Final Results
Zotefoams PLC
04 March 2008
Preliminary Results for the Year Ended 31 December 2007
Strong performance
Zotefoams plc, which manufactures and sells high-performance foams, today
announces its preliminary results for the 12 months ended 31 December 2007.
During 2007, Zotefoams continued investment in high-performance products under
the ZOTEK(R) brand name complementing its strengths in polyolefin foams. ZOTEK
(R) foams are used in a wide range of applications due to their light weight,
fire-retardancy, good chemical resistance and temperature performance. ZOTEK(R)
foams can be used in highly technical and demanding applications such as within
the aerospace, pharmaceutical, semi-conductor and chemical processing industries
thereby broadening the sales base outside of the traditional areas such as sport
and leisure, premium packaging, construction, automotive and industrial goods.
FINANCIAL HIGHLIGHTS
• Revenue of £31.61 million (2006: £30.05 million), up 5%
• Operating profit of £3.46 million (2006: £2.84 million), up 22%
• Profit before tax of £3.37 million (2006: £2.67 million), up 26%*
• Operating margin improved from 9% in 2006 to 11%
• Strong balance sheet with gearing of 6% (2006: 6%)
• Proposed final dividend of 3.0p per share making a total for 2007 of
4.5p (2006: 4.5p)
*Excludes exceptional items. There were no exceptional items in 2007 but in
2006 there was a £1.07million exceptional charge
OPERATIONAL HIGHLIGHTS
• Strong sales growth, particularly in Europe and Asia
• High-performance polymers sales of £734,000, up 49%
• Long-term contract signed by one of Zotefoams' customers to supply parts
fabricated from ZOTEK(R) F PVDF for the 737 - Boeing's highest volume
passenger aircraft
• Distribution agreement signed to act as distributor in Europe and Asia for
the T - Tubes (R) brand of advanced insulation made from ZOTEK(R) F foams
Commenting on the results, Nigel Howard, Chairman, said:
'Zotefoams' strategy is to grow our existing business in polyolefin foams while
developing a portfolio of high-performance polymers. We will seek to profitably
expand through a combination of organically growing both our polyolefin and
high-performance polymers businesses and through partnerships or acquisitions in
related technologies, products or markets.
The polyolefin business performed well in 2007 and trading for the first two
months in 2008 is in line with our expectations. Development of high-performance
polymers continues to progress and offers many exciting opportunities. The Board
continues to be positive about the future.'
Enquiries:
Zotefoams plc Tel Today: 0207-831-3113
David Stirling, Managing Director Thereafter: 0208-664-1600
Clifford Hurst, Finance Director
Financial Dynamics Limited 0207-831-3113
Ben Brewerton/John Dineen
INTRODUCTION
During 2007 we grew profit before tax and exceptional items by 26% to £3.37m
(2006: £2.67m) and sales increased by 5% to £31.61m (2006: £30.05m). There were
no exceptional items in 2007 (2006: a charge of £1.07m) and profit before tax
after exceptional items was therefore £3.37m (2006: £1.60m). Sales growth in the
second six months of the year was particularly pleasing with continued progress
in Europe and Asia and a recovery seen in North America. Gross margins in 2007
increased to 27.1% (2006: 25.9%) and Group operating margins improved from 9% to
11% of sales. Our commitment to development of our high-performance products
business was reinforced with a landmark deal with UFP Technologies of USA, a key
Zotefoams customer, to act as distributor for their T-Tubes (R) product line,
made from our ZOTEK(R) fluoropolymer foam, in Europe and Asia.
We intend to grow sales in our core polyolefin business in excess of the rate of
inflation in Europe and achieve double digit percentage growth in North America
and Asia. Our sales growth in America is supported by our factory in Kentucky
which opened in mid-2001 while in Asia we will consider a similar operation,
either under a license or as a joint venture, as sales increase to a level where
such an investment becomes financially attractive. We are also committed to
developing a portfolio of unique foam products from high-performance materials
which will enjoy significant advantages over competitive materials. This will
allow higher margins for Zotefoams and confirm our position as the pre-eminent
foam technology company. We intend to achieve this growth while continuing to
improve our operating margins and our return on capital employed.
Chris Ryan, who joined Zotefoams in 1999 as a non-executive director, resigned
from the Board effective 31 December 2007 after eight years service. On behalf
of the Board I would like to thank Chris for his service and contribution over
the years. On 23 July 2007 Richard Clowes joined the Board as a non-executive
director. Richard is a chartered engineer with wide ranging operational and
general management experience in supplying components to, amongst others, the
aerospace and automotive markets. He was a main Board Director of GKN plc from
2001 to 2005. I am delighted to welcome Richard to the Board. With Richard,
David Campbell (the ex-Chief Executive of British Vita) who joined the Board in
February 2007 and Roger Lawson (who was a director of 3i) I believe that we have
a strong and balanced team of non-executive directors to support the executive
in moving the business forward.
We are proposing a maintained final dividend of 3.0p per ordinary share, which
if approved, would make a total of 4.5p per ordinary share for the year (2006:
4.5p). At this level the dividend would be covered 1.5 times by post-tax
earnings excluding one-off tax items. The Board's priority is to retain the
capability to support the growth opportunities within the business while
considering an improved dividend policy as dividend cover increases.
