FOCUS, SPECIALISATION AND SERVICE
Annual Report and Accounts 2006 SIG plc
Annual Report and Accounts 2006
SIG plc: Hillsborough Works, Langsett Road, Sheffield S6 2LW, United Kingdom tel: +44 (0) 114 285 6300 fax: +44 (0) 114 285 6385 e-mail: [email protected] web: www.sigplc.co.uk
_7_cover.indd 1 05/04/2007 11:03:54 PRINCIPAL TRADING SUBSIDIARIES
SIG’s strategy is to develop and grow the Group as a leading supplier of specialist products to the construction and related markets, in order to achieve sustainable long term growth in shareholder value.
COUNTRIES IN WHICH SIG OPERATES ACCOUNTS
SIG plc Annual Report and Accounts 2006 105
_7_cover.indd 2 05/04/2007 11:04:22 AT A GLANCE: HIGHLIGHTS FOCUS, SPECIALISATION AND SERVICE
† From continuing operations only (i.e. excluding the USA business sold on 20 November 2006). ABOUT SIG * Underlying figures are stated before the amortisation of acquired intangibles, impairment of goodwill, the profit on sale of the USA business and hedge ineffectiveness. 01 AT A GLANCE: HIGHLIGHTS 02 AT A GLANCE: PERFORMANCE REVENUE† 04 AT A GLANCE: ACTIVITIES +18.4% TO £1,860m
UNDERLYING* PROFIT BEFORE TAX†
06 CHAIRMAN’S STATEMENT 08 BUSINESS REVIEW +18.6% 24 INSULATION 26 ROOFING TO £108.3m 28 COMMERCIAL INTERIORS 30 SPECIALIST CONSTRUCTION AND SAFETY PRODUCTS
BASIC EPS† +28.5% TO 58.1p
32 CORPORATE SOCIAL RESPONSIBILITY 36 BOARD OF DIRECTORS 37 COMPANY INFORMATION 37 FINANCIAL CALENDAR 38 REPORT OF THE DIRECTORS UNDERLYING* BASIC EPS† 40 CORPORATE GOVERNANCE 44 DIRECTORS’ REMUNERATION REPORT +20.4% 52 REPORT OF THE AUDIT COMMITTEE TO 61.3p
54 GROUP ACCOUNTS 55 CONSOLIDATED INCOME STATEMENT 56 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE 57 CONSOLIDATED BALANCE SHEET 58 CONSOLIDATED CASH FLOW STATEMENT DIVIDEND PER SHARE 59 STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES 63 CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY 64 NOTES TO THE ACCOUNTS 95 INDEPENDENT AUDITORS’ REPORT +22.0% 96 FIVE YEAR FINANCIAL SUMMARY 97 COMPANY ACCOUNTS TO 20.5p 98 COMPANY BALANCE SHEET 99 STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES 100 NOTES TO THE ACCOUNTS 103 INDEPENDENT AUDITORS’ REPORT 104 PRINCIPAL ADDRESSES 105 PRINCIPAL TRADING SUBSIDIARIES
SIG plc Annual Report and Accounts 2006 01
_8_SIG_ar06_front.indd 1 05/04/2007 11:04:36 AT A GLANCE: PERFORMANCE
“ 2006 was another year of strong growth, expansion and solid financial performance.”
REVENUE† (£m) UNDERLYING* PROFIT BEFORE TAX† (£m) § §
+18.4% 1,860 +18.6% 108.3 1,571 91.3 1,398 70.9
04 05 06 04 05 06
LIKE FOR LIKE# SALES GROWTH† (%) TOTAL‡ UNDERLYING* PROFIT BEFORE TAX (£m) § §
+7.1% 9.3 +18.8% 112.0 7.7 94.3 7.1 70.9
04 05 06 04 05 06
TOTAL‡ RETURN ON CAPITAL EMPLOYED (%) PROFIT BEFORE TAX† (£m) §
17.7 17.6 102.7 17.6%16.2 +22.5% 83.8 70.2
04 05 06 04 05 06
02 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_front.indd 2 05/04/2007 11:04:37 FOCUS, SPECIALISATION AND SERVICE ABOUT SIG 618 TRADING SITES as at 31 December 2006
BASIC EPS† (p) §
+28.5% 58.1 > 9,600 45.2 39.9 EMPLOYEES as at 31 December 2006
04 05 06
UNDERLYING* BASIC EPS† (p) §
+20.4% 61.3 £1,432m 50.9 40.3 MARKET CAPITALISATION as at 13 March 2007
04 05 06
DIVIDEND PER SHARE (p) §
+22.0% 20.5 £109m 16.8 14.0 ACQUISITION SPEND in 2006
04 05 06
† From continuing operations only (i.e. excluding the USA business sold on 20 November 2006). The 2004 figures have not been restated to exclude the USA business. ‡ Where reference is made to “total”, this should be taken to mean both continuing and discontinued operations. * Underlying figures are stated before the amortisation of acquired intangibles, the impairment of goodwill, the profit on sale of the USA business and hedge ineffectiveness. § Represents the percentage growth in 2006 when compared to 2005. # Like for like is defined as the business excluding the impact of acquisitions and disposals made in the current and prior year. The 2004 and 2005 like for like sales growth figures have not been restated to reflect the elimination of the contribution from the USA business sold in November 2006.
SIG plc Annual Report and Accounts 2006 03
_8_SIG_ar06_front.indd 3 05/04/2007 11:04:37 AT A GLANCE: ACTIVITIES
“ SIG is a supplier of specialist products to the building and construction industry. It focuses its activities into four business sectors: Insulation, Roofing, Commercial Interiors and Specialist Construction and Safety Products.”
INSULATION ROOFING
SIG is the largest supplier of insulation and SIG is the largest supplier of roofing products related products in Europe. It holds leading in the UK and Ireland and a key regional operator market positions in the UK, Ireland, Germany in Germany and Poland. SIG supplies products and Poland and is the leader in industrial and systems to every sector of the roofing insulation in France. SIG also operates in industry for both new projects and repair The Netherlands, Belgium and Austria. and maintenance.
COUNTRIES OF OPERATION: COUNTRIES OF OPERATION: United Kingdom Poland United Kingdom Ireland The Netherlands Ireland Germany Belgium Germany France Austria Poland
CONTINUING REVENUE CONTINUING REVENUE £781m £437m 42.0% 23.5%
04 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_front.indd 4 05/04/2007 11:05:01 FOCUS, SPECIALISATION AND SERVICE ABOUT SIG
Focus, Specialisation and Service are the core principles This mixture of skilled and focused people, efficient business of SIG enabling the Group’s businesses to offer expert advice processes and specialist infrastructure differentiates SIG and know-how, wide product choice and a fast and efficient and has enabled the Group to become the leading supplier delivery service. of specialist building materials in Europe. SIG is committed to providing fast, efficient, no nonsense SIG is Europe’s leading supplier of insulation, roofing, service to customers, locally and nationally, as required. commercial interiors and specialist construction and safety products. Local staff with local knowledge are the driving force of the business and empower it to effectively compete in local market conditions.
COMMERCIAL INTERIORS SPECIALIST CONSTRUCTION AND SAFETY PRODUCTS
SIG is a leading supplier in the UK and Ireland SIG is a leading supplier of specialist construction of purpose made partitions and performance and safety products in the UK and Ireland and doorsets for all types of commercial and other offers a wide portfolio of products including non-residential buildings. It is also the leading concrete accessories, waterproofing systems and distributor of branded complementary products chemicals, brickwork support systems, specialist for the interior fit out of non-residential buildings fixings and safety products. Building chemicals, with trading sites in the UK, Ireland, Germany, which from part of the SCP product range, France, Poland, The Netherlands, Belgium have been sold by SIG in Poland since late 2006. and Austria.
COUNTRIES OF OPERATION: COUNTRIES OF OPERATION: United Kingdom Poland United Kingdom Ireland The Netherlands Ireland Germany Belgium Poland France Austria France (Safety)
CONTINUING REVENUE CONTINUING REVENUE £484m £158m 26.0% 8.5%
SIG plc Annual Report and Accounts 2006 05
_8_SIG_ar06_front.indd 5 05/04/2007 11:05:11 CHAIRMAN’S STATEMENT
“ 2006 – a year of high performance and strong growth.”
The Group has made excellent progress during 2006; the strategic disposal Underlying net finance costs increased by £5.3m to £13.1m (2005: £7.8m). of the USA business combined with the continued expansion and diversity of the trading activities in the two core regions of the UK and Ireland and Total underlying profit before tax increased by £17.7m (18.8%) to £112.0m Mainland Europe lay the foundations for the future growth and development (2005: £94.3m). Underlying profit before tax from continuing operations of SIG. increased by £17.0m (18.6%) to £108.3m (2005: £91.3m).
HIGHLIGHTS OF THE YEAR ARE: Amortisation of acquired intangibles increased by £3.2m to £6.9m record sales growth; (2005: £3.7m). There was no charge made in the year for goodwill impairment (2005: £5.7m). A credit of £1.4m has arisen in relation increased margins; to hedge ineffectiveness (2005: £1.9m). record number of acquisitions; A one-off profit of £1.9m arose from the disposal of the USA business. record increase in the number of additional trading sites; Total profit before tax increased by £21.6m (24.9%) to £108.4m sale of the Group’s operations in the USA in November 2006; (2005: £86.8m). Profit before tax from continuing operations increased by £18.9m (22.6%) to £102.7m (2005: £83.8m). significant growth in Mainland Europe; and significant increase in the full year dividend, reflecting the Board’s Margins confidence in the Group’s outlook. The total gross margin increased to 27.2% (2005: 27.0%). On a continuing basis, the gross margin increased to 27.3% (2005: 27.1%). The continuing RESULTS underlying operating profit margin increased to 6.5% (2005: 6.3%). For the year ended 31 December 2006, compared with the corresponding period in 2005: Earnings and dividends Total underlying basic earnings per share increased by 10.7p to 63.4p Sales (2005: 52.7p), an increase of 20.3%. Total basic earnings per share increased Total sales increased by £285.7m (17.4%) to £1,925.0m (2005: £1,639.3m). by 14.9p to 61.9p (2005: 47.0p), an increase of 31.7%. On a continuing Continuing sales increased by £288.4m (18.4%) to £1,859.8m (2005: £1,571.4m). basis, basic earnings per share increased by 12.9p to 58.1p (2005: 45.2p), Like for like sales growth (i.e. excluding the impact of acquisitions made an increase of 28.5%. in 2005 and 2006) on a continuing basis, was 7.1% in Sterling. A final dividend of 14.3p is proposed, subject to Shareholder approval. Foreign exchange rate movements on a year on year basis were negligible, This would make a total dividend for the full year of 20.5p, an increase and have no significant impact on the growth figures as stated in Sterling of 3.7p (22%) on the 2005 full year dividend of 16.8p and would for the Group as a whole. be covered 2.8 times. If approved, this will be payable on 29 May 2007 to Shareholders on the register at 27 April 2007. Profits Total underlying operating profit increased by £23.1m (22.6%) to £125.2m (2005: £102.1m). On a continuing basis, underlying operating profit increased by £22.3m (22.5%) to £121.4m (2005: £99.1m).
GLOSSARY OF TERMS Total – this should be taken to mean both continuing and discontinued operations. Underlying – this should be taken as before the amortisation of acquired intangibles, the impairment of goodwill, the profit on sale of the USA business and hedge ineffectiveness.
06 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_front.indd 6 05/04/2007 11:05:11 REVIEW OF THE YEAR 05/04/2007 11:05:16 07 2006 Annual Report and Accounts plc Annual Report SIG FOCUS, SPECIALISATION AND FOCUS, SERVICE SPECIALISATION LES TENCH Non-Executive Chairman PROSPECTS In the UK and Ireland, overall construction activity is expected to grow modestly in 2007 over 2006, providing positive conditions for all of the Group’s activities in this region. Non-residential new build construction is the most important single part of the overall market for SIG, and the ongoing recovery in commercial building together with the continuing public expenditure on schools and hospitals is expected to be helpful. the Later initial in the impact year, of the most recent (April 2006) change in the regulations concerning the minimum standards of thermal efficiency of all new buildings is expected to begin to increase market demand for insulation materials. As explained in our Interim Announcement in September 2006 the volume of work which is anticipated to be available(Energy Efficiency in Commitment)2007 from scheme the concerning EEC2 the upgradinginsulation in ofexisting residential properties will be reduced in 2007 over previous years. The new scheme, EEC3, begins in April 2008, and this is expected to increase demand significantly once it begins. an Following exceptionally strong second half in 2006 in Mainland Europe, remain to expected are operate we which in countries those all in conditions positive, with modest growth in overall construction activity anticipated. In terms of growth opportunities, we enter 2007 with of opportunities, since both athe organic start and healthythrough acquisition. Trading pipeline of 2007 has been good, and the Group is confident that further progress will be made. is confident that further progress will be made. by 12.9p by 12.9p to 58.1p (2005: 45.2p), an increase of 28.5%. with a maturity of 7, 10 and 12 years via its second successful Private Placement transaction. This was used to repay existing facilities with its UK relationship banks. The Group has a sound financial position with prudent continuing interest cover (9.2x). since the start of 2007 has been good, Trading and the Group On a continuing On a continuing basis, basic earnings per share increased 2006 acquisition spend amounted to £109m. During the year the Company raised £151m and €100m LES TENCH Non-Executive Chairman Our people lie at the heart of our success; the personalemployee, and their dedication to customer service effortsand the will to succeed of each personally in their own particular job is fundamental to SIG, and I would like efforts. and work hard their for Group the throughout employees all thank to We recently announced the appointment of Chris Davies as Executive Director BOARD APPOINTMENT Director Executive as Davies Chris of appointment the announced recently We to the Board. Chris joined SIG in 1994, and has responsibility as Managing Director Europe for the Group’s operations in that area. Chris has extensive practical experience of both operational management and M&A activity. EMPLOYEES ACQUISITIONS The ongoing programme of the acquisition of businesses in market sectors and geographic regions related to those in which SIG operates, continued with 23 acquisitions completed during 2006. Annualised sales (on a historic basis) for these acquisitions is a total consideration, including assumed debt, was of £240m. £109m. Total Underlying cash flow (i.e. operating cash flow before working capital movements) movements) capital FINANCES working before flow cash operating (i.e. flow cash Underlying increase An year. prior with compared 2006 throughout further strengthened in stock levels (partly due to new trading sites and also to support increased commercial activities), together with further investment in customer service and the acquisition programme resulted in increased borrowings at the year end. Gearing rose to 65% as at 31 December 2006 (2005: 60%). During the year the Company raised £151m and €100m with a maturity of 7, 10 and 12 years via its second successful Placement Private transaction. This was used to repay existing facilities with its UK relationship banks. The Group has a sound financial position with prudent continuing interest cover (9.2x). _8_SIG_ar06_front.indd 7 BUSINESS REVIEW
“ Continued expansion and diversity lay the foundations for future growth.”
This Business Review has been prepared by the Board of SIG plc solely GLOSSARY OF TERMS for the members of SIG plc. It is intended to provide Shareholders with Like for like – is defined as the business excluding the impact of a summary of the development, performance and financial position of the acquisitions made after 31 December 2004 and excluding the impact of the USA business (sold 20 November 2006). Group for 2006. It also provides details of the main trends and factors underlying the year’s results and which are likely to affect future Total – this should be taken to mean both continuing and discontinued operations. performance and describes the Group’s business and its key objectives, strategies, values and resources, together with the main risks and Underlying – this should be taken as before the amortisation of acquired intangibles, the impairment of goodwill, the profit uncertainties it faces. A cautionary comment relating to forward looking on sale of the USA business and hedge ineffectiveness. These statements is provided on page 23. items are presented in the column entitled “other items” in the Consolidated Income Statement on page 55. Unless specifically INTRODUCTION TO SIG stated the underlying numbers refer to continuing operations only. SIG plc is a leading supplier of specialist products to professionals in the CONTENTS building, construction and related industries, with 618 trading sites throughout 08 INTRODUCTION TO SIG the UK, Ireland and Mainland Europe and employs over 9,600 people. 10 STRATEGY AND OBJECTIVES 11 KEY PERFORMANCE INDICATORS Founded in 1957 in Sheffield, UK, SIG has grown from a single insulation 12 TRADING PERFORMANCE distribution business into a multi national specialist distribution business 15 FINANCIAL REVIEW 19 BUILDING REGULATIONS operating in four different market sectors. The Company was listed on 19 OUTLOOK the London Stock Exchange in May 1989 and is a constituent member 19 RESOURCES of the FTSE 250 index listed within the Support Services sector. 20 OPERATIONAL RISK MANAGEMENT 22 TREASURY RISK MANAGEMENT 23 OTHER MATTERS On 13 March 2007, the share price closed at £11.63. At this date there were 123,111,571 shares in issue, giving a market capitalisation at that date of £1,432m.
SIG is primarily a distributor handling and supplying specialist products manufactured by other companies (in excess of 90% of products are manufactured by other companies). SIG provides a crucial role in the specialist building products supply chain: breaking bulk for manufacturers; providing “immediate” availability of product close to site location; having the most extensive delivery fleet in the industry; providing technical advice and product expertise; and enabling contractors to maximise efficient use of labour.
08 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_front.indd 8 05/04/2007 11:05:16 REVIEW OF THE YEAR 05/04/2007 11:05:24 09 2006 Annual Report and Accounts plc Annual Report SIG wide range wide range of industries and markets certain in and distributor, specialist a as product groups as a manufacturer. specialist building products supply chain. supply products building specialist SIG is well diversified, serving a SIG provides a crucial role in the FOCUS, SPECIALISATION AND FOCUS, SERVICE SPECIALISATION Sale of USA business On 20 November 2006 SIG sold its USA business for £27m, resulting in a profit on sale after expenses of £1.9m. Although the USA business had performed extremely well over recent years SIG decided that it could not see a route by which to grow the business. Given the future opportunities for SIG within the UK, Ireland and Mainland Europe, strategy SIG’s is to concentrate its resources towards these territories. Demand for the products sold by SIG is influenced byof factors. Overall building aactivity is both widea for main residential driver, and range non-residential properties, and also the expenditure on RMI of all types of existing of buildings. the Parts SIG product range are influenced by other specific factors. Insulation usage in new construction Building isRegulations in operation Over in time, each affectedit country. is expected by the that governments, businesses and the public will increasinglyreducing energy consumption more vigorously than in the focuspast and that on as a result insulation demand will continue to rise. Within the Roofing and Building Plastics division, certainused extensively for upgrading existing productsproperties and demand over time are is expected to increase as people look for low maintenanceto replace traditional painted timber on the exterior productsof buildings. changes design by driven partly is products interior commercial for Demand following change of use and occupancy arrangements within existing offices storage wall partitions, of removal and refitting requiring premises, shop and and ceiling systems. markets respective the in names trading of variety a wide under operates SIG and countries in which it has trading sites. Many of these brands are widely recognised throughout their respective market sectors or countries as the leading supplier of focused products and services to customers. New GARETH DAVIES Finance Director Group subgroup subgroup % of % of % of Total build RMI 31% 44% 56%
environmental issues; rising energy costs; and improvement and renewal of the built environment. regulation; DAVID WILLIAMS DAVID Chief Executive
Source: SIG estimates The table above highlights the significant use supplied SIG’s products have in the RMI market. The RMI market is less sensitive fluctuations towhich can impact thethe new build sector and economicprovides a strong underlying market in periods of economic downturn. Non-housing, building and construction Housing 58% Industry (non-construction) 53% 47% 11% 53% 47% Specialist contractors and other customers know that it is essential to have sound technical knowledge of these specific applications to ensure that legal and safety standards are met in buildings and industry and that the products supplied match the exacting requirements in each case. These drivers have enabled SIG to build businesses that are able to differentiate themselves from mainstream competitors. important an is This site. building the to sold goods of 70% over delivers SIG building specialist supplies and sources SIG SIG. by offered element value-added depth the has is which company regulation, and product both on advice expert European provides and materials other No contractors. specialist the for essential both trades, majority vast The fields. professional product its in has SIG that and expertise and experience of companies contracting specialist to made are sales of for new construction and for RMI. SIG is well diversified, serving a wide range of industries and markets as where as groups a and product manufacturer in certain distributor, specialist a table following The customer. the for order to made are required products the information, sector of analysis SIG’s upon based estimate, indicative an provides of the breakdown of the 2006 Group sales into the different end markets: Whereas general builders tend to purchase products from general builders’ nature in specialist are supplies SIG that products and materials the merchants, and are provided to specialist contracting companies and professional trades, both for new construction and for repairs, maintenance and improvement (“RMI”). Demand for certain of the products that SIG supply is driven by: _8_SIG_ar06_front.indd 9 BUSINESS REVIEW CONTINUED
“ SIG is committed to developing and growing by applying the Group’s three core principles of Focus, Specialisation and Service.”
THE CORE SIG BUSINESS OFFERING: SIG has a programme of investing in new trading sites in order to increase inventory holding capability and reduce delivery journey times. The delivery SUPPLY SPECIALIST CONTRACTORS fleet, which is controlled and directed by local management in each trading area, is being expanded to ensure rapid availability and flexibility to meet customer demands. The increase in the Group’s trading sites over the last three years WITH SPECIALIST PRODUCTS is shown below: UK and Mainland Ireland Europe USA Total 2004 257 133 22 412 IN FOUR KEY MARKETS Net new openings/(closures) 17 1 (2) 16 Acquired/(disposed) 63 5 – 68 2005 337 139 20 496 INSULATION Net new openings/(closures) 4 5 1 10 Acquired/(disposed) 81 52 (21) 112 ROOFING 2006 422 196 – 618
COMMERCIAL INTERIORS 2. Extending the product range Extending the range of specialist products and services which SIG offers SPECIALIST CONSTRUCTION improves customer service and market penetration. An example of this is the AND SAFETY PRODUCTS recent product launches during the year within the UK Commercial Interiors division which include new security doorsets, a system of wall panel products for use specifically in hospitals and other health facilities and access panels for services in commercial and public buildings.
STRATEGY AND OBJECTIVES 3. Growth through targeted acquisitions – geographic SIG is committed to the following key long term objectives: and product expansion SIG employs a carefully targeted acquisition strategy. The rationale is to develop and grow by applying the Group’s three core principles of Focus, improve SIG’s geographic coverage, widen its product range and consolidate Specialisation and Service; and strengthen its market position. expand the Company and its activities as a leading specialist supplier to professional trades in the construction and related industries; In 2006 SIG invested £109m on 23 acquisitions (2005: £110m on 21 acquisitions). These acquisitions were widely spread right across SIG’s existing geographic supplement organic growth with carefully targeted acquisitions; areas and in each of SIG’s four business streams, bringing annualised sales provide annual dividend growth; and to the Group of £240m (2005: £145m).
create long term growth in Shareholder value. The annualised sales from these 23 acquisitions breaks down £132m in Mainland Europe and £108m in the UK and Ireland. The Group has SIG’s key long term objectives are supported by the following operational been making acquisitions each year for the last 15 years, and the figure activities and dynamics: for Mainland Europe in 2006 is the largest in any one year.
1. Organic expansion within the existing geographic regions Further details of SIG’s 2006 acquisition programme are provided A key feature of the essential service to customers is the ability to deliver on pages 14, 16 and 17. product to site or the customer’s premises at very short notice. Lead times from order placing to actual delivery are usually between one and two days. In most cases customers are unable to hold any inventory and delivery times are critical to ensure the efficient use of manpower on site.
