Final Results - Year Ended 2 October 1999

Avon Rubber PLC 2 December 1999 PRELIMINARY RESULTS FOR THE YEAR ENDED 2 OCTOBER 1999 Avon Rubber p.l.c. announces its preliminary results for the year to 2 October 1999 which the Board approved on 1 December 1999. 1999 1998 £MILLION £MILLION -------- -------- TURNOVER -------- Continuing 261.2 267.1 Acquisitions 5.0 - -------- -------- 266.2 267.1 -------- -------- OPERATING PROFIT - before Exceptionals ---------------- Continuing 21.4 22.4 Acquisitions 0.5 - -------- -------- 21.9 22.4 -------- -------- PROFIT BEFORE TAX ----------------- - before Exceptionals 20.5 23.2 - after Exceptionals 21.9 23.9 EARNINGS PER SHARE ------------------ Basic 56.8p 62.4p Continuing Activities - before Exceptionals 53.5p 59.8p Diluted 56.7p 61.7p DIVIDEND PER SHARE 24.2p 22.8p ------------------ * Strong performances from North America and Continental Europe helped to offset weak UK demand * Substantial investment including acquisition of Flexo automotive hose business in Spain * Significant new business won * 5th consecutive year of dividend increase to 24.2p per share - up 6.1% For further enquiries: Avon Rubber p.l.c. Steve Willcox - Chief Executive Between 10.30 - 12.30am and 14.00 - 15.30pm Terry Stead - Group Finance Director Tel: 0171 253 2252 Ludgate Communications Richard Hews 0171 253 2252 Leone Lewis INTRODUCTION In line with our strategy for growth, we have continued to invest in facilities, equipment, training and product development and have succeeded in winning significant contracts for new business. Increased capacity in our Continental European and North American facilities supported the increased sales and profits in those regions. Early action to reduce costs could not fully cover the reduction in profits caused by lower sales from our UK factories. Construction of two new manufacturing units in Wiltshire, UK has proceeded to plan. The new buildings will provide world class manufacturing facilities for the activities currently located on the nearby Cooper-Avon Tyres site. DIVIDEND The Board are recommending a final dividend of 17.2p per share which will be paid on 28 January 2000 to ordinary shareholders on the register on 6 January 2000. When added to the interim dividend of 7.0p per share the total dividend of 24.2p shows an increase of 6.1% on the 1998 dividend of 22.8p and is the fifth consecutive year of real increase in dividend. RESULTS Operating profit for the year was £21.9 million (1998: £22.4 million). As a result of a net interest charge of £1.4 million (1998: net interest income £0.8 million) Group profit before exceptional items and taxation was £20.5 million (1998: £23.2 million) on a turnover of £266.2 million (1998: £267.1 million). The Group profit after exceptional items and before taxation was £21.9 million (1998: £23.9 million). There was an exceptional gain of £1.4 million (1998: £0.7 million) which arose from insurance proceeds received for the refurbishment of plant and machinery that could not be replaced following the fire at our facility in Albion, New York. The taxation charge of £6.3 million (1998: £7.0 million) represented 28.1% (1998: 30.2%) of profit before taxation and exceptional items. Profit after taxation was £15.6 million (1998: £16.9 million) and basic earnings per share were 56.8p (1998: 62.4p). Profit after taxation and before exceptional items was £14.7 million (1998: £16.2 million) with earnings per share on the same basis at 53.5p (1998: 59.8p). The acquisition in Spain of Industrial Flexo SA and Proflex SA at a cost of £20.7 million including net borrowings assumed of £3.1 million, included goodwill of £13.2 million which is being amortised over 20 years. The goodwill amortised during the year was £0.2 million. In previous years goodwill on acquisitions was written off to reserves in the year of acquisition. Capital expenditure was £35.4 million (1998: £14.0 million) of which £19.8 million (1998: £2.0 million) was associated with the new facilities in Wiltshire. Before including the costs of acquisitions and capital expenditure, the Group generated cash of £9.8 million (1998: £22.2 million). As part of the funding of the Spanish acquisitions a Euro loan was arranged, which also reduced the balance sheet exposure of the assets of our companies in countries with Euro based currencies. Net debt at the year-end was £46.4 million (1998: £2.5 million). AUTOMOTIVE Avon Automotive has benefited substantially from an approach which recognises the important combination of local relationships supported by global customer links. We have invested in Engineering, Sales Support and Product Development Centres around the world. These facilities work in close partnership with the major vehicle makers to offer a comprehensive system design, build and test service. The manufacturing facilities are strategically located to ensure consistency of supply and quality to customer production lines. At constant exchange rates and including acquisitions, turnover decreased by 