OUTLOOK
The polyolefin business performed well in 2007 and trading for the first two
months in 2008 is in line with our expectations. Development of high-performance
polymers continues to progress and offers many exciting opportunities. The Board
continues to be positive about the future.
BUSINESS REVIEW
Zotefoams is the world's leading manufacturer of cross-linked block foams. Its
products are used in a wide range of markets including sports and leisure,
packaging, automotive, aerospace, healthcare, construction, marine and the
military. Through a unique production process, the Company produces foams which
have controlled properties and are of a strength, consistency, quality and
purity superior to foams produced by other methods.
BUSINESS OVERVIEW
Zotefoams considers its business to fall into two distinct categories:
polyolefin foams and high-performance polymers. Both businesses rely on our
unique production process which uses nitrogen gas at high temperature and
pressure to foam solid plastics. Polyolefin foams are mainly made from
polyethylene which, when foamed, produces a versatile material used in a wide
variety of applications. Typically our products are sold to foam converters who
process the foam by a variety of techniques such as cutting, welding, moulding
and routing into finished or semi-finished parts based on end-user requirements.
The benefits of Zotefoams' products are evident at both foam processors and
end-users and include purity, consistency of processing, good performance to
weight ratio and aesthetics. Key to growing our business successfully is
developing and maintaining close relationships with the converters combined with
business development activities at end-users to highlight the benefits of our
materials and track industry trends for future development.
High-performance polymers use the processing technology developed for polyolefin
foams and applies it to other materials. This is an emerging business which
offers an improved return on capital in new business segments. We have
developed, patented and launched world leading products made from fluoropolymer
and nylon which are branded 'ZOTEK(R) ' - our high-performance foams' trademark.
These foams are targeted at highly technical and demanding applications in
markets such as aerospace, pharmaceutical, semi-conductor, chemical processing
and automotive where market development lead times are long. The timing of
revenue generation is therefore difficult to predict.
STRATEGY AND OBJECTIVES
Zotefoams' strategy is to grow our existing business in polyolefin foams while
developing a portfolio of high-performance polymers.
Our stated objectives are to:
1. Grow sales in our polyolefin business in excess of the rate of inflation in
Europe and achieve double digit percentage growth in North America and Asia.
2. Develop a high-performance polymers portfolio to deliver enhanced margins.
3. Improve our operating margins.
4. Improve our return on capital employed.
Performance in 2007 against these objectives was as follows:
1. Sales:
a. Polyolefin sales in the UK and Europe grew by 7% which was
significantly above the average inflation rate.
b. Polyolefin sales in North America fell by 1% in constant currency.
Polyolefin sales growth of 19% in the second half of 2007 compared
to the second half of 2006 almost entirely reversed the decline seen
in the first six months of the year.
c. Polyolefin sales in Asia grew by 96%. We stated that 2006 would be a
year of transition, exiting a regional distribution agreement and
forming more direct relationships with foam converters and end-users.
The results for 2007 vindicate this approach and we believe that Asia
offers significant potential for growth in niche, higher added-value
products. We are therefore focusing our resources on these products
and have recently recruited additional sales resource for this
territory.
2. Sales of high-performance polymers grew by 49%. (59% after adjusting for
movements in exchange rates).
3. Group operating margins, pre-exceptional items, improved from 9% to 11% of
sales revenue.
4. Pre-tax return on capital employed, pre-exceptional items, increased from 11%
to 13%
FINANCIAL RESULTS
The 5% increase in Group sales was mainly due to a 4% volume increase in
polyolefin foams. Growth in high-performance polymer foams increased Group sales
by 1%. Movements in foreign currency exchange rates reduced sales by 2% although
these were offset by price rises and changes in product mix. Gross margin
increased to 27.1% from 25.9% with savings in sales commissions and
manufacturing costs more than offsetting increases in raw material and energy
prices.
Distribution costs (which include selling expenses) rose by 11% as we continued
to increase our sales resources in both polyolefins and high-performance
polymers. Administrative expenses are net of a foreign exchange gain of £0.23m
(2006: loss of £0.15m). Profit before tax increased by 26% to £3.37m (2006:
£2.67m before exceptional items). Profit before tax after exceptional items was
£3.37m (2006: £1.60m).
The overall effective tax rate is 13% (2006: 26% before exceptional items). The
decline was due to a £0.20m reduction in the Group's deferred tax liability
following a change in the rate at which the Group's future corporation tax
liabilities are provided for and a £0.23m favourable adjustment to the tax
charge in respect of prior periods. Excluding these two items, the effective
tax rate is 26%.
Earnings per share and Dividend
Group earnings per share after exceptional items were 8.0p (2006: 5.5p excluding
exceptional items). The Directors are recommending that the final dividend is
maintained at 3.0p per share payable on 22 May 2008 to shareholders on the
Company register at 25 April 2008. This would bring the total dividend to 4.5p
per ordinary share for the year (2006: 4.5p).