10 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_front.indd 10 05/04/2007 11:05:24 REVIEW OF THE YEAR 05/04/2007 11:05:24 11 2006 2006 8.0% 6.5% 4.6% 10.5% 2006 2004 2005 2004 2005 Annual Report and Accounts plc Annual Report SIG
FOCUS, SPECIALISATION AND FOCUS, SERVICE SPECIALISATION UK and Ireland Mainland Europe Group* costs) (after Parent * Continuing operations only for 2005 and 2006. capital 3. to Working sales (including capital working of ratio the as defined is sales to capital Working provisions) to annualised 5.5% sales (i.e. after adjusting for acquisitions and disposals in the current and prior year). 7.0% 3.6% 6.3% value the to relation in capital working its manage to Group the of ability The 7.7% generates Group the that ensure to essential is business each by made sales of 4.1% cash from its operations. Cash generation is important to fund and underpin capital and acquisition investment expenditure, to enable the business to pay its taxes as they fall due and to support the progressive dividend policy. years. of number a over area this in success particular had has Group The It is important to note that the 2004 figure includes the USA business which had the highest ratio of working capital to sales in the Group prior its sale in November 2006. The 2005 and 2006 figures do not include the USA business. Result capital to Working sales 12.2% 10.4% 2. Underlying operating profit margin The underlying operating profit margin is defined as the ratio of underlying operating profit to sales. SIG works to improve its underlying operating profit margin by managing its selling prices in the local markets in which it operates and by controlling the cost base through operational efficiencies. SIG experiences lower underlying operating profit margins in Mainland Europe than it does in the UK and Ireland and the mix of sales between these two regions has an influence on the overall Group underlying operating profit margin. Result 2006 7.1% 2004 2005
the elimination of the contribution from the USA business sold in November 2006. Like for like sales growth* The 2004 and 2005 like for like sales growth * figures have not been restated to reflect 7.7% 9.3% 1. Like for like sales growth Like for like sales growth is defined as the percentage growth in the sales of the Group excluding the impact of current year and prior year acquisitions and disposals. The measure reflects the underlying sales growth in the business which typically arises from increased sales volumes to both new and existing customers, product price inflation and selling new products through our existing infrastructure. The growth is supported by investment in new brownfield trading site openings and trading site relocations into larger premises with Maintaining additional positive stockholding like capability. for like growth in every business is a key target by which every business is measured and is a key component of being able to drive profit growth. Result KEY PERFORMANCE INDICATORS The Group uses the following key performance indicators to evaluate the success of its business: 5. Development of our people properly are management and employees all that ensuring to committed is SIG inducted into SIG and given the necessary training to fulfil their roles. In Ireland, for example, we are running a development programme for operational management which covers a wide range of commercial and business topics of direct relevance to SIG, as well as more general areas such as finance, risk management and HR legislation. There is an active and extensive programme of training in place. time Full supplemented is work their and employed are trainers professional dedicated as required by external courses and external agencies. In order to ever increasing meetcustomer demand particular emphasis is placed on customer service and interpersonal skills in the trainingobjective of increasing the number of programme.man-hours of staff and management SIG has an training each year. 4. Development of new business streams SIG has a policy of applying sharp focus to specific specialist products and customer requirements. This can lead example, to an the As creation of a separate strategic sectors. market or products particular for (“SBU”) unit business during 2006, SIG entered the roofing distribution market in Germany and market roofing SIG The Melle. of acquisition the with time first the for Poland developed well are which contracts supplier and knowledge product expertise, of this acquisition to in the the evaluation UK were of and importance Ireland opportunity and to the successful integration following completion. _8_SIG_ar06_front.indd 11 BUSINESS REVIEW CONTINUED
“ Our strategy of investing in the core operations to drive growth and in the acquisition of complementary businesses, continued at a strong pace.”
TRADING PERFORMANCE In practice, this change means that more insulation will be built-in to new 2006 was another year of strong growth, expansion and solid financial buildings going forward. As we indicated in September 2006 at the time performance for the Group. of our 2006 Interim Results Announcement, factors within the Local Government planning authorities, where the implementation of new Our strategy of investing in the core operations to drive growth and in Building Regulations effectively begins through the planning consent process, the acquisition of complementary businesses, continued at a strong pace. meant that the practical application of the higher standards of insulation in new construction was delayed. The April 2006 new (Part L) Building During the course of the year we expanded the range of specialist products Regulations had no impact on the market in 2006 and are now expected which are offered to customers across all of our operations; improved the to begin to influence demand in the second half of 2007. service and delivery facilities to ensure that we strengthen further our ability to provide customers with first class service; increased the number and We also indicated in September 2006 that the amount of work relating quality of our customer-facing staff; and significantly increased the number to the upgrading of roofing and wall insulation in existing homes was of trading sites to facilitate improved service to existing customers and set to decline during the latter part of 2006, and throughout 2007, the securing of new customers. due to timing and funding issues under the government-backed EEC2 (Energy Efficiency Commitment phase 2). This programme has been very This continued investment in customer-related services provides the platform successful and has generated increased volumes of demand for insulation for continued future growth. over the last four years. The targeted amount of work required to be conducted under EEC2 has been substantially met, and therefore the Trading highlights amount of insulation upgrading under this scheme will be very limited until Where reference is made to “total” sales, this refers to the results of both the next phase of targets and funding commences in 2008, under EEC3. continuing and the discontinued USA operations. Where reference is made to “underlying” operating profit and underlying operating profit margin, Against the background of these mixed conditions in 2006, the Insulation this is defined as being before the amortisation of acquired intangibles, operations in the UK and Ireland increased sales by 6% and underlying the impairment of goodwill and the profit on sale of the USA business. operating profits by a similar amount.
UK and Ireland (65% of total sales) We added four trading sites during the year and relocated five branches into Sales increased by £156.3m (14.2%) to £1,254.4m (2005: £1,098.1m). new, larger premises to cater for increased stockholding and future growth. Like for like sales increased by £45.6m (4.4%). In the insulation market, SIG has a number of facilities which convert basic Underlying operating profit increased by £15.5m (18.4%) to £99.9m insulation materials into more specialist products, to meet specific customer (2005: £84.4m). requirements. These activities were expanded, with two additional facilities acquired during the year. Like for like underlying operating profit increased by £6.8m (8.7%) to £85.4m (2005: £78.6m). In the Roofing division, the subdued market conditions which existed in The underlying operating profit margin was increased to 8.0% 2005 continued throughout 2006. (2005: 7.7%). Repairs and maintenance of existing buildings, especially residential buildings, 85 trading sites were added in the year, taking the total at 31 December 2006 is a significant driver of market demand. Some of this roofing work is of an to 422 (31 December 2005: 337). essential nature and, as such, carries on regardless of economic conditions. Other work is less essential, and its timing is more discretionary, depending Within the Insulation market in the UK and Ireland, whilst the volume upon a range of factors relating to household expenditure. This discretionary of demand grew, prices were on average lower than prior year due to element of the market has been slower than in previous years, reducing the over-supply arising from additional capacity coming on stream late 2005 overall market demand for roofing materials. It is believed that these are and during 2006. This additional capacity is in anticipation of higher market timing factors and that the longer term outlook for this market is positive. demand in forthcoming years, partly driven by Regulations. Within the residential new-build market, the proportion of dwellings built The UK Government introduced new (Part L) Building Regulations in April 2006, as apartments rather than using more traditional designs increased, which requiring all types of buildings which commenced new construction after has the effect of reducing the area of roof constructed on a “per dwelling” that date to meet new higher standards of thermal efficiency. basis, thus reducing demand for roofing materials in the new build sector.
12 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_front.indd 12 05/04/2007 11:05:25 REVIEW OF THE YEAR 05/04/2007 11:05:25 13 2006 £606m 33% £1,254m 67%
Annual Report and Accounts plc Annual Report SIG (63% of sales in Mainland Europe), market (32% of total sales) UK and Ireland increased both sales and underlying operating profit on a like for like basis in 2006 compared with prior year. taking the total the year, to 196 at 31 December 2006. (2005: £473.4m). (2005: £19.6m). increased by £4.5m (22.9%) to £24.1m (2005: £19.6m). Germany and Austria The underlying operating profit margin increased to 4.6% (2005: 4.1%). All countries in which SIG has trading activities in Mainland Europe 57 trading sites were added to the Group in Mainland Europe during Sales in Mainland Europe increased by £132.1m (27.9%) to £605.5m Like for like sales on a constant currency basis increased by 13.2%. Underlying operating profits increased by £8.0m (40.6%) to £27.6m Like for like underlying operating profit, on a constant currency basis, £1,860m Mainland Europe 2006 CONTINUING REVENUE BY BY GEOGRAPHIC REGION FOCUS, SPECIALISATION AND FOCUS, SERVICE SPECIALISATION conditions in the first four months of the year were very disappointing. Weather conditions were much more low adverse This than spring. the normal until and moving the sites get to struggled industry construction level of activity reduced demand for materials and had a knock-on effect of effectively eliminating price increases that had been intended to take effect in January 2006 and 2006. February From May 2006 onwards, activity levels began to rise progressivelyand demand strengthened right through into the final quarter of the year, at which time a further boost to orders was created by some pull-forward on to beat building the increased materials rate which of came VAT into effect on 1 January 2007 in Germany. Outside demand for the more construction specialist sector, insulation for industrial applications was good. Overall results in Germany were further boosted by thein July 2006 of a regional our acquisitionroofing first materials move distributor, into this fragmented, specialist market. The roofing supplies industry in Germany is inherently sharply seasonal, with a very high proportion of profits being The achieved timing in the second of half this year. acquisition meant that it had a disproportionately positive effect on the second half underlying operating profit margins. In total 11 trading sites were added taking the in total the year, to 76 at Sterling. in 30.9% Euros, in 31.2% by increased Sales 2006. December 31 Like for like sales growth was 13.9% in Euros, an excellent performance. The underlying operating profit margin increased and underlying operating profits were increased substantially. In Mainland Europe division continued division experienced generally improved demand, Specialist Construction and Safety Products Commercial Interiors The The In a market in which the supply chain is still very fragmented, we continued continued we fragmented, very still is chain supply the which in a In market to expand the number of trading sites both through acquisitionby opening brownfield trading sites. 63 trading sites were added during and theincluding year, a number which specialise in new ranges of building opened, was facility stocking central a new Ireland, In products. maintenance enabling imported roofing products to be more efficiently distributed throughout the trading site network and to customers. The combination of acquisitions and product range expansion enabled the division to 19% increase and sales significantly by increase underlying operating profits compared with prior year. to expand and develop its activities significantly. Supplying an increasing range of specialist products to construction and the main end industry, markets are new-build non-residential and secondly residential construction. 16 trading sites were added including three in in the Ireland, year, which are our first stand-alone Specialist Construction (“SCP”)Products trading sites outside the UK. This takes the total number of trading sites in this division to 43. This compares with just 17 at the end of 2003. This continued expansion of the customer base, trading sites and product range diversity resulted in sales increasing by 40% and underlying profits increased substantially. and whilst the volume of new public expenditure related work was slower in being released than had been expected, private sector developments such as commercial, retail, sports and leisure were more buoyant. Several new products were including launched new during security the year, doorsets, a system of wall panel products for use specifically in hospitals and other health facilities, and access panels for servicespublic buildings. in commercial and The division was the focus of significant including investment during the year, several relocations to larger premises, additional sales staff and upgrading and renewal of processing machinery to improve productivity and product A new range facility diversity. was opened to improve the range and quality of manufactured metal clad wall systems, which are essential to certain trading sites were added market during sectors. the Two year. The division 15% increased and sales grew by the underlying operating profits substantially. _8_SIG_ar06_front.indd 13 BUSINESS REVIEW CONTINUED
“ The acquisitions are being successfully absorbed into the Group and progressing well with their respective individual improvement plans.”
TRADING PERFORMANCE CONTINUED Up to the time of its disposal, sales in the USA were £65.2m, slightly less Mainland Europe (32% of total sales) continued than the full year 2005 figure of £67.9m. Good cost control and gross In France (22% of sales in Mainland Europe), construction activity margin improvement enabled the underlying operating profit to increase and overall demand was good throughout the year. We continued by £0.8m to £3.8m (2005: £3.0m). to expand our product range and geographic coverage, and added six new trading sites during the year, two of which were acquired. We now Acquisitions have a total of 51 trading sites in France. 2006 was a year of record acquisition activity, with 23 transactions completed in the year, for a total consideration of £109m, including assumed debt. Sales of these Sales increased by 11.0% in Euros, 10.7% in Sterling. Like for like sales acquired businesses was £240m on an historic annualised basis, and their combined grew by 9.1% in Euros. Again, the underlying operating profit margin was impact on 2006 was sales of £93m. The acquisitions added 133 trading sites to the increased and the underlying operating profit was increased substantially. Group, and substantially widened the product range on a regional basis.
In Poland (9% of sales in Mainland Europe), overall construction activity Of the 23 acquisitions, 19 were in the UK and Ireland, and four in Mainland continued to grow, with non-residential construction doing rather better Europe. The £240m historic sales breaks down as £132m Mainland Europe than residential, which is a more favourable mix in terms of the SIG and £108m UK and Ireland. product range. Each of the acquired businesses fits into the Group’s strategy of strengthening 2006 was a transforming year for SIG in Poland due to a significant increase and developing our position as a leading European supplier of specialist in the number of trading sites, chiefly arising from two acquisitions during products for the building, construction and related industries, with emphasis the second half year, and a substantial expansion of the range of specialist on professional trades rather than consumer-led markets. products offered to customers including roofing materials and a range of building chemicals and other products which are sold in the UK within The acquisitions are being successfully absorbed into the Group and progressing the Specialist Construction Products (“SCP”) division. In total, 40 trading well with their respective individual improvement plans. sites were added in the year, taking the total to 59 at 31 December 2006. Summary of trading performance Sales in Poland increased by 70.0% in local currency, 75.1% in Sterling. 2006 has been a year of high performance and strong growth, with each Like for like sales increased by 23.1% in local currency and the underlying region and each business stream showing expansion and development; operating profits were substantially increased. the dynamic nature of SIG is clearly reflected in the excellent results.
Market conditions improved in Benelux (6% of sales in Mainland Europe), 2006 CONTINUING REVENUE with some modest growth in overall construction activity. BY MARKET SEGMENT
Whilst the number of trading sites was unchanged at ten, various investments were made to the facilities including improvements to the fabrication and processing facilities for industrial insulation materials. £1,860m Sales increased by 20.8% in Euros, 20.5% in Sterling. Like for like sales Insulation growth was 11.9% in Euros. Roofing £158m Commercial Interiors 8.5% The underlying operating profit margin was increased and underlying Specialist Construction operating profits grew substantially. and Safety Products
USA (3% of total Group sales) The Group sold its business in the USA in November 2006 for a total £437m of $51m (£27m) in cash. The decision to divest the USA operations was 23.5% taken following a strategic review of all the Group’s activities and of the opportunity for future growth within each trading region.
£781m £484m 42.0% 26.0%
14 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_front.indd 14 05/04/2007 11:05:25 REVIEW OF THE YEAR 05/04/2007 11:05:25 15
2006
– £6.942m (2005: £3.688m).
Annual Report and Accounts plc Annual Report SIG – £nil (2005: £5.654m). In 2006 as required – income of £1.357m (2005: £1.880m). There from the USA business
by IFRS the carrying value of goodwill was reviewed andconsidered was not impaired. In 2005, the goodwill associated Screenbasewith SIG’s business was written off in full. Further detailsimpairment are set out in the 2005 ofAnnual Report and Accounts; thisand Amortisation of acquired intangibles Goodwill impairment loss Hedge ineffectiveness (2005: £7.462m); and (2005: £nil), being the profit on sale of the USA business. This is explained further in Note 28 on page 94. The accounting policies section on page 60 and Note 12 to the Accounts on page 77 provide details of what is included within intangible assets and over what periods the assets are amortised. The increase in the expense is a result of our significant acquisition activity during 2005 and 2006; is a small element of ineffectiveness in our Euro/Sterling net investment hedge derivatives that we have held since 2001 in relation to our private placement notes. Under IAS 32 and IAS 39 the movementvalue of this ineffective inportion is recorded thein the Consolidated Income fair Statement. This hedge ineffectiveness is explained further within the risk management section on page 23. Treasury continuing operations profit before tax – a charge of £5.585m discontinued operations profit before tax – a credit of £1.947m FOCUS, SPECIALISATION AND FOCUS, SERVICE SPECIALISATION The table at the top of this page provides a summary of the various profit before tax measures. Non-underlying items Non-underlying items are included within £7.5m), (2005: £3.6m to amount theand Statement “other Income Consolidated items”the of column which relate to: An explanation of the non-underlying items included within continuing operations of £5.585m (2005: £7.462m) is set out below: Profit Profit before tax Finance income Finance and charges relating to our defined benefit pension schemes amounted to £0.6m in 2006 (2005: £0.9m). details Further are provided in Note 27d to the Accounts on pages 89 to 93. Hedge ineffectiveness on certain financing derivatives gave rise to finance income of £1.4m (2005: £1.9m). This is recorded in the “other items” column of the Consolidated Income Statement and is explained further in the sections that follow. Growth 86.8 24.9% Statutory profit before tax including the contribution (3.0) 26.0% – Contribution from the USA business in both periods – One-off profit arising on the sale of the USA business (7.5) – See the section below for an explanation of these items
2005 91.3 % 18.6% 3.0 Definitions Excludes non-underlying items (see below) 94.3 26.0% 18.8% Contribution from the USA business in both periods Includes contribution from the USA business, but excludes 83.8 22.5% Statutory profit before tax 3.8 2006 (3.8) (1.9) (3.6) 108.4 102.7 108.3 112.0
non-underlying items (see below)
– continuing operations Profit Profit before tax – continuing operations Underlying profit before tax – total operations Profit before tax – total operations PROFIT BEFORE TAX The following table provides a summary of the various profit before tax measures: Underlying profit before tax Non-underlying items £m £m Profit on Profit sale of USA business Profit before Profit tax from USA business Profit before Profit tax from USA business Operating profit Underlying operating profit increased by 22.5% or £22.3m to £121.4m, increased profit Operating like. for like being growth the of (45%) £10m with by 27.5% or £24.7m to £114.5m. Finance costs Net finance costs before hedge ineffectiveness and financing items relating to our defined benefit pension schemes (i.e. net borrowing costs) increased by £5.5m to £12.5m in 2006. The net borrowing cost as a percentage of average debt in issue during the year increased from 5.4% to 6.5%, primarily due to the market increases in Sterling and Euro interest rates during 2006. Net borrowing costs benefited from improved working capital management, which reduced the daily amount of debt details are Further provided in the cash outstandingflow and financial position section with our banks. on pages 17 and 18. details Further of interest SIG’s rate policies are provided in the interest rate risk section on page 22. Margins Gross profit margin increased from 27.1% to 27.3% reflecting improved pricing management, improved buying andacquisitions that have thehistorically achieved higher gross margins than impactthat of the 2005 of the Group. Overall the gross profit margin achievedacquisitions in bytheir first few months with thethe Group was lower 2006than the Group average and is partly a result of traditionally lower gross margins in the German acquisitions. and management Pricing Polish action plans have already been put in place as part of our integration plans to improve the future profitability of these businesses. The underlying operating profit margin improved from 6.3% to 6.5%. FINANCIAL REVIEW Revenue Sales for the year rose by £289m to £1,860m (2005: £1,571m). Including the sales of the USA business, which was sold on 20 November 2006, total sales rose by £286m to £1,925m (2005: £1,639m). Like for like sales increased in all geographical locations with growth of 7.1% in Sterling and achievement. excellent on a constant an currency basis. The Group has years, now achieved in excess of three 7% last the of each in growth sales like for like _8_SIG_ar06_front.indd 15 BUSINESS REVIEW CONTINUED
“ Dividend growth of 22% to 20.5p reflects the Board’s confidence in the business going forward.”
FINANCIAL REVIEW CONTINUED an increase of 28.5%. The weighted average number of shares in issue Foreign currency translation in the period rose from 121.6m to 122.6m, as a result of employees being Overseas earnings streams are translated at the average rate of exchange issued shares under certain of the Group’s share option plans. for the year with balance sheets at closing rates. The table below sets out the relevant exchange rates used: Dividends Average rate Closing rate The proposed final dividend of 14.3p per share delivers a full year dividend
2006 2005 2006 2005 of 20.5p, representing an increase of 22.0%. This sets another new record for dividend growth and is a reflection of our confidence in the business Euro 1.468 1.464 1.490 1.457 going forward. Dividend cover, when measured against basic EPS from US Dollar* 1.847 1.813 1.898 1.721 continuing operations of 58.1p, amounts to 2.8 times (2005: 2.7 times). Polish Zloty 5.717 5.892 5.683 5.592 Going forward SIG intends to maintain a policy of dividend progression, * As a result of SIG selling its USA business on 20 November 2006, the US Dollar rates whilst maintaining dividend cover of between two and three times. The chart shown are up to 20 November 2006 (average rate) and as at 20 November 2006 at the top of page 17 tracks the dividend growth over the last ten years. (closing rate). Fluctuations in exchange rates have and will continue to give rise to translation Acquisitions differences of overseas earnings streams. Acquisitions are a key component of SIG’s growth strategy, supplementing organic growth. A total of 23 acquisitions were completed in the year The movement in average exchange rates compared to 2005 had a very for a consideration of £109m (including assumed net debt and contingent small effect on total overseas earnings streams. Total sales were reduced consideration), all of which complement existing businesses within SIG and by £1.3m and total profit before tax was reduced by £0.1m. Further details are within countries in which we already have a trading presence. of SIG’s foreign exchange policies are detailed in the foreign currency risk section on pages 22 and 23. The Group continues to strengthen its management structures and Corporate Development resources to enable it to successfully continue its acquisition Taxation strategy. The table below provides a detailed breakdown of the acquisition The income tax charge for the year on underlying continuing profits amounts spend over the last two years. to £32.5m (2005: £28.4m) which represents an effective rate of 30.0% (2005: 31.1%). Following the annual detailed review of the Group’s tax 2006 2005 affairs, we are pleased to be able to provide Shareholders with a reduced Number of transactions 23 21 effective tax charge. Notwithstanding the fact that there are always a number Annualised sales £240m £145m of factors affecting the future effective tax charge, we currently anticipate this Additional trading sites 133 68 being close to 30% again for 2007. Acquisition consideration (including assumed net debt and contingent consideration) £109m £110m Cash tax payments during 2006 amounted to £36.6m, some £3m higher than the underlying income tax charge of £33.6m in the Consolidated Transactions by geographic segment Income Statement. This is a result of a number of timing differences UK and Ireland 19 17 between tax falling due and tax being paid. This can be explained partly Mainland Europe 4 4 by the 2005 cash tax payments of £21.9m being £7.3m less than the 23 21 underlying income tax charge of £29.2m. Looking forward into 2007, we do not anticipate cash tax payments to be above the underlying The table below provides an overview of the different geographic income tax charge to the same extent as we have experienced in 2006. and product areas in which SIG has acquired businesses during 2006: Earnings per share (“EPS”) £m sales acquired Note 8 to the Accounts on pages 70 and 71 sets out eight different Specialist Construction EPS measures as the basic and diluted measures are calculated on both Commercial and Safety All a continuing and total operations basis and on a underlying and Insulation Roofing Interiors Products sectors non underlying basis in order to provide Shareholders with a view UK and on our earnings under each of these scenarios. Ireland £15m £44m £5m £44m £108m Mainland Underlying basic EPS from continuing operations amounted to 61.3p Europe £22m £74m £21m £15m £132m (2005: 50.9p), which represents an increase of 20.4%. Basic EPS from All geographies £37m £118m £26m £59m £240m continuing operations amounted to 58.1p (2005: 45.2p), which represents
16 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_front.indd 16 05/04/2007 11:05:26 REVIEW OF THE YEAR
05/04/2007 11:05:26 17 (10.6) (18.4) (21.8) (76.4) (98.3) (174.7) (29.8) (104.8) 06 20.5 113.6 62.0 – (4.6) 2005 £’m £’m 7.4 2006 2006 59.9 25.3 (24.1) (19.7) (22.4) (48.4) (54.1) 132.4 (104.6) (174.7) (228.8)
05 16.8
04 14.0
Annual Report and Accounts plc Annual Report SIG 03 12.4
02 11.6 increase of £17.4m, which represents 16.2% of our like for like capital salesto sales working end year SIG’s above is This £107.6m. of increase ratio of 10.5% and represents additional an investment in working capital at the year end of £6m, which is principally related to additional inventory in new trading sites; and balance being considered investment capital expenditure. expenditure Capital shown above includes finance leases drawn down in each period. (2005: £5.3m), which has been recognised as a liability in the Accounts but is yet to give rise to a cash flow. included within cash flow from operating activities is a working capital FOCUS, SPECIALISATION AND FOCUS, SERVICE SPECIALISATION Dividends (including minority dividends) Other items Free cash flow Free available for investment Opening net debt Maintenance capital expenditure* Net proceeds (after expenses) from sale of to vendors)** Interest and tax Acquisition investment (including loan notes issued Investment capital expenditure* Movement in net debt Cash flow and financial position SIG has benefited from another good year of generating cash from operating activities to help support its strategy of investment acquisition-basedin both growth.organic The following and table explains the movement in net SIG’s debt: Cash flow from operating activities USA business Closing net debt with the depreciation, to as equivalent is considered expenditure capital * Maintenance The acquisition investment figure excludes contingent consideration ** of £4.6m Key points to note are: The Group continues to monitor the life expectancy assumptions used to value its pension scheme liabilities and has not changed this assumption for the valuation of the 2006 pension scheme liabilities.pension For scheme,the main the life expectancy for a male employeenormal retirement age of beyond60 is 24 years, which is considered the appropriate for a scheme of this nature. The cost of the Group’s defined contribution schemes increased by 39% (£1.1m) to £3.9m, primarily due to the effect of inheriting pension scheme arrangements in the 2005 and 2006 acquisitions.