3.7% to £187.8 million and operating profits were lower by 15.4% in comparison to 1998 at £13.2 million. The return on sales was 7.0% compared with 8.0% in 1998. Reductions in car builds by a number of our European customers hit the profitability of our UK plants. These well publicised shortfalls, caused by the late introduction of new models and by poor sales of existing vehicles, eased during the last quarter but affected most of the year. The Continental European plants all gained business from new models coming on stream and product lines which were transferred from the UK and USA. Of particular relevance were the blow moulding of air ducts and start up of Avon's permeation resistant fuel hose 'CADbar' in France, and increased coolant hose production in Portugal and the Czech Republic. The acquisition of Industrial Flexo SA and Proflex SA in Spain significantly increased our share of the European coolant hose market as well as providing Avon with new customers, new technologies and a strong local management team. In North America volumes remained buoyant and our ability to introduce new variants of 'CADbar' maintained our technology lead despite increased competition. The build up of coolant hose volumes at the Orizaba factory in Mexico has established the plant as a qualified automotive component facility gaining the benefits of volume and scale. Market conditions in all regions remained tough throughout the year with continued pressure to reduce prices. These requirements were met through a combination of cost reductions and product redesigns. The newly formed procurement team was able to leverage Avon's global purchasing and worked with suppliers to achieve the most cost effective purchasing practices. Our development of preferred suppliers will be of increasing importance over the next few years. During the year we won a number of new orders which will come into production during the next three years and provide a substantial platform for growth. New business with General Motors, Ford, Daimler-Chrysler, VW and Nissan for hose and anti-vibration products results from the ongoing investment in process and product development, which enables us to offer innovative products at a cost effective price from our global manufacturing base. TECHNICAL PRODUCTS As the result of the actions we have taken in line with our strategy of tighter focus, we have increased sales and profits. Acquisitions that were made in 1997-1998 have been integrated as we have continued to focus on those businesses which offer the potential for growth and sustainable earnings. This has led to the sale of our UK Fabrications business in September 1999 and CQC Ltd during the following month. At constant exchange rates, turnover of £78.4 million was 10.9% higher than 1998 and operating profits were 31.8% higher at £8.7 million with a return on sales of 11.1% compared with 9.3% in 1998. We are the world's largest manufacturers of rubber components for machine milking systems. Our teams in the United States and Europe maintain close liaison with major equipment suppliers and contribute specialist expertise to support their development programmes. During the year we successfully transferred our dairy rubberware business from Cadillac, Michigan, to our Hi-Life facility in Johnson Creek, Wisconsin. This was achieved with no disruption to our customers and has delivered benefits in line with our plans. Our world-leading position in the design and manufacture of military respirators enabled us to submit a tender for the Joint Services General Purposes Mask Programme for US military personnel. Bids are currently being evaluated and a decision is expected early in year 2000. Nylaflow, the braided plastic hose product line that was acquired from DSM last year was relocated from Reading, Pennsylvania and the opportunity was taken to upgrade the production equipment at the time of the transfer to Cadillac, Michigan. The Zatec facility near Boston, Massachusetts, which manufactures cleaning blades for business machines, has introduced new working methods to increase productivity. The result has been a leaner, more focussed operation, capable of expanding its customer base. Blades are also manufactured in our UK Business Machines joint venture Avon-Ames, where development costs and low sales of established roller products led to an unsatisfactory trading result. Earlier investments in improved production equipment have enhanced profitability in our market-leading aerosol gasket business and enabled our plant at Malesherbes, France, to provide supplies of high quality mixed compounds to other facilities in addition to meeting its own requirements. OUTLOOK The coming year will see the completion of two new factories in the UK. Despite the strength of sterling, the lower cost base of these facilities together with recent investments in our overseas operations will contribute to the strong positioning of Avon as an international partner for customers in our core markets. We have won important