Cash Flow
Cash generated from operations was £4.78m (2006: £4.72m) after a £1.29m increase
in working capital. The working capital increase reflected the higher sales
activity in the second half of 2007 and the final instalment payment of £0.48m
to terminate a distribution agreement (the termination cost was taken as an
exceptional item in 2006). Capital expenditure of £2.69m was similar to last
year. During the year the Company paid £0.24m to purchase 196,330 of its own
shares. After the dividend payment of £1.64m the net cash outflow amounted to
£0.25m, increasing net debt to £1.68m (2006: £1.43m). Gearing remains low at 6%
(2006: 6%).
MARKETS AND OPERATIONS
In 2007 overall sales grew by 5% to £31.61m (2006: £30.05m).
The polyolefin foams business grew to £30.87m (2006: £29.56m). Overall the
polyolefin foams market is relatively mature and growth comes from focused
development in more specialist areas. Our sales and marketing approach
recognises this and our sales teams work closely with customers to identify
areas of opportunity and support them in their approach to these areas. This
structure, with a direct sales organisation to service all customers, is showing
good progress particularly in continental Europe where sales grew by 6% and Asia
where sales grew by 96%. These areas, until March 2006, were managed by an
agent and a distributor respectively and the cost of exiting these relationships
was shown as an exceptional item in 2006. In the UK sales increased by 8% with
a combination of volume growth and a stronger product mix. In North America,
where our business has been affected by a weaker economy, sales declined by 1%
in US dollars as sales growth of 19% in the second six months of the year offset
the poor result in the first six months of 2007.
Our high-performance polymers ('HPP') are unique foams produced for technically
demanding applications. They offer properties such as improved chemical
resistance, fire-retardancy or temperature performance compared to other foam
materials. The applications for these products are often much larger in value
than a typical polyolefin foam application, however the performance requirements
and test conditions are very demanding and evaluation can take many months or
sometimes years. Therefore the inherent uncertainty of such projects,
particularly their timing and the unique requirements of specific applications
which will vary from project to project makes projecting revenues and success
rates extremely difficult, especially at this early stage of their development.
In 2007, HPP sales were £734,000, an increase of 49% over the previous year.
The majority of these sales were ZOTEK (R) F fluoropolymer grades of foam in
aerospace and clean-room insulation applications, although other projects are
under development which use their unique combination of fire-retardancy, purity
and chemical resistance. Particularly pleasing was a contract awarded in
February 2008 to Technifab Inc., a long-standing customer based in Ohio USA, for
supply of fabricated foam gaskets for the Boeing 737 programme. As our HPP
business develops, we are investing significantly in both technical and
marketing resource. During 2007 we increased sales and marketing expenditure to
investigate and develop markets for our ZOTEK(R) N B50 polyamide (nylon) foam, a
high temperature material with the capability to be heat moulded. Development
of a second product in the ZOTEK(R) N range, with a softer feel for specific
application requirements, is close to completion with launch anticipated in the
next few months. In August 2007, we signed a distribution agreement with UFP
Technologies Inc. under which Zotefoams will act as distributor in Europe and
Asia for the T-Tubes (R) brand of advanced insulation made from a specific grade
of ZOTEK(R) F foam which in October 2007 received an industry standard approval
for clean room insulation use. This is significant partnership approach to
development of a new market with a key customer where Zotefoams will act as the
direct sales contact for an end-user market for the first time.
Zotefoams operates from two sites: Croydon UK and Northern Kentucky, USA. Our
site in Kentucky receives intermediate materials from the UK and processes them
into Azote (R) polyolefin foams for the North American market. From our Croydon
site we supply Azote (R) foams to all locations outside North America,
intermediate Azote (R) products to our 'satellite foaming plant' in Kentucky and
ZOTEK (R) foams for worldwide sale. With sufficient capacity in Kentucky for
the foreseeable future our capital program for capacity increases and process
capability enhancement is focused on our Croydon plant. During 2007 we spent
£2.69m on capital expenditure which included the completion of the refurbishment
and upgrade of another of our large high-pressure vessels. This reduces to
approximately 20% the proportion of our high-pressure capacity which operates on
a water-cooling mechanism where corrosion accelerates the need for
refurbishment. There remains one large high-pressure vessel which has not been
refurbished and, as part of an ongoing programme to minimise the risks
associated with corrosion, this vessel will be removed from production and
inspected within the next few months.
Our major raw materials are commodity polymers and therefore are subject to
rapid and sometimes large price movements. However in 2007 the price of low
density polyethylene, by far our largest raw material cost, remained relatively
stable during the year with Euro prices averaging a 2.6% increase over 2006.
Purchasing bulk raw materials in Euros helps to offset the natural currency
exposure of the business where we typically sell in the currency of the
customer. As approximately 75% of our sales are to non-UK customers,
denominated mainly in Euro and US Dollars, we are exposed to foreign exchange
movements. The Group experienced adverse movements in average exchange rates
before currency hedging during 2007. At the average rates effective in 2006,
sales would have been approximately £0.5m higher and operating profit
approximately £0.4m higher. This was partly offset by a £0.2m foreign exchange
gain in administrative costs which includes the effects of the Group's hedging
policy.