01 11.0 00 10.2 £m ) p 99 9.3
98 8.4
7.8 97
in 2006 outperformed the core return assumptions; and used at the start and end of the year. This principally increase in relatesthe discount rate used to value the pension toscheme liabilities. an The discount rate used is based on AA rated corporate which bondfor the main scheme in yields,the UK has increased from 4.9% at the beginning of the year to 5.1% at the end of the year and in the other smaller schemes has increased from 4.8% to 5.1%. a gain of £0.5m as the returns achieved on our pension scheme assets a gain of £2.7m as a result of changes made to the financial assumptions TEN YEAR DIVIDEND HISTORY ( Pension schemes Pension Details of the pension schemes operated by SIG are set out in Note 27d to the Accounts starting on page 89. SIG contributed £2.9m (2005: £2.8m) into its six defined benefit pension The schemes total during the charge year. to the Consolidated Income Statement was £2.9m (2005: £2.8m); of this total £2.3m (2005: £1.9m) was charged to operating expenses and £0.6m (2005: £0.9m) was charged to net finance costs. The overall defined benefit pension schemes liability year reducedby £3.4m to £23.6m. The main reason duringfor this reduction in the liability the is the recognition of an actuarial gain of £3.3m, thewhich are set out keybelow: components of Shareholders’ funds Shareholders’ funds increased by £62.4m to £351.5m (2005: £289.1m). The increase comprised the following elements: after Profit tax attributable to equity holders of the Company Dividends paid Exchange differences on assets and liabilities after tax Movements attributable to share options 75.8 Actuarial gain on pension schemes (net of deferred tax) New share capital issued under employee share schemes Increase in Shareholders’ funds 0.8 2.3 1.9 3.3 (21.7) 62.4 All of the acquisitions meet the strategic requirement of being suppliers of specialist products, chiefly to the building and construction industry and the integration process of each acquisition is progressing well. The 133 additional sites added through the 2006 acquisition programme have enabled SIG to reach new customers, extend our product offering to existing and new customers and to further improve of service ourto all customers thereby standardscontinuing the process of strengthening the Company going forward. In order to support continued SIG’s acquisition strategy the Company raised additional Private Placement debt finance during 2006. Thisfurther on page 18. is explained _8_SIG_ar06_front.indd 17 BUSINESS REVIEW CONTINUED
“ We enter 2007 with a pipeline of healthy growth opportunities.”
FINANCIAL REVIEW CONTINUED Private Placement transaction Cash flow and financial position continued On 1 November 2006, SIG successfully completed its second private the total level of investment in our business, being acquisition investment placement transaction raising $255m, €60m and £40m. The Dollar funds (including contingent consideration) and investment capital expenditure were swapped into Sterling and Euros, providing funding of £151m and amounts to £128.9m (2005: £120.7m). Capital expenditure includes €100m (Sterling equivalent of £218m). The funds raised have partly been new delivery vehicles, new brownfield sites and a number of site used to repay certain of the debts due to the Group’s relationship banks relocations to larger trading sites. These trading site relocations increase (RBS and Barclays), thus freeing up these facilities to fund the future growth our operating capacity and will ensure we fully benefit from any upturn of the Group. in market demand. The net capital expenditure to depreciation ratio amounted to 1.82 (2005: 1.49). In order to avoid a significant amount of cash on deposit whilst paying the interest due under the private placement notes, SIG was able Overall, despite our significant rate of like for like sales growth (7.1%), which to negotiate two different draw downs – the first £111m and €40m has the natural effect of increasing our working capital requirements to the were drawn down on 1 November 2006 and €60m and £40m were detriment of our cash balances, we have converted 77% (2005: 97%) of the drawn down on 1 February 2007. The maturity profile of the debt underlying profit after tax attributable to equity holders into free cash as follows: is split between 7, 10 and 12 years. Overall, SIG achieved competitive pricing with margins ranging from 110 to 130 basis points over US Treasuries. 2006 2005 When swapped into appropriate currencies this provided all in pricing £’m £’m between 70 and 84 basis points over the respective underlying interbank Free cash flow available for investment 59.9 62.0 interest rates. Underlying profit after tax attributable to equity holders 77.7 64.1 Free cash flow available for investment as a percentage Working capital statistics of underlying profit after tax attributable to equity holders 77% 97% The ratio of year end working capital to annualised sales for continuing The reduction in the proportion of profits being converted into cash businesses at 31 December 2006 amounted to 10.5%. The comparable compared to 2005 is principally a result of increased investment in inventory working capital to annualised sales ratio for 2005 is 10.4%, demonstrating at the end of 2006. On an ongoing basis, SIG continues to target working a small overall deterioration in the ratio. SIG is continually focusing upon capital management and cash generation across all of its businesses. reducing its working capital requirements.
A summary of the key debt ratios is as follows: The statistics relating to each component of working capital on a like for like 2006 2005 basis and after restating the prior year numbers to take account of the sale Gearing* 65% 60% of the USA business are as follows:
Interest cover** 9.2 times 12.7 times 2006 2005 Leverage – net debt to underlying EBITDA*** 1.58 times 1.45 times Inventory days 38 36 Trade receivable days 48 50 * Net debt divided by net assets. Trade payable days 38 38 ** Underlying operating profit divided by underlying net finance charges on a Bad debt charge as a % of sales 0.7% 0.8% continuing basis. Inventory days have increased by two to 38 in line with our current year *** Net debt divided by continuing underlying operating profit before depreciation. plans as we have widened our product offering in both existing and acquired The Group continues to have relatively conservative levels of interest cover businesses and stocked up in our new brownfield trading sites. The Group’s and leverage (net debt to underlying EBITDA) as set out above. These two trade receivable days at 48 set a new record low for the second successive key debt ratios form the basis of the Group’s borrowing covenants and the year in spite of the solid trading in December 2006 and is a reflection of levels at the end of 2006 still provide the Group with significant headroom our efforts in credit control right across the Group. The number of days against the levels set out in the covenants. we take to pay our payables is in line with prior year.
Details of the Group’s Treasury risk management policies are set out The bad debt charge as a percentage of sales has shown a slight improvement on pages 22 and 23 of this review. against prior year and our policy in respect of recognition of provisions for doubtful debts has continued to be consistently applied.
18 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_front.indd 18 05/04/2007 11:05:26 FOCUS, SPECIALISATION AND SERVICE
BUILDING REGULATIONS OUTLOOK
Building Regulations exist in all developed countries and these regulations In the UK and Ireland, overall construction activity is expected to grow REVIEW OF THE YEAR normally establish legally required performance standards in respect of modestly in 2007 over 2006, providing positive conditions for all of the fire, acoustic and thermal performance of all newly constructed buildings, Group’s activities in this region. Non-residential new build construction regardless of occupancy or the purpose of the building. is the most important single part of the overall market for SIG and the ongoing recovery in commercial building together with the continuing Throughout the EU, each country has sovereignty over its own public expenditure on schools and hospitals is expected to be helpful. Building Regulations, and there has been a pattern of upward revision of the minimum standards of performance under which new buildings Later in the year, the initial impact of the most recent (April 2006) change must be built. This upward revision has most frequently occurred in in the regulations concerning the minimum standards of thermal efficiency respect of thermal performance. of all new buildings is expected to begin to increase market demand for These Regulations are a very important driver of demand for many insulation materials. of the insulation materials which SIG sells into the new build market. The regulations are, generally speaking, not mandatory in the repairs, As explained in our Interim Announcement in September 2006 the volume maintenance and improvement part of the market. of work which is anticipated to be available in 2007 from the EEC2 (Energy Given the particular mix of business which SIG has in each country Efficiency Commitment) scheme concerning the upgrading of insulation in which we have trading operations, any future changes in the Building in existing residential properties will be reduced in 2007 over previous Regulations in the UK, Ireland, Germany, France and Poland would be years. The new scheme, EEC3, begins in April 2008, and this is expected expected to generate additional demand for insulation materials sold by to increase demand significantly once it begins. SIG. Given the product mix of the Group less benefit would be achieved in Mainland Europe. Following an exceptionally strong second half in 2006 in Mainland Europe, conditions in all those countries in which we operate are expected to remain The UK Building Regulations in respect of thermal efficiency were positive, with modest growth in overall construction activity anticipated. revised in April 2006 and this is expected to increase demand for thermal insulation materials used in the construction of new buildings, In terms of growth opportunities, we enter 2007 with a healthy pipeline with the impact on market demand beginning to be felt from the of opportunities, both organic and through acquisition. Trading since the start second half of 2007 onwards. of 2007 has been good and the Group is confident that further progress will This change in the UK Regulations is part of an ongoing programme be made. by the Government to reduce heat loss, and therefore energy consumption in buildings. RESOURCES The EU is addressing the issue of energy consumption within existing Employees dwellings through legislation requiring each member state to introduce The commitment, drive and enthusiasm of all SIG’s employees are its measures, by 2008, to implement a programme of inspecting and greatest asset and SIG’s ability to meet the demands of its customers, reporting on standards of energy efficiency. There is no legal requirement suppliers and Shareholders is dependent upon their efforts. Throughout to install more insulation under this programme and it is not possible SIG, regardless of country or sector, we believe our people are recognised to predict what the future impact on demand might be. as the best in their particular field. SIG’s policy and strategy towards The demand for insulation materials for use in technical and industrial its employees is detailed further in the Corporate Social Responsibility applications are, by implication, not affected by the Building Regulations Report on page 32. Training, coaching and the opportunity for personal in any country. career advancement within the Company are important features of how SIG seeks to recruit, retain and develop skilled staff. In France and Benelux, SIG sales of insulation are heavily biased towards technical and industrial applications. In the UK, Ireland, Germany and Brand strength Poland, sales of technical insulation are a smaller proportion to our total SIG operates under a wide range of trading names in the respective markets insulation sales. and countries in which it has trading sites. When considering the possible impact of future changes in Building Regulations on SIG, it is important to recognise that within the general Many of these brands, including the original company name, Sheffield description of insulation are the sales of a very wide range of products Insulations, are widely recognised throughout their respective market used alongside the insulation material itself. The demand for these sectors or countries as the leading supplier offering very focused products ancillary and related products may not be affected at all by changes and services to customers. in the demand for the insulation materials themselves. SIG believes that the strength and market awareness of its brands are important assets. SIG plc Annual Report and Accounts 2006 19
_8_SIG_ar06_front.indd 19 05/04/2007 11:05:27 BUSINESS REVIEW CONTINUED
“ In the UK SIG has achieved market leading positions in each of its four specific market sectors.”
RESOURCES CONTINUED OPERATIONAL RISK MANAGEMENT Competitive position There are a number of potential risks and uncertainties which could have SIG aims to occupy leading positions as a specialist supplier in each of its a material impact on SIG’s long term performance. SIG has a comprehensive main markets of Insulation, Roofing, Commercial Interiors and Specialist system of risk management installed in all parts of its business and quickly Construction and Safety Products. A position of market leadership has been introduces this into new acquisitions. The processes are described in detail achieved in a number of specific markets. Operations in the other countries on pages 42 and 43 of the Corporate Governance Report. and business streams are continuing to develop their position. Levels of market demand in the building and construction Inventory markets in which SIG operates Immediate availability of a wide range of specialist materials is vital to the Approximately 89% of SIG’s sales are made to the building, construction customers served by SIG. and civil engineering industries.
Materials are often required within hours on an emergency basis. For example, These industries are driven by private and government expenditure, and when a roof leak occurs and immediate repairs are necessary to prevent include major new construction projects (e.g. airports, hospitals and sports damage to the building and its contents, or in a chemical processing plant complexes), new residential housing developments and a wide range where a pipeline becomes dangerously overheated due to a breakdown of renovation, upgrading and repair work of existing buildings. of the insulation. SIG is exposed to changes in the level of activity, and therefore demand, from In both of these examples, customers have an unplanned, unscheduled these industries. Government policy and expenditure plans, private investor emergency need for specific and specialist products in order to prevent decisions, the general economic climate and both business and (to a lesser substantial damage and costs. extent) consumer confidence are all factors which can influence the level of building activity and, therefore, the demand for many of SIG’s products. A fundamental feature of SIG’s position in the supply chain is having these products, in depth, in strategically located trading sites to ensure customer Approximately 11% of SIG’s sales are made into specific industrial applications, requirements can be met. especially where there are temperature critical processes and the use of highly specialist insulation is an important part of the process plant itself. Trading sites These industries include power generation, oil and gas processing, chemical SIG has an extensive and expanding network of trading sites as demonstrated and pharmaceutical, process and manufacture and in the food chain, in the chart at the top of page 21. These are an important resource and an cold storage facilities. important feature of the SIG business model in each country of operation, as they enable the local market surrounding each trading site to be serviced SIG is exposed to activity levels, and therefore demand for some of its products, on an immediate availability basis. For customers conducting work on a within these diverse industries. These industries would, in turn, be affected regional or national basis in each country, SIG can provide a fully national by the general economic climate, energy demand and energy costs and service using locally held inventory, thus avoiding the time and cost penalties business investment decisions in major industries such as power generation of shipping products over large distances. and petrochemicals.
Fleet delivery capability Competitor risk SIG uses a mix of wholly owned delivery vehicles and external hire to deliver SIG has a mix of both direct specialist competition and some overlap with goods to customers. This enables availability and service to customers to be more general suppliers (such as general builders merchants) in all its markets maximised whilst ensuring that the cost base is flexible to cope with periods and countries. of higher or lower daily demand. As a distributor handling and supplying products manufactured by other The direct ownership of a large proportion of the fleet and the management companies, SIG is itself dependent upon other companies for in excess of this resource on a local basis is an important feature of the speed, flexibility of 90% of the products that it sells. The majority of products that are sold and responsiveness that SIG offers to customers. by SIG are relatively bulky and inexpensive in relation to their mass and the cost of transport. This means that the risk faced by SIG of price disruption and possible cross border or international trading having a detrimental impact on prices in any particular country is low.
20 SIG plc Annual Report and Accounts 2006
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FIVE YEAR HISTORY – TRADING SITES 618
496 412 370 371
02 03 04 05 06
Similarly, the risk posed by internet-based trading dependent upon parcel-carrier If product demand outstrips supply, be it due to demand rising or
service is very low because of the bulky nature of most of the products sold supply falling, then this could have an impact on the Group’s ability to REVIEW OF THE YEAR by SIG and the fact that specialist handling and delivery services are an service its customers’ needs. The factories that produce insulation products important feature of the service provided by SIG to many customers. take a number of years to build and so if demand exceeds the production capacity, product shortages will ensue and this could damage the Group’s Information Technology (“IT”) ability to fulfil its customers’ requirements. The Group does however SIG uses a range of computer systems to provide order processing, inventory source its products from a number of manufacturers in order to reduce control and financial management within each country. Any lengthy failure its reliance upon any one manufacturer. or disruption to the IT system in any business unit or country would result in loss of sales and delays to cash flow. These systems are not interdependent, The Group negotiates purchase prices with its suppliers. The ability of SIG and there are dedicated support staff directly employed, together with to secure satisfactory terms of trade is key to its ability to supply the products external support service providers, monitoring the IT systems. to its customers at competitive prices.
Commercial relationships Rising product prices are good for SIG as our standard gross margin SIG is exposed to changes in relationships with both customers and suppliers. is achieved on a higher selling price resulting in improved overhead recovery, It is a key task for the operational management in each country and business thus providing a higher net margin. Rising prices may also provide SIG with unit to maintain and develop relationships with customers and suppliers. the opportunity to benefit from stock gains whereby stock is bought at the lower price and sold on at the higher price. Conversely, falling product prices Credit risk are not good for SIG. Over the last few years, product price inflation across SIG, by the nature of its position in the supply chain, buys products from the basket of SIG products has been positive rather than negative. highly reputable suppliers in bulk and sells the products to a wide variety of professional contractors on credit terms. SIG sells to the majority of Identification and integration of acquisitions customers on credit terms. There is a risk that customers do not pay The Group’s growth strategy is partly dependent upon the identification as the typical customer does not have many assets. SIG has therefore of appropriate acquisition opportunities at an appropriate price and the developed well proven credit control guidelines and procedures that successful integration of an acquisition into the SIG Group. SIG is committing are designed to minimise our credit risk whilst trying to maximise our more dedicated resources to the research of new markets, the origination sales potential. For the year ending 31 December 2006 our bad debt of appropriate acquisition targets and the appropriate due diligence and expense amounted to 0.7% of sales (2005: 0.8% of sales). contract negotiation process. Once acquired, SIG is constantly evaluating the management structures of its businesses to ensure that appropriate Government legislation management time can be dedicated to new businesses. SIG operates in a number of countries right across Europe, each with their own laws and regulations, encompassing environmental, legal, health People and safety, employment and tax matters. SIG is committed to complying SIG is dedicated to providing high quality service to its customers and with each local requirement and the clear devolvement of responsibility to therefore needs to have the best skilled and experienced staff available local operating management together with the employment of competent within the industry. SIG is committed to providing employees with advisers supports this requirement. Changes to legislation are monitored a professional working environment where hard work and commitment locally and appropriate actions taken to ensure they are incorporated into is encouraged and rewarded accordingly. SIG is increasingly investing more our business policies and procedures. resources in developing and training its employees, identifying high potential individuals who will become tomorrow’s managers and senior managers Transport and attracting and recruiting the best people into its businesses in the future. In excess of 70% of total sales are delivered to customers by SIG. In 2006, SIG recruited a new UK HR Director with a specific remit Prolonged disruption to road transport systems or the availability of vehicle to improve our performance in each of these areas. fuel would result in reduced sales in any country in which this may occur. Product defect claims Product availability and product prices Product quality is a key reason why customers would buy from SIG. The availability and the market prices of products that the Group supplies The Group is careful to source products very selectively to ensure any can change. These changes can affect the Group’s sales and operating profits. possible risk associated with products of inferior quality is minimised. The Group has very regular dialogue with its suppliers to ensure that it protects its position regarding product availability and product pricing.
SIG plc Annual Report and Accounts 2006 21
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“ SIG has delivered a 17.6% return on capital employed, which compares favourably to the Company’s estimated weighted average cost of capital of 7.7%.”
TREASURY RISK MANAGEMENT Interest rate risk SIG’s Finance and Treasury Policies set out the approach to managing treasury SIG finances its operations through a mixture of retained profits, bank, private risk. These policies are approved by the Board of Directors on a regular placement and other borrowings. SIG uses derivative financial instruments basis. The treasury risks that SIG faces are interest rate, liquidity and foreign to create the desired currency and interest rate profile, so managing SIG’s currency risk arising from its international operations. exposure to interest rate fluctuations.
SIG sold its USA business on 20 November 2006 and now only faces On 1 November 2006, SIG completed its second private placement transaction a translation risk from the Euro and the Polish Zloty. SIG’s financial borrowing funds under fixed rate private placement notes. 41% of these instruments, other than derivatives, comprise borrowings, cash and liquid private placement notes drawn on 1 November 2006 were swapped into resources and various items such as trade receivables and trade payables floating rate in order to preserve a sensible mix of projected fixed and that arise directly from its operations. SIG also enters into derivative floating interest rate exposures in line with the Group’s treasury policies. financial instruments (principally foreign currency and interest rate swaps). The purposes of such instruments are to hedge certain currency risks A small proportion of SIG’s assets are funded using fixed rate finance lease arising from SIG’s operations and to hedge interest expenses arising from contracts. At 31 December 2006 outstanding liabilities in respect of such SIG’s sources of finance. contracts amounted to £2.8m (2005: £1.6m).
Details of derivative financial instruments are shown in Note 18 to the At 31 December 2006, 76% or £223.4m (2005: 72% or £148.6m) Consolidated Accounts on pages 82 to 84. of the Group’s gross debt, being £292.9m (2005: £206.8m), was in the form of fixed rate debt with an average remaining fixed life of 5.3 years It is, and has been throughout the period under review, SIG’s policy that (2005: 3.6 years). no trading in financial instruments or speculative transactions be undertaken. To minimise the credit risk associated with derivative financial instruments, Liquidity risk SIG only enters derivative financial instruments with its principal bankers, SIG seeks a balance between certainty of funding and a flexible, cost-effective which are both AA rated by Standard & Poor’s. borrowing structure. SIG’s policy is to ensure that, as a minimum, all projected net borrowing needs for the next three years, after taking account of SIG manages its financial liabilities using derivative financial instruments projected free cash flow, are covered by committed facilities. where appropriate to ensure that it has appropriate maturity profiles in relation to its borrowings and appropriate levels of protection against The Group uses a mixture of sources of funding in order to reduce the risk interest rate and exchange rate fluctuations. of being over reliant upon any one provider. The key sources of finance are private placement note providers, being mainly USA pension funds, and our The Group’s financial liabilities at 31 December 2006 of £292.9m principal bankers, The Royal Bank of Scotland plc and Barclays Bank plc. (2005: £206.8m) can be analysed as follows: The private placement transaction completed on 1 November 2006 increased the certainty of the Group’s debt funding, being provided on a committed £137.3m (2005: £64.0m) has a maturity profile of greater than five years; 7, 10 and 12 year basis. The cash received has repaid the vast majority £200.7m (2005: £155.7m) is denominated in foreign currencies, of borrowing the Group had with its relationship banks, thus once again held to partially hedge the assets of our overseas businesses; providing the banks with flexibility and appetite to lend to the Group in the future. £223.4m (2005: £148.6m) carries a fixed rate of interest; and £287.3m (2005: £203.5m) is borrowed on an unsecured basis. The year end maturity profile and value of undrawn committed borrowing facilities are set out in Note 18 to the Accounts on page 84. As at 31 December 2006, SIG had undrawn committed borrowing facilities from its debt providers of £113.9m (2005: £60.3m). Foreign currency risk SIG has a number of overseas businesses whose revenues and costs Gearing increased during the year from 60% to 65% as a result of increased are denominated in the currencies in which the operations are located. investment in property, plant and equipment, working capital and acquisitions. On a continuing basis, approximately 37% of SIG’s 2006 revenues were in foreign currencies, being Euros and Polish Zloty.
22 SIG plc Annual Report and Accounts 2006
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The vast majority of SIG’s sales and purchases are not cross border. When cross Cautionary statement
border transactions occur it is SIG’s policy to eliminate currency exposure This Business Review has been prepared to provide the Company’s REVIEW OF THE YEAR at that time through forward currency contracts, if exposure is considered Shareholders with a fair review of the business of the Company and to be material. a description of the principal risks and uncertainties facing it. It may not be relied upon by anyone, including the Company’s Shareholders, for The Consolidated Balance Sheet is inherently at risk from movements any other purpose. in the Sterling value of its net investments in foreign businesses. This risk is mitigated by SIG combining financial liabilities and derivatives in currencies This Business Review and other sections of this report contain forward that partially hedge the net investment values. At 31 December 2006, looking statements that are subject to risk factors including the economic and SIG had borrowings amounting to €189m and PLN44m that are designated business circumstances occurring from time to time in countries and markets as net investment hedges. in which the Group operates and risk factors associated with the building and construction sectors. By their nature, forward looking statements involve The net after tax effect on the Consolidated Balance Sheet of currency a number of risks, uncertainties and future assumptions because they relate to transaction and translation differences relating to our overseas subsidiaries events and/or depend on circumstances that may or may not occur in the in 2006 was a loss of £2.4m (2005: loss of £1.7m). future and could cause actual results and outcomes to differ materially from those expressed in or implied by the forward looking statements. No assurance Hedge ineffectiveness can be given that the forward looking statements in this Business Review Hedge ineffectiveness income of £1.357m (2005: £1.880m) has been will be realised. Statements about the Directors’ expectations, beliefs, hopes, classified in the “other items” column of the 2006 Consolidated Income plans, intentions and strategies are inherently subject to change and they are Statement. The income relates to the release of the ineffective portion based on expectations and assumptions as to future events, circumstances of the Sterling to Euro derivative financial instruments held as a liability and other factors which are in some cases outside the Company’s control. in the Consolidated Balance Sheet. The ineffective portion now remaining Actual results could differ materially from the Company’s current expectations. as a liability amounts to £2.841m (2005: £4.198m). These derivatives It is believed that the expectations set out in these forward looking statements are held to form a net investment hedge of our European assets and are reasonable but they may be affected by a wide range of variables which were entered into as part of the private placement transaction in 2001. could cause actual results or trends to differ materially, including but not An explanation of this accounting treatment is included in the 2005 limited to, changes in risks associated with the Company’s growth strategy, Annual Report and Accounts. fluctuations in product pricing and changes in exchange and interest rates.
OTHER MATTERS The forward looking statements should be read in particular in the context Shareholder return of the specific risk factors for the Company identified on pages 20 and 21 SIG has delivered a 17.6% return on capital employed (2005: 17.7%), of this Business Review. The Company’s Shareholders are cautioned not which compares favourably to SIG’s estimated weighted average cost of to place undue reliance on the forward looking statements. This Business capital of 7.7% (2005: 6.8%), thus generating substantial Shareholder value. Review has not been audited or otherwise independently verified. The information contained in this Business Review has been prepared on the As at 13 March 2007, SIG’s share price closed at £11.63 per share, basis of the knowledge and information available to Directors at the date representing a market capitalisation of £1,432m at that date. The total of its preparation and the Company does not undertake any obligation dividend for the year of 20.5p (2005: 16.8p) provides Shareholders with to update or revise this Business Review during the financial year ahead. a yield on this date of 1.8%. SIG monitors relative Total Shareholder Return (“TSR”) for assessing relative financial performance. As at 31 December 2006 the Company’s share price was £10.30 per share. When dividends are included this gives a TSR of 336% over a five year performance period. A performance graph has been included on page 48 where the Group’s TSR is compared with the FTSE Support Services Index which produced DAVID WILLIAMS a TSR of 12% over the same five year period. Chief Executive
Going concern The Directors are confident, on the basis of current financial projections and facilities available, that SIG has adequate resources to continue in operation for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the Accounts. GARETH DAVIES Finance Director
SIG plc Annual Report and Accounts 2006 23
_8_SIG_ar06_front.indd 23 05/04/2007 11:05:29 INSULATION
“ SIG is the leading specialist supplier of insulation and related products in Europe.”