new automotive contracts which will come on stream over the next three years and the strong US economic climate remains a positive indicator for our substantial business activities in North America. Whilst we expect further challenges during the coming year, we will continue our strategic progress by means of selective acquisitions, disposals and organic development. SUMMARISED CONSOLIDATED PROFIT AND LOSS ACCOUNT Year Year Ended Ended 02-Oct-99 03-Oct-98 Note £'000 £'000 Turnover Continuing activities 261,142 267,085 Acquisitions 5,022 - -------- -------- Total turnover 266,164 267,085 -------- -------- Operating profit Continuing activities 21,421 22,351 Acquisitions 459 - -------- -------- Total operating profit 2 21,880 22,351 Profit on sale of fixed assets and investments 3 1,422 718 -------- -------- Profit on ordinary activities before interest 23,302 23,069 Interest payable (4,532) (3,014) Interest receivable 3,136 3,850 -------- -------- Profit on ordinary activities before taxation 21,906 23,905 Taxation 4 (6,257) (7,003) -------- -------- Profit on ordinary activities after taxation 15,649 16,902 Minority interests 133 254 -------- -------- Profit for the year 15,782 17,156 Dividends (including non-equity interests) (6,733) (6,298) -------- -------- Retained profit 9,049 10,858 -------- -------- Rate of dividend Cumulative preference 6 7.0% 4.9% Ordinary 6 24.2p 22.8p Earnings per ordinary share 7 Basic 56.8p 62.4p Before exceptional items 53.5p 59.8p Diluted 56.7p 61.7p CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Year Year Ended Ended 02-Oct-99 03-Oct-98 £'000 £'000 Profit for the year 15,782 17,156 Net exchange differences on overseas investments (431) (1,268) -------- -------- Total gains and losses for the year 15,351 15,888 ======== ======== RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS Year Year Ended Ended 02-Oct-99 03-Oct-98 £'000 £'000 Opening shareholders' funds 80,405 105,791 Profit for the period 15,782 17,156 Dividends (6,733) (6,298) Net exchange difference on overseas investments (431) (1,268) New share capital subscribed (net) 534 273 Goodwill written off on acquisitions - (35,249) -------- -------- Closing shareholders' funds 89,557 80,405 ======== ======== Equity shareholders' funds 89,057 79,905 Non-equity shareholders' funds 500 500 -------- -------- 89,557 80,405 ======== ======== CONSOLIDATED BALANCE SHEET Year Year Ended Ended 02-Oct-99 03-Oct-98 £'000 £'000 Fixed assets Intangible assets 12,788 - Tangible assets 102,102 67,408 Investments 900 1,001 -------- -------- 115,790 68,409 Current assets Stocks 24,014 21,444 Debtors - Amounts falling due within one year 58,520 48,502 Debtors - Amounts falling due after more than one year 4,831 5,419 Investments - 36,800 Cash at bank and in hand 17,336 6,473 -------- -------- 104,701 118,638 Creditors Amounts falling due within one year 67,215 55,389 -------- -------- Net current assets 37,486 63,249 Total assets less current liabilities 153,276 131,658 Creditors Amounts falling due after more than one year 55,115 43,564 Provisions for liabilities and charges 6,276 5,263 -------- -------- Net assets 91,885 82,831 ======== ======== Capital and reserves Ordinary share capital 27,824 27,718 Preference share capital 500 500 Share premium account 34,070 33,642 Revaluation reserve 2,723 2,735 Profit and loss account 24,440 15,810 -------- -------- Shareholders' funds (incl.non-equity interests) 89,557 80,405 Minority interests 2,328 2,426 -------- -------- Total capital employed 91,885 82,831 ======== ======== SUMMARISED CONSOLIDATED CASH FLOW STATEMENT Year Year Ended Ended 02-Oct-99 03-Oct-98 Note £'000 £'000 Operating activities Operating profit 21,880 22,351 Goodwill amortisation 163 - Depreciation 9,734 8,871 Movement in working capital and provisions (8,905) 1,787 Other movements (646) 84 -------- -------- Net cash flow from operating activities 22,226 33,093 Associated company dividends received - 149 Returns on investments and servicing of finance (1,926) 1,230 Corporation tax paid (4,215) (7,624) Net capital expenditure (32,226) (12,878) Purchase of fixed asset investments - (292) Sale of fixed asset investments - 145 Purchase of subsidiary undertakings (17,957) (44,262) Equity dividends paid (6,394) (5,930) -------- -------- Net cash outflow before management of liquid resources and financing (40,492) (36,369) Decrease/(Increase) in cash deposits treated as liquid resources 36,800 (1,800) Financing Issue of ordinary shares 534 273 Issue of shares to minority shareholders - 149 Movement in loans and finance leases 13,760 26,937 -------- -------- Increase/(decrease) in cash in the period 10,602 (10,810) ======== ======== Reconciliation of net cash flow to movement in net debt Increase/(decrease) in cash in the period 10,602 (10,810) Movements in loans and finance leases (13,760) (26,935) Movement in liquid resources (36,800) 1,800 Amortisation of loan costs (50) - Loans and finance leases acquired from acquisitions (3,457) - Exchange differences (429) 993 -------- -------- Movement in net debt in the period (43,894) (34,952) Net (debt)/funds at the beginning of the period (2,472) 32,480 -------- -------- Net debt at the end of the period 8 (46,366) (2,472) ======== ======== NOTES TO THE PRELIMINARY ANNOUNCEMENT 1. The figures and financial information for the year ended 2 October 1999 do not constitute the statutory financial statements for that year. Those financial statements have not yet been delivered to the Registrar, nor have the auditors yet reported on them. The company's accounting period ends on the Saturday nearest to 30 September each year. The period ended 2 October 1999 consisted of 52 weeks (1998 53 weeks). This preliminary announcement has been prepared using accounting policies that are consistent with the policies detailed in the financial statements for the year ended 3 October 1998 except for the introduction of the following: * Interest is capitalised gross during the period of construction where it relates either to the financing of major projects with long periods of development or to dedicated financing of other projects. All other interest is charged against income. * In accordance with Financial Reporting Standard No 10 'Goodwill and Intangible Assets' (FRS10), goodwill arising on acquisitions made on or after 3 October 1998 is capitalised and amortised on a straight line basis over its useful economic life. Previously all goodwill was written off against reserves in the year of acquisition. On the subsequent disposal or termination of a previously acquired business, the profit or loss on disposal is determined after including the attributable amount of purchased goodwill previously written off. The results of businesses acquired are included from the effective date of acquisition and businesses sold are included up to the date of disposal. FRS14, 'Earnings per Share' has been adopted and, consequently, basic and diluted earnings per share have been calculated in accordance with the new methodology. Comparative basic and diluted earnings per share for 1998 have been re-calculated on the same basis. Other financial reporting standards which have been adopted for the year ended 2 October 1999, but do not impact on the presentation of information in the preliminary announcement are as follows: * FRS 11 Impairment of fixed assets and goodwill * FRS 12 Provisions, contingent liabilities and contingent assets * FRS 13 Derivatives and other financial instruments: disclosures 2. Segmental Information : Continuing activities Year Ended Year Ended 02-Oct-99 03-Oct-98 £'000 £'000 a) External sales by destination: United Kingdom 51,655 63,025 Other European 73,776 68,020 North America 133,926 129,963 Rest of World 6,807 6,077 -------- -------- 266,164 267,085 ======== ======== b) External sales by origin: United Kingdom 90,621 103,759 Other European 41,385 36,291 North America 134,158 127,035 -------- -------- 266,164 267,085 ======== ======== c) Operating profit by origin: United Kingdom 3,298 5,478 Other European 3,743 2,435 North America 14,839 14,438 ------- ------- 21,880 22,351 ======== ======== d) External sales by business sector: Automotive Components 187,815 196,097 Technical Products 78,349 70,988 -------- -------- 266,164 267,085 ======== ======== e) Operating profit by business sector: Automotive Components 13,198 15,740 Technical Products 8,682 6,611 -------- -------- 21,880 22,351 ======== ======== f) Profit before taxation and exceptional items: 20,484 23,187 ======== ======== g) Analysis of external sales and operating profit: External Sales - First half of year 131,596 128,695 - Second half of year 134,568 138,390 -------- -------- 266,164 267,085 ======== ======== Operating profit - First half of year 10,050 9,609 - Second half of year 11,830 12,742 -------- -------- 21,880 22,351 ======== ======== 3. The exceptional gain arose from insurance proceeds received for the refurbishment of plant and machinery that could not be replaced. The expenditure on the major refurbishment has been capitalised and the proceeds taken as an effective gain on disposal. The gain of £1,422,000 is before taking account of the related tax charge of £498,000. 4. The taxation charge, based on the results for the year, comprises: 1999 1998 Current taxation: £'000 £'000 United Kingdom corporation tax at 30.5% (1998 31%) 546 1,981 Overseas taxes 3,651 5,077 Associated company 14 51 -------- -------- 4,211 7,109 2,046 (106) -------- -------- Deferred Tax 6,257 7,003 ======== ======== 5. Profit and loss accounts of foreign group undertakings are translated at average rates of exchange and balance sheets are translated at year-end rates. 