Energy costs have a significant impact on our business with energy costs
amounting to 7% of Group sales. In March 2007 we renewed our UK energy contract
fixing prices for two years from 1 December 2007 to 30 November 2009 allowing
certainty of input prices on which to base our relationship with customers.
ZOTEK(R) and Azote(R) are registered trademarks of Zotefoams plc
T-Tubes(R) is a registered trademark of UFP Technologies Inc. See
www.t-tubes.com
Consolidated Income Statement
for the year ended 31 December 2007
2007 2006
Pre- Exceptional Post-
exceptional items exceptional
items (see note 4) items
Note £000 £000 £000 £000
______ ______ ______ ______
Revenue 2 31,606 30,052 - 30,052
Cost of sales (23,035) (22,257) - (22,257)
______ ______ ______ ______
Gross profit 8,571 7,795 - 7,795
Distribution costs (2,344) (2,117) - (2,117)
Administrative expenses (2,766) (2,842) (1,074) (3,916)
______ ______ ______ ______
Operating profit 3,461 2,836 (1,074) 1,762
Financial income 5 1,063 884 - 884
Finance costs 5 (1,152) (1,047) - (1,047)
______ ______ ______ ______
Profit before tax 3,372 2,673 (1,074) 1,599
Taxation 6 (454) (682) 322 (360)
______ ______ ______ ______
Profit for the year 3 2,918 1,991 (752) 1,239
______ ______ ______ ______
Attributable to:
Equity holders of
the parent 2,918 1,991 (752) 1,239
______ ______ ______ ______
Earnings per share
Basic (p) 7 8.0 3.4
______ ______
Diluted (p) 7 7.9 3.4
______ ______
Consolidated statement of recognised income and expense
for the year ended 31 December 2007
2007 2006
£000 £000
______ ______
Foreign exchange translation differences on investment in foreign subsidiary (117) (905)
Effective portion of changes in fair value of cash flow hedges net of recycling (269) 163
Actuarial gains on defined benefit schemes 1,141 426
Tax on items taken directly to equity (271) (159)
______ ______
Net income/(expense) recognised directly in equity 484 (475)
Profit for the year 2,918 1,239
______ ______
Total recognised income and expense for the year 3,402 764
______ ______
Attributable to equity holders of the parent 3,402 764
______ ______
Consolidated balance sheet
as at 31 December 2007
2007 2006
Note £000 £000
______ ______
Non-current assets
Property, plant and equipment 26,436 27,018
Deferred tax assets 138 99
______ ______
Total non-current assets 26,574 27,117
Current assets
Inventories 4,280 3,785
Trade and other receivables 7,351 6,163
Cash and cash equivalents 258 82
______ ______
Total current assets 11,889 10,030
______ ______
Total assets 38,463 37,147
______ ______
Equity
Issued share capital (1,820) (1,816)
Share premium (13,941) (13,753)
Capital redemption reserve (15) (5)
Translation reserve 752 635
Hedging reserve 185 (84)
Retained earnings (11,827) (9,815)
______ ______
Total equity attributable to the equity holders of the Company (26,666) (24,838)
______ ______
Non-current liabilities
Interest-bearing loans and borrowings (300) (700)
Employee benefits 9 (2,465) (4,240)
Deferred tax liabilities (2,699) (2,764)
______ ______
Total non-current liabilities (5,464) (7,704)
Current liabilities
Interest-bearing loans and borrowings (400) (400)
Bank overdraft (1,242) (411)
Tax payable (561) (307)
Trade and other payables (4,130) (3,487)
______ ______
Total current liabilities (6,333) (4,605)
______ ______
Total liabilities (11,797) (12,309)
______ ______
Total equity and liabilities (38,463) (37,147)
______ ______
Consolidated cash flow statement
for the year ended 31 December 2007
£000 £000
______ ______
Cash flows from operating activities
Profit for the year 2,918 1,239
Adjustments for:
Depreciation, amortisation and impairment 3,129 3,251
Gain on sale of plant and equipment (9) -
Financial income (1,063) (884)
Financial expense 1,152 1,047
Equity-settled share-based payments 91 64
Taxation 454 360
______ ______
Operating profit before changes in working capital and provisions 6,672 5,077
Increase in trade and other receivables (1,287) (107)
(Increase)/ decrease in inventories (504) 51
Increase in trade and other payables 498 314
Decrease in provisions and employee benefits (600) (619)
______ ______
Cash generated from the operations 4,779 4,716
Interest paid (138) (126)
Tax paid (564) (823)
______ ______
Net cash from operating activities 4,077 3,767
Proceeds on disposal of property, plant and equipment 22 3
Interest received 17 8
Acquisition of property, plant and equipment (2,692) (2,641)
______ ______
Net cash used in investing activities (2,653) (2,630)
______ ______
Proceeds from the issue of share capital 202 -
Repurchase of own shares (242) -
Repayment of borrowings (400) (400)
Dividends paid (1,637) (1,634)
______ ______
Net cash used in financing activities (2,077) (2,034)
______ ______
Net decrease in cash and cash equivalents (653) (897)
Cash and cash equivalents at 1 January (329) 432
Effect of exchange rate fluctuations on cash held (2) 136
______ ______
Cash and cash equivalents at 31 December (984) (329)
______ ______
Cash and cash equivalents comprise cash at bank and short-term highly liquid
investments with a maturity date of less than three months.