CASE STUDY: DEVELOPMENT OF AN EXISTING BUSINESS As the leading supplier of insulation and related products in the UK, the Group continues to develop its customer offering and invests heavily in new locations, delivery capability and staff training.
24 SIG plc Annual Report and Accounts 2006
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Insulation materials are used across all areas of construction and industry. Traditionally they have been used to resist the transfer of heat and fire but are also becoming important in the management of sound transmission within buildings. The goal of reducing carbon emissions is placing increasing importance on the use of appropriate insulation materials and systems.
High energy costs and environmental concerns drive the use of insulation
products across a wide range of construction and industrial applications. REVIEW OF THE YEAR In general, these applications fall into three categories of heat, fire and sound management, all of which are subject to “in country” Building Regulations.
The most widespread application is that of heat management where insulation is most commonly used to retain heat within a building or industrial process. However, there are also applications, such as cold stores, where the requirement is to keep heat out.
Fire protection is another important application for insulation. Good design, material specification and installation are vital in protecting buildings from the ravages of fire and ultimately helps save lives.
The third application of insulation is that of sound management. Cities and towns are becoming increasingly dense and the ability to minimise the transmission of noise between dwellings is now an integral part of building design. The technical capabilities for this application are developing apace and the Group has positioned itself as a leader within this area as well as the wider insulation market.
In all these areas of application, SIG works closely with leading manufacturers to bring a wide range of products to market and provide the technical expertise which only a specialist business is able to offer.
The Group has over 150 trading sites in Europe that are focused on the requirements of the insulation market and are able to provide expert advice, wide and available stock holding and rapid service and delivery.
In the UK, the Group is also engaged in insulation contracting, improving the efficiency of existing residential properties through a number of Government supported schemes and the provision of built-in insulation in new dwellings.
The Group has also developed its own fabrication facilities which have the skills to be able to provide bespoke solutions and thereby offer a service that differentiates itself from mainstream competition.
The new Leeds trading site was opened in 2006 and consolidated COUNTRIES OF OPERATION: two smaller operations in the area. Both these operations continue United Kingdom to trade using different brand names and targeting differing customer Ireland groups but the new combined site has been designed to optimise layout Germany for operational efficiency. The relocated staff have over 320 years France of experience in SIG and the business is now the focal point of insulation Poland expertise in West Yorkshire. The Netherlands Belgium Austria
SIG plc Annual Report and Accounts 2006 25
_8_SIG_ar06_front.indd 25 05/04/2007 11:06:19 ROOFING
“ SIG is the largest supplier of roofing products in the UK and Ireland. During 2006 the Group also entered the German and Polish markets through the acquisition of Melle Dachbaustoffe GmbH, bringing the total number of roofing focused trading sites in the Group to over 250.”
CASE STUDY: EXTENSION OF AN EXISTING GROUP ACTIVITY INTO A NEW GEOGRAPHY The Group has had a strong presence in Germany and Poland for a number of years however it has not been active in the roofing market within these countries. During 2006, SIG acquired Melle Dachbaustoffe GmbH, a roofing materials distribution business with eleven branches in Germany and three branches in Poland.
26 SIG plc Annual Report and Accounts 2006
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The roof is the most critical part of any building. It protects the integrity of the building’s structure and the building’s contents from the elements. Repair and maintenance is often an urgent requirement and this requires suitable products to be readily available on demand.
Each trading site offers materials from the leading manufacturers of roofing
materials and supplies products for pitched, flat, industrial and agricultural REVIEW OF THE YEAR applications. As the largest supplier of roofing materials in Europe, the Group is able to keep at the forefront of innovations and provide its customers with a level of technical know-how unrivalled in the market.
As well as specialist roofing materials, each location offers a range of accessories such as tools and fixings, safety products and insulation materials.
Many of these accessories are core product areas for other Group businesses and the Roofing business is able to draw on the experience and technical knowledge of its sister businesses as well as taking advantage of Group procurement.
SIG is also a leading supplier of reclaimed and pre-used roof tiles and slates which have two key advantages over newly manufactured products. Firstly, they remove the need for high-energy consuming manufacture and secondly, their aged and worn character provides an aesthetically pleasing appearance that matches that of the local environment, something that is increasingly important to local communities and planning agencies.
The on-going need for repair or replacement of existing roofs, whether as the result of natural wear and tear or of storm damage, creates a resilient market for roofing materials. The emergency nature of some repairs requires materials to be readily available from local stock and these demands dictate the nature of the market which is for a large number of depots holding a broad range of stock.
For new build applications, where consumers or designers require certain styles or finishes, SIG also provides “Roof Libraries” which offer a very wide selection of materials and facilitate the specification process.
During the last few years, SIG has also broadened its product offering to include roofline products such as rainwater and guttering, soffit, fascia and bargeboards and the Group has now established a network of over 100 trading sites focused on this particular niche area in the UK roofing market.
The Group is now able to share its know-how, skills and technical COUNTRIES OF OPERATION: knowledge across four countries which enables it to stay at the forefront United Kingdom of market developments and benchmark best practice. The deepening Ireland of the Group’s positions within these territories also provides economies Germany of scale and enhances our business presence. Poland
SIG plc Annual Report and Accounts 2006 27
_8_SIG_ar06_front.indd 27 05/04/2007 11:07:02 COMMERCIAL INTERIORS
“ SIG holds a leading position in the commercial interiors market in Europe and supplies a wide portfolio of products to specialist contractors.”
CASE STUDY: BUSINESS DEVELOPMENT IN POLAND SIG sells a wide range of products for the interior fit-out of buildings from a growing number of trading sites. As part of the expansion programme a specialist distribution business with 34 trading sites was acquired in Poland adding to the 22 which the Group already owned. This expansion of the Polish operations provides a platform for continued future growth.
28 SIG plc Annual Report and Accounts 2006
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The commercial interiors market place is demanding, sophisticated and fast moving. Emphasis is on achieving a balance between efficient utilisation of (often expensive) space and the quality and comfort of the working environment. There is also an added requirement of flexibility to meet the changing business requirements of today’s world.
The core product areas for the Group are ceiling, partitioning, dry lining
and specialist door systems used in non-residential buildings, together with REVIEW OF THE YEAR a wide range of ancillary products supplied to support individual contracts.
All types of non-residential buildings such as schools, hospitals, hotels, offices and shops are supplied with products for either new build or refurbishment projects.
The Group supplies ceiling and dry lining products from leading suppliers and manufactures its own door and partitioning systems.
The Group has over 150 trading sites which blend the requirements of small, maintenance orientated projects which require ready access to materials with those of larger, specification-based contracts where specialist advice, service and support are required to secure orders.
Customer and client support may include technical design and development of visual appearance, together with logistics and delivery scheduling in order to meet the fit-out requirements.
Delivery service is an important element of the project planning as city locations can often have difficult access and minimal space for holding stock. If materials are not available “on time” then contractors face lost “downtime” and potential time penalties.
COUNTRIES OF OPERATION: United Kingdom Ireland Germany France Poland The Netherlands Belgium Austria
SIG plc Annual Report and Accounts 2006 29
_8_SIG_ar06_front.indd 29 05/04/2007 11:07:36 SPECIALIST CONSTRUCTION AND SAFETY PRODUCTS
“ Customers demand quality products at competitive prices delivered when and where they choose; providing this service across a specialist product range is what SIG is about.”
CASE STUDY: NEW BUSINESS ACTIVITY The Group has established this division through the acquisition of a series of businesses, many of which were relatively small in scale but provided excellent technical knowledge or enhanced the Group’s geographic position.
30 SIG plc Annual Report and Accounts 2006
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Specialist Construction and Safety Products provides a range of materials and consumable items that are essential to the construction process. Detailed product knowledge and a keen understanding of particular applications are vital elements of customer support.
The Specialist Construction division covers a wide portfolio of products
such as concrete accessories, waterproofing systems, construction chemicals REVIEW OF THE YEAR and admixtures, brickwork support systems, specialist fixings and tools.
Typically, products are supplied to large commercial or civil engineering projects. Examples include tunnels and bridges, schools and hospitals, retail developments, hotels and office buildings.
The products supplied by SIG are often of critical importance to the whole building programme and must perform to specification and be available for use at the right time and right location.
Relationships with contractors, the capability to resolve problems with expert technical advice and the ability to offer rapid delivery times so as to maintain workflows on large projects is critical to the service of customers.
The division also includes SIG’s Safety Products distribution business, which unlike other Group companies manages its resources from a single site, offering next day delivery throughout the UK mainland. Specialist safety equipment, such as eye, hand and foot protection is supplied to a wide range of industries with particular emphasis on the construction sector.
The Safety business reaches a wide and growing range of customers by direct marketing and has a strong web presence (www.protecdirect.com). The growing requirement for customers to have their work and safety wear branded with their own logo is met by in-house print and embroidery capabilities.
By combining the businesses the Group has been able to achieve COUNTRIES OF OPERATION: back office savings and improve procurement by global sourcing. United Kingdom The product/service offering has also been raised as the best ideas Ireland and practices are shared across the division. National supply agreements Poland with major contractors have also been possible as the development France (Safety) of the trading site network has been extended nationwide.
SIG plc Annual Report and Accounts 2006 31
_8_SIG_ar06_front.indd 31 05/04/2007 11:08:29 CORPORATE SOCIAL RESPONSIBILITY
“ SIG recognises its corporate and social responsibilities to its Shareholders, customers, suppliers and employees and is committed to good practice in all activities.”
SIG continues to make significant progress in developing and implementing supply and promote, wherever possible, those products, which contribute its Corporate Social Responsibility (“CSR”) policies and is pleased to be able to energy conservation and do not damage the environment; and to inform its stakeholders of the measures which it is taking to continue ensure that the Company continues to meet present and future to monitor and improve its CSR performance. environmental standards and legislation. In accordance with the ABI reporting guidelines SIG is able to confirm that To this end the Company has in place an environmental management the Board takes regular account of the significance of social, environmental system in accordance with BS EN ISO 14001:2004. and ethical matters to the business of the Group and that it has in place a comprehensive risk management and internal control process which identifies ENVIRONMENTAL MANAGEMENT and assesses the significant risks to the Company’s short and long term value During the year the focus has continued to be on putting in place the procedures arising from such matters. The Board receives a report on CSR issues and systems for the Group to introduce an Integrated Management System at each of its Board Meetings. CSR issues form part of the overall internal combining BS EN ISO 14001 (Environment) and OHSAS 18001 (Health control process and are covered in the training of Directors. and Safety) in the UK which includes full audits at all locations. Moody International were appointed Assessors and the assessment process, SIG recognises its corporate social responsibilities to its Shareholders, leading to certification under these accreditation schemes, resulted in customers and suppliers and is committed to good practice in all its activities. April 2006 in all the Group’s UK sites receiving certification. In April 2006 SIG was granted certification uwnder ISO 14001 and OHSAS The Group has identified the significant environmental impact of its operations, 18001. This certification covers all of the Group’s UK mainland sites. which are summarised below: ENVIRONMENT Energy and transport As a leading international supplier of insulation and related materials our core As a founder member of the Association for the Conservation of Energy, business is focused on the reduction of energy consumption and the subsequent SIG is active in promoting and encouraging the raising of mandatory reduction in harmful environmental impacts. standards for thermal insulation. The Group Chief Executive, Mr. D. Williams, is the Board Director responsible Reducing energy consumption is a priority for its operations. This is targeted for the environmental performance of the Group. Each individual subsidiary both through reducing the amount of fuel used in delivery, by increasing Managing Director is responsible for the environmental performance of their the efficiency of heating and lighting and maximising the use of natural light own business. SIG is committed to minimising the environmental impact of in the Group’s properties and by environmental awareness training at its activities through good environmental management practices. The Group’s UK sites. Considerable effort has been put into recording and monitoring Environmental Policy was reviewed in 2006. The policy is displayed in all electricity and gas consumption at each location, with sophisticated reporting trading sites and offices throughout the Group and on the SIG website. technology being installed at larger locations. Energy Brokers have been Environmental objectives and targets have been established at relevant instructed to, where practicable, purchase energy from renewable sources. functions and levels within the organisation. SIG is working with the Energy Savings Trust (Transport Advice Team) SIG believes that it is in the Group’s best interests to be aware of, and seeks with the aim of achieving a green fleet operation; to minimise the risks arising from, the social and environmental impact of its SIG has a policy of introducing the most energy efficient vehicles activities and is committed to conducting its activities and operations in line commercially available (currently considered to be Euro V category with current legislation and best environmental practice, seeking continual engines), which the Company has started to purchase, as vehicles are improvement and innovation within all Group businesses and activities. due for renewal; All SIG plc UK companies actively seek to: SIG employs staff to train drivers in driving techniques aimed at reducing accidents and damage (safe driving) and to drive vehicles using methods minimise the use of all materials, supplies and energy – and wherever and practices which will reduce fuel consumption. All vehicles are regularly possible use renewable or recyclable materials; serviced to ensure that vehicle emissions are kept to a minimum; minimise the quantity of waste produced in all aspects of our business; adopt an environmentally sound transport policy; communicate our environmental policy to all staff and encourage them to participate in the achievement of our goals;
32 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_middle.indd 1 05/04/2007 11:08:41 CORPORATE GOVERNANCE 05/04/2007 11:09:02 33 2006 Annual Report and Accounts plc Annual Report SIG or recyclable. partitioning with sustainability in mind. Each component being reusable Komfort Workspace has Komfort this Workspace year launched a range of demountable SIG actively seeks to reduce the number of printed copies of its Annual Report and Accounts and will be actively encouraging Shareholders to elect to receive their communications from the Company in electronic Silk form.Mega using produced been has Accounts and Report Annual 2006 The Challenger and Offset, which are manufactured from wood pulp sourced from sustainable forests. It is manufactured using Elemental Chlorine Free pulp, bleached using weaker chlorine compounds such as chlorine dioxide, producing significantly lower levels of polluting effluent than elemental chlorine bleaching. Acquisitions Considerable importance is placed on environmental mattersof theas due part diligence process for acquisitions. External and assess advisersany environmental risks to which the Group could reviewpotentially become exposed and these are considered considered also are processes asand partcompliance safety and ofHealth process. the acquisition as part of the acquisition process. Suppliers and customers programme The programme. audit supplier formal a place in has Group The is conducted by way of questionnaire and includes a requestof the environmental aspects of the supplier’s foroperations. Environmental details management will be one of the criteria considered whena supplier’s qualifications examiningfor Group orders. The Group has a policy that all timber purchased for use in its manufacturing activities must be from renewable resources. This is a relatively small part of the UK operations but where accreditation and forest stewardship schemes are applicable and available, SIG uses these in its sourcing procedures. level the receive customers its that ensure to policies place in has Group The SIG. from expect to come have they that product of quality the and service of to all employees; activities at principal administrative centres and where practicable at site level; and Company’s membership and of working Valpak closely with suppliers to improve the accuracy of data. SIG meets its responsibilities under the scheme. compliance Valpak’s through UK the in regulations waste packaging entered has it area, this in development ongoing Company’s the of part As into a national agreement for with waste Veolia operates removal. Veolia its own waste recycling and reclamation compliance scheme; has resulted in a significant reduction in internal and external paperwork throughout the Group; pallets and cartons; from customers; of energy reduction awareness information and reminder aids to reduce the amount of motor fuel used relative to the amount of goods delivered, by a minimum of 1% per annum; and which uses the off cuts from its manufacturing processes to provide heat for the manufacturing unit. are required to make the most efficient use of vehicles, consistent with used include maximising meeting customer requirements. Techniques vehicle loading (within legal limits) so reducing vehicle numbers, and route planning, to minimise distances travelled and thereby fuel usage; planning equipment. This is aimed at using the most fuel efficient route for each journey; the expansion of the Group’s waste paper and ink cartridge recycling actively taking part in recycling and reclamation schemes through the SIG embraces electronic communication within its businesses, which purchasing recycled and recyclable packaging where practicable, including returning reusable pallets to suppliers and similarly recovering used pallets reusing packaging for internal transfers and deliveries; environmental awareness training at all sites including the distribution the Company has a policy, which was introduced in 2005 of seeking site Crawley its at boiler burning a wood installed has Workspace Komfort the Transport Co-ordinators in each the location Transport throughout the Group SIG has fitted vehicles with logistics tracking systems and navigation Packaging and Packaging waste reduction SIG works with its suppliers to minimise primary and secondary packaging, while maintaining necessary levels of packaging to ensure that the product arrives with the environmental customer on in perfect organisation condition. the of As impact a break major bulk the supplier, that recognised has SIG waste is through packaging and has taken a pro-active approach to minimise the amount of new packaging entering the market and the amount of waste generated at trading site level. This is achieved by: _8_SIG_ar06_middle.indd 2 CORPORATE SOCIAL RESPONSIBILITY CONTINUED
“ Accreditation to ISO 14001 and OHSAS 18001 for the Group’s UK Mainland sites is a significant achievement in the implementation of SIG’s Health and Safety and Environmental policies.”
HEALTH AND SAFETY The Group has a Charitable Donations Policy. The Policy in addition The Group is committed to high standards of health and safety for all of its to supporting local causes where SIG employees are involved, is to provide employees. The Group’s Health and Safety Policy was reviewed in 2006. support for three main charities for a period of three years commencing The Policy is displayed throughout the Group’s workplaces and is available in November 2004. The three charities selected in the fields of disadvantaged on the Company’s website. Whilst Mr. D. Williams, the Chief Executive, children, humanities and the environment are: is the Board Director responsible for the health and safety performance Henshaws College, which is a unique and pioneering education facility of the Group, the SIG systems ensure that responsibility exists throughout offering high quality independent living skills training to around 65 young all of the SIG businesses. Health and safety objectives and targets have been people aged between 16 and 23, all of whom are visually impaired with established at relevant functions and levels within the organisation. additional disabilities. SIG supports five students from different parts of the UK; As part of the Board’s ongoing commitment to its health and safety improvement policy a programme to achieve OHSAS accreditation Yorkshire Wildlife Trust where SIG sponsors a number of Wildlife projects commenced in 2004 with Moody International as Assessors. The preliminary and have encouraged volunteering days for interested staff; and audits were completed in November 2005 and all of the Group’s UK mainland Hope and Homes for Children, which is an international charity, engaged sites received OHSAS certification following the final audits in April 2006. in providing homes and support for children on a long term basis in third world and war torn countries. The continuing improvement of health and safety performance is a key priority. A Health and Safety Training Manager has been recruited to lead Staff are kept informed of charitable activities and are encouraged to attend the ongoing program to ensure that all UK subsidiary company directors and events as appropriate, as a means of encouraging them to be personally managers will have received appropriate training in health and safety in order associated with charitable work and in particular with the causes supported to meet their responsibilities. Additional Health and Safety Advisers who are by the Group. This has included sponsorship for individuals entering specific either Company or regionally based have been recruited to support the events and support in kind for building projects. By way of example CPD increased focus on health and safety education and awareness at workplace employee Neale Sim, Assistant Manager at the Liverpool CPD Branch level and to carry out full health and safety audits at every UK site. Forklift (pictured on page 33), supported by the Company, raised money for the and commercial driver training form an important part of SIG’s Workplace charity Scope undertaking a three week high altitude trek up Mount Everest. Safety Policy, which impacts on reduced insurance costs, enhanced pedestrian and site safety and improved working environment. Daily inspections The Group has in place a Payroll Giving Scheme, which is available to all complement periodic training to keep the vehicle and driver at peak UK employees. The Company launched this with a gift matching initiative to performance. The statistics collected by the Group in the UK on a monthly encourage staff to enrol. Employees are free to choose one of the current basis indicates that the overall rate of workplace injuries within the UK SIG sponsored charities listed above or any other charity of their choice. businesses continues to fall. BUSINESS PRINCIPLES AND CODE OF ETHICS COMMUNITY The Group is currently in the process of publishing a Group wide Code The Group endeavours to contribute to the communities in which it of Ethics, which sets out a number of fundamental principles, which all operates particularly those neighbouring its sites. SIG is a member of Group companies will be required to follow. It is intended that the Code Business in the Community in the UK and has worked with that organisation when published will be available on the SIG website. The Code will include to help to develop its approach and practices. This is mainly achieved the Company’s policy on how it addresses bribery and corruption. SIG’s through charitable donations and other initiatives that help the community. existing policy on employee conduct and behaviour is set out in its Staff The Group also provides financial support for employees undertaking Handbooks which all employees receive a copy of on joining the Company. overseas charity work. The key business principles contained in the Code of Ethics are set out below: The HR Director has responsibility for community issues within the Group SIG’s policy is to operate within applicable laws; and reports to the Chief Executive who is responsible for community issues discrimination or harassment of any kind will not be tolerated; at Board level. SIG aims to be a responsible partner within its local communities; DONATIONS the legal and moral rights of others will be taken into account in all SIG’s During the year the Group made charitable donations of £100k (2005: £98k). business transactions; It is the Group’s policy not to make political donations and no political donations were made in the year (2005: £nil). we will maintain a safe and healthy environment for people to work in; we will be proactive in managing our responsibilities to the environment; we should not knowingly make misrepresentations; 34 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_middle.indd 3 05/04/2007 11:09:02 CORPORATE GOVERNANCE 05/04/2007 11:09:17 35 2006 Annual Report and Accounts plc Annual Report SIG There is an active and extensive programme of training in place. Full-time supplemented is work their and employed are trainers professional dedicated as required by external courses and external agencies. In order technical, on placed is to meetemphasis particular demand customer increasing ever customer service and interpersonal skills. The Group hasof increasing the number of an man-hours of staff objectiveand management training each year. has been Work undertaken during 2006 to identify in more detail the senior and directors company operating of needs development and training managers within the development UK. plans Personal have been agreed and a programme of activities launched. to Processes identify and nurture talent within the business have been enhanced, with the Group actively seeking to develop emerging talent, those with potential to progress into management, as well as existing managers seeking to progress their careers. Baseline motives have been established to enable comparisons to take place in the future. SIG recognises the importance of good communications with employees and acknowledges that there should be clear channels of communication and opportunities for consultation and dialogue on issues, which affect both business performance and employee’s work lives. This is achieved through a variety of media including the Group’s intranet, noticeboards, newsletters and meetings. questions, any address to opportunity the offered regularly are employees All particularly relating to the financial performance of SIG in relation to the Results Announcements, directly to the Chief Executive, either by email, by telephone, or in writing. During the year the Group introduced a childcare voucher system whereby UK employees can elect to receive childcare vouchers in lieu of part of their salary in a tax efficient manner. Employees are encouraged to become 2005 Shareholders November in in (“SIP”) the Pan Company. Investment Share new a introduced Group The in Earn place Scheme. of The the Company Save gives As one You matching share for each share purchased by the employee up to a maximum of four matching shares per month. At 31 December 2006 there were 1,425 employees saving under the Company’s SIP. The Group operates a number of employee pension schemes across its businesses. In the UK it operates a Defined Contribution Scheme, which is open to all employees. The Group’s UK Defined Benefit Schemes have been closed to new members since 1997. The HR Director has responsibility for human resource issues within the Group and reports to the Chief Executive who is responsible for human resource issues at Board level. reported; and conflicts of interest must be avoided and in all cases must be employees are encouraged to report any suspected wrongdoings. as a we matter do of not policy, make political donations; no bribes can be given or received; EMPLOYEES employees existing all to opportunities equal provide to is policy Group’s The and prospective employees. SIG recognises that its reputation is dependent effectiveness on and the skill quality, base of its employees and is committed to the fair and equitable treatment ofto prohibit discrimination on the allgrounds of race, religion, sex, nationality its employees and specifically or ethnic origin. Employment opportunities are available to disabled persons in accordance with their abilities and aptitudes on equal terms with other employees. If an employee becomes disabled during employment the Group makes every effort to enable them to continue employment, with re-training for alternative work where necessary. management and employees all that ensure to a commitment has Group The are properly inducted into the Company and given the necessary training to fulfil their roles. _8_SIG_ar06_middle.indd 4 BOARD OF DIRECTORS
LEFT TO RIGHT: Michael Borlenghi, Gareth Davies, David Haxby, David Williams, John Chivers, Les Tench, Peter Blackburn (not pictured Chris Davies).
