price pressure from low cost competitors. The closure of the AB Automotive climate control facility in Cardiff was announced in July 2008. This is progressing according to schedule and should be complete in the first half of 2009. The decision has now been taken to withdraw from this business as quickly as possible. This will include the closure of the AB Automotive sites in Brazil and China. In future, this business will be reported as part of the General Industrial division. Electronic manufacturing services Revenue Operating profit Capital employed Return on capital employed 2008 £million 2007 £million 103.4 6.0 34.7 17% 92.2 4.1 32.4 13% Number of employees 1,343 1,070 TT electronics’ global electronic manufacturing services operations are based in the UK, USA, China and Malaysia. These specialise in providing high quality manufacturing support for customers operating in the defence, aerospace, telecom and premium industrial sectors. The Group offers broad capabilities from board assembly to full systems integration, design for manufacturing and logistics support. It has a substantial design engineering team and an international purchasing office based in China. The Group’s strategy is to leverage its global footprint to become an integral part of its customers’ manufacturing solutions, with our western manufacturing bases supporting lower volume, more specialist production, and the low cost Far East manufacturing capabilities targeted to those contracts with higher volume. In addition, our operation in China has established a local sales team with the objective of winning business in the large domestic market. The operations in the UK and China had a very successful first half year. Trading was more difficult in the second half with the completion of some large contracts in the UK. Overall, the business achieved a good improvement in operating profit from £4.1 million in 2007 to £6.0 million in 2008, together with an increase in margins. During 2008 the businesses were further integrated with the UK, US, China and Malaysian sites brought under a new divisional director. The operations continue to work closely on building customer relations and promoting the division’s global presence. The cost base was adjusted during the year and further reductions are planned for 2009. We will continue to monitor developments in the marketplace and act as necessary. From January 2009 these businesses will be managed and reported as the Integrated Manufacturing Services division. This change of name reflects the division’s delivery of integrated supply chain solutions to our customers, focused on higher value-added services for lower volume, complex build and assembly electronic products. Secure power and industrial Revenue Operating profit Capital employed 2008 £million 2007 £million 146.5 12.9 54.0 139.2 13.6 40.1 Return on capital employed 24% 34% Number of employees 1,391 1,340 The Secure Power business achieved an increase in profits due to good performances at both Dale and Ottomotores, assisted by some foreign exchange benefit arising from the strengthening US dollar for the Mexican business. The other businesses, notably AEI Compounds and W T Henley, also made satisfactory contributions. The overall reduction in the segment’s profits from £13.6 million to £12.9 million was mainly due to the connectors business which had achieved an exceptional level of profit in 2007 due to urgent military orders. TT electronics operates in the secure power market through Ottomotores in Mexico and Dale Power Solutions in the UK. Both companies provide secure power solutions for customers’ critical power needs in selected markets worldwide. Ottomotores manufactures generator sets and distributes uninterruptible power supplies. It is the market leader in Mexico for generator sets and recorded underlying export growth of 22 per cent from the supply of standby generating sets to key markets in the Middle East and Latin America. A new factory was opened during the year in Mexico City. This facility will provide enhanced production capabilities and satisfy the increased demand for acoustic canopies and enclosures. Dale Power Solutions also provides generator sets and uninterruptible power supplies. It has continued to expand both in the UK and in key emerging markets in the Middle East and North Africa. Projects for the supply of high-reliability, mission- critical power generation equipment for the petrochemical industry in Algeria and uninterruptible power supply equipment for the United Arab Emirates’ electricity grid in Dubai were successfully delivered during the year. From January 2009 these businesses have formed the new Secure Power division with a dedicated divisional Chief Executive to focus on further development. The interconnection business, which since January 2009 has formed part of the new Components division, operates from two facilities in the UK and one facility in the US. In addition, it is taking advantage of the Group’s low cost manufacturing footprint in Mexico, China and Malaysia. 16 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 17 Our advances in medical technology improve the reliability of equipment which helps to save lives. We are working with companies at the forefront of medical science developing applications for use in both hospitals and the growing community- and home-based healthcare markets. Our product applications include precision control of scanning equipment, high voltage solutions for defibrillator charge control, patient monitoring equipment, potentiometers for diagnostic equipment and advanced blood analysis systems. Our electronic components facility in California has developed technology to provide a more precise diagnosis during CAT and MRI scanning procedures. Our sensors are used to control the scanner active beam area, enabling medical staff to make more informed treatment decisions. 17 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 18 Business review continued The business specialises in the manufacture of specialist connectors for harsh environments and interconnection systems for use by the defence, aerospace and traction markets. It supplies customers on a global basis and works with them in the design of interconnection systems. The integration of New Chapel Electronics into this business has gone well and is nearing completion. New Chapel Electronics operates in the military and civilian aerospace market. The facility at Smithfield, North Carolina, has continued to expand from its original business of connector assembly to providing interconnection systems to the US military. Rail infrastructure projects continue to be a focus for the UK connector factory in Wales, having secured several contracts in 2008 for the supply of connectors and harnessing systems for new trains being built for London Underground. The remaining businesses in the former Secure power and industrial division include businesses involved in the manufacture of electrical fusegear, specialist compounds and fine wire. These businesses, together with the automotive electronic systems business (covered under the Sensors and electronic systems division above), form the core of the new General Industrial division. Restructuring Exceptional costs were incurred during 2008 in respect of the closure of the AB Automotive climate control facility in Cardiff and the AB Electronic facility at Romford. AB Automotive Electronics Ltd AB Electronic Ltd 2008 £million 2.7 1.1 3.8 Dividends and earnings per share Earnings per share before exceptional items were 9.2 pence (2007: 15.5 pence). Basic earnings per share were 7.5 pence (2007: 15.5 pence). As announced in January 2009, the Board has set a dividend policy to maintain cover of at least two times underlying earnings per share and progressively increase dividends from this base. For the year ending 31 December 2008, the Board has not recommended a final dividend. An interim dividend of 3.69 pence per share was paid in October 2008, making the total dividend for the year 3.69 pence per share (2007: 10.05 pence). Taxation The overall rate of tax is 33 per cent (2007: 28 per cent). The underlying rate is 32 per cent before exceptional costs. Deductions arising from cash contributions to the pension funds and the exceptional costs at AB Automotive Electronics and AB Electronic offset taxable profits generated elsewhere within the UK group. The increase in the rate of tax results from changes in the overall mix of profits across the Group and, in particular, the reduced level of operating profits generated by the sensor businesses in Germany and a greater proportion of profits earned in the US and Mexico. Cash flow, borrowings and facilities 2008 £million 2007 £million Cash generated from operations Capital expenditure Development expenditure Net debt 46.2 21.9 10.9 113.2 Stock turn Debtor days Creditor days 4.1 58 50 42.9 29.4 10.1 75.0 4.7 47 46 Cash generated from operations increased by £3.3 million due to a lower level of special contribution towards the pension deficit. Operating profits were lower and there was a net outflow from working capital, mainly due to inventory increases of £6.6 million. A key target for 2009 is a sustained reduction in working capital. Capital expenditure of £21.9 million was lower than depreciation by £1.5 million. Acquisitions totalled £13.9 million, relating to the purchase of New Chapel Electronics in April 2008 and Semelab in August 2008. Net debt was £113.2 million at 31 December 2008 (2007: £75.0 million), the increase reflecting the acquisitions described above and the adverse impact of £22.7 million of changes in exchange rates on dollar denominated borrowings. Gearing is calculated at 53 per cent compared with 41per cent in 2007. The Group had total banking facilities available of £166.0 million, of which £60.0 million are working capital facilities with a number of major UK and overseas banks which in the ordinary course are periodically renewable. The main term loan of £70.0 million is a multi-currency revolving facility with HSBC drawn down in US dollars and extending to 2011. The amount drawn down in dollars is required to be rebalanced to £70.0 million at the prevailing rate in June 2009 and periodically thereafter and forward contracts have been taken towards covering this position. The financial covenants in the loan agreement restrict gross debt to below three times total earnings before interest, tax, depreciation, amortisation and exceptional items (‘EBITDA before exceptionals’) and require that EBITDA before exceptionals covers gross interest by at least six times. 18 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 19 These loan covenants were satisfied comfortably at 31 December 2008: Gross debt/EBITDA before exceptionals EBITDA before exceptionals/ gross interest Target Actual < 3 > 6 2.0 13.6 Two term loans of £20.4 million and £10.0 million respectively fall due for renewal in December 2009 and September 2009. Preliminary discussions with both banks concerned have been positive. The Directors have reviewed the forecasts for 2009 and the projections for 2010 developed during the recent strategic review, which have been adjusted to take account of the current trading environment. Demand in most of the Group’s end markets has been severely affected by the global economic recession. Recognising this, the Directors have considered a range of different scenarios and the impact of these on the Group’s cash flow, facilities and headroom within its banking covenants. Further, the Directors have assessed the future funding requirements of the Group and compared them with the level of available borrowing facilities. Based on this work, the Directors are satisfied that the Group has adequate resources for the foreseeable future. Pensions The Group operates both defined benefit and defined contribution pension schemes in the UK. Assets of the defined benefit scheme were valued at £283.1 million at 31 December 2008 (2007: £298.2 million) and the fund benefited from the change in investment strategy implemented during 2007 and 2008. Scheme liabilities under International Accounting Standard No 19 (IAS19) were valued by the actuaries at £301.7 million (2007: £315.6 million), giving a deficit of £18.6 million (2007: £17.4 million). The previous funding agreement for the scheme was based on the annual IAS19 deficit with the objective of elimination of this deficit by 2014. The arrangement was susceptible to undue volatility in cash payments by the Group and could have led to a substantial increase in contributions as 2014 approached. A revised agreement has now been reached with the Trustee for fixed contributions extending out to 2016 based on the last actuarial deficit at April 2007. Contributions of £8.7 million in 2007 and £2.2 million in 2008 have already been made and under the new agreement, the Group will make further contributions as follows: £2.2 million in 2009, £3.2 million in 2010, £3.5 million in 2011, subsequently increasing by £0.2 million each year to £4.5 million in 2016. Exposure to risks Financial risks (cid:127) Liquidity The current economic conditions create uncertainty over the availability of bank financing in the present banking climate and consequently there is a risk that the Group may have insufficient resources to meet its financial liabilities as they fall due. The Group addresses this risk by maintaining adequate banking facilities and by continuously monitoring forecast and actual cash flows to ensure that bank covenants and liquidity requirements will be met. The Group regularly discusses its requirements with its principal bankers and it is considered unlikely that the Group will face any significant funding issues in the foreseeable future. (cid:127) Foreign currency The Group’s main foreign exchange exposures are to the effect of the translation of profits, and net assets denominated in overseas currencies into sterling and transactions in foreign currencies. The policy of the Group is to use hedges to reduce these risks. These hedges are achieved through forward currency contracts and currency borrowings. Interest cost (cid:127) The interest rate is capped on $50.0 million of total borrowings until February 2010. Short-term interest rate fixes are also used to reduce volatility in interest costs. Commercial and other risks The current global financial crisis presents significant challenges to the Group, principally related to the level of market demand. The Group’s largest market sector is automotive where, directly and indirectly, it serves automotive OEM customers. This exposes the Group to several risks including significantly decreasing manufacturing volumes, the potential for material quality claims and financial exposure should such customers be unable to continue trading in their current form. It is possible that one of the larger US automotive manufacturers may seek protection from its creditors which in turn could result in some of its suppliers seeking similar creditor protection. In this event, the Group may not recover all of the amounts owed to it. In addition, the Group is exposed to risks of product liability, credit risk, reliance on customers’ commitments and other usual commercial risks in all of its businesses. The Group has a wide portfolio of products and operates in a number of market sectors. 19 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 20 Business review continued There are established control procedures in place to manage such risks, including production quality control, management and financial control procedures and insurance with reliable insurers, which have been put in place taking into account the risk involved and the marketplace in which the exposure arises. Outlook Trading conditions remained very difficult in the last quarter of 2008 and we have experienced a further significant weakening in customer demand in January and February with limited forward visibility of market demand. The outlook for most of our major markets is both challenging and uncertain as the unprecedented global economic recession continues to severely impact demand. The outlook for automotive vehicle production is difficult to predict with any confidence and our Sensors division has seen a further rapid decline in demand in the first two months of 2009 as manufacturers reduce inventories and re-align output with consumer demand. The automotive element of the Components division has been similarly affected. We are seeing a significant slowdown in our IMS business as the reduction in manufacturing demand impacts the supply chain. The majority of our other businesses, including Secure Power, are also seeing slower demand. The traction, defence and aerospace markets are proving more resilient and we continue to see solid performance from our Components division in these areas, including our interconnection business and Semelab. In January we identified 1,295 positions to be eliminated in 2008 and 2009. We have accelerated these actions with more than 1,100 jobs eliminated by the end of February and a further 225 underway in Germany. We are continuing to review our cost base in light of the deteriorating market conditions and we now expect total headcount reductions to be higher with increased benefit in the second half of the year. In addition, we have implemented short-time working and temporary shutdowns across a number of sites and an extensive pay freeze is in place. All of these actions are designed to help limit the impact of the current difficult trading conditions. Our balance sheet is sound. Based on management expectations adjusted to take account of the present difficult trading environment, we continue to trade comfortably within our banking facilities with reasonable headroom within our covenants. We continue to generate strong cash flows with an ongoing focus on reducing working capital. Trading conditions in the first two months of the year have become significantly more difficult. Accordingly, trading for the full year to 31 December 2009, and the medium term, is likely to fall materially below management’s previous expectations. The Board is confident that progress against our strategic plan and actions taken to adjust the cost base will provide long term benefits and enhance performance as markets recover. Geraint Anderson Group Chief Executive Shatish D Dasani Group Finance Director 13 March 2009 20 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 21 Directors and Company Secretary 1 John W Newman (63) Executive Chairman Chairman of the Nominations Committee Chairman of the Corporate Governance Committee 5 John C Shakeshaft (54) Independent Non-executive Director Member of the Audit, Remuneration, Nominations and Corporate Governance Committees Appointed to the Board in 2007. Currently chairman of Ludgate Environmental Fund Limited and of Valiance Special Opportunities Fund of Funds and Co-Investment Fund; investment director, Corestone, AG and a director of Tele2 AB, Questair Technologies Inc and TEB, NV. Also an external member of the Audit Committee of Cambridge University. Previously a corporate financier with ABN AMRO, Lazard and Barings. 6 Sean M Watson (60) Independent Non-executive Director Member of the Remuneration, Nominations and Corporate and Social Responsibility Committees Appointed to the Board in 2007. A solicitor and senior corporate finance partner at CMS Cameron McKenna LLP and a non-executive Director of Informa plc. 7 Wendy J Sharp ACA (43) Group Company Secretary Member of the Corporate Governance Committee Appointed to the Board in 1986. A Chartered Accountant who is also Chairman of the Newship group of companies. 2 Geraint Anderson (49) Group Chief Executive Chairman of the Corporate and Social Responsibility Committee Appointed to the Board on 4 August 2008. Previously Vice President and General Manager of the Worldwide Service Provider Organisation for Linksys, a Division of Cisco Systems, Inc. 3 Shatish D Dasani (47) Group Finance Director Member of the Corporate Governance Committee Appointed to the Board on 1 August 2008. A Chartered Accountant, previously with De La Rue plc, Lafarge SA and Blue Circle Industries plc. 4 David S Crowther (63) Senior Independent Non-executive Director Chairman of the Audit and Remuneration Committees and member of the Nominations Committee Appointed to the Board in 2005. A Chartered Accountant who was a senior partner with PricewaterhouseCoopers LLP. Member of the Professional Oversight Board, a part of the Financial Reporting Council, and a non- executive Board Member and chairman of the Audit Committee of the Treasury Solicitor's Department. 