1. Accounting policies
Zotefoams plc (the 'Company') is a Company incorporated in Great Britain.
The Group financial statements consolidate those of the Company and its
subsidiaries (together referred to as the 'Group').
The Group financial statements have been prepared and approved by the Directors
in accordance with International Financial Reporting Standards as adopted by the
EU ('Adopted IFRS').
The financial information does not constitute the Company's statutory accounts
for the year ended 31 December 2007 or 2006 but is derived from those accounts.
Statutory accounts for 2006 have been delivered to the Registrar of Companies,
and those for 2007 will be delivered following the Company's Annual General
Meeting. The auditors have reported on those accounts; their reports were
unqualified and did not contain statements under Section 237 (2) of the
Companies Act.
2. Segment reporting
The Group manufactures and sells high-performance foams for specialist markets
worldwide. These fall into two main business segments best categorised by their
constituent raw materials.
• Polyolefins: these foams are made from olefinic homopolymer and
copolymer resin. The most common resin used is polyethylene.
• High-performance polymers (HPP): these foams exhibit high-performance on
certain key properties, such as improved chemical, flammability or
temperature performance, due to the resins on which they are based. Turnover
in the segment is currently mainly derived from our ZOTEK(R) F foams made
from PVDF fluoropolymer. Other polymers either commercially launched or
being assessed in development include polyamide (nylon).
Due to our unique manufacturing technology Zotefoams can produce polyolefin
foams with superior performance to other manufacturers. Our strategy is to use
the capabilities of our technology to produce foams from other materials in
addition to polyolefins. The development of foams from high-performance polymers
is currently in its early stages with costs (including the technical and
marketing costs to develop these materials) exceeding revenues.
Polyolefins HPP Consolidated
2007 2006 2007 2006 2007 2006
Note £000 £000 £000 £000 £000 £000
______ ______ ______ ______ ______ ______
Revenue 30,872 29,558 734 494 31,606 30,052
Pre-exceptional profit/ 4,001 3,369 (540) (533) 3,461 2,836
(loss)
Exceptional items 4 - (1,074) - - - (1,074)
______ ______ ______ ______ ______ ______
Post-exceptional profit/(loss) 4,001 2,295 (540) (533) 3,461 1,762
Net financing costs (89) (163)
Taxation (454) (360)
______ ______
Profit for the year 2,918 1,239
Segment assets 36,434 35,716 1,891 1,332 38,325 37,048
Unallocated assets - - - - 138 99
______ ______ ______ ______ ______ ______
Total assets 38,463 37,147
Segment liabilities (8,370) (9,123) (167) (115) (8,537) (9,238)
Unallocated liabilities - - - - (3,260) (3,071)
______ ______ ______ ______ ______ ______
Total liabilities (11,797) (12,309)
Depreciation 3,093 3,188 36 63 3,129 3,251
Capital expenditure 2,600 2,287 92 354 2,692 2,641
______ ______ ______ ______ ______ ______
Geographical segments
UK and Eire Europe North Rest of the
America World
£000 £000 £000 £000 Total
______ ______ ______ ______ ______
For the year ended 31 December 2007
Revenue from external customers 8,180 15,249 7,131 1,046 31,606
Segment assets 30,881 - 7,582 - 38,463
Capital expenditure 2,622 - 70 - 2,692
______ ______ ______ ______ ______
For the year ended 31 December 2006
Revenue from external customers 7,543 14,391 7,504 614 30,052
Segment assets 29,746 - 7,401 - 37,147
Capital expenditure 2,574 - 67 - 2,641
______ ______ ______ ______ ______
3. Expenses and auditors' remuneration
2007 2006
£000 £000
______ ______
Included in profit for the year are:
Research and development costs expensed 803 924
Net exchange (gains)/ losses (227) 147
______ ______
Auditors' remuneration:
Group 84 80
- audit of these financial statements
- fees receivable by the auditors and their associates in respect of other
services:
- other services pursuant with legislation 18 18
- other services relating to taxation 11 5
______ ______
113 103
______ ______
4. Exceptional items
In 2006 the Company classified the following items as exceptional:
Bid costs
Relating to legal, advisory and other costs incurred in respect of a preliminary
approach for the share capital of the Company which was announced in January
2005 and terminated in November 2005.
Commercial agreement termination costs
Relating to the termination payment, legal, advisory and other costs to end the
commercial relationship with the Sekisui Group which was announced in March
2006.