LES TENCH BSC PETER BLACKBURN CBE BA, D.LITT, FCA Non-Executive Chairman Non-Executive Director Les Tench (age 61) became a Non-Executive Director in March 2003 and was Peter Blackburn (age 66) became a Non-Executive Director in July 2001. appointed Deputy Chairman in November 2003. He was appointed Chairman He is Chairman of the Remuneration Committee and Senior Independent on 1 May 2004. He joined CRH plc in 1992 and from 1998 until his retirement Director. He is a Non-Executive Director of Compass Group PLC. From in December 2002 was Managing Director of CRH Europe – Building Products. November 1997 to June 2001 he was Chairman and Chief Executive of Nestlé UK. He was Chairman of Northern Foods from February 2002 DAVID WILLIAMS to July 2005. He is a past president of the Food and Drink Federation. Chief Executive David Williams (age 56) joined the Group in 1983 having gained UK and overseas MICHAEL BORLENGHI BSC, FRSA sales and marketing experience in several diverse industries. He was appointed Non-Executive Director Managing Director of Sheffield Insulations and to the main Board in June 1993. Michael Borlenghi (age 63) became a Non-Executive Director in April 2004. He became Chief Executive in January 2002. He is a member of the Advisory He has held a number of Non-Executive Board positions since retiring Board of Sheffield University Management School. in 1991 from the GKN plc Board. Whilst at GKN he was involved in senior management roles both in the UK and overseas in a career spanning 25 years. GARETH DAVIES BA, ACA Finance Director DAVID HAXBY LL.B, FCA Gareth Davies (age 43) joined the Group in November 1993 as Group Financial Non-Executive Director Controller, having previously been a senior manager with Arthur Andersen. David Haxby (age 65) became a Non-Executive Director in March 2003 He was appointed to the main Board in August 2002 as Finance Director. and is Chairman of the Audit Committee. He is currently a Non-Executive Director of Cattles plc, a position he has held since 1999. From 1991 JOHN CHIVERS until his retirement in 1995 he was the London office Managing Partner Executive Director of Arthur Andersen and since then has served on the Board of a number John Chivers (age 54) joined the Group in July 1975 and was appointed of public and private companies. a Director of Sheffield Insulations in April 1989. He became Managing Director of SIG Roofing Supplies in July 1997 and was appointed to the main Board Committees Board in September 2001. He is currently responsible for the Group’s Audit Committee Nominations Committee Roofing, Specialist Construction Products, Roofline and Building Plastics Mr. D. A. Haxby – Chairman Mr. L. O. Tench – Chairman businesses in the UK. Mr. P. H. Blackburn Mr. P. H. Blackburn Mr. M. J. C. Borlenghi Mr. M. J. C. Borlenghi CHRIS DAVIES BA (OXON) Mr. D. A. Haxby Executive Director Remuneration Committee Mr. D. Williams Chris Davies (age 53) joined Sheffield Insulations in 1994, having previously Mr. P. H. Blackburn – Chairman gained UK and overseas management experience of manufacturing, contracting Mr. M. J. C. Borlenghi and specialist distribution in the metals and construction industries. He moved Mr. D. A. Haxby to a Group role in 1996 and in 2001 took up the post of Managing Director Europe. He was appointed to the main Board on 12 February 2007.
36 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_middle.indd 5 05/04/2007 11:09:25 CORPORATE GOVERNANCE 05/04/2007 11:09:25 37 2006
45 Moorfields 1 City Square COMPANY WEBSITE COMPANY www.sigplc.co.uk FINANCIAL PR Finsbury Group House Tenter AUDITORS LLP Deloitte and Touche Leeds Leeds LS1 2AL London London EC2Y 9AE Annual Report and Accounts plc Annual Report SIG
– SHI.L
– UK Listed – Support Services – FTSE 250 London London EC2R 6DA London London EC2M 6XB LISTING DETAILS Market Reference Index Sector 20 Moorgate Gordon Panmure & Co. plc Moorgate Hall SOLICITORS Pinsent Masons Row 1 Park JOINT STOCKBROKERS JP Morgan Cazenove Leeds Leeds LS1 5AB 155 Moorgate
United Kingdom Tel: 0114 285 6300 Sheffield S6 2LW Langsett Langsett Road 3rd Floor PRINCIPAL BANKERS PRINCIPAL plc Scotland of Bank Royal The Corporate Banking 2 Whitehall Quay Barclays Bank plc North East and Yorkshire REGISTERED OFFICE Hillsborough Works REGISTERED NUMBER Registered in England 998314 Leeds Leeds LS1 4HR Larger Larger Business Team 1 Park Row 1 Park Leeds LS1 5WU Fax: Fax: Email: 0114 285 6385 [email protected] PO Box 190 – Announcement September 2007 – 29 May Payable 2007 – May 2008 Payable – to Shareholders Posted April 2008 – November 2007 Payable * – Announcement March 2008
Bristol BS99 7NH Interim dividend 2007 Full year results 2007 Report and Accounts 2007 Final dividend 2007 FINANCIAL CALENDAR Final dividend 2006 Interim results 2007 * Shareholder enquiries should be addressed to 0870 the 702 Registrars at 0000). the above address (Tel: PO Box 82 REGISTRARS AND TRANSFER OFFICE Richard Monro FCIS PRESIDENT Sir Norman Adsetts OBE, MA SECRETARY COMPANY INFORMATION COMPANY Bridgwater Road The Pavilions Computershare Investor Services PLC _8_SIG_ar06_middle.indd 6 REPORT OF THE DIRECTORS
The Directors present their Annual Report and the audited Accounts for the year ended 31 December 2006.
PRINCIPAL ACTIVITIES AND BUSINESS REVIEW The principal activity of the Group is the supply of specialist products to construction and related markets. The main products supplied are insulation, roofing, commercial interiors and specialist construction and safety products. The Chairman’s Statement and Business Review on pages 6 to 23 contain a review of these activities and comments on the future outlook. The financial risk management objectives and policies of the Company are set out in the Business Review on pages 20 to 23. As at the date of this Report, there have been no important events affecting the business of the Company, or any of its subsidiaries, which have occurred since the end of the financial year. Details of the Group’s policies in relation to employees (including disabled employees) and information on charitable and political donations are disclosed on pages 34 and 35. Details of the Group’s policies in relation to corporate governance are disclosed on pages 40 to 43.
GROUP RESULTS The Consolidated Income Statement for the year ended 31 December 2006 is shown on page 55. The movement in the Group reserves during the year is shown in Note 23 on page 87. Segmental information is set out in Note 1 on pages 64 to 66.
DIVIDENDS The Board is recommending a final dividend of 14.3p per share (2005: 11.5p) which, together with the interim dividend of 6.2p (2005: 5.3p) per share, makes a total for the year ended 31 December 2006 of 20.5p (2005: 16.8p) per share. Payment of the final dividend, if approved at the Annual General Meeting, will be made on 29 May 2007 to Shareholders registered at the close of business on 27 April 2007.
DIRECTORS The names of the Directors as at the date of this report together with biographical notes are set out on page 36. They comprised the Board for the whole of the year, except that Mr. C. J. Davies was appointed as a Director on 12 February 2007. All Directors are subject to election at the Annual General Meeting immediately following their appointment and to re-election every three years. Any Director attaining the age of 70 would be subject to re-election annually. Mr. C. J. Davies is therefore submitting himself for election at the forthcoming Annual General Meeting. Mr. Davies has a service contract for a continuous term to retirement age, which provides for a rolling 12 months’ notice period in writing by either party. The other Directors standing for re-election at the Annual General Meeting are Mr. M. J. C. Borlenghi, Mr. M. J. Chivers, and Mr. D. Williams. Each Director being eligible, offers himself for re-election. Full details of Directors’ remuneration, interests in the share capital of the Company and of their share options are set out on pages 44 to 51 in the Directors’ Remuneration Report.
ACQUISITIONS AND DISPOSALS Details of acquisitions during the year are covered in Note 13 on pages 78 to 80. Details of the disposal of the Group’s USA business are covered in Note 28 on page 94.
SHARE CAPITAL Details of the share capital and allotments during the year, which arose solely from the exercise of options under Employee and Executive Share Schemes are set out in Note 22 on page 86. Details of outstanding options under the Group’s Employee and Executive Schemes are set out in Note 22 on page 86.
ACQUISITION BY THE COMPANY OF ITS OWN SHARES Shareholders’ authority for the purchase by the Company of 12,192,500 of its own shares existed at the end of the year. The Company will seek to renew this authority at the 2007 Annual General Meeting.
SUBSTANTIAL SHAREHOLDINGS As at 13 March 2007, the Company had been notified of the following substantial interests of 3% or more in its ordinary issued share capital. Ordinary % of shares issued of 10p share each capital FMR Corporation/Fidelity International Limited 13,457,914 10.93 Schroder PLC 7,473,481 6.07 Prudential PLC 6,415,812 5.21 Barclays PLC 4,910,061 3.99 Legal & General Group PLC 4,423,743 3.59
38 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_middle.indd 7 05/04/2007 11:09:25 CORPORATE GOVERNANCE 05/04/2007 11:09:26 39 2006 Annual Report and Accounts plc Annual Report SIG transactions, other events and conditions on the entity’s financial position and financial performance. the Company’s Auditors are aware of that information. present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the Accounts. properly select and apply accounting policies; select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; and so far as they are each aware, there is no relevant audit information of which the Company’s Auditors are unaware; and each Director has taken all steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that RICHARD MONRO Company Secretary 13 March 2007 The Notice Sheffield convening S75 the 3DQ Annual at General noon Meeting Manor to Hotel, be Church held Lane, at Tankersley, the Tankersley 16 May on Wednesday 2007, together with explanatory notes on the resolutions to be proposed, is contained in a circular to be sent to Shareholders with this report. By order of the Board The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the for safeguarding the Company, assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a Directors’ Report and Directors’ Remuneration Report which comply with the requirements of the Companies Act 1985. The Directors are responsible for the maintenance and integrity of the Company website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions. AUDITORS In accordance with Section 384 of the Companies Act 1985 LLP a as resolution Auditors re-appointing of Deloitte the & Company Touche for the ensuing year will be proposed at the Company’s forthcoming Annual General Meeting. ANNUAL GENERAL MEETING In the case of IFRS Accounts, IAS 1 requires that Accounts present fairly for each financial year the Group’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the IAS for Board’s the ‘Framework and Preparation of Presentation Statements’. Financial In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRS. Directors are also required to: The Directors who held office at the date of approval of this Directors’ Report confirm that: OF DIRECTORS’ RESPONSIBILITIES STATEMENT The Directors are responsible for preparing the Annual Report and Accounts. The Directors have chosen to prepare Accounts for the Group in accordance with International Reporting Standards Financial (“IFRS”) and for the Company in accordance with United Kingdom Generally Accepted Accounting Practice (“UK GAAP”). In the case of UK GAAP Accounts, the Directors are required to prepare Accounts which for each give financial a true year, and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these Accounts, the Directors are required to: FIXED ASSETS In the opinion of the Directors, the market value of the Group’s properties is not materially different from the value included in the Group Accounts. DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE The Company purchases liability insurance cover for Directors and Officers of the Company and its subsidiaries. OF THE DIRECTORS ON STATEMENT THE TO OF DISCLOSURE AUDITORS INFORMATION PAYMENT TO SUPPLIERS PAYMENT The Group follows the CBI’s prompt payment code and operates and abides by a which clearly has defined been policy, agreed with all major suppliers. As at 31 December 2006 the Company had no trade creditors as it does not trade in its own right. The Group’s average number of days outstanding as at 31 December 2006 in respect of trade payables was 38 (2005: 38). _8_SIG_ar06_middle.indd 8 CORPORATE GOVERNANCE
SIG is committed to business integrity, high ethical values and professionalism in all its activities. As an essential part of this commitment the Group supports the highest standards in corporate governance. The Board is accountable to the Company’s Shareholders for good governance and this statement, the Directors’ Remuneration Report on pages 44 to 51 and the Report of the Audit Committee on pages 52 to 53 describe how the principles of good governance set out in the Combined Code on Corporate Governance (“the Code”) are applied within SIG.
STATEMENT OF COMPLIANCE WITH THE CODE The Company has applied the principles set out in Section 1 of the Code for the period under review and has, throughout the year, complied with the provisions set out therein. The Company has not been in compliance from 12 February 2007 following the appointment of an additional Executive Director, with Code provision A3.2 in relation to the required number of Non-Executive Directors’. The Company’s Auditors, Deloitte and Touche LLP, are required to review whether the above statement reflects the Company’s compliance with the nine provisions of the Code specified for its review by the Listing Rules and to report if it does not reflect such compliance. No such report has been made.
THE BOARD As at 31 December 2006, the Board was made up of seven members comprising the Chairman, three Executive Directors and three Non-Executive Directors. Taking into account the provisions of the Code, the Non-Executive Directors are considered by the Board to be independent of management, each other and free of any relationship, which could materially interfere with the exercise of their independent judgement. Biographical details of each of the Directors, which illustrate their range of experience, are set out on page 36. The division of responsibilities between the Chairman and Chief Executive is clearly established and is understood by the Board. The Chairman at the time of his appointment met and continues to meet the independence criteria set out in the Code. The Senior Independent Director is Mr. P. H. Blackburn. On 12 February 2007 Mr. C. J. Davies was appointed an Executive Director. The Board notes the requirement of Code provision A3.2 and confirms that it is intended that in the future that at least half of the Board (excluding the Chairman) should comprise Non-Executive Directors determined by the Board to be independent. All Directors are subject to election at the Annual General Meeting immediately following their appointment and to re-election every three years. Any Director attaining the age of 70 would be subject to re-election annually.
BOARD PROCEDURES The Board met formally on eleven occasions during the year and individual attendance at those and the Board Committee meetings is set out in the table on page 41. All Board members are supplied with information in a form and of a quality appropriate to enable them to discharge their duties. Board and Committee papers are sent out seven days before meetings take place. There is an agreed schedule of matters reserved to the Board for collective decision and these include: determining the strategy and control of the Group; amendments to the structure and capital of the Company and Group; approval of financial reporting and controls; approval of capital and revenue expenditure of a significant size; acquisitions and disposals above a prescribed level; and corporate governance matters and approval of Group policies and risk management strategies. The Board has formally delegated specific responsibilities to Board Committees, including the Nominations, Audit and Remuneration Committees. The Board will also appoint Committees to approve specific processes as deemed necessary. For example, during the year, Board Committees were established to approve bank documentation, dividend payments and the preliminary and interim announcements. To enable the Board to perform its duties effectively all Directors have full access to all relevant information and to the services of the Company Secretary whose responsibility it is for ensuring that Board procedures are followed. The appointment and removal of the Company Secretary is a matter reserved for the Board. There is an agreed procedure whereby Directors wishing to take independent legal advice in the furtherance of their duties may do so at the Company’s expense. Directors have the right to ensure that any concerns they raise about the running of the Company or a proposed action will be recorded in the Board minutes. Further, on resignation, if a Non-Executive Director had any such concerns, the Chairman would invite him to provide a written statement for circulation to the Board. All Board Committees are provided with sufficient resources to undertake their duties. Appropriate training is available to all Directors on appointment and on an ongoing basis as required. The Terms of Reference for each of the Board Committees are available on request from the Company Secretary or on the SIG website (www.sigplc.co.uk).
40 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_middle.indd 9 05/04/2007 11:09:26 CORPORATE GOVERNANCE
05/04/2007 11:09:26 2 2 2 2 1 41 2006 4 4 4 4 4 4 Audit Remuneration Nominations Annual Report and Accounts plc Annual Report SIG
11 11 11 N/A N/A N/A 11 N/A N/A N/A 11 11 N/A N/A 11 N/A N/A Board Committee Committee Committee (11 meetings) (4 meetings) (4 meetings) (2 meetings)
N/A appears in the table the Director listed is not a member of the Committee) The Chairman also holds meetings with the Non-Executive Directors without the Executive Directors present. THE REMUNERATION COMMITTEE THE REMUNERATION of The Reference, which Remuneration Committee are operates consistent under with written current Terms best practice. The Committee comprises only independent Non-Executive Directors. The Committee’s Report is set out on pages 44 to 51. RELATIONS WITH SHAREHOLDERS RELATIONS The Company recognises the importance of communicating with its Shareholders, including its employee Shareholders, to ensure that its strategy and performance is understood. This is achieved principally through the Annual Report and the Annual General Meeting. The Group’s preliminary and interim results, as well as all announcements issued to the London Stock Exchange, are published on the Company’s website. The Company issues regular trading updates to the market and these, together with interviews with the Chief Executive and copies of the presentations made to analysts can also be found on the Company’s website. In addition, a range of other corporate information is available to investors on the Company’s website (www.sigplc.co.uk). announcement the following Shareholders The Chief institutional to Executive and Director made Finance are are primarily responsible for direct investor relations. from Feedback major presentations Shareholders is reported to the Formal Board meetings. its at discussed and Chairman the and Director Finance the by of the Company’s annual and interim results. Contact is also maintained, where appropriate, and policies. withThe Senior Independent Shareholders Director was available to meet with institutional to Shareholders if discussrequested. Although the Non-Executive overallDirectors remuneration plans are not at present asked to meet the Company’s Shareholders, they regularly attend presentations of the annual and interim results. The Board recognises that the Annual General Meeting is the principal forum for dialogue with private Shareholders and all Shareholders are invited to attend. All Directors attend the Annual General Meeting and are available to answer any questions that Shareholders may wish to raise. The Notice of Meeting is sent to Shareholders at least 20 working days before the meeting. The Company provides a facility for Shareholders to vote electronically and the of Form provides Proxy Shareholders with the option of withholding their vote on a resolution if they so wish. for the or resolution vote on against received a of a and each such vote the votes after number proxy show of unless called poll is hands, Shareholders validly proxies the of Details recorded. and received properly are votes that ensures Secretary Company The announced. is abstentions of number the with together lodged on all resolutions are published on the Company’s website immediately after the Annual General Meeting (www.sigplc.co.uk). (Where BOARD EFFECTIVENESS During the theyear, Board continued its ongoing evaluation process to assess its performance and itsthat ofeffectiveness, its Committees and topolicies identify areasand in whichprocesses might be enhanced.individual In 2005Director an appraisalwas carried of outthe usingBoard, a eachtailored Board CompanyquestionnaireCommittee Secretary. and prepared Thethe questionnaireperformance by an independent ofwas eachcompleted third byparty each in Director Directorconjunction received a andcopy withofthe his resultstheown reportChairman togethercollated withand a andcopythe of evaluated the high levelby report,a copy theof each Board whichmember’sindependent analysedreport with a copy of thehis own report Boardbeing third sent to asThe the Chairman Senior a met Independent with Director. whole.party.each Director EachThe Chairman received individually to discuss the results of their individual report and the process with his ownThe purpose of feedbackthe process was to help beingto identify any conductedareas which needed attention, develop byand identify thewhat should be Seniorincluded in the Director’sIndependent future Director. training programme and to suggest any procedures and improvements which might make the Board operate better. identifying on focused which Director each with meetings structured held Chairman the 2005, in done work the on building of process the of part as 2006 In the skills, structures and composition of the Board that would be required to evaluate, formulatestrategies. The process then sought andto identify implementwhether these attributes were in bothplace. The Chairman thethen collated the Group’sresults and circulated them shortto each and long term The Board Board then member. met on two separate occasions devoting significant time to discuss the results of the evaluation process and to agree what actions should be taken. The discussions then focused on how the actions identified through the process should be implemented. During the year a number of the Directors attended training courses and seminars for subjects and topics in conjunction with those that the Chairman had identified as being areas where training would increase the knowledge and training effectiveness Further has of been the programmed Director. for 2007. The Non-Executive Directors, chaired by the meet Senior once Independent a year Director, without the Chairman present to assess his performance, taking into account the views of the Executive Directors. The Board holds at least two of its meetings every year at Divisional locations. This facilitates the whole Board to meet with senior management and assists Board members in gaining a deeper understanding of the business. P. H. Blackburn P. ATTENDANCE AT BOARD AND AT COMMITTEE MEETINGS ATTENDANCE The following table shows the attendance of Directors at meetings of the Board, Audit, Remuneration and Nominations Committees during the year to 31 December 2006:
M. J. C. Borlenghi M. J. Chivers G. W. Davies G. W. D. A. Haxby L. O. Tench L. Tench O. D. Williams _8_SIG_ar06_middle.indd 10 CORPORATE GOVERNANCE CONTINUED
NOMINATIONS COMMITTEE The Nominations Committee operates under written Terms of Reference, which are consistent with current best practice. Its principal duty is the nomination of suitable candidates for the approval of the Board to fill Executive and Non-Executive vacancies on the Board. The Nominations Committee comprises the Chairman, Chief Executive and the three Non-Executive Directors. The meetings of the Committee are chaired by the Non-Executive Chairman. The Committee reviews the structure, size, diversity and composition of the Board and makes recommendations concerning the re-appointment of any Non-Executive Director at the conclusion of their specified term of office and in the identification and nomination of new Directors. The Committee retains external search and selection consultants as appropriate. The Committee also advises the Board on succession planning for Executive Board appointments although the Board itself is responsible for succession generally. In general terms, when considering candidates for appointment as Directors of the Company, the Nominations Committee would, in conjunction with the Board, draft a detailed job specification and candidate profile. In drafting this, consideration would be given to the existing experience, knowledge and background of Board Members as well as the strategic and business objectives of the Group. Once a detailed specification has been agreed with the Board, the Committee would then work with an appropriate external search and selection agency to identify candidates of the appropriate calibre and with whom an initial candidate shortlist could be agreed. Shortlisted candidates would then be invited to interview with members of the Committee and, if recommended by the Committee, would be invited to meet the entire Board before any decision is taken relating to the appointment. Following the appointment of a new Director, the Chairman in conjunction with the Company Secretary, is responsible for ensuring that a full, formal and tailored induction to the Company is given. The Committee recommended to the Board in March 2007, that Mr. M. J. C. Borlenghi, who would have completed his first three-year term in office in April 2007, should be re-appointed as a Non-Executive Director, subject to his continued re-election by Shareholders. Mr. Borlenghi will be submitting himself for re-election at the forthcoming Annual General Meeting. Mr. Borlenghi took no part in the discussion concerning his recommendation for re-appointment. Following the year end the Committee met to consider the Chief Executive’s proposal that Mr. C. J. Davies, Managing Director, Europe, should be appointed an Executive Director. The appointment of Mr. C. J. Davies followed on from the Board effectiveness process which had concluded that the growing importance of the Group’s European operations and future development plans was such that these should have direct representation at Board level. After careful consideration the Committee recommended his appointment to the main Board. By way of induction a detailed pack and programme was provided to Mr. Davies on his appointment.
AUDIT COMMITTEE The Audit Committee operates under written Terms of Reference, which are consistent with current best practice. The Committee comprises only independent Non-Executive Directors. The Chairman of the Committee attends the Annual General Meeting to respond to any Shareholder questions that might be raised on the Committee’s activities. The Group does not have a dedicated internal audit function. The Board annually reviews the need for such a function and as was reported in last years Annual Report the Board had accepted the Audit Committee’s recommendation that the Group’s internal control and risk management systems would be further strengthened by the appointment of an outsourced internal audit function and Ernst & Young LLP were appointed in April 2006 to fulfil that role for the Group. The Committee’s Report is set out on pages 52 to 53.
RISK MANAGEMENT AND INTERNAL CONTROL The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. It is the role of management to implement the Board’s policies on risk and control through the design and operation of appropriate internal control systems. For the whole of the year under review and up to the date of approval of the Annual Report and Accounts, the Board has had formal procedures in place to ensure that it is in a position to consider all significant aspects of internal control. The Board has conducted a review of the effectiveness of the Group’s system of internal control. This review has covered all controls including operational, compliance and risk management procedures, as well as financial. The review is undertaken on a six monthly basis. The formal process followed and reviewed by the Board to assess the effectiveness of the Group’s system of internal control accords with the guidance issued by the Turnbull Report ‘Internal Control: Guidance for Directors on the Combined Code’ and is part of the ongoing process for identifying, evaluating and managing the significant risks faced by the Group. This process is summarised as follows: operating management is charged with the ongoing responsibility for identifying risks facing each of the operating units and for putting in place procedures to mitigate, manage and monitor risks; operating units formally review all business risks and set out the significant risks to the operations, the controls in place and additional controls, which could be implemented. These proposals are approved by each operating unit’s management and submitted in the form of risk action plans to Group Executive management for review and approval. Any significant matters arising from this review are formally reported to the Board by the Finance Director to ensure that appropriate initiatives are developed and implemented to manage those risks. The Board is advised in this process by the Audit Committee; the risk and control identification and management process is monitored and periodically reviewed by Group Executive management; and operating units complete comprehensive control self assessment questionnaires every six months. These are analysed by local and Group management and are reported on independently by Ernst & Young LLP as part of the process of their providing an outsourced internal audit function.
42 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_middle.indd 11 05/04/2007 11:09:26 CORPORATE GOVERNANCE 05/04/2007 11:09:26 43 2006 Annual Report and Accounts plc Annual Report SIG CONTINUED relating to risk and control; The Board approves the overall Group’s budget and plans. Monthly actual results are reported against budget and prior year and the forecast for the year is Any revised significant where changes necessary. and adverse variances are questioned by the Board and remedial action is taken where appropriate. There is weekly cash and treasury reporting to the Director Finance and periodic reporting to the Board on the Group’s tax and treasury position. an embedded culture of openness of communication between operating divisional management and the Group Executive management on matters defined expenditure authorisation levels; operating reviews covering all aspects of each business are conducted by Group Executive management at least half yearly; and a comprehensive system of financial reporting. An annual budget for each operating company is prepared in detail and approved by the Chief Executive. an organisational structure with clearly defined delegation lines of of authority responsibility, and reporting requirements; RICHARD MONRO Company Secretary 13 March 2007 GOING CONCERN adequate have Group the and Company the that statements, financial the approving of time the at enquiries appropriate making after consider, Directors The resources to continue in operational existence for the foreseeable that future, it and is accordingly, appropriate to adopt the going concern basis in the preparation of the Accounts. The system of internal control is designed to manage rather than eliminate the risk of failing to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The risk framework as outlined above, gives reasonable assurance that the structure of controls in operation is appropriate to the Group’s situation and that there is an acceptable level of risk throughout the business. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group and that this has been in place for the year under review and up to the date of approval of the Annual Report and Accounts. RISK MANAGEMENT AND INTERNAL CONTROL The key elements of the controls framework within which the Group operates are: _8_SIG_ar06_middle.indd 12 DIRECTORS’ REMUNERATION REPORT INCLUDING THE STATEMENT OF REMUNERATION POLICY FOR THE YEAR ENDED 31 DECEMBER 2006
This report has been prepared by the Remuneration Committee on behalf of the Board in accordance with the requirements of the Directors’ Remuneration Report Regulations 2002 and The Listing Rules. The Information shown on pages 48 to 51 of this report which details individual remuneration, share options and share interests is audited. Compliance with the Combined Code is detailed in the Corporate Governance Report on page 40.