1 2 3 4 5 6 7 21 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 22 Directors’ report The Directors present their report and the audited financial statements for the year ended 31 December 2008. Principal activities and business review Financial risk management objectives and policies These are set out under Exposure to risks in the Business review on page 19. TT electronics plc is the parent company of a Group whose principal activities during the year were the design, manufacture and sale of electronic and electrical components for the automotive, telecom and computer, aerospace, defence and other industrial markets. Further details of the Group’s activities and future plans are set out in the Chairman's statement and the Business review on pages 2 and 10 to 20 of this Annual Report and these should be read as part of the Directors’ report. The principal operating subsidiaries are listed on page 75. Results and dividends The Group’s profit on ordinary activities before taxation and exceptional items was £21.1 million (2007: £33.3 million) and after taxation and exceptional items was £11.6 million (2007: £24.0 million). The audited financial statements of the Group and the Company are set out on pages 37 to 75. Further details of the Group’s activities are set out in the Business review on pages 10 to 20. The Directors are not recommending a final dividend for the year ended 31 December 2008 (2007: 6.36p). An interim dividend of 3.69p per share was paid on 23 October 2008, making the total dividend for the year 3.69p per share (2007: 10.05p). Significant agreements relating to change of control The Group has a number of borrowing facilities provided by various banking groups. Some of these facility agreements include change of control provisions which, in the event of a change in ownership of the Company, could result in renegotiation or withdrawal of these facilities. There are a number of other agreements that may be renegotiated upon a change of control of the Company. None is considered to be significant in terms of their potential impact on the business of the Group as a whole. Supplier payments policy The Group’s policy in relation to the payment of its suppliers is to agree its terms of payment with each supplier when negotiating the terms of each business transaction. It is Group practice to abide by the agreed terms of payment unless the supplier defaults under its own obligations. Trade creditors at the year end amount to 50 days of average supplies for the year (2007: 46 days). Corporate governance The application of the principles and provisions of the Combined Code is set out in the Directors’ report on corporate governance. Acquisitions Directors On 2 April 2008 the Group announced the acquisition of New Chapel Electronics Limited. Further details are set out in note 26 to the consolidated financial statements. On 21 August 2008 the Group announced that it had acquired assets comprising the majority of the business of Semelab Limited. Further details are set out in note 26 to the consolidated financial statements. Fixed assets No professional valuation of land and buildings has been carried out during the year, but in the opinion of the Directors the market value, on an existing use basis, is considered to be not materially different from net book value. Research and development The Group carries out research and development in order to develop new products and processes and to substantially improve existing products and processes. The Directors are listed on page 21 with brief biographical notes. All the Directors held office throughout the year, with the exception of S D Dasani and G Anderson who were appointed on 1 and 4 August 2008 respectively. N A Rodgers resigned on 11 June 2008. R W Weaver and D E A Crowe retired on 1 August 2008 and 3 September 2008 respectively. J W Armstrong retired on 5 January 2009. At the forthcoming Annual General Meeting J W Newman retires and, being eligible, offers himself for re-election. G Anderson and S D Dasani, having been appointed since the previous Annual General Meeting, retire in accordance with the Articles of Association and, being eligible, offer themselves for re-election. 22 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 23 Rules for the appointment and replacement of Directors are set out in the Company’s Articles of Association. Directors are appointed by the Board on the recommendation of the Nominations Committee. Directors may also be appointed or removed by the Company by ordinary resolution at a general meeting of holders of ordinary shares. The office of a Director shall be vacated if his resignation is requested by all the other Directors and all the other Directors are not less than three in number. The Corporate governance report sets out further details of the requirements for re-election of Directors on page 26. In addition, further details of the activities of the Nominations Committee are set out on page 28. Other than an extended notice period of 18 months which applies to G Anderson’s service contract in the event of a bid approach on or prior to 3 August 2009 which is successful, there are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment that occurs as a result of a takeover bid. Further details of the executive Directors’ service contracts can be found in the Directors’ remuneration report on pages 31 to 36. The Group maintains Directors’ and Officers’liability insurance. The Directors of the Company also benefit from a qualifying third party indemnity provision in accordance with section 234 of the Companies Act 2006 and the Company’s Articles of Association. The Company has provided a qualifying pension scheme indemnity within the meaning of section 235 of the Companies Act 2006 to directors of associated companies. Directors’ interests The Directors of the Company at 31 December 2008 held interests in the following numbers of the Company’s ordinary shares of 25p each on 1 January 2008, 31 December 2008 and 9 March 2009: 9 March 2009 Ordinary shares 1 Jan 2008 (or date of 31 Dec 2008 appointment if later) Ordinary shares Ordinary shares 10,848,627 90,000 150,000 n/a 40,000 15,479 62,950 10,848,627 90,000 150,000 70,582 40,000 15,479 62,950 9,598,627 – 30,000 39,582 20,000 7,219 7,700 J W Newman G Anderson(1) S D Dasani(2) J W Armstrong(3) D S Crowther J C Shakeshaft S M Watson (1) appointed 4 August 2008 (2) appointed 1 August 2008 (3) retired 5 January 2009 The interests of the Directors in the Company’s share options and Long Term Incentive Plan are shown in the Directors’ remuneration report on pages 31 to 36. Substantial shareholdings At 9 March 2009 the Company had been notified of the following voting rights attaching to TT electronics plc shares in accordance with the Disclosure and Transparency Rules: Tweedy, Browne Company LLC J W Newman(1) J O Hambro Capital Management Limited Mondrian Investment Partners Limited Barclays Global Investors Number 15,359,648 9,452,010 8,298,662 7,783,343 5,163,416 % 9.9 6.1 5.3 5.0 3.3 (1) At the time of the last disclosure made by J W Newman in his capacity as a substantial shareholder under the Disclosure and Transparency Rules, 9,432,437 TT electronics shares in which J W Newman had voting rights were held by Newship Investments Limited. (Newship Investments Limited is a wholly-owned subsidiary of Newship Industries Limited, in which J W Newman holds a controlling interest). So far as has been ascertained no other person or corporation holds or is beneficially interested in any substantial part of the share capital of the Company. Share capital The Company’s issued share capital comprises a single class of share capital which is divided into ordinary shares of 25p each. The share capital during the year and the number of ordinary shares reserved for issue are shown in note 15 to the consolidated financial statements. The rights and obligations attaching to the Company’s ordinary shares are set out in the Company’s Articles of Association, copies of which can be obtained from Companies House in the United Kingdom or by writing to the Company Secretary. Subject to applicable statutes, shares may be issued with such rights and restrictions as the Company may by ordinary resolution decide, or (if there is no such resolution or so far as it does not make specific provision) as the Board may decide. Holders of ordinary shares are entitled to speak at general meetings of the Company, to appoint one or more proxies and, if they are corporations, to appoint corporate representatives and to exercise voting rights. Holders of ordinary shares may also receive a dividend and on a liquidation may share in the assets of the Company. In addition, holders of ordinary shares are entitled to receive the Company’s Annual Report and accounts. Subject to meeting certain thresholds, holders of ordinary shares may require a general meeting of the Company to be held or the proposal of resolutions at Annual General Meetings. 23 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 24 Directors’ report continued Authority to Allot Shares and Disapply Statutory Pre-Emption Rights incapable of managing their affairs; or (iv) is in favour of not more than four transferees. The Directors will be seeking to renew their authorities to allot unissued shares and to disapply statutory pre-emption rights at the Annual General Meeting to be held on 13 May 2009. Further details are set out in the papers containing details of the Annual General Meeting which accompany this document. Purchase of Own Shares At the Annual General Meeting held on 14 May 2008, the Company was given authority to purchase up to 15,495,279 of its ordinary shares until the date of its next Annual General Meeting. No purchases were made during the year. The Directors will be seeking a new authority for the Company to purchase its ordinary shares at the forthcoming Annual General Meeting. Further details are set out in the papers containing details of the Annual General Meeting which accompany this document. Voting Rights and Restrictions on Transfer of Shares On a show of hands at a general meeting of the Company every holder of ordinary shares present in person or by proxy and entitled to vote has one vote and on a poll every member present in person or by proxy and entitled to vote has one vote for every ordinary share held. Further details regarding voting at the Annual General Meeting can be found in the Notice of the Annual General Meeting which accompanies this document. None of the ordinary shares carry any special rights with regard to control of the Company. Electronic and paper proxy appointments and voting instructions must be received by the Company’s Registrars not later than 48 hours before a general meeting. A shareholder can lose his entitlement to vote at a general meeting where that shareholder has been served with a disclosure notice and has failed to provide the Company with information concerning interests in those shares. The Directors may refuse to register a transfer of a certificated share which is not fully paid, provided that the refusal does not prevent dealings in shares in the Company from taking place on an open and proper basis. The Directors may also refuse to register a transfer of a certificated share unless the instrument of transfer: (i) is lodged, duly stamped (if stampable), at the registered office of the Company or any other place decided by the Directors accompanied by the certificate for the share to which it relates and/or such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer; (ii) is in respect of only one class of shares; (iii) is in favour of a person who is not a minor, bankrupt or a person in respect of whom an order has been made on the ground that such person is suffering from a mental disorder or is otherwise Transfers of uncertificated shares must be carried out using CREST and the Directors can refuse to register a transfer of an uncertificated share in accordance with the regulations governing the operation of CREST. The Directors may decide to suspend the registration of transfers, for up to 30 days a year, by closing the register of shareholders. The Directors cannot suspend the registration of transfers of any uncertificated shares without obtaining consent from CREST. There are no other restrictions on the transfer of ordinary shares in the Company except: (cid:127) certain restrictions may from time to time be imposed by laws and regulations (for example insider trading laws); (cid:127) pursuant to the Company’s share dealing code whereby the Directors and certain employees of the Group require approval to deal in the Company’s shares; and (cid:127) where a shareholder with at least a 0.25 per cent interest in the Company’s certificated shares has been served with a disclosure notice and has failed to provide the Company with information concerning interests in those shares. The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of ordinary shares or on voting rights. Articles of Association The Company’s Articles of Association may only be amended by special resolution approved at a general meeting of the shareholders. Annual General Meeting The Annual General Meeting of the Company will be held on Wednesday 13 May 2009 at the Ironmongers’ Hall, Shaftesbury Place, Barbican, London EC2Y 8AA at 12 noon. The Notice of the Company’s Annual General Meeting accompanies this document. Auditors Grant Thornton UK LLP have expressed their willingness to continue in office as Auditors and a resolution will be proposed to reappoint them at the Annual General Meeting. The Auditors’ responsibilities are set out on pages 37 and 66 and should be read in conjunction with those of the Directors as set out below. 24 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 25 Statement of Directors’ responsibilities in relation to financial statements The Directors are responsible for the preparation of financial statements for each financial year in accordance with applicable law and regulations. The Directors are required to prepare the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The Directors have elected to prepare the Company’s financial statements under UK Generally Accepted Accounting Practice (UK GAAP). The financial statements are required by law to give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group. The Directors, in preparing the financial statements, are required to: (cid:127) use suitable accounting policies and to apply them consistently; (cid:127) make reasonable and prudent judgements and estimates; (cid:127) state that the consolidated financial statements comply with IFRS as adopted by the European Union and that the Company financial statements comply with UK GAAP subject to any departures disclosed and explained in the financial statements The Directors have responsibility for: (cid:127) ensuring that the Company and the Group prepare and maintain accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group at that time and which enable them to ensure that the financial statements comply with the Companies Act 1985 and Article 4 of the IAS Regulation; taking such steps as are reasonably open to them to safeguard the assets of the Company and the Group and to prevent and detect fraud and other irregularities; the maintenance and integrity of the financial information on the Company’s website (cid:127) (cid:127) Going concern The Directors have reviewed the forecasts for 2009 and the projections for 2010 developed during the recent strategic review, which have been adjusted to take account of the current trading environment. Demand in most of the Group’s end markets has been severely affected by the global economic recession. Recognising this, the Directors have considered a range of different scenarios and the impact of these on the Group’s cash flow, facilities and headroom within its banking covenants. Further, the Directors have assessed the future funding requirements of the Group and compared them with the level of available borrowing facilities. Based on this work, the Directors are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements. To the best of each Director’s knowledge and belief, there is no audit information relevant to the preparation of the Auditors’ Report of which the Auditors are unaware and each Director has taken all the steps which might be expected to be aware of such relevant information and to establish that the Auditors are also aware of that information. By order of the Board: W J Sharp Company Secretary 13 March 2009 Responsibility statement We confirm that to the best of our knowledge: (cid:127) the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; and (cid:127) the business review includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. G Anderson Group Chief Executive S D Dasani Group Finance Director 13 March 2009 25 TT electronics plc Annual Report 2008 Results 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 26 Directors’ report on corporate governance The Company is committed to achieving and maintaining high standards of corporate governance. The principles of good corporate governance set out in Section 1 of the 2006 Combined Code (‘Code’) contained in the Listing Rules of the Financial Services Authority, have been complied with throughout the year ended 31 December 2008 and this compliance has continued through to the date of this report. Details and explanations of the application of the principles of corporate governance are set out below. The Board The Board’s main roles are to provide leadership to the management of the Group, determine the Group’s strategy and ensure that the agreed strategy is implemented. The Board has also reserved certain specific matters to itself for decision. These include financial policy, acquisition and disposal policy, and the approval of major capital expenditure projects. The Board appoints its members and those of its Committees, and reviews recommendations of the Board Committees and the financial performance and operation of each of the Group businesses. It regularly reviews the identification, evaluation and management of the principal risks faced by the Group and the effectiveness of the Group’s system of internal control. During 2008 the Board comprised up to four executive Directors and up to four non-executive Directors of whom three were considered independent. Of the executive Directors, J W Newman and J W Armstrong served throughout the year. N A Rodgers resigned on 11 June 2008 and R W Weaver retired on 1 August 2008. S D Dasani and G Anderson were appointed on 1 and 4 August 2008 respectively. Since the year end, J W Armstrong has also retired. Of the non-executive Directors, D S Crowther, J C Shakeshaft and S M Watson served throughout the year. D S Crowther is the senior non-executive Director. D E A Crowe retired on 3 September 2008. S M Watson is a senior corporate partner at CMS Cameron McKenna LLP, one of a number of law firms which advise the Company. Under provision A.3.1 of the Combined Code, a non- executive director cannot be considered independent if he has, or has had within the last three years, a material business relationship with the Company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the Company. Before his appointment as a non-executive Director, the Company, in consultation with Riskmetrics and major shareholders, undertook an assessment to ascertain whether S M Watson met this and the other criteria for independence set out in the Combined Code. It was concluded that he did as the value of the fees charged by CMS Cameron McKenna LLP to the Company, relative to each of their respective turnovers, was not significant enough to be considered material. This continues to be the position, the Company having paid CMS Cameron McKenna circa £67,000 during 2008. Accordingly, all current non-executive Directors are considered to be independent as defined by the Combined Code. During the year there were 11 Board meetings on scheduled dates for which full notice was given. All Directors attended each Board meeting other than D E A Crowe and S M Watson who were each unable to attend one meeting. Directors’ biographies including the Committees on which they serve and chair are shown on page 21. Each Director will offer himself for re-election every three years. The Executive Chairman and Group Chief Executive The Company has an executive Chairman and a Group Chief Executive, and their respective areas of responsibility are defined. On 21January 2009, it was announced that the Chairman planned to become non-executive later in the year. The Chairman is responsible for the leadership of the Board ensuring that all Directors receive information on financial, business and corporate matters to enable them to participate effectively in Board decisions. He currently takes an active role in strategic planning and banking relationships and is also directly responsible, through the appropriate senior executives, for the functions of treasury, pensions and legal matters. The Group Chief Executive is responsible for the operations of the Group, formulation of strategy and the maximisation of profits in the long-term. He is also responsible for ensuring that the Group’s businesses are managed in line with strategy and approved business plans, and comply with applicable legislation and Group policy. Other areas of responsibility include investor relations and risk management. Under the provisions of the Code, the Chairman should on appointment be considered independent. However, J W Newman was appointed executive Chairman in 1995 before the Company was bound by any provision as to the independence of its Chairman. 