Tax adjustment to exceptional items in prior year
2007 2006
£000 £000
______ ______
Bid costs - 30
Commercial agreement termination - (1,104)
______ ______
Exceptional items before taxation - (1,074)
Tax on above - 322
______ ______
Exceptional items after taxation - (752)
______ ______
5. Finance income and costs
Financial income
2007 2006
£000 £000
______ ______
Interest on bank deposits 17 8
Expected return on assets of defined benefit pension fund 1,046 876
______ ______
1,063 884
______ ______
Finance costs
2007 2006
£000 £000
______ ______
On bank loans and overdrafts 140 125
Interest on defined benefit pension obligation 1,012 922
______ ______
1,152 1,047
______ ______
6. Taxation
2007 2006
£000 £000
______ ______
UK corporation tax 904 484
Overseas taxation (5) 6
Adjustment to prior year UK tax charge (81) (60)
______ ______
Current taxation 818 430
Deferred taxation (364) (70)
______ ______
Total tax charge 454 360
______ ______
Factors affecting the tax charge
The tax charge for the period is lower (2006: lower) than the standard rate of
corporation tax in the UK of 30% (2006: 30%). The differences are explained
below:
2007 2006
£000 £000
______ ______
Tax reconciliation
Profit on ordinary activities before tax 3,372 1,599
______ ______
Tax at 30% (2006: 30%) 1,011 480
Effects of:
Research and development tax credits less expenses not deductible for tax (39) (53)
purposes
Deferred tax rate change from 30% to 28% (204) -
Partial recognition of US tax losses (32) (1)
Lower tax rates on overseas earnings (51) (6)
Adjustments to UK corporation tax charge in respect of previous periods (81) (60)
Adjustments to deferred tax charge in respect of previous periods (150) -
______ ______
Total tax charge 454 360
______ ______
In June 2007 a reduction in the UK tax rate from 30% to 28%, which will be
effective from 1 April 2008, was substantially enacted. In accordance with IAS12
Income Taxes, the deferred tax liability and assets have been calculated using a
rate of 28%
7. Dividends and earnings per share
2007 2006
£000 £000
______ ______
Final dividend prior year of 3.0p (2006: 3.0p) net per 5.0p ordinary share 1,090 1,087
Interim dividend of 1.5p (2006: 1.5p) net per 5.0p ordinary share 547 547
______ ______
Dividends paid during the year 1,637 1,634
______ ______
The proposed final dividend for the year ended 31 December 2007 of 3.0p per
share (2006: 3.0p) is subject to approval by shareholders at the AGM and has not
been included as a liability in these financial statements.
Earnings per ordinary share
Earnings per ordinary share is calculated by dividing profit after tax of
£2,918,000 (2006: £1,239,000) by the weighted average number of shares in issue
during the year. Diluted earnings per ordinary share adjusts for the potential
dilutive effect of share option schemes in accordance with IAS 33.
2007 2006
______ ______
Average number of ordinary shares issued 36,375,270 36,319,924
Deemed issued for no consideration 692,568 339,875
______ ______
Diluted 37,067,838 36,659,799
______ ______
Shares deemed issued for no consideration have been calculated based on the
potential dilutive effect of the Executive Share Option Scheme, options granted
under the HMRC Approved Share Option Scheme and Long Term Incentive Plans:
Exercise Number of shares under option
Date from which exercisable price 2007 2006
______ ______
7 April 2007 72.5p 152,834 1,130,034
22 December 2008 77.0p 1,026,320 1,026,320
27 March 2009 80.5p - 111,801
10 May 2010 Nil 306,959 -
______ ______ ______
1,486,113 2,268,155
______ ______
The average fair value of one ordinary share during the year was considered to
be 113.6p (2006: 88.3p).
8. Financial instruments
Policy
The Group's principal financial instruments include bank loans, cash and short-
term deposits the main purpose of which is to raise finance for the Group's
operations. Foreign exchange derivatives are used to help manage the Group's
currency exposure. It is and has been throughout the period under review, the
Group's policy that no trading in financial instruments shall be undertaken.
The main risks arising from the Group's financial instruments are credit risk,
interest rate risk, liquidity risk and foreign exchange risk. The Board reviews
and agrees policies for managing each of these risks and they are summarised
overleaf. These policies have remained fundamentally unchanged throughout the
year.
Credit risk
Management has a credit policy in place and the exposure to credit risk is
monitored on an ongoing basis. Credit evaluations are performed on all customers
requiring credit over a certain amount. The Group does not require collateral in
respect of financial assets.
In 2007 and 2006, the Group had credit insurance to mitigate this risk. However,
not all the exposure is covered so elements of risk remain.
At the balance sheet date there were no significant concentrations of credit
risk. The maximum exposure to credit risk is represented by the carrying amount
of each financial asset, including derivative financial instruments, in the
Balance Sheet.
Interest rate risk
The Group finances its operations through a mixture of retained profits and bank
borrowings. The Group borrows in the desired currency generally at a variable
rate of interest.
The interest rate profile of the Group's borrowings at 31 December was:
2007
Effective interest Fixed rates Variable rates Total
rate £000 £000 £000
______ ______ ______
Sterling 6% - 1,942 1,942
______ ______ ______ ______
- 1,942 1,942
______ ______ ______
The interest rate payable on the sterling overdraft is determined by LIBOR (or
similar) plus a bank margin.