THE REMUNERATION COMMITTEE The Board has a long established Remuneration Committee (“the Committee”), which meets at least twice a year. It is comprised solely of independent Non-Executive Directors. The Committee comprises the following Non-Executive Directors: Mr. P. H. Blackburn (who chairs the Committee), Mr M. J. C. Borlenghi and Mr. D. A. Haxby, all of whom are independent within the definition set out in the Code. They comprised the Committee for all of 2005, the entire year under review and up to the date of this report. Biographical details of all of the Committee members are set out on page 36. The fees paid to Non-Executive Directors are determined by the Board. The Non-Executive Directors do not participate in any way in connection with the determination of their own fees. The role of the Committee is to determine on behalf of the Board, the salary and benefits received by the Chairman and the Executive Directors and for overseeing the remuneration of other Senior Executives. The Committee’s Terms of Reference are set out on the Company’s website www.sigplc.co.uk. Its key responsibilities are: to design specific remuneration packages which include salaries, bonuses, incentive payments, pension rights and benefits; to review the Executive Directors’ service contracts; to ensure that failure is not rewarded and that steps are always taken to mitigate loss on termination, within contractual obligations; to review remuneration trends across the Group; and to approve the terms of and recommend grants under the Group’s incentive plans. The Chief Executive, Mr. D. Williams, is consulted on the remuneration of Executive Directors and attends meetings by invitation but does not participate when his own remuneration is discussed. The Chairman of the Board also attends meetings by invitation but does not participate in any way in connection with the determination of his own salary. The Company Secretary provides information to the Committee and is in attendance at meetings. During the year the Committee met four times. The Committee also takes independent professional advice, on an ad hoc basis, as required. The Committee reviews its own performance annually and considers where improvements can be made. In January 2006, the Remuneration Committee appointed PricewaterhouseCoopers LLP (“PwC”), a leading consultancy firm with substantial expertise in Executive remuneration to assist the Committee in refining its strategy on rewarding and compensating its Senior Executives and in so doing have regard for market comparability and the remuneration policies of the Group’s peers and competitors. PwC advised the Committee during the 2006 financial year particularly in relation to the continued implementation of the Group’s remuneration strategy and the provision of relevant market information. PwC also provides the Company with taxation advice and consultancy services.
POLICY ON REMUNERATION OF EXECUTIVE DIRECTORS The Company’s policy for 2006 and subsequent years is to provide remuneration packages that fairly reward the Executive Directors for the contribution they make to the business and are competitive enough to attract, retain and motivate Executive Directors and Senior Managers of the right calibre. The policy is designed to incentivise the Directors to meet the Company’s financial and strategic objectives such that a significant proportion of remuneration is performance related. The bar chart below explains the relative importance of the elements of the remuneration package that are performance-related and those that are not.
Relative importance of fixed and variable elements of pay 100% DABS LTIP 80% Bonus Benefits 60% Salary 40%
20%
0% D. Williams M. J. Chivers G. W. Davies
For the purposes of the chart set out above, salary, benefits and bonus are the amounts received in 2006, LTIP and DABs awards in 2006 are included at their face value.
44 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_middle.indd 13 05/04/2007 11:09:27 CORPORATE GOVERNANCE
05/04/2007 11:09:27 – – 45 % of salary bonus 2006 – 60% – % of 2007 Increase salary – £219,000 – % of Profit Profit Personal Maximum 2006 salary Annual Report and Accounts plc Annual Report SIG before tax objectives
Annual rate Annual rate of salary of salary 90% 10% 100% £455,000 £480,000 5.5% 90% 10% 100% £270,000 £285,000 5.5% 60% £245,000 £258,000 5.3%
62% 12% 74% 50% 10% 60% 60% 14% 74%
63% 9% 72%
CONTINUED
2006 2007 2006 2007 2006 2007 2006 2007
D. Williams ANNUAL ANNUAL BONUS The annual performance related bonus provides Executive Directors with an incentive to achieve performance targets, which are set at the beginning The performance of a financial metrics year. for the year under review and the following year are shown in the table below: D. Williams BASE SALARY AND BENEFITS Base salary and benefits are determined on an annual basis by the Committee based upon the recommendations of the Chief Executive and after a review of the individual’s performance, experience and market trends. The Chief Executive does not make recommendations to the Committee in respect of his own remuneration. The Committee takes into account published remuneration information on comparable companies and salary policy within the rest of the Group. Benefits medical comprise a and company permanent car, health insurance. The value of benefits is not pensionable. The annual rates of base salary in force during the year are shown in the table below: POLICY ON REMUNERATION POLICY OF ON EXECUTIVE REMUNERATION DIRECTORS Committee the and Group the within employees other to granted increase of levels the to given is consideration due salaries Directors’ Executive reviewing In reviews and notes the total individual remuneration packages of each of the other Senior Executives. The Committee established in 2003 that the Executive Directors’ remuneration packages were considerably below both market rates and the median of the Company’s comparator group, which comprises 23 companies of broadly similar market capitalisation to the Company’s (excluding finance and real estate companies) and 20 companies having broadly similar The salary levels increases of turnover. awarded to the Directors in 2004, 2005 and 2006 reflected the ongoing process of alignment with market rates for the various positions. Basic salaries are reviewed annually or when a change of responsibility occurs. The Committee considers that the targets set for the different elements of performance related remuneration (including the share option schemes) are appropriate and demanding in the context of the Company’s trading environment and the business challenges it faces. The Committee believes that the Earnings per Share (“EPS”) condition is appropriate for its share incentive schemes and (i.e. DABS) LTIP as it requires substantial improvements in the underlying financial performance of the Company in order for achieved the been options LLP, have to become exercisable. schemes Deloitte share & Touche relevant all for targets performance the whether to as calculations the review to required are Auditors, as capacity their in before any exercise is permitted. The main components of Executive Directors’ remuneration are given below: Name Name
G. W. Davies G. W. M. J. Chivers M. J. Chivers C. J. Davies – appointed 12 2007 February
The rates of increase in base salary for Executive Directors were higher than those for other employees in the Group because of the realignment necessary to bring their remuneration packages into line with the market. G. W. Davies G. W.
C. J. Davies
The pre-determined performance targets and personal objectives for 2006 were achieved in full by Mr. G. W. Davies and 73.4% by Mr. D. Williams resulting resulting D. Williams and by 73.4% Davies Mr. G. W. in full by for 2006 were achieved Mr. objectives and personal targets performance The pre-determined in the maximum 60% of base salary being payable to pre-determined Mr. G. performance targets, Davieswhich W. relate to the profit performance andof those businesses under 73.4%his direct control and to the ofSIG Group as a whole base salary being payable to were Mr. D.substantially achieved resulting Williams.in an amount of 49% of base salary Mr. M. being payable. J. Chivers’ For the 2007 financial year the Committee has agreed that the maximum bonus that can be earned74% (£210,000)should Davies C. and J. D. 100% Davies’ beG. Williams. (£480,000) Mr. maximum for for W. bonus 74%Mr. the is Mr. 72% (£162,000). (£192,000)However, forM. Mr. J. Chivers, maximum bonus will only be paid on the achievement of very stretching targets and personal objectives. _8_SIG_ar06_middle.indd 14 DIRECTORS’ REMUNERATION REPORT CONTINUED INCLUDING THE STATEMENT OF REMUNERATION POLICY FOR THE YEAR ENDED 31 DECEMBER 2006
PENSION SCHEMES All Executive Directors are members of the Group’s contributory defined benefit pension scheme, which enables members to retire at age 60 with a maximum pension after 40 years’ pensionable service equivalent to two thirds of final pensionable salary. Pensionable salary is basic salary, excluding bonuses. Final pensionable salary is the average of the highest three consecutive pensionable salaries in the last ten years before retirement. For service up to 31 July 2002, pensions in payment are guaranteed to increase by 5% per annum compound. Following consultation with the active membership of the scheme certain changes were made to the contribution levels and benefits in order to limit future liabilities and, consequently, for service from 1 August 2002, pensions in payment are guaranteed to increase by the lower of 5% per annum or the increase in the Retail Price Index. On death before retirement, a lump sum equal to four times current salary is paid, together with a spouse’s pension of 50% of pensionable salary. As part of this scheme, all Executive Directors are covered by permanent health insurance. In March 2006 the Board agreed that the rules of the Group’s contributory defined pension scheme should be amended to permit continued accrual in the Scheme to age 65. Members will still be permitted to take their benefits at age 60 without abatement if they so wish.
SHARE OPTION SCHEMES Long Term Incentive Plans (“LTIP”) All Executive Directors are eligible to participate in the LTIP. Under the LTIP participating Directors and other designated Senior Managers are granted nil cost share options having a value of up to a maximum of 70% of base salary. In 2004 Shareholders approved the adoption of a new LTIP. Options were granted in each of the five years ended 31 December 2003 under the old Plan and in 2004, 2005 and 2006 under the new Plan. As set out on page 50 in the Directors’ share options table under the heading Long Term Incentive Plan, Mr. D. Williams, Mr. M. J. Chivers and Mr. G. W. Davies have no awards which had not vested at 31 December 2006 under the old Plan. Awards under the LTIP are not pensionable. Awards under both of the LTIPs are exercisable between three and seven years from the date of grant but the right to exercise options terminates upon the employee ceasing to hold office with the Group, subject to certain exceptions and the discretion of the Remuneration Committee. All LTIP awards are subject to earnings per share performance conditions. The performance targets attaching to LTIP Awards that are still subject to performance are set out below. In the case of the LTIP Awards made in 2004, 2005 and 2006, the performance condition is based on real (in excess of RPI) annual compound growth in EPS as shown below. The three year performance period for Awards starts at the beginning of the financial year in which the Award is made. There is no facility for retesting the performance condition after the end of the three year performance period. Real annual compound growth in Group EPS over three years Percentage of Award vesting Threshold* 3% 30% Maximum 10% 100% Between Threshold and Maximum 3% – 10% Pro-rata between 30% and 100% * For the Awards to be granted in 2007 the Committee has decided that the threshold at which 30% of the Award vests will be increased to requiring 5% real annual compound growth in EPS over the three year performance period. The above performance conditions were chosen because they were believed to be challenging and not only take account of the need for long term performance and commitment but also are an important means of aligning the interests of employees and Shareholders. At the end of the relevant period the Remuneration Committee assesses whether the performance conditions have been satisfied. In 2006 Awards were made under the LTIP to Mr. D. Williams with a value of 70% of his base salary and to Mr. M. J. Chivers and Mr. G. W. Davies with a value of 50% of their base salary as shown in the table on page 50. Deferred Annual Bonus Scheme (“DABS”) In 2004, Shareholders approved the introduction of a DABS. Participants (including Executive Directors) are invited to use up to 50% of their annual performance-related cash bonus (after income tax and national insurance) in respect of the preceding financial year to purchase shares in the Company. The purchased shares must be retained for three years. Participants purchasing such shares will be eligible to receive up to a maximum of one additional free matching share for every share purchased, providing certain pre-set real (in excess of RPI) annual compound EPS growth targets are met over a three year period. For 2006 the performance targets for the DABS are shown below: Real annual compound growth in Group EPS over three years Percentage of Award vesting Threshold 3% 50% Maximum 5% 100% Between Threshold and Maximum 3% – 5% Pro-rata between 50% and 100% The above performance conditions were chosen because they were believed to be challenging and not only take account of the need for long term performance and commitment but also are an important means of aligning the interests of employees and Shareholders. At the end of the relevant period the Remuneration Committee assesses whether the performance conditions have been satisfied. Awards made under the DABS are not pensionable and are set out in the table on page 50.
46 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_middle.indd 15 05/04/2007 11:09:27 CORPORATE GOVERNANCE
05/04/2007 11:09:27 £ 47 Total
2006 £ – 130,000 – 40,000 fee annual fees Chairman of £ – – 6,000 46,000 – Senior Remuneration/ Annual Report and Accounts plc Annual Report SIG
Independent Committee Audit
£
appointment letter of Basic fee Director fee
Date of 28/2/2003 130,000 14/6/2001 40,000 2,000 6,000 48,000 28/2/2003 40,000 08/3/2004 40,000
CONTINUED
To better align Executive Director interests with To those of Shareholders the Company has established the principle of requiring Executive Directors to build up and maintain a beneficial holding of shares in the Company equivalent to a minimum of one Under times normal basic circumstances salary. it is expected that this should be achieved within five years of 31the satisfaction of this target Decemberwill be mainly achieved by the vesting of 2004,shares through the Company’s orshare schemes. within five years of appointment, whichever is the later. It is anticipated that SHARE OWNERSHIP GUIDELINES The Executive Directors have service contracts for a continuous term to retirement age providing for a rolling 12 months’ notice period in writing by either party. either by writing in period notice months’ EXECUTIVE 12 DIRECTORS’ SERVICE CONTRACTS rolling a for providing age retirement to term continuous a for contracts service have Directors Executive The The D. service contract Williams is for dated Mr. 4 December 2006. The Company can terminate his employment forthwith in lieu of a 12 month notice period or any unexpired portion thereof by paying to him an amount equal to his basic hesalary would forhave suchreceived period had and he an remainedamount employedin lieu duringof thethe bonusnotice whichperiod and providing him terminates withemployment without giving allnotice or benefitsmaking a payment in lieu, toany damages whichto which he may he be entitled isis to entitled.be calculated in accordance with If the Company common law principles, including those relating to mitigation of loss and accelerated receipt. The service contracts forM. Mr. J. Chivers, DaviesG. Mr. W. andC. Mr. J. Davies are dated 1 January 1995, 1 The Company Augustcan discharge any obligation 2002in relation to andthe unexpired 12portion of Septembertheir notice period or any 2002.notice required to be given under their service contracts by making a payment in lieu thereof subject to the deduction of tax and national insurance. If the Company terminates employment without giving notice or making a payment in lieu, any damages to which the Executive may be entitled is to be calculated in accordance with common law principles, including those relating to mitigation of loss and accelerated receipt. L. O. Tench L. Tench O. from 1 June. The dates of their letters of appointment and annual entitlement to fees are set out below: NON-EXECUTIVE DIRECTORS The Non-Executive Directors, including the Chairman, do not have service contracts The Company’s Non-Executive policy is notice. that Non-Executive written Directors, are months’ appointed three upon party either of discretion the at and by earlier terminated otherwise unless years three of terms specific for Directors’ appointments are reviewed at the end of each three year term. Non-Executive Directors will normally be expected to serve two three-year terms, although the Board may invite them to serve for an additional period. The Executive Directors are responsible for recommending to the Board the fees of Non-Executiveis calculatedDirectors. by Thereference basic Non-Executiveto current marketDirector levelsfee and takes account of the time commitment Non-Executiveand the responsibilities Directors of the Non-Executive do notDirectors. receive benefits from thein any bonus or incentive scheme Companyor any of the Company’s andshare option schemes. Any theyreasonable expenses that they incur arein the furtherance of their notduties eligible to join the Company’sare repaid bypension the Company.scheme The or Chairmanparticipate and the Non-Executive Directors’ fees are reviewed in May each year with any increase being payable Employee Share Schemes The Executive Directors are also eligible to participate in the Company’s Share Incentive Plan (“SIP”), which commenced in November 2005 and is open to all UK employees of the Group. This replaced the Savings Related Share Option for Scheme UK (“SAYE”) employees as a decision has been taken not to operate both schemes at the same time. SHARE OPTION SCHEMES Under the ESOS, Executives could be awarded an annual grant of share options at market price, provided that the total amount payable by him to exercise options under the ESOS exercisable are or ESOS the anyunder otherOptions share pensionable. not are optionscheme this under scheme Awards of benefits. and bonus the Group salary, (excluding base times four exceed savingsnot does years ten related schemes) granted during the immediately preceding between three and ten years (for the Inland Revenue approved scheme) and three and seven years (for the unapproved scheme) from the date of grant. The Committee has resolved that following the introduction of the DABS, no further options will be granted under this scheme.
1997 Executive Share Option Scheme (“ESOS”) P. H. Blackburn P. D. A. Haxby M. J. C. Borlenghi _8_SIG_ar06_middle.indd 16 DIRECTORS’ REMUNERATION REPORT CONTINUED INCLUDING THE STATEMENT OF REMUNERATION POLICY FOR THE YEAR ENDED 31 DECEMBER 2006
PERFORMANCE GRAPH The following graph shows the Company’s Total Shareholder Return (“TSR”) performance, compared with the performance of the FTSE All Share Support Services Index over the five year period to 31 December 2006. This index has been selected because the Company believes that the constituent companies comprising the FTSE All Share Support Services Index are the most appropriate for this comparison as they are affected by similar commercial and economic factors to SIG. Total Shareholder Return 1 January 2002 to 31 December 2006 ��� ��� ��� ��� ��� ������� ��� ������������������������������� ��� ��� ��� �� � ���� ���� ���� ���� ���� ��������������������������
TSR (rebased = 100 at 1 January 2002)
DIRECTORS’ INTERESTS IN THE SHARES OF SIG PLC The register kept by the Company pursuant to Section 325 of the Companies Act 2005 shows that the Directors who were in office at 31 December 2006 and their families had the under-mentioned interests in the ordinary shares of the Company. 31 December 1 January 2006 2006 P. H. Blackburn 8,000 8,000 M. J. C. Borlenghi 5,000 5,000 M. J. Chivers 46,270* 43,138 G. W. Davies 43,998* 17,957* D. A. Haxby Nil Nil L. O. Tench 20,000 20,000 D. Williams 100,190* 77,039* * Includes shares purchased under the SIG plc Share Incentive Plan. The Register of Directors’ interests, which is open to inspection at the Company’s Registered Office, contains full details of Directors’ shareholdings and share options. All shareholdings were unchanged as at 13 March 2007 other than on 15 January 2007 Mr. D. Williams and Mr. G. W. Davies acquired a further eleven shares and Mr. M. J. Chivers a further nine shares under the SIG Share Incentive Plan and on 15 February 2007 Mr. D. Williams and Mr. G. W. Davies acquired a further ten shares and Mr. M. J. Chivers eight shares under the SIG plc Share Incentive Plan. Mr. C. J. Davies held 14,112 shares on his appointment as a Director on 12 February 2007. He acquired a further ten shares under the SIG plc Share Incentive Plan on 15 February 2007.
48 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_middle.indd 17 05/04/2007 11:09:42 CORPORATE GOVERNANCE
05/04/2007 11:09:42 49 42 35 39 79 Total value 2005 £000’s £000’s Transfer
emoluments 108 732 340 394 1,690 2006 34 464 18 248 20 46 39 44 125 795 385 450 2006 Total £000’s £000’s 1,884 emoluments
– – – – 6 44 20 18 2006 Executive to deducting £000’s £000’s Annual Report and Accounts plc Annual Report SIG – – – – 2006 bonus Benefits £000’s £000’s performance Annual 39 44 46 51 559 453 2006 Salary related £000’s £000’s
and fees
125 455 334 1,224 616 245 270 120 162 86 net of 31 December 31 December 1 January made by increase after £000’s
of increase in accrued Accrued Transfer Transfer
value Transfer
32 486 190 3,632 3,112 18 295 116 2,095 1,782 11 net of Executive or date of or date of or date of the scheme Executive £000’s in accrued
Increase benefits benefits at value at value at Contributions
36 21 12 £000’s benefits inflation contributions cessation cessation appointment in the year contributions Increase benefits inflation and in accrued
D. Williams DIRECTORS’ PENSIONS The following Directors had retirement benefits accruing under the Company’s main contributory defined benefit scheme in respect of qualifying services during the year: M. J. Chivers P. H. Blackburn P. Chairman L. Tench O. Executive D. Williams Non-Executive DIRECTORS’ EMOLUMENTS G. W. Davies G. W. M. J. C. Borlenghi D. A. Haxby Total
M. J. Chivers Davies G. W. The base salaries for the Executive Directors as at 1 Davies January £285,000; 2007 following G. D. the W. review Williams £480,000; are: Mr. Mr. and Mr M. J. Chivers £258,000. The increases were in salary as The Chairman’s lineat 1 January C. 2007 J. is withDavies’ £130,000. Mr. base salary at the thedate of his appointment Committee’son 12 2007 February was £190,000 stated policy of targeting and basewas increased to £225,000 with salarieseffect from 1 March 2007 on his appointment atto the Board. median market rate. There were no expense allowances or compensation for loss of office payments. There are no deferred bonuses. The highest paid Director in the D. year Williams. was Mr. Benefits relate to the estimated value of the provision of a company car and medical insurance premiums. There were no sums paid to third parties in respect of the services of any Director. Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire ordinary shares in the Company granted to or held by the Executive Directors. The transfer values disclosed above are calculated in a (GN11)’ manner published consistent Values by with the ‘Retirement Benefit Schemes – Transfer Institute of Actuaries and the of Faculty Actuaries. They do not represent a sum paid or payable to the individual Director but instead represent a potential liability of the pension scheme. Members of the above scheme have the option to pay Contributions; Additional neither Voluntary such contributions nor the resulting benefits are included in the above table. _8_SIG_ar06_middle.indd 18 DIRECTORS’ REMUNERATION REPORT CONTINUED INCLUDING THE STATEMENT OF REMUNERATION POLICY FOR THE YEAR ENDED 31 DECEMBER 2006
DIRECTORS’ SHARE OPTIONS Mr. P. H. Blackburn, Mr. M. J. C. Borlenghi, Mr. D. A. Haxby and Mr. L. O. Tench, as Non-Executive Directors, did not hold or have granted any share options during the year. The share options for the other Directors who held office at any time during the year ended 31 December 2006 are set out below:
Number of shares Market price at date of: Exercise dates
Market price when Exercise Date scheme At At price Earliest on which Date on which scheme interest was 1 January 31 December per 10p vesting Date option interest was awarded awarded 2006 Granted Exercised Lapsed 2006 share Vesting Exercise date exercised* expires Deferred Annual Bonus Scheme D. Williams – 19/04/2005 610.0p 2,626 – – – 2,626 Nil – – 19/04/2008 19/04/2008 18/04/2015 – 13/04/2006 866.3p – 2,026 – – 2,026 Nil – – 13/04/2009 13/04/2009 12/04/2016
Long Term Incentive Plan D. Williams – 17/04/2001 251.0p 13,944 – (13,944) – – 10.0p 590.0p 892.0p 17/04/2004 21/04/2006 16/04/2008 – 19/04/2002 321.0p 26,168 – (26,168) – – 10.0p 601.0p 892.0p 19/04/2005 21/04/2006 18/04/2009 – 11/04/2003 205.5p 62,408 – (62,408) – – 10.0p 897.5p 892.0p 11/04/2006 21/04/2006 10/04/2010 – 11/05/2004 359.25p 70,809 – – – 70,809 10.0p – – 11/05/2007 11/05/2007 10/05/2011 – 19/04/2005 610.0p 48,770 – – – 48,770 Nil – – 19/04/2008 19/04/2008 18/04/2012 – 13/04/2006 911.7p – 34,935 – – 34,935 Nil – – 13/04/2009 13/04/2009 12/04/2013 M. J. Chivers – 11/04/2000 232.5p 2,765 – (2,765) – – 10.0p 207.0p 892.0p 11/04/2003 21/04/2006 10/04/2007 – 17/04/2001 251.0p 5,129 – (5,129) – – 10.0p 590.0p 892.0p 17/04/2004 21/04/2006 16/04/2008 – 19/04/2002 321.0p 7,788 – (7,788) – – 10.0p 601.0p 892.0p 19/04/2005 21/04/2006 18/04/2009 – 11/04/2003 205.5p 18,248 – (18,248) – – 10.0p 897.5p 892.0p 11/04/2006 21/04/2006 10/04/2010 – 11/05/2004 359.25p 25,289 – – – 25,289 10.0p – – 11/05/2007 11/05/2007 10/05/2011 – 19/04/2005 610.0p 17,622 – – – 17,622 Nil – – 19/04/2008 19/04/2008 18/04/2012 – 13/04/2006 911.7p – 13,436 – – 13,436 Nil – – 13/04/2009 13/04/2009 12/04/2013 G. W. Davies – 01/10/2002 178.0p 15,168 – (15,168) – – 10.0p 730.5p 892.0p 01/10/2005 21/04/2006 30/09/2009 – 11/04/2003 205.5p 18,248 – (18,248) – – 10.0p 897.5p 892.0p 11/04/2006 21/04/2006 10/04/2010 – 11/05/2004 359.25p 28,901 – – – 28,901 10.0p – – 11/05/2007 11/05/2007 10/05/2011 – 19/04/2005 610.0p 19,262 – – – 19,262 Nil – – 19/04/2008 19/04/2008 18/04/2012 – 13/04/2006 911.7p – 14,808 – – 14,808 Nil – – 13/04/2009 13/04/2009 12/04/2013
1997 Executive Share Option Scheme G. W. Davies – 19/04/2002 321.0p 6,000 – (6,000) – – 321.0p 601.0p 892.0p 19/04/2005 20/04/2006 18/04/2012
Savings Related Schemes M. J. Chivers – 10/05/2004 360.0p 5,450 – – – 5,450 300.0p – – 01/07/2009 01/07/2009 31/12/2009 G. W. Davies – 07/05/2003 205.5p 9,954 – – – 9,954 165.0p – – 01/07/2008 01/07/2008 31/12/2008
Total 404,549 65,205 (175,866) – 293,888 * or date from which option may be exercised.