26 TT electronics plc Annual Report 2008 Governance 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 27 Report on corporate governance continued Board procedures and performance evaluation All Directors have access to the advice and services of the Company Secretary and are offered training to fulfil their role as Directors, both on appointment and at any subsequent time. There is an agreed procedure for any individual Director to take independent professional advice at the Company’s expense if he considers it necessary. The Company amended its Articles of Association in May 2008 to deal with, amongst other things, the provisions on conflicts of interest in the Companies Act 2006 which came into force in October 2008. Following this, the Company has put in place procedures for the disclosure and review of any conflicts, or potential conflicts, of interest which the Directors may have and for the authorisation of such conflict matters by the Board. In deciding whether to authorise a conflict or potential conflict the Directors must have regard to their general duties under the Companies Act 2006. The authorisation of any conflict matter, and the terms of authorisation, may be reviewed at any time. During the year the Board conducted an evaluation of its performance covering, among other matters: (cid:127) maintaining and improving its performance; (cid:127) developing the Group’s strategy; (cid:127) maintaining the optimum mix of skills and knowledge among the Directors; (cid:127) ensuring robust and effective risk management; and (cid:127) considering full and timely information on financial and other performance. In addition, each of the principal Committees carried out an assessment of its own performance during the year. The performance of individual Directors is also reviewed annually and includes discussions between the Chairman and senior non-executive Director on their respective performance. Following these detailed reviews it was considered that the Board and its Committees were performing satisfactorily. Review of principal risks and internal controls The Directors have overall responsibility for the Group’s systems of internal control and for reviewing their effectiveness. These systems have been in place for the full financial year. The Group is committed to a policy of maintaining strict internal control over all of its activities. Controls are designed to provide the Directors with reasonable assurance that assets are safeguarded, transactions are properly authorised, and that material errors and irregularities are either prevented or are discovered on a timely basis. The systems of control are reviewed regularly and improved where necessary to meet the Group’s requirements. Business risk evaluation takes place at Group level as part of the annual budget preparation. Having identified risks, each operating company then monitors and reviews them regularly. The Group Chief Executive oversees maintenance of the Group’s Register of Principal Risks. Members of staff who are involved in the Group’s risk management function report directly to the Group Chief Executive at a quarterly meeting. The principal risks of the Group are subject to review by the Audit Committee and the Board. Further details of the Group’s exposure to risk are set out in the Business review on pages 10 to 20. The risk management procedures and systems of internal control are designed to identify and assess the significant risks which the Group faces and to manage them appropriately. However, such systems can only provide reasonable and not absolute protection against material mis-statement or loss. Principal features of the system of internal control (cid:127) The Directors meet as a Board at least every other month to monitor financial performance, give direction on significant strategic and financial issues and review the principal risks of the Group. (cid:127) The Group Chief Executive chairs a Committee (‘Operating Board’) which meets on a regular basis and reviews the performance of the Group as a whole and oversees the implementation of strategy. (cid:127) Each operating company within the Group operates within the policies, rules and procedures determined by the Directors and communicated through a Group manual. The Directors exercise control over operating companies through divisional senior executives who monitor and oversee the activities, financial performance and controls of each operating company. The directors of operating companies are held accountable for the effectiveness of the implementation and maintenance of controls within their companies. This provides constant and consistent management. (cid:127) The Group has detailed financial planning and reporting systems. Detailed management accounts are prepared monthly by each operating company comparing actual performance with budget. The financial performance of each operating company is subjected to detailed formal review at monthly meetings. One purpose of these reviews is the early identification of potential business risks and agreement on suitable and prompt courses of action. Operating 27 TT electronics plc Annual Report 2008 Governance 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 28 Directors’ report on corporate governance continued companies prepare strategic plans and annual budgets which are reviewed and approved by the divisional senior executives, Group management and the Board. (cid:127) The Group has comprehensive control and approval procedures which are rigorously enforced. There are clear definitions of appropriate authorisation levels. Capital investment and other major items of expenditure are made only after compliance with detailed appraisal procedures and, if above set levels, only with the approval of the executive Directors. (cid:127) Accounting and reporting policies and practices require that the Group’s accounting records are prepared consistently, accurately and in compliance with Group policy and relevant accounting standards. (cid:127) The framework for maintaining control and the adherence to procedures is reviewed by the Group Internal Controls Executive, who reports to the Group Finance Director and the Audit Committee. (cid:127) Certain key functions, including treasury, taxation, pensions, provision of legal advice, risk and insurance are controlled at the Group’s head office and are monitored by the executive Directors. The Directors have reviewed the effectiveness of the systems of risk management and internal control during the year to 31 December 2008 and during the period since then to the date of this report. They have made improvements where necessary. Board Committees The Board has established a number of Committees, each with its own delegated authority defined in terms of reference. These terms are reviewed periodically and the Board receives reports and copies of minutes of Committee meetings. The Board appoints the chairmen of all Board Committees, having received the recommendations of the Nominations Committee. The principal Committees and brief descriptions of their terms of reference (full details of which are available for inspection by shareholders at the Annual General Meeting and on the Group’s website) and duties are as follows: a) Audit Committee During the year, the Audit Committee comprised two of the independent non-executive Directors: J C Shakeshaft and D S Crowther (Chairman) who has recent and relevant financial knowledge, as required by the Code. The Committee’s duties include reviewing and advising the Board on: (cid:127) (cid:127) (cid:127) (cid:127) the integrity of the financial statements; the appointment and remuneration of external auditors; the effectiveness of the Auditors in line with the requirements of the Code; the nature and extent of non-audit services provided by the Auditors to ensure that their independence and objectivity are maintained; (cid:127) changes to accounting policies and procedures, decisions of judgement affecting financial reporting, compliance with accounting standards and with the Companies Act; (cid:127) (cid:127) (cid:127) (cid:127) the Auditors’ assessment of internal audit and other internal controls; the scope, performance and effectiveness of the internal audit and other internal control functions; risk management and any changes to the Register of Principal Risks; and the Company’s written procedures for responding to any allegations made by whistleblowers. In order to fulfil its duties the Audit Committee regularly receives reports on the findings of the Group Internal Controls Executive who is required to attend the Committee's meetings and the Committee reviews internal audit plans and recommendations. During 2008 the Audit Committee met five times and both committee members attended all the meetings. Two of the meetings were also attended by the Auditors without executives of the Company being present. The Committee reviewed the effectiveness of the external auditors during the year and also carried out a self assessment of its performance, based on a questionnaire completed by the members of the Committee. b) Remuneration Committee The Directors’ remuneration report on pages 31 to 36 includes details of the Remuneration Committee and its work. c) Nominations Committee The Nominations Committee generally meets twice a year to make recommendations to the Board regarding the appointment of replacement or additional directors. It comprises the independent non-executive Directors and executive Chairman, who also chairs the Committee. The Committee has an established procedure for recommending Board appointments and for the appointment of members to the Audit and 28 TT electronics plc Annual Report 2008 Governance 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 29 Directors’ report on corporate governance continued Remuneration Committees. In 2008 the Committee met twice. The appointments of both G Anderson and S D Dasani were made on the recommendation of the Committee, following its review of the candidates shortlisted by headhunters. All Committee members attended both meetings, except for J C Shakeshaft who was absent from one meeting. The Committee also carried out an assessment of its performance in 2008. Board and Committee Meeting Attendance 2008 The table below shows the number of meetings held and the attendance of each of the Directors at those meetings. Board Audit Committee Remuneration Committee Nominations Committee 5 n/a n/a n/a n/a n/a n/a n/a 5 5 n/a 7 n/a n/a n/a n/a n/a n/a n/a 7 7 6 2 2 n/a n/a n/a n/a n/a n/a 2 1 2 11 11 4 4 4 7 11 7 11 11 10 Total meetings held J W Newman G Anderson(1) S D Dasani(2) N A Rodgers(3) R W Weaver(4) J W Armstrong(5) D E A Crowe(6) D S Crowther J C Shakeshaft S M Watson (1) appointed 4 August 2008 (2) appointed 1 August 2008 (3) resigned 11 June 2008 (4) retired 1 August 2008 (5) retired 5 January 2009 (6) retired 3 September 2008 Corporate Governance Committee The Corporate Governance Committee is responsible for monitoring the Group’s compliance with good corporate governance. During the year it was chaired by the Corporate Development Director and included the Group Finance Director, one non-executive Director and the Company Secretary. The Committee met twice during 2008. Following J W Armstrong’s retirement, the Chairman has taken over the role of chairing this Committee. The Committee therefore now comprises the Chairman, the Group Finance Director, one non-executive Director and the Company Secretary. benefits the Company in terms of its reputation and ability to conduct business effectively with customers and suppliers. It also helps in the recruitment, motivation and retention of employees at all levels. The Company’s subsidiaries participate in the life of their local communities and make significant efforts to foster good relations with community stakeholders. Ensuring a safe working environment for employees and reducing wasteful consumption are sound business practices as well as being examples of corporate responsibility, and the Company continuously seeks to improve its performance Group-wide. Every company in the Group is encouraged to develop and implement employment policies and remuneration schemes designed so that employees identify with their company’s achievements and their knowledge and skills can best contribute towards its success. The Directors recognise the importance of employee involvement throughout the Group and this is fostered by the development of communications though the normal subsidiary company reporting procedures. The Corporate and Social Responsibility Committee monitors the Group’s performance on these matters and regularly reports to the Board. The Committee is chaired by the Group Chief Executive and also comprises one non-executive Director, the Group Legal Counsel, and up to three senior executives from within the Group. The Committee met three times during 2008 and has had one meeting to date during 2009. The Board recently reviewed the remit of the Committee and decided that its role should be expanded in order to proactively advance social and environmental responsibility within the Group. With this in mind, the Committee, on behalf of the Company, intends to seek membership of the Electronic Industry Citizenship Coalition in 2009. This is an industry body promoting good corporate citizenship practices within the electronics industry. The Committee’s expanded duties include monitoring Group performance, reviewing and advising the Board on: Corporate and Social Responsibility Committee (cid:127) Employment The Group operates worldwide with a diverse workforce. Our managers deal with changing local and transnational regulatory frameworks, as well as running businesses, and must engage constructively with employees, customers, local residents, regulators and other interested third parties. The Company requires its managers and employees to act with integrity and to conduct business to high ethical standards. Being a trusted industrial partner and a responsible member of the community The Group is committed to the fair and equal treatment of all its employees regardless of gender, race, age, religion, disability or sexual orientation. The Group makes significant efforts to ensure that high standards of employee welfare are maintained worldwide in all its operations, irrespective of geography and local market conditions, and intends to seek assurances from suppliers that they too are committed to high standards of employee welfare. 29 TT electronics plc Annual Report 2008 Governance 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 30 Directors’ report on corporate governance continued (cid:127) Health and safety Donations During the year the Group contributed £50,000 (2007: £50,000) for charitable purposes. Employees across the Group regularly fund-raise for charity. There were no political contributions. Communications with shareholders G Anderson and S D Dasani meet institutional investors immediately after publication of the annual and interim results, as well as providing the information needed to maintain an orderly market in the Company’s shares. The Company carries on a regular dialogue with institutional shareholders and analysts. Trading updates and press releases are issued as appropriate and the Company’s brokers provide briefings on shareholder opinion and compile independent feedback from investor meetings. Information offered at the analysts’ meetings together with our financial press releases are available on the Group’s website. The Annual General Meeting is used by the Directors to communicate with both institutional and private investors. Approved by the Board on 13 March 2009 and signed on its behalf by: W J Sharp Company Secretary The Directors must comply with all relevant legislation and codes of practice and are mindful of the importance of health and safety in the Group’s activities. The Group constantly seeks to reduce the incidence of accidents, work-related ill-health, emissions, waste and dangerous occurrences and strives to achieve and maintain safe conditions of work for all employees and sub-contractors. In 2009 the Group will continue to encourage a culture in which employees ensure that they, their colleagues and members of the general public are kept safe from potential incidents and hazards and will also seek to promote the issue of health and safety with its suppliers. (cid:127) Environmental policy The Group strives to meet requirements of all applicable environmental laws and regulations, to seek continuous improvement in environmental performance and to contribute to long-term economic, environmental and social sustainability. The pursuit of recognised environmental management standards, such as ISO 14001 accreditation, is encouraged throughout the Group. Group companies will continue to: (cid:127) seek energy efficient means of manufacture; (cid:127) reduce, where possible, the use of dangerous, volatile or environmentally damaging chemicals; (cid:127) recycle and re-use waste; and (cid:127) dispose of non-reusable waste responsibly. (cid:127) Ethics To meet its business objectives and its wider responsibilities in the communities in which it operates, the Group is committed to the highest standards of business integrity. The Corporate and Social Responsibility Committee establishes standards and monitors compliance in respect of the Group’s business ethics, and takes the lead in communicating these core values to employees and stakeholders. 30 TT electronics plc Annual Report 2008 Governance 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 31 Directors’ remuneration report This report has been prepared in accordance with Schedule 7A of the Companies Act 1985 (‘Act’). A resolution to approve the report will be proposed at the Annual General Meeting on 13 May 2009. It sets out the Company’s policy for Directors’ remuneration, the arrangements for 2008 and proposals for 2009. The Act requires the Auditors to report to the Company’s members on the auditable section of the Directors’ remuneration report and to state whether in their opinion that part of the report has been properly prepared in accordance with the Act. The report has therefore been divided into separate sections for audited and unaudited information. Unaudited information Remuneration Committee The Remuneration Committee comprises the independent non- executive Directors and is chaired by D S Crowther (the senior independent non-executive Director). Its other members are J C Shakeshaft and S M Watson. In 2008 the Committee met seven times and all members of the Committee attended each meeting other than S M Watson who was unable to attend one meeting. During the year the Committee carried out a self assessment of its performance, constitution and terms of reference based on a questionnaire completed by the members of the Committee. The role of the Committee is to recommend to the Board the policy for the remuneration of the executive Directors, Divisional Chief Executives, Divisional Directors and the Company Secretary. This covers salaries and other benefits, pensions, performance related pay and share incentive plans and the terms and conditions of service. The Committee is responsible for appointing external independent consultants to advise on senior executive remuneration matters. This advice was provided during 2008 by Hewitt New Bridge Street (‘HNBS’) and they continue to advise the Remuneration Committee. HNBS provided no other services to the Company during the year. Remuneration policy The objectives of the Group’s remuneration policy are to recruit, retain and motivate senior executives with appropriate expertise to realise the Group’s business objectives and to align their interests with those of shareholders. Base salary The remuneration policy is to provide senior executives with a base salary that is competitive with the base salary paid in other comparable companies. The base salaries of executive Directors are reviewed annually at 1 July having regard to personal performance, Group performance, competitive market practice as determined by external research and pay levels within the Group. Details of base salary levels for executive Directors, together with the previous salaries, are set out below: J W Newman G Anderson(1) S D Dasani(2) 1 July 2008 (or date of appointment if later) £214,882 £350,000 £220,000 1 July 2007 £206,617 n/a n/a (1) appointed 4 August 2008 (2) appointed 1 August 2008, salary increased to £240,000 on 1 January 2009 as specified in his appointment contract. It is currently envisaged that no base salary increases will be made at the 1 July 2009 review. Annual bonus Executive Directors, other than J W Newman, participate in an annual bonus arrangement. The objective of the performance linked element of remuneration is to stimulate improved results of the Group by providing the opportunity of increased remuneration subject to achieving challenging performance criteria. For 2008, measurement was based on challenging, sliding scale Group profit before taxation targets. Because these profit targets were not met, no bonuses arise for 2008. For 2009, following the completion of the strategic review, the Committee has concluded that a more balanced set of annual performance targets should be operated, with the introduction of sliding scale cashflow targets (30% of total potential) and personal objectives (20% of total potential) in addition to the sliding scale profit targets (50% of total potential, reduced from 100%). No bonus will be payable for personal objectives unless at least threshold performance against both the profit and cashflow sliding scale targets has been achieved. The maximum potential bonus which can be earned remains capped at 100 per cent of salary. Long term incentive plan 2005 (‘LTIP’) The LTIP is the primary long-term incentive arrangement of the Company. LTIP participants may receive annual awards of up to 100 per cent of basic salary per annum. The award is a contingent right to receive shares in the future, subject to continued employment and the achievement of predetermined performance criteria. 