(continued from table above)
2006
Effective interest Fixed rates Variable rates Total
rate £000 £000 £000
______ ______ ______
Sterling 6% - 1,511 1,511
______ ______ ______ ______
- 1,511 1,511
______ ______ ______
The interest rate payable on the sterling overdraft is determined by LIBOR (or
similar) plus a bank margin.
Liquidity risk
The Group's objective is to maintain a balance of continuity of funding and
flexibility through the use of overdrafts, loans and finance leases as
applicable.
The Group has a short-term facility of £5m which is freely transferable and
convertible into sterling.
This facility expires at the end of April 2008 and is utilised by Zotefoams plc
and its subsidiary undertakings under a cross-guarantee structure.
On 25 August 2004 Zotefoams plc borrowed £2.0m under a five year mortgage,
repayable in equal quarterly instalments. This facility is secured over specific
plant assets. At 31 December 2007 £0.7m of this mortgage was outstanding and
£1.3m had been repaid.
Foreign currency risk
The Group is exposed to foreign currency risk on sales, purchases, assets and
liabilities which are denominated in a currency other than sterling. The
currencies giving rise to this risk are primarily the euro and the US dollar.
The euro and US dollar rates used in preparing the accounts are as follows:
2007 2006
Average Closing Average Closing
______ ______ ______ ______
Euro/sterling 1.46 1.36 1.47 1.48
US dollar/sterling 2.00 1.99 1.85 1.96
______ ______ ______ ______
The Group hedges a proportion of its estimated cash exposure in respect of trade
and other receivables, trade and other payables and forecast sales receipts and
purchase payments for the next nine months. The Group uses forward exchange
contracts to hedge its foreign currency risk. As at 31 December 2007 these
forward currency contracts covered approximately two-thirds of the estimated net
cash foreign exchange exposure for the next nine months. Further details are
shown below in the paragraph on sensitivity analysis.
In respect of other monetary assets and liabilities held in currencies other
than the euro and the US dollar, the Group ensures that the net exposure is kept
to a manageable level, by buying or selling foreign currencies at spot rates
where necessary to address short-term imbalances.
Forecasted transactions
The Group classifies its forward exchange contracts hedging forecasted
transactions as cash flow hedges and states them at fair value. The net fair
value of forward exchange contracts used as hedges of forecasted transactions at
31 December 2007 was a net liability of £185,000 (2006: net asset of £84,000)
comprising assets of £8,000 (2006: £85,000) and liabilities of £193,000 (2006:
£1,000) that were recognised in fair value derivatives in 2007.
Recognised assets and liabilities
Changes in the fair value of forward exchange contracts that economically hedge
monetary assets and liabilities in foreign currencies and for which no hedge
accounting is applied are recognised in the Income Statement. Both the changes
in fair value of the forward contracts and the foreign exchange gains and losses
relating to the monetary items are recognised as part of administrative expenses
(see note 3).
Sensitivity analysis
In managing currency risks the Group aims to reduce impact of short-term
fluctuations on the Group's earnings. Over the longer-term, however, permanent
changes in foreign exchange and interest rates would have an impact on
consolidated earnings.
Short-term fluctuations in interest rates are not hedged as the Group, at
present, does not consider them material. At 31 December 2007 it is estimated
that a general increase of one percentage point in interest rates would decrease
the Group's profit before tax by approximately £19,000 (2006: £15,000).
At 31 December 2007 it is estimated that an increase of one percentage point in
the value of sterling against the euro and US dollar would decrease the Group's
profit before tax by approximately £67,000 (2006: £64,000) before forward
exchange contracts and £33,000 (2006: £44,000) after forward exchange contracts
are included for the euro and £52,000 (2006: £47,000) for the US dollar before
forward exchange contracts and £24,000 (2006: £30,000) after forward exchange
contracts are included.
Sensitivity analysis continued
The Group has significant undertakings in the USA whose revenue and expenses are
denominated in US dollars.
Zotefoams makes a significant proportion of its sales to European customers and
these revenues are predominantly in euros. It was the Group's policy in 2007 to
hedge the foreign currency cash flows of invoiced sales net of expected foreign
expenditure. Hedging is achieved by the use of foreign currency contracts
expiring in the month of expected cash flow.
Fair values
The fair values together with the carrying amounts shown in the Balance Sheet
are as follows:
2007 2006
Carrying amount Fair value Carrying amount Fair value
£000 £000 £000 £000
______ ______ ______ ______
Trade and other receivables 7,343 7,343 6,078 6,078
______ ______ ______ ______
Cash and cash equivalents (984) (984) (329) (329)
Forward exchange contracts
- assets 8 8 85 85
- liabilities (193) (193) (1) (1)
______ ______ ______ ______
Secured bank loans (700) (700) (1,100) (1,100)
______ ______ ______ ______
Trade and other payables (3,937) (3,937) (3,486) (3,486)
______ ______ ______ ______
Estimation of fair values
The following summarises the major methods and assumptions used in estimating
fair values of financial instruments reflected in the table.
Derivatives
Forward exchange contracts are marked to market using listed market prices.
Interest-bearing loans and borrowings and trade and other receivables/payables
Carrying amounts equals the fair value.