50 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_middle.indd 19 05/04/2007 11:09:43 CORPORATE GOVERNANCE 05/04/2007 11:09:43 51 2006 Annual Report and Accounts plc Annual Report SIG CONTINUED PETER BLACKBURN Chairman of the Remuneration Committee 13 March 2007 DIRECTORS’ SHARE OPTIONS and DABS LTIP awards are subject to real annual compound EPS targets over the three year performance period as set out on page 46. No price has been paid for any awards of share options which were unexpired at any time in the financial year. The market price of the shares at 31 December 2006 was 1,030p and the range during 2006 was 746p to 1,067.5p. The aggregate of the total theoretical gains on options exercised by the Directors during 2006 amounted to £1,144,279 (2005: £15,100). This is calculated by reference to the difference between the closing mid-market price of the shares on the date of exercise and the exercise price of the options, disregarding whether such shares were sold or retained on exercise and is stated before tax. A resolution to approve this report will be proposed at the Annual General Meeting. The Board of SIG plc has approved this Remuneration Report. On behalf of the Board _8_SIG_ar06_middle.indd 20 REPORT OF THE AUDIT COMMITTEE
This report has been prepared by the Audit Committee (“the Committee”) on behalf of the Board in accordance with the requirements of paragraph C.3.3 of the Combined Code on Corporate Governance and paragraphs 5.1 and 5.2 of the guidance on Audit Committees produced by Sir Robert Smith. The report gives details of the work of the Committee in discharging its responsibilities.
TERMS OF REFERENCE The Committee operates under Terms of Reference which can be found on the Company’s website and which are available on application to the Company Secretary at the registered office. They are reviewed annually by the Committee and changes are recommended to the Board for approval. The main duties of the Committee set out in its Terms of Reference are: monitoring the integrity of the Company’s Accounts including its Annual Report and Accounts and its Interim Announcement; reviewing the consistency of accounting policies, including any changes; keeping under review the effectiveness of the Company’s internal control and risk management systems; reviewing the Company’s arrangements for its employees to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters; monitoring and reviewing the effectiveness of the Company’s outsourced internal audit function; reviewing the annual audit plan and receiving the Auditors’ reports and the Company’s response; considering and making recommendations to the Board in relation to the appointment, re-appointment and removal of the Company’s external Auditors; overseeing the relationship with the external Auditors, including (but not limited to) approving their remuneration, assessing annually their independence and objectivity, taking into account relevant professional and regulatory requirements and the relationship with the Auditors as a whole, including the provision of any non-audit services; and reporting to the Board identifying any matters on which the Committee considers that action or improvement is needed and making recommendations as to the steps to be taken. The Committee has the power to engage outside advisers if it considers it to be necessary. The Committee reviews its own performance annually and considers where improvements can be made. The Chairman of the Committee attends the Annual General Meeting to respond to any Shareholder questions that might be raised on the Committee’s activities.
MEMBERSHIP Throughout 2006, the Committee comprised the three independent Non-Executive Directors. Mr. D. A. Haxby was the Chairman and Mr. P. H. Blackburn and Mr. M. J. C. Borlenghi were members. The Chairman of the Committee, Mr. D. A. Haxby is a Chartered Accountant (FCA) and is considered by the Board to have significant recent and relevant financial experience. He was a Partner in Arthur Andersen for 18 years (1977–1995) holding senior management positions in the UK Practice from 1985 to 1995. Since then he has served as Audit Committee Chairman of a number of UK listed companies. The other members of the Committee have a wide range of business experience, which is evidenced by their biographical summaries on page 36. The Board makes appointments to the Committee. The Company Secretary acts as Secretary to the Committee. Members of the Committee undertake ongoing training as required.
MEETINGS The Committee is planned to meet four times a year. In 2006 it met four times and all members of the Committee attended each meeting. The Finance Director attended all four of the scheduled meetings and the external Auditors two and they have direct access to the Committee Chairman. The Chairman of the Board and the other Executive Directors attend the meetings of the Committee at the invitation of the Committee Chairman. The external Auditors had a confidential discussion with members of the Committee without the Chairman of the Board and the Executive Directors being present on one occasion in 2006. Ernst & Young who provide an outsourced internal audit function for the Group are invited to all meetings to present their reports.
WORK OF THE COMMITTEE The Committee discharged its obligations in respect of 2006 as follows: Annual Report and Accounts and Interim Statement – at its meetings in August 2006 and March 2007, the Committee reviewed the financial reporting issues and judgements contained in the Company’s Interim Announcement and its Annual Report and Accounts respectively. At the March 2007 meeting the Committee received a report from the external Auditors setting out the accounting or judgemental issues which required its attention; accounting policies – at its November 2006 meeting the Committee reviewed the application of the Group’s Goodwill Impairment Review Policy. The Committee is updated regularly on actual and pending changes to Accounting Standards; internal controls and risk management – in November 2006 and March 2007, the Committee considered detailed reports from the Group Finance Director on the operation of, and issues arising from, the Group’s internal control procedures, together with observations from the external Auditors. It also monitored the effectiveness of the Group’s risk management process, which considers the key risks, both financial and non-financial, facing the Group and the effectiveness of the Group’s controls to manage and reduce the impact of those risks;
52 SIG plc Annual Report and Accounts 2006
_8_SIG_ar06_middle.indd 21 05/04/2007 11:09:43 CORPORATE GOVERNANCE 05/04/2007 11:09:43 53 2006 Annual Report and Accounts plc Annual Report SIG CONTINUED (e.g. selection, design or implementation of major financial systems; provision of internal audit services or risk management assessment and monitoring services); and the service (e.g. complex tax planning and structure advice, corporate finance and M&A activity). to the Committee (e.g. regulatory and other specialist financial reporting; accounting advisory services); the Company of any concerns, inter alia matters involving financial reporting. It also reviewed the procedures for investigating and resolving any such concerns. A copy of the whistleblowing policy is available on the Company’s website. pre year-end issues pre year-end report in December 2006; reviewed the fees paid for audit and for non-audit services in March 2007; and assessed the external Auditors’ independence and objectivity in November 2006 and March 2007; agreed a proposed approach and work plan for 2006. During undertook the work year on Ernst the & Group’s Young control self assessment procedures and some special project work. The Committee received at reports its from meetings Ernst in & August Young 2006, November 2006, December 2006 and March 2007; and as the Group’s tax advisers and other preferred suppliers having been identified for role due is diligence now services, solely Deloitte that & Touche’s of Group Auditor for the whole of the SIG Group together with any auditor permitted services which the Group considers appropriate; Auditor excluded services – those engagements that the Committee and the Board do not consider appropriate for the Auditors to undertake Auditor authorised services – those services for which the specific approval of the Committee is required before the Auditors are permitted to provide Auditor permitted services – those services which it is acceptable for the Auditors to provide and the provision of which can be engaged without referral “Whistleblowing” policy – in March 2007 the Committee reviewed the “whistleblowing” policy under which employees may in confidence notify external Auditors’ work and relationship – the Committee reviewed the external Auditors’ proposed audit plan in November 2006; considered its internal audit function – in LLP April were 2006 appointed Ernst to & provide Young an outsourced internal audit function for the Group. The Committee in March 2006 the Committee reviewed its Terms of Reference and Non-audit Services Policy. Following in the Following March of appointment 2006 Reference of and the PricewaterhouseCoopers Non-audit Committee Services reviewed Policy. its Terms DAVID HAXBY DAVID Chairman of the Audit Committee 13 March 2007 General Meeting. On behalf of the Board The policy defines the types of services falling under each category and sets out the criteria to be met and the internal approvals required prior to Authorised Services”. the commencement The of Committee any regularly “Auditor reviews an analysis of all services provided by the external Auditors. The policy is reviewed annually by the Committee and is approved by the Board. Details of the amounts paid to the external Auditors for audit and non-audit services in 2006 are set out in Note 4 to the Accounts on page 67. The external Auditors report to the Committee confirmed each year on formally the have actions they have taken to comply with professional & Touche and regulatory requirements Deloitte and team. best audit external the of members key of rotation the including independence, their ensure to designed practice their independence to the Board in respect of the period covered by these financial statements. Having reviewed and expressed satisfaction with the level the Committee recommends (and the expertise, of fees, Board resources independence, and LLP, objectivity, general effectiveness of Deloitte & Touche agrees) that a resolution for LLP the as re-appointment Auditors of of Deloitte the & Company Touche will be proposed at the forthcoming Annual INDEPENDENCE OF AUDITORS The Board is aware of the need to maintain an appropriate degree of independence and objectivity on the part of the Group external Auditors. have safeguards in place to avoid the Both the Audit Auditors’ Committee independence and LLP, and the objectivity external Auditors, Deloitte & Touche being compromised. The Group policy with regard to the provision of audit and non-audit services by the external Auditors, which was operated during 2006, is based on the principles that they should only undertake non-audit services where they are the most appropriatethe provision of non-audit services or anddoes is not not the cost-effectiveimpair, perceived external Auditors’ to It impair, independence categorises and such objectivity. provider of the service and where services between: WORK OF THE COMMITTEE _8_SIG_ar06_middle.indd 22 GROUP ACCOUNTS (PREPARED IN ACCORDANCE WITH IFRS)
_1_SIG_ar06_back.indd 1 05/04/2007 11:00:59 ACCOUNTS
05/04/2007 11:00:59 – 55 Total 2005 £000’s
2006 – – 834 2,162 – 956 – – 1,513,258 – – 58,190 1,571,448 – 1,145,337 426,111 – 5,747 – 14,509 – 2,996 – 2005 items* £000’s
– 2005 items* other Other Before £000’s Annual Report and Accounts plc Annual Report SIG (6,691) (1,880) (8,571)
834 2,162 65,062 (6,920) 64,106 956 58,142 (6,920) 57,186 50.9p 50.1p (5.7p) 52.7p (5.6p) 51.9p 45.2p (5.7p) 44.5p (5.6p) 47.0p 46.3p 1,513,258 58,190 1,571,448 1,145,337 426,111 327,016 93,348 9,342 5,747 99,095 336,358 (9,342) 14,509 (9,342) 84,006 91,277 28,377 89,753 62,900 (7,462) (542) 2,996 (6,920) 83,815 27,835 55,980 2006
– 673 – 93,150 – 19,200 – 4,705 – 3,774 – 507,349 – 1,766,682 – – 1,859,832 1,352,483 2006
– 1,947 1,947 673 2006 items* items* Total other Other £000’s £000’s £000’s 2,650 2,039 4,689 4,705 3,774 61.3p 60.6p (3.2p) 63.4p (3.1p) 62.8p 58.1p (1.5p) 57.5p (1.6p) 61.9p 61.2p Before (6,056) (1,357) (7,413) 78,392 (1,870) 77,719 76,522 (1,870) 75,849 93,150 19,200 32,515 75,742 (1,676) (3,909) 30,839 71,833 507,349 385,948 116,696 6,942 121,401 (6,942) 392,890 109,754 (6,942) 108,257 114,459 (5,585) 102,672 1,766,682 1,859,832 1,352,483
1,124 (92) 1,032
4 8 8 8 3 3 6 8 1 2 2 Note
operation. Other items have been disclosed separately in order to give an indication of the underlying earnings of the Group. information Further is provided within the Statement of Significant on Accounting page Policies 59. Minority interests Diluted earnings per share continuing and From discontinued operations: Basic earnings per share Diluted earnings per share Other items relate to the amortisation of acquired intangibles, * goodwill impairment, hedge ineffectiveness and the profit on disposal of discontinued The accompanying Statement of Significant and Accounting Notes Policies to the Accounts are an integral part of this Consolidated Income Statement. Acquisitions income Finance costs Finance Income tax expense From continuing operations: From Basic earnings per share Profit Profit after tax Attributable to: Equity holders of the Company Earnings per share Profit Profit after tax from continuing operations Discontinued operation: before Profit tax from discontinued operation 28 Operating profit Existing operations Profit before tax Revenue Existing operations Gross profit
FOR THE YEAR ENDED 31 DECEMBER 2006 CONSOLIDATED INCOME STATEMENT INCOME CONSOLIDATED
Acquisitions Continuing operations Cost of sales Other operating expenses Continuing operations on Profit disposal of discontinued operation 28 Income tax expense on discontinued operation 28 _1_SIG_ar06_back.indd 2 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 31 DECEMBER 2006
2006 2005 Note £000’s £000’s Profit after tax 76,522 58,142 Exchange difference on retranslation of foreign currency goodwill and intangibles 23 (918) (725) Exchange difference on retranslation of foreign currency net investments (excluding goodwill and intangibles) 23 (3,980) (1,669) Exchange and fair value movements associated with borrowings and derivative financial instruments 23 6,712 1,111 Tax charge on exchange difference arising on borrowings and derivative financial instruments 23 (1,078) (639) Current and deferred tax on share options 23 2,214 596 Actuarial gain/(loss) on defined benefit pension schemes 23 3,292 (1,885) Deferred tax movement associated with actuarial gain/(loss) 23 (966) 563 Transitional adjustment to adopt IAS 32 and IAS 39 at 1 January 2005 – (6,625) Recognition of deferred tax assets on certain transitional adjustments at 1 January 2005 – 3,869 Total recognised income and expense for the year 81,798 52,738
Attributable to: Equity holders of the Company 81,125 51,782 Minority interests 673 956 81,798 52,738
The accompanying Statement of Significant Accounting Policies and Notes to the Accounts are an integral part of this Consolidated Statement of Recognised Income and Expense.
56 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 3 05/04/2007 11:00:59 ACCOUNTS
05/04/2007 11:01:00 – – 57 2005 £000’s 237,515 353,962 155,823 (2,282) 25,483 2,252 838 521 5,081 70,659 28,376 7,507 2,159 26,987 13,695 509,785 290,339 12,189 17,883 22,113 347 1,375 289,140 1,199 290,339 102,093 164,675 49,252 21,085 337,105 128,101 281,053 21,745 32,120 463,019 800,124 224,859 756 3,211 95,148 2,253 2006 – 61 347 483 2006 £000’s 1,448 4,703 1,267 1,786 1,153 1,668 1,391 3,302 21,366 12,019 37,659 17,764 23,633 14,164 12,310 19,636 81,925 16,435 20,527 62,447 50,845 350,068 193,043 293,681 643,749 352,662 299,887 351,509 352,662 216,257 449,560 151,791 310,418 546,851 996,411 260,601
22,113 (4,570) 134,943
17 10 16 23 23 22 14 16 23 16 17 17 17 17 17 17 23 23 23 11 12 20 15 15 16 16 16 16 17 17 23 23 15 16 Note Annual Report and Accounts plc Annual Report SIG
GARETH DAVIES Director
DAVID WILLIAMS DAVID Director The accompanying Statement of Significant and Accounting Notes Policies to the Accounts are an integral part of this Consolidated Balance Sheet. Attributable to equity holders of the Company Minority interests equity Total Capital and reserves Called up share capital Total liabilities Total Net assets Non-current liabilities Obligations under finance leases and hire purchase agreements Total assets Total Current liabilities and other payables Trade Current assets Inventories Non-current assets plant and equipment Property, AS AT 31 AS DECEMBER AT 2006 CONSOLIDATED BALANCE SHEET BALANCE CONSOLIDATED
Retained Retained profits Provisions Provisions Bank loans Loan notes placement Private notes Derivative financial instruments Deferred tax liabilities Other payables Retirement benefit obligations Provisions Share premium account Capital redemption reserve Special reserve Share option reserve Hedging and translation reserve The Accounts were approved by the Board of Directors on 13 March 2007 and signed on its behalf by: Goodwill Intangible assets Deferred tax assets receivables Trade Other receivables Derivative financial instruments Cash and cash equivalents Obligations under finance leases and hire purchase agreements Bank overdrafts Bank loans Loan notes Derivative financial instruments Current tax liabilities _1_SIG_ar06_back.indd 4 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006
2006 2005 Note £000’s £000’s Net cash flow from operating activities Cash inflow from operating activities 24 132,355 113,581 Borrowing costs paid (14,206) (11,511) Interest received 2,433 3,518 Income tax paid (36,615) (21,850) Net cash inflow from operating activities 83,967 83,738
Cash flows from investing activities Purchase of property, plant and equipment (44,682) (33,576) Proceeds from sale of property, plant and equipment 2,009 2,098 Purchase of businesses 13 (90,061) (83,482) Net proceeds from sale of discontinued operation 28 25,327 – Net cash used in investing activities (107,407) (114,960)
Cash flows from financing activities Proceeds from issue of ordinary share capital 22 1,874 1,140 Capital element of finance lease rental payments (1,723) (1,306) Repayment of loans (135,112) (22,020) New loans 211,562 84,511 Dividends paid to equity holders of the Company 7 (21,719) (17,861) Payments to minority shareholder (719) (572) Net cash generated in financing activities 54,163 43,892 Increase in cash and cash equivalents in the year 25 30,723 12,670
Cash and cash equivalents at beginning of year 26 28,909 16,501 Effect of foreign exchange rate changes (487) (262) Cash and cash equivalents at end of year 26 59,145 28,909 The accompanying Statement of Significant Accounting Policies and Notes to the Accounts are an integral part of this Consolidated Cash Flow Statement.
58 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 5 05/04/2007 11:01:00 ACCOUNTS 05/04/2007 11:01:00 59 2006 Annual Report and Accounts plc Annual Report SIG profit on disposal of discontinued operation (USA business sold on 20 November 2006). amortisation of acquired intangibles; goodwill impairment losses; hedge ineffectiveness; and operations. tax after from continuing profit below separately have been disclosed to prior its disposal USA business of the the discontinued results In addition, GOODWILL AND BUSINESS COMBINATIONS All business combinations are accounted for by applying the purchase method. Goodwill arising on consolidation represents the excess of the cost of the acquisition over the Group’s interest in the fair value of identifiable assets (including intangible assets) and liabilities of the business acquired. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is not amortised but is tested annually for impairment, or more frequently when there is an indication that goodwill may be impaired. For the purposes of impairment testing, units (“CGU”) goodwillexpected to benefit from isthe synergies allocatedof the combination. If the torecoverable amount of eachthe CGU is of less than thethe carrying Group’samount of the unit, cash-generating the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal the of attributable a amount subsidiary, of remaining goodwill relating to the entity disposed of is included in the determination of any profit or loss on disposal. In accordance with the transitional arrangements of IFRS 1, the Group has taken the option to apply IFRS 3 to business combinations from the transition date only (1 January 2005). Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1 January 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. Goodwill recorded in foreign currency is retranslated at each period end. Any movements in the carrying value of goodwill as a result of foreign exchange rate movements are recognised in the Consolidated Statement of Recognised Income and Expense. Negative goodwill arising on an acquisition is recognised immediately in the Consolidated Income Statement. CONSOLIDATED INCOME STATEMENT DISCLOSURE INCOME STATEMENT CONSOLIDATED In order to give an indication of the underlying earnings of the Group, certain items are presented in the middle column of the Consolidated Income Statement entitled “other items”. These include: control passed. Minority interests in the net assets of consolidated subsidiaries are identified separately therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interest of SIG except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. BASIS OF CONSOLIDATION The Consolidated Accounts incorporate the Accounts of the Company and each of its subsidiary undertakings after eliminating all significant inter-company transactions and balances. The results of subsidiary undertakings acquired or sold are consolidated for the periods from or to the date on which The significant accounting policies adopted in this Annual Report and Accounts for the year ended 31 December 2006 are set out below. BASIS OF PREPARATION The Accounts have been prepared in accordance with International Reporting Standards Financial (“IFRS”) as adopted by the European Union. The Accounts have been prepared under the historical cost convention except for derivative financial instruments that are stated at their fair value. There are a number of new standards and interpretations issued but not yet effective which the Group has not applied in these Accounts, including instruments: IFRS 7 “Financial Disclosures”. It is anticipated that the adoption of these standards and interpretations would not have a significant impact on the Accounts of the Group except for additional disclosure requirements. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING SIGNIFICANT OF STATEMENT _1_SIG_ar06_back.indd 6 STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
INTANGIBLES The Group recognises intangible assets at cost less accumulated amortisation and impairment losses. The Group recognises two types of intangible assets: acquired and purchased. Acquired intangible assets arise as a result of applying IFRS 3 which requires the separate recognition of intangible assets from goodwill on all business combinations from 1 January 2004. Purchased intangible assets relate primarily to software that is separable from any associated hardware. Intangible assets are amortised on a straight line basis over their useful economic lives as follows: Amortisation period Customer relationships Life of the relationship Brands Indefinite Non-compete contracts Life of the contract Specific customer contracts Life of the contract Order-books Life of the order-book Software Useful life of software The Group is currently amortising customer relationships and non-compete contracts on average over 7.5 years and 3 years respectively. An indefinite useful life has been determined for brands on the basis that the brand is expected to be maintained indefinitely and is expected to continue to drive value for the Group. Brands will be reviewed for impairment on at least an annual basis. At 31 December 2006, the net book value of specific customer contracts, order-books and software was £nil.
REVENUE RECOGNITION Revenue represents amounts receivable for goods net of allowances and value added tax. Revenue from the sale of goods is recognised when the goods have been received by the customer.
BORROWING COSTS All borrowing costs are recognised in the Consolidated Income Statement in the period in which they are incurred.
PENSION COSTS SIG operates six defined benefit pension schemes. The Group’s net obligation in respect of these defined benefit pension schemes is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in both current and prior periods. That benefit is discounted using an appropriate discount rate to determine its present value and the fair value of any plan assets is deducted. Where the benefits of the plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the Consolidated Income Statement, on a straight line basis, over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately. The full service cost of the pension schemes is charged to operating profit. The finance cost of liabilities and expected return on assets are included within finance costs and finance income respectively in the Consolidated Income Statement and are shown separately in Note 3. The actuarial gain or loss arising is charged through the Consolidated Statement of Recognised Income and Expense and is made up of the difference between the expected return on assets and those actually achieved, the difference between the actuarial assumptions for liabilities and actual experience in the period and any changes in the assumptions used in the valuations. The pension scheme deficit is recognised in full and presented on the face of the Consolidated Balance Sheet. The associated deferred tax asset is recognised within non-current assets in the Consolidated Balance Sheet. For defined contribution schemes the amount charged to the Consolidated Income Statement in respect of pension costs and other post-retirement benefits is the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are included within either accruals or prepayments in the Consolidated Balance Sheet.
SHARE-BASED PAYMENT TRANSACTIONS In accordance with the transitional provisions, IFRS 2 has been applied to all share options granted after 7 November 2002 that remained unvested as of 1 January 2005. IFRS 2 has also been applied to all share options granted in 2005 and 2006. The Group issues equity-settled share-based payments only (share options). Share options are measured at fair value at the date of grant based on the Group’s estimate of shares that will eventually vest. The fair value determined is then expensed in the Consolidated Income Statement on a straight line basis over the vesting period, with a corresponding increase in equity. The fair value of the options is measured by use of the Black-Scholes option pricing model. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting.