31 TT electronics plc Annual Report 2008 Governance 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 32 Directors’ remuneration report continued Participants make no payment upon the grant, vesting or release of an award (other than such as may be required as a result of tax, social security or other regulatory requirements). Awards will vest three years after the date of grant. The maximum number of shares which could be issued under outstanding grants is 2,189,744 compared to 1,144,002 in 2007. The Committee considers that the combined use of EPS and TSR performance conditions will provide a good blend of performance metrics, with EPS rewarding strong financial performance and TSR rewarding relative stock market performance. The Company’s largest shareholders and ABI and Riskmetrics will be consulted on the changes to the scheme and in advance of the 2009 awards being granted. Performance conditions Award levels The performance targets attached to awards granted in 2008 require the Group’s earnings per share (‘EPS’), measured over a three year period, to grow by at least 3 per cent compound per annum in excess of the Retail Price Index (‘RPI’). At this level only 25 per cent of an award will vest. For an award to vest in full, the Group’s EPS, measured over the same period must grow by at least 7 per cent compound per annum in excess of RPI. For EPS between these thresholds, the number of shares vesting will be calculated on a proportional basis. Following a review of long-term incentive provision, the Committee has concluded that, while the use of EPS and the existing range of targets remain appropriately challenging, the LTIP should be refined to enhance the alignment between the management team and shareholders through the introduction of a relative total shareholder return ('TSR') performance measure. Therefore, for awards to be granted in April 2009 and in future years, the current EPS performance targets will only apply to 50 per cent of an LTIP award (instead of the current 100 per cent) with TSR targets applying to the other 50 per cent. In effect therefore, it is proposed that two separate performance targets will apply: (cid:127) The performance target attached to 50 per cent of an award will be based on the current three year EPS targets, namely 25 per cent of the shares subject to this part of the award will vest for EPS growth of 3 per cent compound per annum in excess of RPI, increasing on a straight-line basis to 100 per cent vesting for EPS growth of at least 7 per cent compound per annum in excess of RPI; and (cid:127) The performance target attached to the other 50 per cent of an LTIP award will be based on TSR performance targets against the FTSE SmallCap (excluding investment trusts); 25 per cent of shares subject to this part of the award will vest at median performance increasing on a straight-line basis to 100 per cent vesting at the upper quartile of the comparator group. In addition to the TSR targets above, the Committee will also consider the Company's underlying financial performance to ensure that vesting percentages under this part of an award are appropriate. As an incentive to join and recognising forfeited rights G Anderson and S D Dasani received LTIP awards over shares worth 100 per cent of their respective base salaries on appointment in 2008. In 2008 awards to relevant executive Directors were made of 75 per cent of base salary, however, as a result of the fall in share price over the last year and in light of recent investor pronouncements with respect to reducing award levels where a company's share price has fallen, it is intended that executive Directors (other than J W Newman) will receive awards over shares to a value of circa 50 per cent of base salary for 2009. Share options The Company has operated a number of share option schemes in the past. It is the Committee’s policy not to make further grants to executive Directors under these plans. There are no other share-based incentive plans operated by the Company. Shareholding guidelines In conjunction with the amendments to the LTIP performance targets set out above, shareholding guidelines for executive Directors will be introduced, linked to the out-turn of the LTIP. At the time awards vest under the LTIP (or any other executive plan operated in the future), there will be a requirement to retain no fewer than 50 per cent of shares (net of taxes) until such time as a total personal shareholding equivalent to 100 per cent of prevailing base salary has been achieved. Service contracts The executive Directors, other than the Chairman, have service contracts which reflect both current market practice and the appropriate balance between the interests of the Company and the individual Director. These contracts include 12 month non-compete clauses and standard provisions for summary termination and are terminable on 12 months notice from either side. As part of the terms of his appointment, G Anderson has an extended notice period of 18 months in the event of a bid approach on or prior to 3 August 2009 which is successful. After this date, his notice period reduces to 12 months. 32 TT electronics plc Annual Report 2008 Governance 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 33 Pensions (1) appointed 4 August 2008. The Company operates a defined benefit scheme and defined contribution scheme for employees including the executive Directors. G Anderson and S D Dasani are members of the defined contribution arrangement. Benefits are based on contributions paid and investment returns achieved during their membership of the scheme. All other executive Directors who served during the year are members of the defined benefit scheme. Benefits are based on the numbers of years of accrued service and pensionable salary. Non-executive Directors The remuneration of each of the non-executive Directors is determined by the executive members of the Board, reflecting time commitment, responsibility of each role and the fees paid in other comparable companies. Fee increases awarded in 2008 were in line with inflation and the duties performed. No benefits in kind are provided for non-executive Directors. Audited information Aggregate Directors’ emoluments Set out below are tables of remuneration of the Directors who served during the year ended 31 December 2008. The amount of each element of the remuneration received and receivable by the Directors in the year including base salary and fees paid during the year, benefits in kind and other payments is: Salary/fees £000 Other £000 Compensation for loss of office £000 Benefits £000 Executive Directors J W Newman G Anderson(1) S D Dasani(2) J W Armstrong(3) N A Rodgers(4) R W Weaver(5) 211 146 92 194 165 157 Non-executive Directors D S Crowther D E A Crowe(6) J C Shakeshaft S M Watson T H Reed Sir L H P Magnus 41 21 31 31 – – – – 60 – – 50 – – – – – – 15 5 9 22 15 23 – – – – – – – – – – 402 – – – – – – – 2008 Total £000 226 151 161 216 582 230 41 21 31 31 – – 2007 Total £000 428 – – 259 427 335 37 29 13 3 15 16 1,089 110 89 402 1,690 1,562 (2) appointed 1 August 2008. S D Dasani received a payment of £60,000 for lost incentives as a result of leaving his previous employer. (3) retired 5 January 2009. (4) resigned 11 June 2008. N A Rodgers’ compensation for loss of office comprised £330,000 payment in lieu of notice, £50,000 termination payment and benefits in kind valued at £22,000 in respect of the retained use of his company car and private medical insurance for the period to 30 June 2009. (5) retired 1 August 2008. It was agreed that R W Weaver would receive a bonus of £50,000 in recognition of his performance up to the date of his retirement. He also retained his company car. This is included within the benefit figure disclosed above. (6) retired 3 September 2008. The value of benefits in kind received during the year comprised life assurance cover, company car benefits, telephone expenses and the provision of private medical insurance. No Directors received expense allowances during the year. Executive Directors’ pensions - defined benefit During the year four of the executive Directors were members of the Company’s defined benefit pension scheme. Pension com- Accrued mutation lump sum received 2008 during year £000 £000 Decrease in pension at 31 Dec accrued pension £000 J W Newman J W Armstrong N A Rodgers R W Weaver Notes (46) (1) (47) (33) 220 66 36 62 543 n/a 242 411 Value at 31 Dec 2008 £000 4,193 1,143 940 1,463 Increase in value £000 841 237 63 350 Value at 31 Dec 2007 £000 3,349 892 866 1,102 (a) J W Newman, R W Weaver and N A Rodgers all retired from the pension scheme during the year and elected to take a lump sum in exchange for part of their pension entitlement. They are now drawing their pensions. (b) J W Armstrong’s accrued pension is that which would be paid annually on retirement at normal retirement date based on pensionable service and final pensionable salary to 31 December 2008. (c) Members of the scheme have the option to pay additional voluntary contributions; neither these contributions nor the resulting benefits are included in the above table. (d) The decrease in accrued pension during the year excludes any increases for inflation. (e) Values are calculated in accordance with ‘Retirement Benefit Schemes – Transfer Values (GN 11)’ published by the Institute of Actuaries and the Faculty of Actuaries. (f ) The increase in value during the year is net of employee contributions made to the scheme and arises principally from the increased cost of pension provision during the year due to falls in gilt yields and increased life expectancies. (g) Each executive Director has a normal retirement date of his 65th birthday but can take a pension from age 60. (h) No actuarial reduction is made in respect of early retirement between the ages of 60 and 65. (i) Pensions in payment accrued between 1 January 1989 and 5 April 2005 for J W Newman and J W Armstrong, and in total for R W Weaver and N A Rodgers, are increased annually in line with the annual rise in the All Items Index of Retail Prices subject to a maximum of 5 per cent per annum. Post 5 April 2005, increases are subject to a maximum of 2.5 per cent per annum. Pensionable salaries have been frozen at the 6 April 2006 level for three years. (j) In the event of the death of an executive Director, a pension equal to one half of the Director’s pension will become payable to a surviving spouse. 33 TT electronics plc Annual Report 2008 Governance 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 34 Directors’ remuneration report continued Executive Directors’ pensions – defined contribution G Anderson and S D Dasani who were appointed during the year are members of the Company’s group personal pension arrangement. During the year the Company contributed £5,833 for G Anderson and £5,683 for S D Dasani. Long Term Incentive Plan Two awards under this plan were made during the year to the executive Directors of the Company. An initial award was made following the announcement of the Group’s results and a further award over shares worth 100 per cent of base salary was made to G Anderson and S D Dasani on their respective appointments: J W Newman G Anderson S D Dasani J W Armstrong (1) N A Rodgers (2) R W Weaver (1) Date of grant 1 January 2008 16 Jan 07 28 Aug 08 28 Aug 08 16 Jan 07 31 May 07 24 Apr 08 16 Jan 07 31 May 07 24 Apr 08 16 Jan 07 31 May 07 117,596 – – 38,754 29,953 – 61,878 47,826 – 50,288 38,868 Awarded during the year – 341,463 214,634 – – 129,545 – – 225,000 – – Lapsed Vested Market price 31 December at grant date pence 2008 Vesting date – – – – 9,984 86,363 – 47,826 225,000 – 12,956 – – – – – – – – – – – 117,596 341,463 214,634 38,754 19,969 43,182 61,878 – – 50,288 25,912 248.0 16 Jan 10 102.5 28 Aug 11 102.5 28 Aug 11 248.0 16 Mar 09 217.5 16 Mar 09 110.0 16 Mar 09 248.0 16 Jan 10 – 217.5 110.0 – 248.0 16 Mar 09 217.5 16 Mar 09 (1) On their respective retirements it was agreed that R W Weaver and J W Armstrong would, subject to performance conditions, benefit from the vesting of proportions of the awards made under the LTIP arrangements. In respect of the award made in January 2007, the LTIPs may potentially vest in respect of the full LTIP award subject to performance. In respect of the awards made in May 2007 and April 2008, the maximum number of shares that may vest is two thirds and one third respectively of the awards made. The table shows the maximum amount of shares which may vest and reflects the shares which have lapsed. The shortened performance will be measured against the EPS for the end of the 2008 financial year and will vest or lapse on the announcement of the Group’s results. (2) It was agreed that N A Rodgers would, subject to performance conditions, benefit from the vesting of the full award made under the LTIP arrangement in January 2007 subject to performance. No consideration is payable for the awards, the terms of which are set out earlier in this report. 34 TT electronics plc Annual Report 2008 Governance 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 35 Directors’ remuneration report continued Directors’ share options Options set out below granted under the 1994 Executive Share Option Scheme (Approved) are marked(1), the 1996 Executive Share Option Scheme (Unapproved) are marked(2) and the 2004 Company Share Option Plan (Unapproved) are marked(3): J W Newman J W Armstrong (4) N A Rodgers R W Weaver (4) 31 December 2008 Exercise price pence Lapsed 19,825 1 January 2008 19,825 147,058 248,192 128,593 273,180 155,241 112,823 0(2) 147,058(2) 248,192(2) 128,593(2) 273,180(2) 155,241(3) 112,823(3) 1,084,912 19,825 1,065,087 5,033 73,529 109,289 38,253 11,818 28,975 86,662 49,247 37,181 5,033 0(2) 73,529(2) 109,289(2) 38,253(2) 11,818(1) 28,975(2) 86,662(2) 49,247(3) 37,181(3) 439,987 5,033 434,954 2,852 10,570 23,662 45,901 6,550 20,450 6,424 21,091 58,500 84,137 59,367 2,852 10,570 23,662 45,901 6,550 20,450 6,424 21,091 58,500 84,137 59,367 339,504 339,504 0(1) 0(2) 0(2) 0(2) 0(1) 0(2) 0(1) 0(2) 0(2) 0(3) 0(3) 0 20,000 147,058 109,289 49,638 9,090 43,845 112,455 48,248 20,000 0(2) 147,058(2) 109,289(2) 49,638(2) 9,090(1) 43,845(2) 112,455(2) 48,248(3) 539,623 20,000 519,623 300.0 136.0 166.0 165.0 80.0 145.0 205.5 300.0 136.0 91.5 166.0 165.0 165.0 80.0 145.0 205.5 300.0 300.0 177.5 91.5 163.0 163.0 165.0 165.0 80.0 145.0 205.5 300.0 136.0 91.5 166.0 165.0 165.0 80.0 205.5 Exercise period Mar 2001 – Mar 2008 Sep 2002 – Sep 2009 May 2004 – May 2011 Apr 2005 – Apr 2012 Mar 2006 – Mar 2013 May 2007 – May 2014 Apr 2008 – Apr 2015 Mar 2001 – Mar 2008 Sep 2002 – Jul 2009 Mar 2003 – Jul 2009 May 2004 – Jul 2009 Apr 2005 – Jul 2009 Apr 2005 – Jul 2009 Mar 2006 – Jul 2009 May 2007 – Jul 2009 Apr 2008 – Jul 2009 Mar 2001 – Mar 2008 Mar 2001 – Mar 2008 Mar 2002 – Dec 2008 Mar 2003 – Dec 2008 Apr 2004 – Dec 2008 Apr 2004 – Dec 2008 Apr 2005 – Dec 2008 Apr 2005 – Dec 2008 Mar 2006 – Dec 2008 May 2007 – Dec 2008 Apr 2008 – Dec 2008 Mar 2001 – Mar 2008 Mar 2002 – Jan 2009 Mar 2003 – Jan 2009 May 2004 – Jan 2009 Apr 2005 – Jan 2009 Apr 2005 – Jan 2009 Mar 2006 – Jan 2009 Apr 2008 – Jan 2009 35 TT electronics plc Annual Report 2008 Governance 213447_TT_REPORT_P1_36:213447_TT_REPORT_P1_36 2/4/09 10:31 Page 36 Directors’ remuneration report continued Notes Total shareholder returns (1,2) Options granted under the 1994 and 1996 Executive Share Option Schemes are generally exercisable not less than three and not more than ten years after their grant, and only then if a performance criterion has been achieved. Prior to 2001 the Group must have experienced annual growth in its earnings per share of at least 2 per cent over and above the Retail Price Index for a period of three years following the grant of the options. Options granted after 2000 carry a performance condition of annual growth in the Group’s earnings per share of at least 4 per cent over and above the Retail Price Index for a period of three years following the grant of the options. The constituent parts of the condition are calculated each year to see if the performance condition has been met. (3) Options granted under the 2004 HMRC Approved and the Unapproved Company Share Option Plans carry a performance condition stating that the growth in the Group’s earnings per share must exceed the increase in Retail Price Index by an average of 4 per cent per annum over a period of three consecutive years. Any year in which earnings per share is negative cannot be included. Options granted under these schemes lapse on the sixth anniversary of the date of grant in the event that any exercise condition is no longer capable of satisfaction. (4) Following retirement the options under the plan may be exercised within six months of the date of retirement provided the performance condition has been achieved. During the year options granted to the executive Directors totalling 384,362 shares have lapsed. No options were exercised by the executive Directors. The closing middle market prices for an ordinary share of 25p of the Company on 31 December 2008 and 2007 as derived from the Stock Exchange Daily Official List were 34.88p and 112.75p respectively. During the year the middle market price of TT electronics plc ordinary shares ranged between 23.88p and 134.88p. The Company’s total shareholder return performance for the five years to 31 December 2008 is shown on the graph below compared with the performance achieved by the FTSE SmallCap companies (excluding investment trusts). The Company is a constituent of the FTSE SmallCap Index and for this reason the Directors consider it appropriate to benchmark the Company’s performance against it. 250 225 200 175 150 125 100 75 50 25 0 Dec 2003 Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 — — TT electronics plc FTSE SmallCap (excluding investment trusts) Approved by the Board on 13 March 2009 and signed on its behalf by: D S Crowther Chairman of the Remuneration Committee 36 TT electronics plc Annual Report 2008 Governance 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 37 Report of the Independent Auditors to the members of TT electronics plc We have audited the consolidated financial statements of TT electronics plc for the year ended 31 December 2008 which comprise the consolidated income statement, the consolidated balance sheet, the consolidated statement of recognised income and expense, the consolidated cash flow statement, the accounting policies and notes 1 to 32. These consolidated financial statements have been prepared under the accounting policies set out therein. We have reported separately on page 66 on the Company financial statements of TT electronics plc for the year ended 31 December 2008 and the information in the Directors’ remuneration report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the Annual Report and the consolidated financial statements in accordance with United Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the consolidated financial statements 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 consolidated financial statements give a true and fair view and whether the consolidated financial statements have been properly prepared in accordance with the Companies Act 1985 and 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 consolidated financial statements. In addition we report to you if, in our opinion, 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 Directors’ report on corporate governance 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 other information contained in the Annual Report and consider whether it is consistent with the audited consolidated financial statements. The other information comprises only the Directors’ report, the Chairman’s statement, the Business review, the Directors’ report on corporate governance, the unaudited part of the Directors’ remuneration report and the historical record. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the consolidated 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 consolidated financial statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the group financial statements, and of whether the accounting policies are appropriate to the group’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 consolidated financial statements 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 consolidated financial statements. Opinion In our opinion (cid:127) (cid:127) (cid:127) the consolidated financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group’s affairs as at 31 December 2008 and of its profit for the year then ended; the consolidated financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and the information given in the Directors’ report is consistent with the financial statements. Grant Thornton UK LLP Registered Auditors, Chartered Accountants London, 13 March 2009 37 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 38 Consolidated income statement for the year ended 31 December 2008 Continuing operations Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other operating income Operating profit before exceptional items Exceptional items Operating profit Finance income Finance costs Profit before taxation Taxation Profit for the year from continuing operations Discontinued operation Loss for the year from discontinued operation Profit for the year attributable to shareholders Earnings per share From continuing operations – basic – diluted From continuing and discontinued operations – basic – diluted Note 1 1 4 2 2 1 5 6 8 2008 £million 584.3 (480.8) 103.5 (37.5) (40.4) 1.4 27.0 (3.8) 23.2 18.1 (24.0) 17.3 (5.7) 11.6 – 11.6 7.5p 7.5p 7.5p 7.5p 2007 £million 544.9 (437.0) 107.9 (36.0) (35.2) 1.0 37.7 – 37.7 18.3 (22.7) 33.3 (9.3) 24.0 (11.8) 12.2 15.5p 15.3p 7.9p 7.8p 38 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 39 Consolidated balance sheet at 31 December 2008 Assets Non-current assets Property, plant and equipment Goodwill Other intangible assets Deferred tax assets Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Short-term borrowings Financial derivatives Trade and other payables Current tax payable Provisions for liabilities Total current liabilities Non-current liabilities Long-term borrowings Deferred tax provision Pensions and other post employment benefits Provisions for liabilities Other non-current liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Share premium account Share options reserve Hedging and translation reserves Retained earnings Minority interests Total equity Note 2008 £million 10 11 12 22 13 14 14 20 21 25 24 20 22 30 24 25 15 16 16 17 18 19 137.4 74.5 23.6 5.5 241.0 120.0 111.5 10.1 241.6 482.6 51.2 2.9 99.4 3.1 5.6 162.2 72.1 8.7 18.6 0.1 8.0 107.5 269.7 212.9 38.7 0.2 1.2 35.8 134.6 2.4 212.9 2007 £million 112.0 52.3 17.3 4.2 185.8 91.0 95.1 7.6 193.7 379.5 16.8 0.7 81.9 – 0.3 99.7 65.8 6.0 17.4 0.7 7.6 97.5 197.2 182.3 38.7 0.2 1.1 (1.5) 141.8 2.0 182.3 Approved by the Directors on 13 March 2009 and signed on their behalf by: G Anderson Director S D Dasani Director 39 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 40 Consolidated statement of recognised income and expense for the year ended 31 December 2008 Profit for the year Exchange differences on net foreign currency investments Hedging reserve Actuarial (loss)/gain on defined benefit pension schemes Deferred tax on actuarial gains Total recognised income and expense for the year attributable to shareholders 2008 £million 11.6 39.4 (2.1) (3.2) – 45.7 2007 £million 12.2 4.8 (0.2) 38.3 (14.7) 40.4 40 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 41 Consolidated cash flow statement for the year ended 31 December 2008 Note 2008 £million 2007 £million Operating activities Profit for the year Adjustments for: Finance costs Taxation Exceptional items Depreciation of property, plant and equipment Amortisation of intangible assets Share based payment expense Gain on disposal of property, plant and equipment Loss on disposal of business Pension curtailment gain Other non-cash items Exceptional costs Additional payments to pension funds Operating cash flow before movements in working capital Decrease in financial derivatives Increase in inventories Decrease in receivables Increase/(decrease) in payables Cash generated from operations Tax paid Net cash from operating activities Cash flows from investing activities: Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment and grants received Development expenditure and purchase of patents and licences Acquisition of subsidiaries net of cash acquired Loan repayment Net cash proceeds from sale of business Net cash used in investing activities Cash flows from financing activities: Interest paid (net) Net changes in long-term borrowings and finance lease liabilities Issue of shares Dividends paid Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Exchange difference Cash and cash equivalents at end of period Cash and cash equivalents comprise: Cash and cash equivalents Bank overdrafts 6 14 20 11.6 5.9 5.7 3.8 23.4 10.9 0.1 (1.9) – (1.2) (3.8) (1.7) (3.2) 49.6 2.2 (6.6) – 1.0 46.2 (3.6) 42.6 (21.9) 5.1 (10.9) (13.9) 2.0 0.9 (38.7) (3.8) 9.0 – (15.6) (10.4) (6.5) (5.2) (0.5) (12.2) 10.1 (22.3) (12.2) 12.2 4.6 8.3 – 21.7 9.6 0.3 (2.7) 12.3 (1.1) (1.5) – (15.7) 48.0 1.3 (4.2) 0.4 (2.6) 42.9 (7.3) 35.6 (29.4) 7.1 (10.1) – – 10.8 (21.6) (4.7) 0.3 0.2 (15.6) (19.8) (5.8) 0.7 (0.1) (5.2) 7.6 (12.8) (5.2) 41 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 42 Accounting policies for the consolidated financial statements The consolidated financial statements have been prepared under International Financial Reporting Standards (IFRS) as endorsed by the European Union. The financial statements have been prepared under the historical cost convention modified by the revaluation of financial assets and derivatives held at fair value and by the revaluation at the transition date to IFRS of certain property, plant and equipment. Other intangible assets Intangible assets acquired as part of a business combination are stated in the balance sheet at their fair value at the date of acquisition less accumulated amortisation. Internally generated intangible assets, principally product development costs, are stated in the balance sheet at cost less accumulated amortisation. The amortisation rates for intangible assets are: The Group is not yet required to, and has not, adopted the latest revisions of: IAS 1; IAS 23; IAS 27; IFRS 3; IFRS 8; IFRICs 12, 13, 14, 15, 16, 17 and 18. The adoption of these revisions and standards would not have had any significant effect on these financial statements. Acquired patents and licences Development projects Customer relationships – up to 10 years – up to 3 years – 3-8 years Amortisation is on a straight-line basis. Basis of consolidation The Group’s financial statements consolidate the financial statements of TT electronics plc and all its subsidiaries. Subsidiaries are consolidated from the date on which control transfers to the Group and are included until the date on which the Group ceases to control them. Transactions between Group companies are eliminated, together with unrealised gains on inter-group transactions, on consolidation. Revenue recognition Revenue is the fair value, usually the invoiced value, of goods and services supplied to external customers excluding value added tax and other sales related taxes. Transactions are recorded as sales when the delivery of products or performance of services takes place in accordance with the contract terms of sale. Goodwill Goodwill arising on the acquisition of a business, representing the difference between the cost of acquisition and the fair value of the identifiable net assets acquired, is capitalised and is tested annually for impairment. The net book value of goodwill at the date of transition to IFRS has been treated as deemed cost. On the subsequent disposal or discontinuance of a previously acquired business, the relevant goodwill is dealt with in the income statement except for the goodwill already charged to reserves. The carrying values of intangible assets are tested for impairment when there is an indication that they may be impaired. Foreign currencies Assets and liabilities of overseas subsidiaries are translated into sterling at the rate of exchange ruling at the balance sheet date. The results and cash flows of overseas subsidiaries are translated into sterling using the average rate of exchange for the year. Exchange movements on the restatement of the net assets of overseas subsidiaries, foreign currency loans held for the purpose of financing overseas investments, and the adjustment between the income statement translated at the average rate and the closing rate are recognised in equity and reported in the statement of recognised income and expense. All other exchange differences are dealt with through the consolidated income statement. On disposal of an overseas subsidiary any cumulative exchange movements relating to that subsidiary held in the translation reserve are transferred to the consolidated income statement. The Group uses forward currency contracts in order to partially hedge its exposure to foreign exchange risks. 42 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 43 Property, plant and equipment Financial assets: Property, plant and equipment are stated at cost less a provision for depreciation. Depreciation is calculated so as to write-off the cost less estimated residual value of the assets in equal instalments over their expected useful lives. No depreciation is provided on freehold land. Depreciation is provided on other assets at the following rates: Freehold buildings Leasehold buildings – 2% – 2% (or over the period of the lease if less than 50 years) Plant, equipment and vehicles – 10% to 33% The carrying values of property, plant and equipment are reviewed for impairment when there is an indication that they may be impaired. Inventories Inventories are valued at the lower of cost, including related overheads, and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and the overheads incurred in bringing inventories to their present location and condition. Cost is calculated on a weighted average cost basis. Deferred taxation Deferred taxation is provided on taxable temporary differences between the carrying amounts of assets and liabilities in the financial statements and their corresponding tax bases. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which temporary differences can be utilised or that they will reverse. No provision is made for deferred tax which would become payable on the distribution of retained profits by overseas subsidiaries unless there is an intention to distribute such profits. Deferred tax is measured using the tax rates expected to apply when the asset is realised or the liability settled based on tax rates enacted or substantially enacted by the balance sheet date. Leases Assets acquired under finance leases which confer substantially all the risks and rewards of ownership of an asset are capitalised within property, plant and equipment and the outstanding rental instalments, net of interest, are shown in borrowings. Assets held under finance leases are depreciated over the shorter of the lease terms and the expected useful lives of the assets. Payments on operating leases are charged to the income statement on a straight-line basis over the lease term. Trade and other receivables Trade and other receivables are carried at the invoiced or contractually agreed amount less any required allowances for uncollectable amounts. Financial derivatives Derivative financial instruments are measured at fair value. The Group uses forward foreign exchange contracts and interest rate instruments to manage the relevant exposures. These derivative financial instruments are classified as fair value through profit or loss and all changes in fair value are recognised in the consolidated income statement. Cash and cash equivalents Cash and cash equivalents comprise cash at hand, demand deposits and short-term highly liquid investments that are easily convertible into known amounts of cash. Financial liabilities: Hedge accounting The Group uses cash flow hedges to reduce its exposure to exchange rate, interest rate and other financial risks. The application of the hedge is documented before hedge accounting commences and is regularly reviewed for effectiveness. The net gains or losses relating to hedged items to the extent that the hedge is effective are dealt with in the Statement of recognised income and expense. Any ineffective portions are dealt with in the income statement. Bank borrowings Bank borrowings are carried at the amounts payable at the balance sheet date. The Group uses borrowings in overseas currencies to hedge its exchange rate exposure on overseas assets. All borrowing costs are expensed. Trade payables Trade payables are carried at the amounts expected to be paid to counterparties. 43 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 44 Accounting policies for the consolidated financial statements continued Employee benefits Segmental reporting The Group operates defined benefit post retirement benefit schemes and defined contribution pension schemes. The liability recognised in the balance sheet for defined benefit schemes is the present value of schemes’ liabilities less the fair value of schemes’ assets. The operating and financing costs of defined benefit schemes are recognised separately in the income statement. Operating costs comprise the current service cost, any gains or losses on settlement or curtailments, and past service costs where benefits have vested. Finance items comprise the unwinding of the discount on schemes’ liabilities and the expected return on schemes’ assets. Actuarial gains or losses comprising differences between the actual and expected return on schemes’ assets, changes in schemes’ liabilities due to experience and changes in actuarial assumptions are recognised immediately in the Statement of recognised income and expense. Pension costs for the defined contribution plans represent the amount of contributions payable in respect of the accounting period. Government grants Government grants relating to non-current assets are treated as deferred income and credited to the income statement by equal instalments over the anticipated useful lives of the assets to which the grants relate. Other grants are credited to the income statement over the period of the project to which they relate. Research and development Research costs are written-off as incurred. Development costs incurred in the development of new or substantially improved products and processes are capitalised as intangible assets if it is probable that the expenditure will generate future economic benefits and can be measured reliably. Such costs are amortised on a straight-line basis over three years. Share based payments The fair value at the date of grant of share based remuneration is calculated using appropriate pricing models and charged to the income statement on a straight-line basis over the vesting period of the award. The charge to the income statement takes account of the estimated number of shares that will vest. All share based remuneration is equity settled. The Group’s primary reporting format is business segments which are subject to similar risks and returns. The secondary format is geographical segments. Critical judgements in applying the entity’s accounting policies There were no material transactions or events during the year requiring critical judgements in applying the Group’s accounting policies. However in preparing the accounts, there are a number of sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. These are shown below. Key sources of estimation uncertainty i Recoverability of internally generated intangible assets The recoverability of capitalised development costs is dependent on assessments of the future commercial viability of the relevant products and processes. The carrying amount of £18.3 million at 31 December 2008 is considered to be fairly stated. ii Impairment of goodwill The carrying amount of goodwill is £74.5 million. This has been tested for impairment by estimating the value in use of the cash generating units to which it has been allocated. The value in use is estimated by discounting future cash flows. This process gives rise to uncertainty in respect of the cash flows themselves and the discount factors applied. iii Defined benefit pension obligations The defined benefit pension obligations are calculated using a number of assumptions, such as future inflation, salary increases and mortality and the obligation is then discounted to its present value using an assumed discount rate. The pension deficit of £18.6 million at 31 December 2008 has been calculated using the assumptions set out in note 30. iv Provisions The Group makes appropriate provision on a consistent basis for risks of product liability, litigation, credit risk and other normal trading exposures. Discontinued operations v Deferred tax The Group reports a business as a discontinued operation when its sale, probable sale or abandonment results in the cessation of a major line of business or geographical area of operation. The recognition of deferred tax assets is dependent on assessments of future taxable income in the countries concerned. 44 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 45 Notes to the consolidated financial statements 1 Segmental reporting The Group’s primary reporting segments for 2007 and 2008 were the following business sectors (cid:127) Sensors and electronic systems – manufactured for major automotive and other customers. (cid:127) Electronic components – resistors, microcircuits, potentiometers and trimmers, power control modules. (cid:127) Electronic manufacturing services – printed circuit board and higher level assemblies. (cid:127) Secure power and industrial – standby and continuous power systems, electrical transmission and connection systems and insulation products. – Sensors and electronic systems – Electronic components – Electronic manufacturing services – Secure power and industrial Total Exceptional operating items (note 4) Operating profit Finance income (note 2) Finance costs (note 2) Profit before tax Taxation (note 5) Profit for the year from continuing operations There are no significant sales between sectors. – Sensors and electronic systems – Electronic components – Electronic manufacturing services – Secure power and industrial Sector assets and liabilities – continuing operations Pensions and other post employment benefits Unallocated assets and liabilities 2008 £million 162.1 164.4 56.9 83.6 467.0 – 15.6 Assets 2007 £million 134.7 120.8 50.2 62.0 367.7 – 11.8 Total net assets 482.6 379.5 2008 £million 189.2 145.2 103.4 146.5 584.3 Revenue 2007 £million 182.3 131.2 92.2 139.2 544.9 Sector result 2008 £million 2007 £million 0.8 7.3 6.0 12.9 27.0 (3.8) 23.2 18.1 (24.0) 17.3 (5.7) 11.6 10.0 10.0 4.1 13.6 37.7 – 37.7 18.3 (22.7) 33.3 (9.3) 24.0 Liabilities 2007 £million 29.6 21.4 17.8 21.9 90.7 17.4 89.1 Total capital employed 2007 £million 105.1 99.4 32.4 40.1 277.0 (17.4) (77.3) 2008 £million 127.8 134.4 34.7 54.0 350.9 (18.6) (119.4) 197.2 212.9 182.3 2008 £million 34.3 30.0 22.2 29.6 116.1 18.6 135.0 269.7 45 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 46 Notes to the consolidated financial statements continued 1 Segmental reporting continued – Sensors and electronic systems – Electronic components – Electronic manufacturing services – Secure power and industrial Total – before exceptional items Exceptional items Total continuing operations Geographical segments Capital additions Depreciation and amortisation 2008 £million 2007 £million 2008 £million 2007 £million 20.0 7.6 1.0 4.2 32.8 – 32.8 21.3 11.0 2.3 4.6 39.2 – 39.2 17.1 10.9 2.3 3.6 33.9 0.4 34.3 14.7 10.0 2.4 3.5 30.6 – 30.6 The following is an analysis of the carrying amount of segment assets and additions to property, plant and equipment and intangible assets analysed by the geographical area in which the assets are located. Capital additions Carrying amount of segment assets United Kingdom Rest of Europe North America Rest of the World Total – continuing operations The Group operates globally. Revenue by geographical destination is: United Kingdom Rest of Europe North America Rest of the World 2 Finance costs – net Interest receivable Expected return on pension scheme assets Finance income Interest on bank overdrafts and loans Interest on finance leases Unwinding of the discount on pension scheme liabilities Finance costs Finance costs – net 2008 £million 2007 £million 2008 £million 6.6 17.6 6.1 2.5 32.8 8.6 21.3 7.2 2.1 39.2 Continuing operations Discontinued operation 2008 £million 108.3 213.4 154.3 108.3 584.3 2007 £million 2008 £million 2007 £million 111.2 201.1 149.5 83.1 544.9 – – – – – 31.1 1.6 0.1 4.8 37.6 117.3 114.7 183.8 51.2 467.0 2008 £million 108.3 213.4 154.3 108.3 584.3 Continuing operations Discontinued operation 2008 £million 2007 £million 2008 £million 2007 £million 2008 £million 0.4 17.7 18.1 4.4 0.1 19.5 24.0 5.9 0.5 17.8 18.3 4.7 0.3 17.7 22.7 4.4 – – – – – – – – – 0.7 0.7 0.2 – 0.7 0.9 0.2 0.4 17.7 18.1 4.4 0.1 19.5 24.0 5.9 2007 £million 102.5 89.1 139.2 36.9 367.7 Total 2007 £million 142.3 202.7 149.6 87.9 582.5 Total 2007 £million 0.5 18.5 19.0 4.9 0.3 18.4 23.6 4.6 46 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 47 3 Profit for the year Profit for the year is stated after charging/(crediting): Depreciation of property, plant and equipment Amortisation of intangible assets included in cost of sales Net foreign exchange losses Cost of inventories recognised as an expense Employee emoluments Fees to group Auditors – company and consolidation statutory audits Fees to group Auditors and associates – statutory audit of subsidiaries – tax services – audit of group pension schemes Fees to other Auditors – statutory audit of subsidiaries – tax services Government grants credited Share based payment 4 Exceptional items AB Automotive Electronics Limited AB Electronic Limited Continuing operations Discontinued operation 2008 £million 23.4 10.9 1.1 480.8 153.9 0.1 0.8 0.2 – 0.1 0.1 (1.4) 0.1 2007 £million 21.0 9.6 0.6 437.0 144.2 0.2 0.6 0.2 0.1 0.1 0.1 (1.2) 0.3 2008 £million 2007 £million – – – – – – – – – – – – – 0.7 – – 35.0 6.3 – – – – – – – – 2008 £million 23.4 10.9 1.1 480.8 153.9 0.1 0.8 0.2 – 0.1 0.1 (1.4) 0.1 Total 2007 £million 21.7 9.6 0.6 472.0 150.5 0.2 0.6 0.2 0.1 0.1 0.1 (1.2) 0.3 2008 £million 2007 £million 2.7 1.1 3.8 – – – The exceptional items are the costs of closing the UK production sites of AB Automotive Electronics Limited and AB Electronic Limited. Production for AB Electronic Limited is being relocated to Group companies in China and India. The Group reports income or expenditure as exceptional when the size, nature or function of an item or aggregation of similar items is such that separate presentation is relevant to an understanding of its financial position. 