9. Employee benefits
The Group and Company operate one defined benefit scheme in the UK which offers
both pensions in retirement and death benefits to members. Pension benefits are
related to the members' final salary at retirement and their length of service.
Since 1 October 2001 the scheme has been closed to new members.
From 31 December 2005 future accrual of benefits for existing members of the
scheme ceased.
Contributions to the plan for the year from the Company have been agreed with
the Trustees at £50,000 per month from January 2006 to December 2010.
The Company has opted to recognise all actuarial gains and losses immediately
via the Statement of Recognised Income and Expenditure (SORIE). An actuarial
valuation of the scheme was carried out as at 5 April 2005 and the results have
been updated to 31 December 2007 by a qualified independent actuary. The major
assumptions used by the actuary were (in nominal terms) as follows:
As at As at
31 December 31 December
2007 2006
______ ______
Discount rate 5.90% 5.10%
Expected return on plan assets 6.62% 6.58%
Rate of salary increase n/a n/a
Rate of increase to pensions in payment 3.30% 3.00%
Rate of inflation 3.40% 3.10%
Mortality assumption PA92 MC 90% of
PA92
Life expectancy from age 65 of current male pensioners: 22.5 years 20.7 years
The overall expected return on assets assumption of 6.62% as at 31 December 2007
has been derived by calculating the weighted average of the expected rate of
return for each asset class. The following approach has been used to determine
the expected rate of return for each asset class:
• Equities - allowance for an additional return of 2.5% above that available on
gilts;
• Gilts - derived from the yield on 15-year fixed interest gilts; and
• Cash - based on the Bank of England base rate.
Year Ended 31 December 2007 Year Ended 31 December 2006
Present value of scheme assets Long term Market Value Long term Market Value
rate of return £000 rate of return £000
expected expected
______ ______
Equities 7.1% 13,458 7.1% 12,402
Bonds 4.6% 2,431 4.6% 2,437
Other 5.5% 1,353 5.0% 1,022
______ ______ ______ ______
17,242 15,861
______ ______
Present value of defined obligation:
Funded plans 19,707 (20,101)
______ ______
Total 19,707 (20,101)
______ ______
Deficit in the scheme (2,465) (4,240)
______ ______
Related deferred tax asset 690 1,272
______ ______
Net pension liability (1,775) (2,968)
______ ______
Reconciliation of opening and closing
balances of the present value of the
defined benefit obligation:
Benefit obligation at beginning of year 20,101 19,479
Service cost - -
Interest cost 1,012 922
Actuarial (gains)/losses (875) 233
Benefits paid (531) (552)
Past service costs - 19
______ ______
Benefit obligation at end of year 19,707 20,101
______ ______
Reconciliation of opening and closing
balances of the fair value of plan assets:
Fair value of plan assets at beginning of 15,861 14,259
year
Expected return on plan assets 1,046 876
Actuarial gain 266 659
Contributions by employers 600 619
Benefits paid (531) (552)
______ ______
Fair value of plan assets at end of year 17,242 15,861
______ ______
The amounts recognised in the Income
Statement are:
Interest on obligation 1,012 922
Expected return on plan assets (1,046) (876)
Past service cost - 19
______ ______
Total (gain)/expense (34) 65
______ ______
The (gain)/expense is recognised in the following line items in the Income
Statement:
Group and Company
2007 2006
£000 £000
______ ______
Cost of sales - 19
Financial income (1,046) (876)
Finance costs 1,012 922
______ ______
(34) 65
______ ______
Actuarial gains shown in SORIE since 1 January
2004:
2007 2006 2005 2004
£000 £000 £000 £000
______ ______ ______ ______
Balance as at 1 January 648 222 264 -
Actuarial gains/(losses) 1,141 426 (42) 264
______ ______ ______ ______
Balance as at 31 December 1,789 648 222 264
______ ______ ______ ______
History of scheme assets, obligations and experience adjustments
As at 31 As at 31 As at 31 As at 31
December December December December
2007 2006 2005 2004
______ ______ ______ ______
Present value of defined benefit obligation 19,707 20,101 19,479 18,721
Fair value of scheme assets 17,242 15,861 14,259 11,529
Deficit in the scheme (2,465) (4,240) (5,220) (7,192)
Experience adjustments arising on scheme liabilities (875) 233 1,621 93
Experience item as a percentage of scheme liabilities 4% 1% 8% 0%
Experience adjustments arising on scheme assets 266 659 1,579 299
Experience item as a percentage of scheme 2% 4% 11% 3%
assets
______ ______ ______ ______
Other pension schemes
On 1 January 2006 a separate stakeholder scheme was set up for those employees
who were originally in the closed defined benefit scheme. The contributions paid
by the Company in 2007 were £527,000 (2006: £534,000).
In addition to this scheme, Zotefoams plc operates a stakeholder scheme which is
open to employees who joined after 1 October 2001. The contributions paid by the
Company in 2007 were £27,000 (2006: £20,000).
For US based employees Zotefoams Inc. operates a 401(k) plan. The contributions
paid by Zotefoams Inc. in 2007 were $76,000 (2006: $86,000).
This information is provided by RNS
The company news service from the London Stock Exchange
Tuesday, 4th June 2024
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