6. If approved, payment of the final dividend on the ordinary shares will be made on 28 January 2000 to shareholders on the register at the close of business on 6 January 2000. The cost will be £4,762,000 (1998: £4,458,000). The half year dividend on the 500,000 7% cumulative preference shares will be paid at the rate of 3.5p per share on 31 December 1999 to shareholders on the register at close of business on 3 December 1999. The cost will be £17,500 (1998 £12,250). The title of these shares has been changed during the year following the abolition of ACT. 7.Basic earnings per share amount to 56.8p (1998 62.4p) and are based on profit after taxation, and deduction of minority interests, and non-equity dividends, of £15,747,000 (1998 £17,131,000) and 27,721,000 ordinary shares (1998 27,454,000) being the weighted average of the shares in issue during the year. Earnings per share before exceptional items amount to 53.5p (1998 59.8p) and are based on profit after taxation and deduction of minority interests and non-equity dividends, of £14,823,000 (1998: £16,413,000). Diluted earnings per share amount to 56.7p (1998 61.7p) and are based on profit after taxation, and deduction of minority interests, and non-equity dividends of £15,747,000 (1998: £17,131,000) and 27,795,000 ordinary shares (1998: 27,750,000) being the diluted weighted average number of shares in issue during the year. The difference between the weighted average number of shares in issue and the diluted weighted average number of shares in issue relates to unexercised share options. Adjusted earnings per share figures have been calculated in addition to the basic and diluted figures since, in the opinion of the directors, this gives a better understanding of the Group's performance. 8. Analysis of movement in net debt As at 03-Oct-98 Cash flow £'000 £'000 Cash in bank and in hand 6,473 10,313 Overdrafts (2,366) (105) Debt due after 1 year (41,240) (7,752) Debt due within 1 year (103) (6,671) Finance leases (2,036) 613 Current asset investments 36,800 (36,800) ------- ------- (2,472) (40,402) ------- ------- Exchange As at movements Acquisitions 02-Oct-99 £'000 £'000 £'000 Cash in bank and in 48 502 17,336 Overdrafts 178 (108) (2,401) Debt due after 1 year (605) (3,282) (52,879) Debt due within 1 year (54) - (6,828) Finance leases 4 (175) (1,594) Current asset investments - - - -------- -------- -------- (429) (3,063) (46,366) -------- -------- -------- 9.On 30 June 1999 the Group acquired two Spanish companies; Industrial Flexo S.A. and Proflex S.A. The total cost of the acquisition was £17,681,000 including £850,000 of acquisition expenses. The fair value of the net assets acquired totalled £4,529,000 giving rise to goodwill of £13,152,000. 10. The company completed the sale of its subsidiary company, CQC Ltd (formerly known as CQC PLC) on 15 October 1999 to a new company Crossco (430) Ltd which was formed by three existing directors of CQC, Mr M Rennie, Managing Director, Mr P Gulliford, Marketing Director and Mr A Greene, Finance Director. Based in Barnstaple, Devon the company manufactures a wide range of advanced textile based clothing and personal protection equipment for armed forces and, at the date of the disposal, employed 157 people. The consideration for this disposal amounted to £1.6 million in cash. Additionally, and by a separate transaction, the Group also sold the freehold site, from which CQC Ltd operated, for a consideration of £1.0 million in cash. The sale of the business, which was regarded as non-core to the Group's activities did not result in any significant gain or loss based upon the carrying value in the accounts (including goodwill previously written off against reserves). During the year ended 2 October 1999, CQC Ltd made a profit before interest, tax and management charges of £0.6 million. 11. Over the last three years the Group has conducted a review aimed at ensuring that all IT systems will be Year 2000 compliant in time to support business operations and that all embedded chips in production and process equipment are checked and where necessary replaced. This review has been extensive and subject to external audit by specialist consultants acting for customers and we believe that we have taken all reasonable steps to ensure that all significant IT systems (including production and process equipment) will be compliant by the end of the year. However, the diversity of systems in use and reliance on third parties for some services means that it is impossible to guarantee that no Year 2000 problems will arise. Contingency and 'Roll Over' plans have been designed to promote a smooth transition to the new millennium and to minimise disruption caused by unexpected internal or external failures. Major customers and suppliers have been contacted and where appropriate Avon staff have carried out on-site audits. The incremental costs of this exercise have been covered within normal IT expenditure and are not considered material. 12. Copies of the directors' report and the audited financial statements for the year ended 2 October 1999 will be posted to shareholders by 22 December 1999 and may be obtained thereafter from the company's registered office at Manvers House, Kingston Road, Bradford on Avon, Wiltshire BA15 1AA (Telephone 01225 861100).

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