47 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 48 Notes to the consolidated financial statements continued 5 Taxation Current tax Deferred tax (note 22) Continuing operations Discontinued operation 2008 £million 2007 £million 2008 £million 2007 £million 2008 £million 5.9 (0.2) 5.7 7.1 2.2 9.3 – – – (1.0) – (1.0) 5.9 (0.2) 5.7 Total 2007 £million 6.1 2.2 8.3 UK tax is calculated at 28.5 per cent (2007: 30 per cent) of taxable profit. Overseas tax is calculated at the rates ruling in the relevant countries. The total tax charge for the year represents an overall rate of 33 per cent (2007: 28 per cent). The tax charge is explained as follows: Profit before taxation Continuing operations Discontinued operation Tax at the UK income tax rate Tax rates of non UK subsidiaries Utilisation of losses not previously recognised Losses for which no deferred tax asset is recognised Expenses not deductible for tax purposes Other 2008 £million 2007 £million 17.3 – 17.3 4.9 0.6 (1.1) 0.5 0.8 – 5.7 33.3 (12.8) 20.5 6.2 (0.4) (2.1) 4.0 0.8 (0.2) 8.3 6 Discontinued operation On 3 September 2007 the Group sold the business and net trading assets of AEI Cables Limited, which completed the Group’s exit from the cables business. The loan note for £0.9 million forming part of the disposal proceeds was repaid on 3 September 2008. The amount included in the income statement for this disposal comprises: Loss after taxation before curtailment gain Curtailment of pension scheme benefits Loss on disposal of business and assets 7 Dividends The following dividends have been paid in the year: Final dividend for prior year Interim dividend for current year 2008 £million – – – – 2008 pence per share 6.36 3.69 10.05 2008 £million 9.9 5.7 15.6 2007 pence per share 6.36 3.69 10.05 The Directors are not recommending the payment of a final dividend for 2008. 48 TT electronics plc Annual Report 2008 Group accounts 2007 £million (0.6) 1.1 (12.3) (11.8) 2007 £million 9.9 5.7 15.6 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 49 8 Earnings per share From continuing operations: Headline (1) Basic Diluted 2008 pence per share 2007 pence per share 9.2 7.5 7.5 15.5 15.5 15.3 Earnings per share has been calculated by dividing the profit attributable to shareholders by the weighted average number of shares in issue during the year. The numbers used in calculating basic and fully diluted earnings per share are reconciled below: Profit for the year attributable to shareholders Add loss for the year from discontinued operation Earnings from continuing operations Weighted average number of shares in issue: Basic Adjustment for share options Diluted 2008 £million 11.6 – 11.6 2008 million 155.0 0.1 155.1 2007 £million 12.2 11.8 24.0 2007 million 154.9 1.5 156.4 (1) Headline earnings per share on continuing operations before exceptional items of 9.2p (2007: 15.5p) is based on the profit for the year of £11.6 million (2007: £24.0 million) adjusted for exceptional items of £3.8 million (2007: £nil million) less the associated taxation of £1.1 million (2007: £nil million). From continuing and discontinued operations: Basic Diluted Profit for the year attributable to shareholders: Earnings basic and diluted The denominators are the same as shown above for both basic and diluted earnings per share. From discontinued operation: Basic – loss Diluted – loss Loss for the year from discontinued operation The denominators are the same as shown above for both basic and diluted loss per share. 2008 pence per share 2007 pence per share 7.5 7.5 2008 £million 11.6 7.9 7.8 2007 £million 12.2 2008 pence per share 2007 pence per share – – 2008 £million – (7.6) (7.5) 2007 £million (11.8) 49 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 50 Notes to the consolidated financial statements continued 9 Employees The average number of full time equivalent employees (including Directors) during the year was: By function Production Sales and distribution Administration By sector – Sensors and electronic systems – Electronic components – Electronic manufacturing services – Secure power and industrial Total continuing operations Discontinued operation Total The aggregate emoluments including those of Directors for the year were: Wages and salaries Employers’ social security charges Employers’ pension costs Remuneration in respect of the Directors was as follows: Emoluments 2008 number 6,455 645 492 7,592 2,216 2,642 1,343 1,391 7,592 – 7,592 2008 £million 129.1 21.3 3.5 153.9 2008 £million 1.7 2007 number 6,709 589 463 7,761 2,429 2,707 1,070 1,340 7,546 215 7,761 2007 £million 126.2 19.9 4.4 150.5 2007 £million 1.6 Further details of individual Directors’ remuneration, pension benefits and share options are shown in the Directors’ remuneration report on pages 31 to 36. 50 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 51 10 Property, plant and equipment Cost At 1 January 2007 Additions Disposal of business Disposals Exchange translation differences At 1 January 2008 Additions Acquisition of subsidiaries Disposals Exchange translation differences At 31 December 2008 Accumulated depreciation and impairment At 1 January 2007 Depreciation charge for the year Disposal of business Eliminated on disposals Exchange translation differences At 1 January 2008 Depreciation charge for the year Acquisition of subsidiaries Eliminated on disposals Exchange translation differences At 31 December 2008 Carrying amount: At 31 December 2008 At 31 December 2007 Land and buildings £million Plant and equipment £million Total £million 55.0 4.9 – (5.7) 1.7 55.9 3.4 2.6 (3.7) 10.9 292.6 24.5 (10.0) (23.0) 7.2 291.3 18.5 2.6 (8.7) 60.6 347.6 29.4 (10.0) (28.7) 8.9 347.2 21.9 5.2 (12.4) 71.5 69.1 364.3 433.4 12.4 1.3 – (0.4) 0.4 13.7 1.7 – (2.7) 2.5 226.6 20.4 (8.7) (21.8) 5.0 221.5 21.7 1.0 (8.3) 44.9 239.0 21.7 (8.7) (22.2) 5.4 235.2 23.4 1.0 (11.0) 47.4 15.2 280.8 296.0 53.9 42.2 83.5 69.8 137.4 112.0 The following rates are used for the depreciation of property, plant and equipment: Freehold property 2% Leasehold land and buildings 2% (or over the period of the lease if less than 50 years) Plant and equipment 10% to 33% The carrying amount of land and buildings includes £0.4 million (2007: £0.5 million) in respect of assets held under finance leases. 51 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 52 Notes to the consolidated financial statements continued 11 Goodwill Cost At 1 January 2007 Exchange translation differences At 1 January 2008 Acquisition of subsidiaries Exchange translation differences At 31 December 2008 Goodwill is primarily attributed to the following cash generating units in the sectors shown: BI Technologies – Electronic components Optek Technology – Sensors and electronic systems TT electronics integrated manufacturing services, Inc USA – Electronic manufacturing services TT electronics integrated manufacturing services (Suzhou) Co Ltd – Electronic manufacturing services New Chapel Electronics Semelab £million 53.1 (0.8) 52.3 5.7 16.5 74.5 £million 30.9 23.6 8.4 5.1 3.4 2.3 Goodwill has been tested for impairment by assessing the value in use of the relevant cash generating units. The value in use calculations were based on projected cash flows for the years 2009 – 18. Cashflows for 2009 are based on the budget for the year, which was finalised in December 2008 in light of changed economic conditions. Cashflows for 2010 and 2011 are based on the financial data derived from the strategic review initiated in August 2008 the results of which were announced on 21 January 2009. The strategic review was conducted for every subsidiary and reviewed in depth by key management and external consultants. The results of the strategic review have been endorsed by the Board. In the outer years (2012 – 18), cashflows are based on a prudent level of sales growth of 3% per annum or lower, taking account of past performance and the strategic review projections. The terminal value has been conservatively estimated as 5 times EBITDA for the final year. Cash flows for 2009 – 18 were discounted at 10% per annum, which is the estimated cost of capital for the businesses concerned. The impairment tests have been subjected to sensitivity analysis using a reduction in annual operating profits of 20%, changing the terminal value to 3 times EBITDA or changing the discount rate to 12%. The conclusion reached is that no impairment provision is required. 52 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 53 12 Other intangible assets Cost At 1 January 2007 Additions Retirements Exchange translation differences At 1 January 2008 Additions Acquisition of subsidiaries Retirements Exchange translation differences At 31 December 2008 Amortisation At 1 January 2007 Charge for the year Retirements Exchange translation differences At 1 January 2008 Charge for the year Retirements Exchange translation differences At 31 December 2008 Carrying amount At 31 December 2008 At 31 December 2007 Development costs £million Patents and licences £million Customer relationships £million Total £million 26.4 9.5 (9.7) 1.5 27.7 10.3 – (9.3) 7.3 36.0 13.6 8.8 (9.7) 0.7 13.4 10.0 (9.3) 3.6 17.7 18.3 14.3 3.0 0.6 – 0.1 3.7 0.6 0.2 – 0.2 4.7 0.8 0.4 – 0.1 1.3 0.4 – 0.1 1.8 2.9 2.4 1.1 – – – 1.1 – 2.3 – 0.2 30.5 10.1 (9.7) 1.6 32.5 10.9 2.5 (9.3) 7.7 3.6 44.3 0.1 0.4 – – 0.5 0.5 – 0.2 14.5 9.6 (9.7) 0.8 15.2 10.9 (9.3) 3.9 1.2 20.7 2.4 0.6 23.6 17.3 Development costs are amortised over up to three years and are retired when fully written-off. Patents and licences are amortised over ten years. The attributed value of customer relationships are amortised over 3-8 years. 53 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 54 Notes to the consolidated financial statements continued 13 Inventories Raw materials Work in progress Finished goods 2008 £million 51.9 24.3 43.8 120.0 Inventories are stated after deduction of a provision for slow moving and obsolete items of £19.0 million (2007: £14.2 million). The carrying amount of inventories has increased by £19.6 million as a result of currency exchange rate movements. 14 Other financial assets and prepayments Trade and other receivables Trade debtors Prepayments Other debtors Loan to Newship Limited 2008 £million 98.1 8.1 5.3 – 111.5 The loan to Newship Limited was repaid on 15 May 2008. The carrying amount of trade and other receivables approximates to their fair value. The carrying amount of trade and other receivables has increased by £16.4 million as a result of currency exchange rate movements. Cash and cash equivalents 2008 £million 10.1 2007 £million 40.4 19.4 31.2 91.0 2007 £million 76.8 8.3 8.0 2.0 95.1 2007 £million 7.6 Cash and cash equivalents comprise bank balances and short-term bank deposits. The carrying amount approximates to fair value. The Group’s financial assets comprise cash and loans and receivables. The credit risk on the cash and cash equivalents is negligible because the counterparties are banks with high credit ratings. The carrying amount approximates to fair value. Trade debtors are stated net of an allowance for estimated irrecoverable amounts of £2.8 million (2007: £2.2 million) and the carrying amount approximates to fair value. The Group is not reliant on any particular customer in the markets in which it operates and there is no significant concentration of credit risk. An analysis of the age of trade debtors that were past due at the year end but for which no impairment provision was made is: Not more than 3 months More than 3 months but not more than 6 months More than 6 months but not more than 1 year More than one year 2008 £million 20.7 1.4 0.1 – 22.2 2007 £million 20.5 1.7 0.3 0.3 22.8 The Group has strict procedures in place to ensure debts are not entered into without appropriate authorisation and that they are collected in a timely manner. Trade debtors are denominated in the currencies in which the Group trades. The Group’s policy is that debtors and creditors not in the functional currency of the subsidiary concerned are covered by forward foreign currency exchange contracts. The exchange risk at Group level is therefore restricted to the risk on the translation of overseas assets, liabilities and cash flows into sterling. 54 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 55 14 Other financial assets and prepayments continued Financial assets analysed by currency are: Sterling US dollar Euro Other 15 Share capital Authorised 226,000,000 (2007: 226,000,000) ordinary shares of 25p each Issued and fully paid 154,952,795 (2007: 154,952,795) ordinary shares of 25p each The ordinary shares of 25p each are equity share capital. 2008 £million 35.5 24.5 23.3 29.7 113.0 2008 £million 56.5 38.7 2007 £million 32.4 19.4 18.9 23.7 94.4 2007 £million 56.5 38.7 Potential issues of ordinary shares The Company has share option schemes, which are closed for future grants, and a Long Term Incentive Plan (‘LTIP’) for senior executives. Details of the share options outstanding during the year are: At 1 January Granted Forfeited Exercised Expired At 31 December Exercisable at 31 December Number of share options 5,136,108 – (849,302) – (141,387) 4,145,419 546,730 2008 Weighted average exercise price (p) 135.0 – 111.4 – 300.0 134.2 145.0 Number of share options 5,798,564 – (315,555) (154,692) (192,209) 5,136,108 721,445 2007 Weighted average exercise price (p) 147.9 – 230.7 145.0 359.0 135.0 145.0 For share options outstanding at 31 December 2008 the range of exercise prices was 80.0p to 205.5p (2007: 80.0p to 300.0p) and the weighted average remaining contractual life was 3.4 years (2007: 4.4 years). Options are equity settled, have a life of ten years (with the exception of certain schemes where the options lapse after six years if the performance criteria are not achieved) and vest after three years. Exercise of the options is conditional on there being an increase in earnings per share over any consecutive three year period of 2 per cent per annum for options granted prior to 2001 and 4 per cent per annum for options granted after 2000 above the increase in the Retail Price Index over the same period. On 24 April 2008 and 28 August 2008 grants of awards were made under the LTIP for the issue of up to 1,019,045 and 556,097 shares in 2011. During the year, 529,400 shares were forfeited and 2,189,744 shares were outstanding as at 31 December 2008 (2007: 1,144,002 shares). The award is a contingent right to receive shares in the future, subject to continued employment and the achievement of predetermined performance criteria. The performance targets attached to awards granted in 2008 are that the Group’s earnings per share, measured over a three year period, must grow by at least 3 per cent compound per annum in excess of the Retail Price Index. At this level only 25 per cent of an award will vest. For an award to vest in full, the Group’s earnings per share measured over the same period must have grown by at least 7 per cent compound per annum in excess of the Retail Price Index. For earnings per share between these thresholds, the number of shares vesting will be calculated on a proportional basis. Any part of an award that does not vest after three years where the performance criteria are not reached will lapse. 55 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 56 Notes to the consolidated financial statements continued 15 Share capital continued The estimated fair values of the LTIP grants on 24 April 2008 and 28 August 2008 are 82.4p and 74.9p per share respectively. These fair values were calculated using the following inputs: Share price Dividend per annum Risk free rate Grant vesting 24 April 110.0p 10.05p 4.5% 25% 28 August 102.5p 10.05p 4.4% 25% The Group charged £0.1 million (2007: £0.3 million) to the Consolidated income statement in respect of share based payments. The charge represents the cost allocated to 2008 in respect of the LTIP grants in 2006, 2007 and 2008 offset by a credit of £0.1 million arising from attrition to options issued in 2003 and 2005. 16 Capital reserves At 1 January 2007 Share issues Share based payments At 1 January 2008 Share based payments At 31 December 2008 17 Hedging and translation reserves At 1 January 2007 Exchange differences on translation of foreign operations Exchange differences on US$124 million borrowings Cash flow hedges At 1 January 2008 Exchange differences on translation of foreign operations Exchange differences on US$124 million borrowings Cash flow hedges At 31 December 2008 Share premium account £million Share option reserve £million Total £million – 0.2 – 0.2 – 0.2 0.8 – 0.3 1.1 0.1 1.2 Hedging reserve £million Translation reserve £million 5.2 – 1.1 (0.2) 6.1 – (22.1) (2.1) (18.1) (11.3) 3.7 – – (7.6) 61.5 – – 53.9 0.8 0.2 0.3 1.3 0.1 1.4 Total £million (6.1) 3.7 1.1 (0.2) (1.5) 61.5 (22.1) (2.1) 35.8 The cash flow hedges arise from the 2008 profit translation hedges £0.1 million and the forward foreign exchange contracts hedging 2009 transactions £2.2 million. The effect in the Consolidated income statement of hedges unwinding was £0.5 million (2007: £nil million). 56 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 57 18 Retained earnings At 1 January 2007 Profit for the year Actuarial net gain on defined benefit pension schemes Deferred tax thereon Dividends paid At 1 January 2008 Profit for the year attributable to equity Actuarial net loss on defined benefit pension schemes Dividends paid At 31 December 2008 19 Shareholders’ equity At 1 January 2007 Profit for the year Exchange differences on net foreign currency investments Actuarial net gain on defined benefit pension schemes Deferred tax on actuarial gain Dividends paid Share based payments Premium on share issues Cash flow hedges At 1 January 2008 Profit for the year Exchange differences on net foreign currency investments Actuarial net loss on defined benefit pension schemes Dividends paid Share based payments Cash flow hedges Minority interests At 31 December 2008 Details of movements in the constituent elements of shareholders’ equity are given in notes 15, 16, 17 and 18. £million 121.6 12.2 38.3 (14.7) (15.6) 141.8 11.6 (3.2) (15.6) 134.6 £million 157.0 12.2 4.8 38.3 (14.7) (15.6) 0.3 0.2 (0.2) 182.3 11.6 39.4 (3.2) (15.6) 0.1 (2.1) 0.4 212.9 57 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 58 Notes to the consolidated financial statements continued 20 Borrowings Bank overdrafts Bank loans Finance leases The borrowings are repayable as follows: In one year or less In more than one year but not more than two years In more than two years but not more than three years In more than three years but not more than four years In more than four years but not more than five years In more than five years In more than one year The carrying amounts of the Group’s borrowings are denominated in the following currencies: Sterling US dollar Euro Other 2008 £million 22.3 100.5 0.5 123.3 2008 £million 51.2 1.7 70.0 0.1 0.1 0.2 72.1 2008 £million 22.2 89.0 11.7 0.4 Borrowings of £96.9 million (2007: £66.5 million) are at fixed interest rates for an average period of 0.4 years (2007: 0.4 years). The average interest rates at the balance sheet date were: Bank overdrafts Bank loans Finance leases The estimated fair value of borrowings is: Bank overdrafts Bank loans Finance leases 2008 % 3.1 4.0 7.8 2008 £million 22.3 100.5 0.5 2007 £million 12.8 67.6 2.2 82.6 2007 £million 16.8 0.6 1.5 62.5 0.3 0.9 65.8 2007 £million 5.2 68.1 8.9 0.4 2007 % 5.7 4.9 7.9 2007 £million 12.8 67.6 2.2 The borrowing facilities available to the Group amounted to £166.2 million (2007: £164.1 million). At 31 December 2008, the Group had available £14.9 million (2007: £15.4 million) of undrawn committed borrowing facilities. The Group borrowings are funded mainly through bank overdrafts including short-term committed facilities of £30.0 million and a committed unsecured £70.0 million multi-currency revolving bank loan facility which expires in April 2011. Under this facility funds can be drawn in sterling, US dollars or euros or a combination thereof at fixed rates of interest for periods varying from one month to a year. Interest rates are at a fixed margin over the inter-bank borrowing rate at the date the funds are drawn. The amount drawn down in dollars at 31 December 2008 is required to be rebalanced to £70.0 million at the prevailing rate in June 2009 and periodically thereafter and forward contracts have been taken towards covering this positition. 58 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 59 20 Borrowings continued Interest rate hedge At 31 December 2008 the Group had an interest rate cap applying to $50.0 million at a rate of 4.75% from 4 February 2008 to 4 February 2010. This cap is designated as a cash flow hedge and marked to market at the year end. At 31 December 2008 and 31 December 2007 the market value was £nil million. Hedge of net investment The Group has designated $124.0 million (2007: $124.0 million) of its borrowings as a currency hedge of its US dollar denominated net assets. This is an effective partial hedge. The net result of translating the US dollar net assets and the $124.0 million of borrowings is dealt with in the translation reserve and reported in the Consolidated statement of recognised income and expense, together with the exchange difference arising from the translation of the Group’s other overseas net assets. In 2008 there was a net gain of £39.4 million (2007: £4.8 million) on translation of overseas assets after accounting for this hedge. 21 Derivative financial instruments Forward foreign currency contracts 2008 Liabilities £million 2.9 2007 Liabilities £million 0.7 The Group uses forward foreign exchange contracts to reduce currency exposures on sales and purchasing transactions for up to a year ahead. In January 2006 the Group purchased an interest rate cap of 5.0 per cent for the period 2 February 2006 to 4 February 2008 for $50.0 million of its borrowings. A further interest rate cap on $50.0 million of borrowings for the period 4 February 2008 to 4 February 2010 was purchased in November 2007. These caps are designated as hedges of the interest expense relating to the $124.0 million loan. The Group hedged the effect of currency movements against sterling on the translation of 2008 profit earned in euros and US dollars, by selling forward euros and US dollars for sterling at fixed exchange rates. At 31 December 2007 contracts were in place for $10.0 million and euro 4.0 million. Subsequently contracts for the sale of a further euro 4.0 million were entered into. The contracts were marked to market at 31 December 2007 and were a net liability of £0.1 million. No hedges against the effect of currency movements against sterling on the translation of 2009 profits were in place at 31 December 2008. The Group’s financial assets and liabilities are sensitive to movements in currency exchange rates against sterling. Analysis of financial assets and liabilities by currency are given in notes 14 and 25, the major overseas currencies being the US dollar and the euro . The effect of any such currency movement on the net financial liabilities is reported in equity in the Group accounts. US dollar Euro – effect of 10% strengthening : a reduction in equity of £7.6 million – effect of 10% strengthening : no significant net effect Whilst the Group had a net financial liability in US dollars, overall it had a net asset position when taking into account inventory and non-current assets. Details of the Group’s exposure to risk are given on pages 19 to 20 of the Business review. 59 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 60 Notes to the consolidated financial statements continued 22 Deferred tax At 1 January 2007 Income statement Charge to equity Exchange differences At 1 January 2008 Income statement Exchange differences At 31 December 2008 Deferred tax assets Deferred tax liabilities Accelerated Deferred capital development costs £million allowances £million (5.9) 1.0 – (0.5) (5.4) 0.6 (1.6) (6.4) (3.4) (0.7) – – (4.1) (0.1) (1.3) (5.5) Retirement benefit obligations £million Other £million Total £million 21.9 (2.9) (14.7) – 4.3 – (0.2) 4.1 2008 £million 5.5 (8.7) 3.0 0.4 – – 3.4 (0.3) 1.5 4.6 15.6 (2.2) (14.7) (0.5) (1.8) 0.2 (1.6) (3.2) 2007 £million 4.2 (6.0) At 31 December 2008 the Group had unused tax losses of £14.0 million (2007: £13.9 million) for which no deferred tax asset has been recognised. None of these tax losses have an expiry date. At the balance sheet date the aggregate unrecognised deferred tax liability in respect of undistributed earnings of subsidiaries is £2.1 million (2007: £2.2 million). 23 Obligations under finance leases Amounts payable under finance leases: One year or less Between one and five years Over five years Minimum Present value of lease payments minimum lease payments 2008 £million 2007 £million 2008 £million 2007 £million 0.1 0.3 0.2 0.4 1.4 1.1 0.1 0.2 0.2 0.3 1.0 0.9 The obligations derive mainly from property leases where the risks and rewards of ownership are considered to be with the Group and which are therefore accounted for as finance leases. The average implicit interest rate used to evaluate the obligations is 8 per cent (2007: 8 per cent). The fair value of the lease obligation approximates to carrying amount. Total minimum lease payments include £0.1 million (2007: £0.7 million) of future finance costs. 60 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 61 24 Provisions for liabilities Reorganisation £million Environmental £million At 1 January 2008 Reclassification Utilised Transfer from/(to) Consolidated income statement At 31 December 2008 – – (1.3) 3.8 2.5 0.6 – (0.4) (0.1) 0.1 Legal and other claims £million 0.4 2.3 (0.2) 0.6 3.1 The reorganisation provision relates to the closure of production sites of AB Automotive Electronics Limited and AB Electronic Limited, see note 4. The environmental provision is for probable clean up costs of ex-production sites. Legal and other claims represent the best estimate for the cost of settling outstanding product and other claims. The total provisions are analysed: Non-current Current 25 Trade and other payables Current liabilities Trade creditors Taxation and social security Other creditors, accruals and deferred income Non-current liabilities Accruals and deferred income Other creditors 2008 £million 0.1 5.6 5.7 2008 £million 58.7 4.7 36.0 99.4 8.0 – 8.0 Total £million 1.0 2.3 (1.9) 4.3 5.7 2007 £million 0.7 0.3 1.0 2007 £million 51.1 3.9 26.9 81.9 5.3 2.3 7.6 The carrying amount of trade and other payables approximates to their fair value. Trade and other payables have increased by £14.3 million as a result of currency exchange rate movements. Trade and other payables are denominated in the currencies in which the Group trades. The Group’s policy is that trade debtors and creditors not in the functional currency of the subsidiary concerned are covered by forward foreign currency exchange contracts. The exchange risk at Group level is therefore restricted to the risk on the translation of overseas assets, liabilities and cash flows into sterling. Financial liabilities comprising trade and other creditors, bank overdrafts and other borrowings analysed by currency are: Sterling US dollar Euro Other 2008 £million 52.2 100.6 22.6 17.7 193.1 2007 £million 32.4 77.9 18.5 13.3 142.1 61 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 62 Notes to the consolidated financial statements continued 26 Acquisition of subsidiaries The Group acquired New Chapel Electronics Limited on 2 April 2008 and assets comprising the majority of the business of Semelab Limited on 21 August 2008. The Group owns 100 per cent of the equity of the acquired entities. The net assets acquired and the goodwill arising are as follows: New Chapel Electronics Book value £million Fair value £million Semelab Book value £million Fair value £million Total Fair value £million Intangible assets Property, plant and equipment Inventories Trade and other receivables Trade and other payables Tax payables Goodwill Total consideration Net outflows arising Cash consideration Cash costs Net cash outflow Deferred consideration, capped at £1.0 million Total consideration – 0.2 0.7 0.8 (0.9) (0.1) 0.7 1.3 0.3 0.6 0.8 (1.0) (0.2) 1.8 3.4 5.2 – 3.5 2.1 1.9 (1.6) – 5.9 1.2 3.9 2.2 2.0 (1.9) – 7.4 2.3 9.7 2.5 4.2 2.8 2.8 (2.9) (0.2) 9.2 5.7 14.9 £million 13.6 0.3 13.9 1.0 14.9 New Chapel Electronics Limited designs and manufactures specialist interconnection systems and is based in the United Kingdom. The goodwill on acquisition arises because it complements the Group’s existing interconnection systems business by providing improved sales channels to the high margin military and civil aerospace market. New Chapel Electronics Limited is included in the secure power and industrial sector and contributed revenue of £4.8 million and operating profit of £0.3 million since acquisition. If the acquisition had been for the full financial year, revenue would have been £6.2 million and operating profit would have been £0.4 million. Semelab Limited designs and produces specialised radio frequency and power semiconductors, optoelectronic components and power microcircuits primarily for the UK and European markets. The goodwill on acquisition arises from the broadening of the Group’s product range, joint R&D efforts for new products and the Group’s sales presence in North America providing the resources for expansion. Semelab Limited is included in the electronic components sector and contributed revenue of £4.6 million and operating profit of £0.5 million. If the acquisition had been made on 1 January 2008, revenue would have been £12.2 million and operating profit would have been £1.3 million. 27 Contingent liabilities The Group has contingent liabilities amounting to £2.7 million (2007: £1.4 million) in respect of performance bonds and guarantees entered into in the normal course of business. The Group is the subject of claims which arise in the ordinary course of business. Other than those for which provisions have been included within note 24, the Directors consider the likelihood of any other claims giving rise to a liability to be remote. 28 Capital commitments Contractual commitments for the purchase of property, plant and equipment 2008 £million 6.3 2007 £million 7.4 62 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 63 29 Operating leases Minimum operating lease payments charged to operating profit: Fixtures and equipment Land and buildings 2008 £million 0.3 4.6 The Group has outstanding commitments under non-cancellable operating leases, which fall due as follows: In less than one year Between one and five years After five years 2008 £million 4.6 11.0 4.2 2007 £million 0.3 4.1 2007 £million 3.5 7.5 2.9 Lease terms for land and buildings are predominantly for less than ten years with rents fixed for an average of four years. There are no contingent rents. 30 Retirement benefit schemes Defined contribution schemes The Group operates defined contribution schemes in the United Kingdom and the Rest of the World and 401(k) plans in North America. The assets of these schemes are held independently of the Group. The total contributions charged by the Group in respect of defined contribution schemes were £1.6 million (2007: £1.6 million). Defined benefit schemes The Group operated one significant defined benefit pension scheme in the United Kingdom and two overseas. The Company has reached agreement with the UK scheme for additional fixed contributions extending to 2016 based on the actuarial deficit at April 2007. These planned contributions amount to: 2009 £2.2 million, 2010 £3.2 million, 2011 £3.5 million then increasing by £0.2 million each year to £4.5 million in 2016. A curtailment gain of £1.2 million arises from the closure of the AB Automotive Electronics business and the extension of the freeze on pensionable salaries by one year. The Group also operates defined benefit schemes in the United States and Japan. All these schemes are closed to new members. Actuarial valuations of the schemes were carried out by independent qualified actuaries in 2007 and 2008 using the projected unit credit method. These actuarial valuations have been updated by the actuaries to assess the assets and liabilities of the schemes at 31 December 2008. Pension scheme assets are stated at market value at 31 December 2008. The principal assumptions used for the purpose of the actuarial valuations were as follows: Discount rate Inflation rate Increases to pensions in payment Salary increases to April 2010 (pensionable salaries have been frozen) Salary increases thereafter 2008 % 6.1 2.9 2.2 – 2.9 – 3.4 2007 % 6.0 3.2 2.5 – 3.2 – 3.7 A decrease in the discount rate by 0.1% per annum increases the liabilities by approximately £5.6 million. An increase in the inflation rate of 0.1% per annum increases the liabilities by approximately £4.2 million. The expected percentage long-term rates of return on the main asset classes, net of expenses, set by management having regard to actuarial advice and relevant indices were: Equities Bonds Gilts and cash 2008 Second half 2008 First half 2007 Second half 2007 First half 7.5 6.1 4.5 7.2 5.6 4.2 7.9 5.5 4.9 7.0 4.5 4.0 The mortality tables applied by the actuaries at 31 December 2008 were PA92 MC + two years. 63 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 64 Notes to the consolidated financial statements continued 30 Retirement benefit schemes continued The amounts recognised on the Consolidated balance sheet are: Equities Bonds Gilts and cash Swaps Fair value of assets Present value of funded obligation 2008 £million 174.7 25.8 48.7 33.9 2007 £million 182.0 12.4 103.8 – 283.1 (301.7) 298.2 (315.6) 2006 £million 187.8 10.9 73.4 – 272.1 (344.7) 2005 £million 170.5 2.9 72.3 – 2004 £million 154.6 4.0 44.9 – 245.7 (335.9) 203.5 (274.4) Net liability recognised on the Consolidated balance sheet (18.6) (17.4) (72.6) (90.2) (70.9) The schemes’ assets do not include the Group’s financial instruments nor any property occupied by, or other assets used by the Group. Swaps are liability driven hedges. Amounts recognised in the Consolidated income statement are: Current service cost Interest on obligation Expected return on schemes’ assets 2008 £million 1.9 19.5 (17.7) 2007 £million 2.8 18.4 (18.5) Of the current service cost of £1.9 million (2007: £2.8 million), £1.3 million (2007: £1.5 million) is included in cost of sales in the income statement, £0.3 million (2007: £0.3 million) is included in distribution costs and £0.3 million (2007: £1.0 million) is included in administrative expenses. The actual return on schemes’ assets was a loss of £7.7 million (2007: a gain of £19.0 million). Actuarial gains and losses are recognised directly in retained earnings and reported in the Consolidated statement of recognised income and expense and, since transition to IFRS, amount to a net gain of £2.1 million. Changes in the present value of the defined benefit obligation are: Opening defined benefit obligation Current service cost Interest on obligation Scheme participant contributions Curtailment Change in actuarial estimates and assumptions Exchange differences Benefits paid Closing defined benefit obligation Changes in the fair value of the schemes’ assets are: Opening fair value of schemes’ assets Expected return on schemes’ assets (Deficit)/excess of actual over expected returns Contributions by employer Contributions by employees Exchange differences Benefits paid Closing fair value of schemes’ assets 2008 £million 315.6 1.9 19.5 1.2 (1.2) (22.2) 2.2 (15.3) 301.7 2008 £million 298.2 17.7 (25.4) 5.1 1.2 1.6 (15.3) 283.1 2007 £million 344.7 2.8 18.4 1.5 (1.1) (37.8) – (12.9) 315.6 2007 £million 272.1 18.5 0.5 18.5 1.5 – (12.9) 298.2 64 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 65 30 Retirement benefit schemes continued The experience adjustments arising on the schemes’ assets and liabilities are reported in the Consolidated statement of recognised income and expense and are as follows: Experience adjustments on schemes’ liabilities Experience adjustments on schemes’ assets 2008 £million 22.2 (25.4) 2007 £million 2006 £million 37.8 0.5 (6.2) 9.4 2005 £million (47.6) 21.6 2004 £million (19.1) 8.9 The Group expects to contribute approximately £5 million to defined benefit schemes in 2009. 31 Related party transactions All related party transactions are with entities in which J W Newman was interested during the year. TT electronics plc Subsidiaries TT electronics plc Subsidiaries Purchase of goods and services Sale of goods and services 2008 £000 1 – 1 2007 £000 2008 £000 2007 £000 – – – 9 – 9 1 – 1 2008 £000 165 2 167 Rents paid Rents received 2007 £000 165 3 168 2008 £000 5 – 5 2007 £000 28 – 28 Amounts owed by related parties Amounts owed to related parties 2008 £000 – – – 2007 £000 5 – 5 2008 £000 16 – 16 2007 £000 16 – 16 Sales and purchases of goods and services were on normal credit terms at third party prices. Rentals, which included for premises used by J W Newman in performing duties as executive Chairman, were calculated on open market bases and paid to agreed terms. As part of the demerger from TT electronics on 14 May 2001 two loans totalling £8 million were made to Newship Limited (formerly Send Group Limited). Subsequently, Newship Limited became a related party on 15 November 2002. One loan of £6.0 million was repaid in 2004 and the other of £2.0 million was repaid on 15 May 2008. Interest on the loan amounted to £46,000 (2007: £130,000) of which £nil (2007: £34,000) was outstanding at the year end. Compensation of key management personnel The remuneration of key management during the year was as follows: Short-term benefits Compensation for loss of office Post-employment benefits Share based payments 2008 £million 2.3 0.4 0.2 0.1 3.0 2007 £million 2.7 – 0.2 0.1 3.0 Key management personnel comprise the Directors, Company Secretary and Divisional Chief Executives. Their compensation is considered and recommended to the Board by the Remuneration Committee. 32 Post balance sheet event On 21 January 2009, the Group announced the results of its strategic review, details of which are given in the Business review and on the Group’s website. The strategic review reported the exit from the climate control business and European and other restructurings which were estimated to have an exceptional cost of £12.8 million in 2009 and from which substantial cost savings were anticipated. 65 TT electronics plc Annual Report 2008 Group accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 66 Report of the Independent Auditors to the members of TT electronics plc We have audited the Company financial statements of TT electronics plc for the year ended 31 December 2008 which comprise the balance sheet, the accounting policies for the Company financial statements and notes 1 to 13. These Company 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. We have reported separately on page 37 on the consolidated financial statements of TT electronics plc for the year ended 31 December 2008. This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the Annual Report, the Directors’ remuneration report and the parent company financial statements in accordance with United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the Company 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 Company financial statements give a true and fair view and whether the 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. We also report to you whether in our opinion the information given in the Directors’ report is consistent with the financial statements. 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 read other information contained in the Annual Report and consider whether it is consistent with the audited Company financial statements. The other information comprises only the Directors’ report, the unaudited part of the Directors’ remuneration report, the Chairman’s statement, the Business review, the Directors’ report on corporate governance and the historical record. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Company 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 parent company 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 Company financial statements, and of whether the accounting policies are appropriate to the 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 Company 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 Company financial statements and the part of the Directors’ remuneration report to be audited. Opinion In our opinion: (cid:127) the Company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company’s affairs as at 31 December 2008; (cid:127) the 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 (cid:127) the information given in the Directors’ report is consistent with the financial statements. Grant Thornton UK LLP Registered Auditors, Chartered Accountants London, 13 March 2009 66 TT electronics plc Annual Report 2008 Company accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 67 Company balance sheet at 31 December 2008 Fixed assets Tangible assets Investments Current assets Debtors Financial derivatives Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Total net assets Capital and reserves Share capital Share premium Profit and loss account Shareholders’ funds Approved by the Directors on 13 March 2009 and signed on their behalf by: G Anderson Director S D Dasani Director Note 1 2 3 5 4 4 6 8 8 2008 £million 2.3 132.3 134.6 122.0 – – 122.0 (20.6) 101.4 236.0 (70.0) 166.0 38.7 0.2 127.1 166.0 2007 £million 2.4 139.3 141.7 105.8 – 0.3 106.1 (5.5) 100.6 242.3 (62.2) 180.1 38.7 0.2 141.2 180.1 67 TT electronics plc Annual Report 2008 Company accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 68 Accounting policies for the Company financial statements Foreign currencies Assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange ruling at the balance sheet date. Share based payments The fair value at the date of grant of share based remuneration, principally share options, is calculated using a binomial pricing model and charged to the profit and loss account on a straight- line basis over the vesting period of the award. The charge to the profit and loss account takes account of the estimated number of shares that will vest. All share based remuneration is equity settled. Leases Payments on operating leases are charged to the profit and loss account on a straight-line basis over the lease term. Financial instruments Derivative financial instruments used to manage exposure to interest rate risk and to changes in currency exchange rates are measured at fair value. All changes in fair value are recognised in the profit and loss account. The financial statements of TT electronics plc (the Company) have been prepared under the historical cost convention as modified by the revaluation of financial assets and derivatives held at fair value in accordance with applicable United Kingdom accounting standards. The principal accounting policies of the Company are: Tangible fixed assets and depreciation Tangible fixed assets are stated at cost less a provision for depreciation. Depreciation is calculated so as to write-off the cost less estimated residual value of tangible fixed assets, in equal instalments over their expected useful lives. No depreciation is provided on freehold land. The depreciation rates for the major categories of asset are given in note 1. The carrying values of fixed assets are reviewed for impairment when there is an indication that the assets may be impaired. Investments Investments in subsidiaries are carried at cost less amounts written-off. Deferred taxation Deferred taxation is the taxation attributable to timing differences between the results computed for taxation purposes and results as stated in the financial statements. It is recognised on all timing differences where the transaction or event which gives the Company an obligation to pay more tax, or the right to pay less tax in the future, has occurred by the balance sheet date. Deferred tax assets are recognised when it is more likely than not that they will be recovered. Deferred tax is measured using the rates of tax enacted or substantively enacted by the balance sheet date. Pension costs The Company is a member of a multi-employer defined benefit scheme. The Company cannot identify its share of the scheme assets and liabilities. Pension costs are therefore accounted for under the rules for defined contribution schemes and represent the contributions payable in respect of the period. 68 TT electronics plc Annual Report 2008 Company accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 69 Notes to the Company financial statements 1 Tangible fixed assets Cost at 31 December 2008 and 1 January 2008 Depreciation at 1 January 2008 Charge for the year Depreciation at 31 December 2008 Net book amounts At 31 December 2008 At 31 December 2007 Freehold land and buildings £million Plant, equipment and vehicles £million 2.9 0.6 0.1 0.7 2.2 2.3 0.7 0.6 – 0.6 0.1 0.1 Total £million 3.6 1.2 0.1 1.3 2.3 2.4 Freehold land and buildings includes a carrying value for freehold land of £0.6 million (2007: £0.6 million). No depreciation is provided on freehold land. Depreciation is provided on other assets at the following rates: Freehold buildings Plant, equipment and vehicles 2% 10% to 33% 2 Fixed asset investments At 1 January 2008 Provision At 31 December 2008 Subsidiary undertakings £million 139.3 (7.0) 132.3 The Company’s principal operating subsidiary undertakings and the location of their principal operations are shown in note 13. The Company owns 100 per cent of the ordinary share capital or equivalent and 100 per cent of voting rights of all subsidiary undertakings other than Thuthuka Conductors and Insulations (Pty) Ltd which is 74 per cent owned, Padmini TT Electronics Private Limited which is 51 per cent owned and Rodco Limited, which is non-trading and is 60 per cent owned. Shareholdings are held indirectly for all principal operating subsidiary undertakings. 3 Debtors Amounts falling due within one year Trade debtors Amounts owed by subsidiary undertakings Prepayments and accrued income Corporation tax Loan to Newship Limited 2008 £million 0.1 116.7 0.6 4.6 – 122.0 2007 £million 0.1 93.6 1.0 9.1 2.0 105.8 69 TT electronics plc Annual Report 2008 Company accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 70 Notes to the Company financial statements continued 4 Creditors Amounts falling due within one year Short-term borrowings (note 5) Trade creditors Amounts owed to subsidiary undertakings Taxation and social security Accruals and deferred income Amounts falling due after more than one year Bank loans (note 5) 5 Borrowings and financial derivatives 2008 £million 2007 £million 14.4 0.8 2.3 0.5 2.6 20.6 70.0 – 0.5 1.7 0.5 2.8 5.5 62.2 The Company’s principal borrowing is under a committed unsecured multi-currency loan facility which expires in April 2011. Under this facility funds can be drawn in either sterling, US dollars or euros or a combination thereof at fixed rates of interest for periods varying from one month to one year. Interest rates are at a fixed margin over the appropriate inter-bank borrowing rate at the date the funds are drawn. In November 2007 the Company purchased an interest rate cap of 4.75% on $50.0 million of borrowings for the period 4 February 2008 to 4 February 2010. The carrying amounts of the Company’s borrowings are denominated in the following currencies: Sterling US dollars The borrowings are repayable as follows: On demand or within one year In the third year In the fourth year 2008 £million – 84.4 84.4 2008 £million 14.4 70.0 – 84.4 2007 £million – 62.2 62.2 2007 £million – – 62.2 62.2 The fair value of borrowings is the same as their carrying value. At 31 December 2008, the Company had committed undrawn borrowing facilities available of £nil million (2007: £7.8 million). There are other substantial committed and uncommitted borrowing facilities available to the Group. Financial derivatives Current assets Interest rate cap 6 Share capital Authorised 226,000,000 (2007: 226,000,000) ordinary shares of 25p each Issued called up and fully paid 154,952,795 (2007: 154,952,795) ordinary shares of 25p each Ordinary shares of 25p each are equity share capital. 2008 £million – 2008 £million 56.5 38.7 2007 £million – 2007 £million 56.5 38.7 70 TT electronics plc Annual Report 2008 Company accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 71 Share option schemes At 31 December 2008 options were exercisable over 4,145,419 (2007: 5,136,108) ordinary shares under the Group share option schemes up to 2015. Subscription prices range from 80.0p to 205.5p with a weighted average of 134.2p. Subsequent to 31 December 2008 no options have been exercised. Following the approval of the Long Term Incentive Plan 2005 at the Extraordinary General Meeting held on 20 October 2006, all existing share option schemes were closed for future grants. 1994 Executive scheme This scheme for senior executives was approved at the Annual General Meeting on 24 May 1994. The options outstanding at the date of this report are over 888,550 ordinary shares and such options are: Exercisable on or after 31.03.2002 28.03.2003 18.04.2004 03.04.2005 26.03.2006 Options 82,236 158,452 153,195 220,042 274,625 Subscription price (p) 177.5 91.5 163.0 165.0 80.0 1996 Executive scheme This scheme for senior executives was approved at the Annual General Meeting on 14 May 1996. The options outstanding at the date of this report are over 2,221,299 ordinary shares and such options are: Exercisable on or after 31.03.2002 15.09.2002 28.03.2003 18.04.2004 23.05.2004 03.04.2005 26.03.2006 Options 40,616 367,645 336,441 72,190 336,083 273,277 795,047 Subscription price (p) 177.5 136.0 91.5 163.0 166.0 165.0 80.0 Options issued under the 1994 and 1996 Executive Share Option Schemes may not generally be exercised for a period of three years from the date of grant and are conditional on there being an increase in earnings per share over any consecutive three year period between the date of grant and the date of exercise of 2 per cent per annum for options granted prior to 2001 and 4 per cent for options granted after 2000 above the increase in the All Items Index of Retail Prices over the same period. For this purpose earnings per share on any relevant date is that derived from the audited financial statements of the Company and its subsidiaries last published prior to such date. 2004 Approved Plan This scheme for senior executives was approved at the Annual General Meeting on 19 May 2004. The options outstanding at the date of this report are over 224,830 ordinary shares and such options are: Exercisable on or after 25.05.2007 07.04.2008 Options 126,400 98,430 Subscription price (p) 145.0 205.5 71 TT electronics plc Annual Report 2008 Company accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 72 Notes to the Company financial statements continued 2004 Unapproved Plan This scheme for senior executives was approved at the Annual General Meeting on 19 May 2004. The options outstanding at the date of this report are over 810,740 ordinary shares and such options are: Exercisable on or after 25.05.2007 17.04.2008 Options 420,330 390,410 Subscription price (p) 145.0 205.5 Options issued under the 2004 Approved and Unapproved Company Share Option Plans may not generally be exercised for a period of three years from the date of grant and are conditional on there being growth in the Group’s earnings per share exceeding the Retail Price Index by an average of 4 per cent per annum over a period of three consecutive years prior to exercise. Any year in which earnings per share is negative cannot be included. For this purpose the earnings per share on any relevant date is that derived from the audited financial statements of the Company and its subsidiaries last published prior to such date. Long Term Incentive Plan 2005 This scheme for senior executives was approved at the Extraordinary General Meeting held on 20 October 2006. On 24 April 2008 and 28 August 2008 grants of awards were made under the Long Term Incentive Plan 2005 for the issue of up to 1,019,045 and 556,097 shares in 2011. The awards outstanding at the date of this report are over 2,189,744 ordinary shares and such awards potentially vest on the following dates: Normal vesting date 16.01.2010 31.05.2010 24.04.2011 28.08.2011 Shares 472,203 462,387 699,057 556,097 The award is a contingent right to receive shares in the future, subject to continued employment and the achievement of predetermined performance criteria. The performance targets attached to awards granted in 2007 and 2008 are that the Group’s earnings per share, measured over a three-year period, must grow by at least 3 per cent compound per annum in excess of the Retail Price Index. At this level only 25 per cent of an award will vest. For an award to vest in full, the Group’s earnings per share measured over the same period must have grown by at least 7 per cent compound per annum in excess of the Retail Price Index. For earnings per share between these thresholds, the number of shares vesting will be calculated on a proportional basis. Any part of an award that does not vest after 3 years where the performance criterion is not reached will lapse. 7 Share based payments Details of the share options issued are given in note 6. The bases of calculation of the share based payments are given in the consolidated financial statements, note 15. 8 Reserves At 1 January 2008 Final dividend 2007 Interim dividend 2008 Share based payment Profit for the year At 31 December 2008 Share premium £million Profit and loss account £million 0.2 – – – – 0.2 141.2 (9.9) (5.7) 0.1 1.4 127.1 In accordance with the exemption allowed by Section 230 of the Companies Act 1985, the Company has not presented its own profit and loss account. 72 TT electronics plc Annual Report 2008 Company accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 73 9 Guarantees and financial commitments Financial commitments relating to bank loans are set out in note 5. The Company has no guarantees or contingent financial commitments. 10 Obligations under operating leases The operating lease payments due within one year to which the Company was committed at 31 December 2008 were: On leases expiring: Within one year Between two and five years Over five years 11 Pension schemes Defined benefit scheme: Land and buildings £million Other £million 2008 Total £million Land and buildings £million Other £million 2007 Total £million 0.3 0.5 – 0.8 – 0.1 – 0.1 0.3 0.6 – 0.9 0.2 0.2 0.4 0.8 – 0.1 – 0.1 0.2 0.3 0.4 0.9 The Company is a member of a multi-employer defined benefit scheme which is closed to new entrants. The Company is unable to identify its share of the underlying assets and liabilities of the scheme. Accordingly the Company has applied the exemption in FRS 17 and accounted for the scheme as if it were a defined contribution scheme. The total contributions charged by the Company in respect of the year ended 31 December 2008 were £2.5 million (2007: £14.0 million). The most recent triennial valuation of the scheme has been updated by an independent qualified actuary, taking account of the requirements of FRS 17 to assess the liabilities of the scheme at 31 December 2008. The market value of the scheme’s assets at the year end was £279.0 million and the present value of the scheme’s liabilities was £294.1 million. Further details and an analysis of the Group’s pension schemes are given in note 30 to the consolidated financial statements. Defined contribution scheme: The Company operates a defined contribution scheme which is set up under trust and whose assets are therefore independent of the Company. The total contributions charged by the Company in respect of the year ended 31 December 2008 were £84,000 (2007: £59,000). 73 TT electronics plc Annual Report 2008 Company accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 74 Notes to the Company financial statements continued 12 Employees The average number of employees (including Directors) during the year was: By function Administration The aggregate emoluments (including those of Directors) for the year were: Wages and salaries Employer’s social security charges Employer’s pension contributions Remuneration in respect of the Directors was as follows: Emoluments 2008 number 46 2008 £million 4.4 0.6 2.5 7.5 2008 £million 1.7 2007 number 50 2007 £million 4.3 0.5 14.1 18.9 2007 £million 1.6 Further details of individual Directors’ remuneration, pension benefits and share options are shown in the Directors’ remuneration report on pages 31 to 36. 74 TT electronics plc Annual Report 2008 Company accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 75 13 Principal operating subsidiaries The principal operating subsidiaries are: Sensors and electronic systems AB Automotive Electronics Limited AB Interconnect, Inc, USA AB Electronic Limited AB Elektronik GmbH, Germany AB Elektronik Sachsen GmbH, Germany Optek Technology, USA, Mexico Padmini TT Electronics Private Limited, India (51% owned) Electronic components AB Mikroelektronik GmbH, Austria BI Technologies, USA, UK, Mexico, Malaysia International Resistive Company, Inc, USA MMG India Private Limited, India Welwyn Components Limited Semelab Limited Electronic manufacturing services TT electronics integrated manufacturing services Limited TT electronics integrated manufacturing systems Limited TT electronics integrated manufacturing services (Suzhou) Co Ltd, China TT electronics integrated manufacturing services, Inc, USA BI Technologies, Malaysia Secure power and industrial Dale Power Solutions plc Ottomotores SA de CV, Mexico AB Connectors Limited New Chapel Electronics Limited AEI Compounds Limited Wire Systems Technology (Pty) Limited, South Africa W T Henley Limited BAS Components Limited Companies are located and incorporated in the UK except where indicated. 75 TT electronics plc Annual Report 2008 Company accounts 213447_TT_REPORT_P37_76:213447_TT_REPORT_P37_76 2/4/09 10:36 Page 76 Historical record Accounting year Revenue Operating profit Profit before taxation Earnings Earnings per ordinary share Ordinary dividend Ordinary dividend per share Average ordinary shares in issue Net debt Shareholders’ funds Notes 2008 (£million) 584.3 2007 544.9 2006 539.4 2005 503.8 2004 505.9 (£million) (£million) (£million) (p) (£million) 27.0 21.1 14.3 9.2 5.7 (p) 3.69 (million) 155.0 (£million) 113.2 37.7 33.3 24.0 15.5 15.6 10.05 154.9 75.0 36.2 31.2 21.8 14.1 15.6 10.05 154.8 71.0 29.9 24.5 16.4 10.6 15.6 10.05 154.8 47.1 (£million) 212.9 182.3 157.0 151.7 34.7 31.6 21.2 13.7 15.6 10.05 154.8 67.3 166.7 1 Results have been adjusted where appropriate to exclude discontinued operations. 2 Operating profit, profit before taxation, earnings and earnings per share are stated as being before impairment provisions, goodwill amortisation and exceptional items where appropriate for the applicable accounting standards ruling at that time. 76 TT electronics plc Annual Report 2008 Company accounts 213447_TT_REPORT_COVER:213447_TT_REPORT_COVER 2/4/09 10:38 Page 2 TT electronics is a world leader in sensor and electronic component technology Shareholder information Our intention is to achieve growth by Annual General Meeting Share dealing services Shareholder enquiries (cid:127) Concentrating on highly-engineered, bespoke electronic components for niche growth markets, offering good margins (cid:127) Restructuring our sensor business to reduce our automotive exposure from approximately 40% to 25 – 30% of Group sales (cid:127) Investing in our Secure Power and Integrated Manufacturing Services businesses to realise growth and value potential (cid:127) Implementing a new operating structure to improve execution, facilitate cross divisional co-operation and drive sales (cid:127) Withdrawing from low growth, unprofitable areas Results Group accounts Company accounts Highlights and financial summary Chairman’s statement Summary of sectors The way forward Business review Directors and Company Secretary Directors’ report Governance Directors’ report on corporate governance Directors’ remuneration report 1 2 3 4 10 21 22 26 31 Report of the Independent Auditors on Report of the Independent Auditors the consolidated financial statements Consolidated income statement Consolidated balance sheet Consolidated statement of recognised income and expense Consolidated cash flow statement Accounting policies for the consolidated financial statements Notes to the consolidated financial statements 37 38 39 40 41 42 45 on the Company financial statements Company balance sheet Accounting policies for the Company financial statements Notes to the 66 67 68 Company financial statements 69 Historical record and Shareholder information 76 Shareview Dealing is a telephone and internet service provided by Equiniti and provides a simple and convenient way of buying and selling TT electronics plc shares. Equiniti maintain the register of members of the Company. If you have any queries concerning your shareholding, or if any of your details change, please contact the Registrars: Log on to www.shareview.co.uk/dealing or call 08456 037037 between 8.30am and 4.30pm, Monday to Friday, for more information about this service and for details of the rates and charges. A weekly postal dealing service is also available and a form together with terms and conditions can be obtained by calling 0871 384 2248*. Commission is 1 per cent with a minimum of £10. ShareGift ShareGift is a charity share donation scheme for shareholders, administered by The Orr Mackintosh Foundation. It is especially for those who may wish to dispose of a small parcel of shares whose value makes it uneconomical to sell on a commission basis. Further information can be obtained at www.sharegift.org or from Equiniti. Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone 0871 384 2396* Fax 0871 384 2100* Textphone for shareholders with hearing difficulties 0871 384 2255* Equiniti also offer a range of shareholder information on-line at www.shareview.co.uk. * Calls to this number are charged at 8p per minute from a BT landline. Other telephony provider costs may vary. Website Information on the Group’s financial performance, activities and share price is available at www.ttelectronics.com. The Annual General Meeting will be held on 13 May 2009 at 12 noon at the Ironmongers’ Hall, Shaftesbury Place, Barbican, London EC2Y 8AA. Results Announcement of 2009 half year results – late August 2009. Preliminary announcement of 2009 results – late March 2010. Annual report 2009 – to be posted mid April 2010. Dividends For the year ending 31 December 2008, the Board has not recommended a final dividend. An interim dividend of 3.69p per share was paid on 23 October, making the total dividend for the year 3.69p per share (2007: 10.05p). Multiple accounts on the shareholder register If you have received two or more copies of this document, this means that there is more than one account in your name on the shareholder register. This may be caused by either your name or address appearing on each account in a slightly different way. For security reasons, the Registrars will not amalgamate the accounts without your written consent, so if you would like any multiple accounts combined into one account, please write to Equiniti Limited at the address given below. This report is printed on Hello Silk which is made up of virgin pulp which has been FSC (Forest Stewardship Council) certified. It is 100% recyclable and biodegradable and has been printed by CTD using an alcohol free process; the printing inks are made from vegetable oil and are non-hazardous from renewable sources. Over 90% of solvents and developers are recycled for further use and recycling initiatives are in place for all other waste associated with this production. CTD are FSC and ISO 14001 certified with strict procedures in place to safeguard the environment through all our processes Designed and produced by Linnett Webb Jenkins. 213447_TT_REPORT_COVER:213447_TT_REPORT_COVER 2/4/09 10:38 Page 1 T T e l e c t r o n i c s p l c A n n u a l R e p o r t 2 0 0 8 Building for the future TT electronics plc Clive House 12 – 18 Queens Road Weybridge Surrey KT13 9XB Reg No 87249 Tel +44(0) 1932 841310 Fax +44(0) 1932 836450 TT electronics plc Annual Report 2008 

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