60 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 7 05/04/2007 11:01:00 ACCOUNTS 05/04/2007 11:01:01 61 2006 Annual Report and Accounts plc Annual Report SIG FAIR VALUE HEDGES FAIR VALUE an For effective hedge of an exposure to changes in the fair value, the hedged item is adjusted for changes in fair value attributable to the risk being hedged with the corresponding entry in the Consolidated Income Statement. Gains or losses from remeasuring the derivative financial instruments are recognised immediately in the Consolidated Income Statement. HEDGE OF NET INVESTMENT IN FOREIGN OPERATIONS The portion of any gain or loss on an instrument used to hedge a net investment in a foreign operation that is determined to be an effective hedge is recognised in the Consolidated Statement of Recognised Income and Expense (i.e. equity). The ineffective portion of any gain or loss is recognised immediately as hedge ineffectiveness and is included as part of finance income or finance costs within the column of the Consolidated Income Statement entitled “other items”. CASH FLOW CASH HEDGES FLOW When a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised or asset a or highly liability, probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in the Consolidated Statement ofIncome Recognisedand Expense (i.e. equity). When the forecasted transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial Ifasset a hedge or of liability. a forecasted transaction subsequently results in the recognition of a financial asset or financial thenliability, the associated gains or losseswere thatpreviously recognised in the Consolidated Statement of Recognised Income and Expense (i.e. equity) are reclassified into the Consolidated Income Statement in the same period or periods during which the asset acquired or liability assumed affects the Consolidated Income Statement. cash For flow hedges, the ineffective portion of any gain or loss is recognised immediately as hedge ineffectiveness and is included as part of finance income or finance costs within the column of the Consolidated Income Statement entitled “other items”. DERIVATIVE FINANCIAL INSTRUMENTS DERIVATIVE financial and operational from arising risks rate interest and exchange currency foreign to exposure its hedge to instruments financial derivative uses Group The the Group does not hold Policy, or activities. issue In accordance derivative with financial its instruments Treasury for derivative trading purposes. However, financial instruments, or part that thereof, do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised immediately at cost. Subsequent to their initial recognition, derivative financial instruments are then stated at their fair value. Unless hedge accounting is achieved, the gain or loss on remeasurement to fair value is recognised immediately as hedge ineffectiveness and is included as part of finance income or finance costs within the column of the Consolidated Income Statement entitled “other items”. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. If a hedged transaction is no the longer net expected cumulative to gain occur, or loss recognised in equity is transferred to the Consolidated Income Statement for the period. Transactions denominated in foreign currencies are recorded Transactions in the local currency at actual exchange rates at the date of the transaction. At each balance sheet date, monetary assets and liabilities denominated in foreign currencies are reported at the rates of exchange prevailing at that date. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the Consolidated Income Statement. rates at the sheets at rate and balance their the average are translated undertakings subsidiary of overseas statements income of the consolidation, purpose For ruling at the balance sheet date. Exchange differences arising on translation of the opening net assets, results of overseas operations and on foreign currency borrowings, to the extent that they hedge the Group’s investment in such operations, are reported in the Consolidated Statement of Recognised Income and Expense. TRADE RECEIVABLES AND TRADE TRADE RECEIVABLES PAYABLES receivables and trade payables are measured Trade initially at fair value and then subsequently at amortised cost. With regard to trade receivables, when there is objective evidence of impairment appropriate allowances are made for estimated irrecoverable amounts based upon expected future cash flows discounted by an appropriate interest rate where applicable. FOREIGN CURRENCY CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purposes of the Consolidated Cash Flow Statement. _1_SIG_ar06_back.indd 8 STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
TAXATION Income tax on the profit or loss for the periods presented comprises both current and deferred tax. Income tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in the Consolidated Statement of Recognised Income and Expense. Current tax is the expected tax payable on the taxable income for the year, using tax rates that have been enacted or substantively enacted by the balance sheet date and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. In accordance with IAS 12, the following temporary differences are not provided for: goodwill not deductible for taxation purposes; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted by the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is shown at original cost to the Group less accumulated depreciation and any provision for impairment. Depreciation is provided at rates calculated to write off the cost less estimated residual value of property, plant and equipment on a straight line basis over their estimated useful lives as follows: Freehold buildings – 50 years Leasehold buildings – period of lease Plant and machinery (including motor vehicles) – 3 to 8 years Residual values, which are based on market rates, are reassessed annually.
INVENTORIES Inventories are stated at the lower of cost (including an appropriate proportion of attributable overheads, supplier rebates and discounts) and net realisable value. Net realisable value is based on estimated normal selling price, less further costs expected to be incurred to completion and disposal. Provision is made for obsolete, slow moving, or defective items where appropriate.
LEASES AND HIRE PURCHASE AGREEMENTS The cost of assets held under finance leases and hire purchase agreements is capitalised with an equivalent liability categorised as appropriate under current liabilities or non-current liabilities. The asset is depreciated over its useful life. Rentals under finance leases and hire purchase agreements are apportioned between finance costs and reduction of the lease obligation. The finance costs are charged in arriving at the profit before tax. Lease charges are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Rentals under operating leases are charged to the Consolidated Income Statement on a straight line basis over the lease term. Lease incentives are recognised on a straight line basis over the lease term in the Consolidated Income Statement.
PROPERTY PROVISIONS The Group makes provisions in respect of onerous leasehold property contracts and leasehold dilapidation commitments where it is probable that a transfer of economic benefits will be required to settle a present obligation.
62 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 9 05/04/2007 11:01:01 ACCOUNTS 05/04/2007 11:01:01 63 2006 Annual Report and Accounts plc Annual Report SIG PROVISIONS Using information available at the balance sheet date, the Directors make judgements based on experience on the level of provision required to satisfy all onerous lease and dilapidation commitments, to account for potential uncollectible receivables and unsaleable inventory. SHARE-BASED PAYMENTS The Company provides share-based payments under five separate schemes. In accordance with IFRS 2, share options are measured at fair value at the date of grant. The fair value determined is then expensed in the Consolidated Income Statement on a straight line basis over the vesting period, with a corresponding The increase fair in value equity. of the options is measured by use of the Black-Scholes option pricing model. The valuation of these share-based payments requires several judgements to be made in respect of the number of options that are expected to be exercised. Details of the assumptions made in respect of each of the five share-based payment schemes are disclosed in Note 9 on pages 71 to 74. TAXATION Accruals for corporation tax contingencies require the Directors to make judgements and estimates as to the level of corporation tax that will be payable based upon the interpretation of applicable tax legislation on a country by country basis and an assessment of the likely outcome of any open tax computations. All such accruals are included within current liabilities. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted by the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Therefore, judgements are required to establish whether deferred tax balances should be recognised. POST-EMPLOYMENT BENEFITS POST-EMPLOYMENT accordance in for accounted been have schemes these with associated benefits post-employment All schemes. pension benefit defined six operates Group The with IAS 19 “Employee Benefits”. As detailed within the Statement of Significant on Accounting page Policies 60, in accordance with IAS 19, all actuarial gains and losses have been recognised immediately through the Consolidated Statement of Recognised Income and Expense. all For defined benefit pension schemes, pension valuations have been performed using specialist advice obtained from independent qualified actuaries. In performing these valuations, judgements, assumptions and estimates have been made. These assumptions have been disclosed within Note 27d on pages 89 to 93. IMPAIRMENT OF IMPAIRMENT NON-CURRENT ASSETS Determining whether a non-current asset is impaired requires an estimation of the “value in use” and/or the “fair value less costs to sell” of the rates cash-generating units (“CGU”) discount to which the non-current asset has been estimate allocated. The value in use calculation requires Directors an estimate The of the future costs. direct and prices selling to changes cash flows expected to expected arise from the CGU and and a suitable rates discount rate in order to growth calculate present value. The key rates, assumptions for these value in discount regarding those are calculations use using pre tax rates that reflect current market assessments of the time value of money and the risks specific to the individual CGU. Cash flow forecasts are prepared using the following year’s operating budget approved by the Directors and an appropriate projection of cash flows based upon industry expectations for up to five years. After this period, the growth rates applied to the cash flow forecasts are no more than 2% and do not exceed the long term average growth rate for the industry. The carrying amount of non-current assets at 31 December 2006 was £449.560m (2005: £337.105m). No instances of impairment of non-current assets have been noted as a result of the impairment reviews performed in the year. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES KEY AND JUDGEMENTS ACCOUNTING CRITICAL UNCERTAINTY ESTIMATION OF _1_SIG_ar06_back.indd 10 NOTES TO THE ACCOUNTS
1. REVENUE AND SEGMENTAL INFORMATION Revenue An analysis of the Group’s revenue is as follows: 2006 2005 £000’s £000’s Continuing operations – sale of goods 1,859,832 1,571,448 Discontinued operation – sale of goods 65,228 67,884 Total revenue 1,925,060 1,639,332
Geographical segments As at 31 December 2006, the Group is managed and organised in two geographies: UK and Ireland and Mainland Europe. On 20 November 2006, the Group disposed of its operations in the USA. These geographies are the basis on which the Group reports its primary segment information. Segment information about these geographies is presented below: 2006 2006 2006 2006 2006 2005 2005 2005 2005 2005 Discontinued Discontinued UK and Mainland operation UK and Mainland operation Ireland Europe (USA) Eliminations Total Ireland Europe (USA) Eliminations Total £000’s £000’s £000’s £000’s £000’s £000’s £000’s £000’s £000’s £000’s Revenue External sales 1,254,376 605,456 65,228 – 1,925,060 1,098,055 473,393 67,884 – 1,639,332 Inter-segment sales* 34 – 17 (51) – – 2 50 (52) – Total revenue 1,254,410 605,456 65,245 (51) 1,925,060 1,098,055 473,395 67,934 (52) 1,639,332
Result Segment result before amortisation of acquired intangibles and goodwill impairment loss 99,919 27,577 3,758 – 131,254 84,359 19,612 3,008 – 106,979 Amortisation of acquired intangibles (6,470) (472) – – (6,942) (3,630) (58) – – (3,688) Goodwill impairment loss – – – – – (5,654) – – – (5,654) Segment result 93,449 27,105 3,758 – 124,312 75,075 19,554 3,008 – 97,637 Parent Company costs (6,095) (4,876) Operating profit 118,217 92,761 Net finance costs – continuing operations (11,787) (5,938) Net finance income/(costs) – discontinued operation 16 (12) Profit before tax 106,446 86,811 Profit on disposal of discontinued operation 1,947 – Income tax credit – on profit on disposal of discontinued operation 92 – Income tax expense – continuing operations (30,839) (27,835) Income tax expense – discontinued operation (1,124) (834) Minority interests (673) (956) Retained profit 75,849 57,186
Attributable to: Continuing operations 71,160 55,024 Discontinued operation 4,689 2,162 75,849 57,186 * Inter-segment sales are charged at the prevailing market rates.
64 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 11 05/04/2007 11:01:01 ACCOUNTS
05/04/2007 11:01:01 65 2006 Total
2006 – 11,628 – 996,411 – 984,783 – – 39,628 55,361 2006 (USA)
Discontinued 2006 Total Total Discontinued Annual Report and Accounts plc Annual Report SIG
996,411 continuing operation
11,628 2006 UK and Mainland operation 3,630 5,654 58 – – – – – 3,688 5,654 2005 Ireland 2005 £000’s Europe £000’s 2005 587,710 179,100 (USA) Eliminations £000’s 2005 31,535 £000’s Total 2005 238,255 – £000’s 54,200 798,345 6,327 25,773 – 37,543 298,782 8,448 56,107 689 1,474 16,537 326 1,779 800,124 4,781 – – – 501 34,547 211,003 – – 509,785 38,232 – 57,581 21,819
2006
Total 11,628 996,411 287,525 643,749
Commercial Eliminations
2006 CONTINUED Discontinued
2006 14,887 8,991 18,638 2,894 45,410 391 45,801 781,129 437,061 374,031 483,556 249,510 158,086 294,830 1,859,832 66,412 65,228 984,783 1,925,060
– – – – –
Insulation Roofing Interiors SC&SP operations 11,137 12,118 5,779 17,306 2,374 5,452 20,338 20,485 39,628 55,361
£000’s £000’s £000’s £000’s £000’s £000’s £000’s 2006 2006 2006 2006 2006 £000’s £000’s £000’s £000’s £000’s 6,470 472 – – 6,942 Ireland Europe (USA) UK and Mainland operation 37,289 8,121 36,470 18,891 18,217 391 5,540 – – 346 45,801 – 55,361 – 24,103 718,293 266,490 – 264,338 91,886 – 984,783 – – 356,224
28,835 10,793 – – 39,628
continued
Goodwill impairment loss Unallocated assets Consolidated total assets Unallocated liabilities Consolidated total liabilities Intangible assets Goodwill Non-cash expenditure: Depreciation Amortisation of acquired intangibles
Other segment information Capital expenditure on: plant and equipment Property, Intangible assets Goodwill Revenue External sales Assets Segment assets Unallocated assets Consolidated total assets The Group operates in four different segments of the market – Insulation, Roofing, Commercial Interiors and Specialist Construction and Safety Products (“SC&SP”). Products Safety and Construction Business segments are the Specialist basis on and which the Group presents its secondary segment Interiors information. Commercial Roofing, Insulation, – market the of segments different four in operates Group The The following table provides an analysis of Group sales, assets and capital expenditure by business segment: Business segments Liabilities Segment liabilities Other segment information Capital expenditure on: plant and equipment Property, Balance sheet Assets Segment assets 1. REVENUE AND SEGMENTAL INFORMATION 1. REVENUE INFORMATION AND SEGMENTAL
Geographical segments _1_SIG_ar06_back.indd 12 NOTES TO THE ACCOUNTS CONTINUED
1. REVENUE AND SEGMENTAL INFORMATION CONTINUED Business segments continued 2005 2005 2005 2005 2005 2005 2005 Total Discontinued Commercial continuing operation Insulation Roofing Interiors SC&SP operations (USA) Total £000’s £000’s £000’s £000’s £000’s £000’s £000’s Revenue External sales 718,995 327,866 434,423 90,164 1,571,448 67,884 1,639,332
Assets Segment assets* 275,240 227,780 209,870 53,920 766,810 31,535 798,345 Unallocated assets 1,779 – 1,779 Consolidated total assets 768,589 31,535 800,124
Other segment information Capital expenditure on: Property, plant and equipment 12,496 8,769 10,434 2,522 34,221 326 34,547 Intangible assets 1,343 9,013 20,354 7,522 38,232 – 38,232 Goodwill 1,307 35,965 13,703 6,606 57,581 – 57,581 * Segment assets have been restated to reflect a more accurate allocation of assets between the business segments.
2. COST OF SALES AND OTHER OPERATING EXPENSES 2006 2006 2006 2006 2005 2005 2005 2005 Discontinued Discontinued Existing operation Existing operation operations Acquisitions (USA) Total operations Acquisitions (USA) Total £000’s £000’s £000’s £000’s £000’s £000’s £000’s £000’s Cost of sales 1,281,585 70,898 48,480 1,400,963 1,107,475 37,862 50,991 1,196,328 Operating expenses: – distribution costs 152,372 7,049 3,637 163,058 132,868 5,936 3,798 142,602 – selling and marketing costs 125,120 5,801 3,248 134,169 103,679 4,653 3,434 111,766 – administrative expenses 97,851 4,697 6,105 108,653 85,230 3,992 6,653 95,875 375,343 17,547 12,990 405,880 321,777 14,581 13,885 350,243 The administrative expenses above include £6.942m (2005: £3.688m) in respect of amortisation of acquired intangibles and £nil (2005: £5.654m) in respect of a goodwill impairment loss.
3. FINANCE INCOME AND FINANCE COSTS 2006 2005 £000’s £000’s Finance income Interest on bank deposits 2,433 3,518 Finance income on pension scheme assets 3,639 3,173 Finance income before hedge ineffectiveness 6,072 6,691 Fair value gains on derivative financial instruments transferred from equity (hedge ineffectiveness) 1,357 1,880 Total finance income 7,429 8,571
Finance costs On bank loans, overdrafts and other items 7,158 4,080 On private placement notes 7,719 6,311 Interest on obligations under finance leases and hire purchase agreements 104 104 Finance charge on pension scheme liabilities 4,219 4,026 Total finance costs 19,200 14,521 Net finance costs 11,771 5,950
Attributable to: Continuing operations 11,787 5,938 Discontinued operation (16) 12 11,771 5,950
66 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 13 05/04/2007 11:01:01 ACCOUNTS
05/04/2007 11:01:02 – 67 63 60 60 Total 2005 2005 £000’s £000’s Deloitte
and Touche 190 487 677 100 209 309 1,046 2006 – – – – – 195 1,880 – – – 885 3,688 5,654 – 369 – 4 572 17 677 65 51 134 677 811 116 927 2005 2006 (USA) £000’s £000’s Deloitte and Touche
Discontinued
– 63 2005 £000’s Annual Report and Accounts plc Annual Report 1,097,903 50,959 1,148,862 SIG
1,219 206,114 (18) 6,661 212,775 1,201 Continuing operations operation 195 1,880 581 568 (19) 20,433 885 3,688 562 5,654 501 26,249 20,934 4,034 660 1,379 369 381 27,628 4,415
– – 42 2006 Total
– 221 – 746 – – 811 116 – 1,357 – 6,942 – – – 4 630 2006
Discontinued
– – 42 986 268 1,254 221 626 746 811 116 2006 £000’s £000’s £000’s 3,342 128 3,470 1,357 6,942 5,847 328 6,175 23,011 346 29,398 23,357 1,184 30,582 249,864 6,344 256,208 operations (USA) 1,294,261 48,311 1,342,572
Continuing operation
Foreign exchange Foreign rate losses* * Excludes gains and losses incurred as a result of adopting IAS 39 Instruments: “Financial Recognition and Measurement”. A more detailed analysis of Auditors’ remuneration on a worldwide basis is provided below: Gain on plant disposal and of equipment property, – held under finance leases and hire purchase agreements – plant and machinery Auditors’ remuneration for audit services Non-audit fees Staff costs (Note 5) Corporate finance services Grand total Tax services Tax – compliance services Audit services payable Fees to the Company’s Auditors for the audit of the Group’s Consolidated Accounts Cost of inventories recognised as an expense Profit Profit before tax is stated after crediting: exchange Foreign rate gains* And after charging: 4. PROFIT BEFORE TAX transferred from equity (hedge ineffectiveness) plant Depreciation and of equipment property, – owned Total Total
Fair value Fair gains on derivative financial instruments Decrease in provision for inventories expenses operating in included intangibles acquired of Amortisation Goodwill impairment loss Operating lease rentals – land and buildings Increase in provision for inventories
Fees payable Fees to the Company’s Auditors and their associates for other services to the Group: – for the audit of the Company’s subsidiaries pursuant to legislation Total – advisory services Total audit the 2005 December 31 ended year the for where France, of exception the with 2005 in Auditors Group sole appointed were LLP Touche and Deloitte In LLP. 2006, was LLP the LLP performed and sole with jointly Ernst Auditors no exceptions. by & were Deloitte Young Deloitte and and Touche Touche As a result, the 2005 information has been restated to compliance LLP include invoiced tax only In those LLP. 2005, fees Ernst and (£4,000), paid Young to Deloitte services and Touche audit above; table the in disclosed not are which France in Auditors being still whilst Group entire the across fees following the services (£20,000) and tax advisory services (£67,000). The report of the Audit Committee on pages 52 and 53 provides an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the Auditors. (including in 2005 £62,000 relating to IFRS conversion) Increase in provision for receivables _1_SIG_ar06_back.indd 14 NOTES TO THE ACCOUNTS CONTINUED
5. STAFF COSTS Particulars of employees (including Directors) are shown below: 2006 2005 £000’s £000’s Employee costs during the year amounted to: Wages and salaries 220,468 182,981 Social security costs 27,775 23,384 IFRS 2 share option charge 1,089 736 Other pension costs (Note 27d) 6,876 5,674 256,208 212,775
Attributable to: Continuing operations 249,864 206,114 Discontinued operation 6,344 6,661 256,208 212,775 Of the pension costs noted above, £2.928m (2005: £2.835m) relates to defined benefit schemes and £3.948m (2005: £2.839m) relates to defined contribution schemes. The average monthly number of persons employed by the Group during the year was as follows: 2006 2005 Number Number Production 1,853 1,366 Distribution 2,849 2,611 Sales 3,350 2,658 Administration 1,326 1,189 9,378 7,824
Attributable to: Continuing operations 9,114 7,523 Discontinued operation 264 301 9,378 7,824
Directors’ emoluments: Details of the individual Director’s emoluments are given in the Directors’ Remuneration Report on page 49. The employee costs shown above include the following emoluments in respect of Directors of the Company: 2006 2005 £000’s £000’s Directors’ remuneration (excluding IFRS 2 share option charge) 1,884 1,690
6. INCOME TAX EXPENSE The income tax expense comprises: 2006 2005 £000’s £000’s Current tax UK Corporation tax – on profits for the year 23,508 22,832 – adjustments in respect of previous years (1,360) 1,639 22,148 24,471 Overseas taxation – on profits for the year 11,534 5,066 – adjustments in respect of previous years (2,198) 609 Total current tax 31,484 30,146 Deferred taxation Current year (1,049) 1,598 Adjustments in respect of previous years 996 (3,512) Deferred tax charge in respect of pension schemes 440 437 Total deferred tax 387 (1,477) Total income tax expense 31,871 28,669
Attributable to: Continuing operations 30,839 27,835 Discontinued operation 1,032 834 31,871 28,669
68 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 15 05/04/2007 11:01:02 ACCOUNTS
05/04/2007 11:01:02 – – % 69 2005 2005 2005 2005 £000’s £000’s £000’s 563 (639) 596 3,869 4,389 11,412 6,449 17,861 14,017 2006 – – – 170 2005 2006 2006 2006 (966) £000’s £000’s £000’s £000’s 2,214 7,702 (1,078) 14,017 21,719 17,604 (1,264) (26) (1.5%)
26,043 2,885 30.0% 3.3% 1,031 28,669 1.2% 27,835 33.0% 31.1%
83,815 2,996 86,811
% 2006 Annual Report and Accounts plc Annual Report SIG
844 0.8% 2006 (676) (121) (0.6%) (0.1%) £000’s 3,774 1,947 1,868 1.7% (2,562) (2.4%) 32,518 30.0% 31,871 30,839 29.4% 30.0% 108,393
102,672
CONTINUED and Ireland/Poland (corporate tax rates substantially less than 30%). If the proportion of profits from these jurisdictions changes, this could result in a higher higher a in result this could changes, jurisdictions from these of profits If less than 30%). the proportion tax substantially rates (corporate and Ireland/Poland or lower Group tax charge; the impact of permanent disallowables; and agreement of open tax computations with the respective tax authorities. the mix of profits between the UK (corporate tax rate 30%) and overseas; in particular, France/Germany (corporate tax rates substantially more than 30%) 30%) than more substantially rates tax (corporate France/Germany particular, in overseas; and 30%) rate tax (corporate UK the between profits of mix the – losses not previously recognised in deferred tax – adjustments in respect of previous years – effect of overseas tax rates final Proposed dividend for the year ended 31 December 2006 of 14.3p per share (2005: 11.5p) 7. DIVIDENDS Amounts recognised as distributions to equity holders of the Company in the year: approved Final dividend for the year ended 31 December 2005 of 11.5p per share (2004: 9.4p) Deferred tax movement associated with actuarial gain/(loss) The Group has taken account of the majority of its trading losses in its deferred tax balance. Although tax losses can be used to reduce cash payments of tax, utilisation of such losses would result in a deferred tax charge in that year which would eliminate any profit and loss benefit. In addition to the amounts charged to the Consolidated Income Statement, the following amounts in relation to taxes have been credited/(charged) directly to equity and are shown in the Consolidated Statement of Recognised Income and Expense and Note 23: Profit on Profit ordinary activities before tax – continuing operations 6. INCOME TAX 6. EXPENSE INCOME TAX The total tax charge for the year is lower (2005: higher) than that resulting from applying the standard rate of corporation tax in the UK: 30% (2005: 30%). The differences are explained in the following reconciliation:
Current and deferred tax on share options adjustment to adopt IAS 32 and Transitional IAS 39 at 1 January 2005 Factors affecting Factors the income tax expense for the year: – permanent items – profit on sale of discontinued operation income tax expense for the year Total Effective tax rate: – tax on continuing operations (excluding goodwill impairment losses) The effective tax charge for the Group is 30.0% (2005: 31.1%). The following factors that will affect the Group’s future total tax charge as a percentage of underlying profits are: Tax charge on exchange difference arising on Tax borrowings and derivative financial instruments Interim dividend for the year ended 31 December 2006 of 6.2p per share (2005: 5.3p) Amounts proposed as distributions to equity holders of the Company after the year end: The proposed final dividend is subject to approval by Shareholders at the Annual General Meeting and as such has not been included as a financial liability in these Accounts. Profit on Profit ordinary activities before tax – discontinued operation on Profit disposal of discontinued operation at 30% thereon Tax _1_SIG_ar06_back.indd 16 NOTES TO THE ACCOUNTS CONTINUED
8. EARNINGS PER SHARE The calculations of earnings per share are based on the following profits and numbers of shares: Basic and diluted 2006 2006 2006 2005 2005 2005 Discontinued Discontinued Continuing operation Continuing operation operations (USA) Total operations (USA) Total £000’s £000’s £000’s £000’s £000’s £000’s Profit after tax 71,833 4,689 76,522 55,980 2,162 58,142 Minority interests (673) – (673) (956) – (956) 71,160 4,689 75,849 55,024 2,162 57,186
Basic and diluted before amortisation of acquired intangibles, goodwill impairment, hedge ineffectiveness and profit on disposal of discontinued operation 2006 2006 2006 2005 2005 2005 Discontinued Discontinued Continuing operation Continuing operation operations (USA) Total operations (USA) Total £000’s £000’s £000’s £000’s £000’s £000’s Profit after tax 71,833 4,689 76,522 55,980 2,162 58,142 Minority interests (673) – (673) (956) – (956) Amortisation of acquired intangibles 6,942 – 6,942 3,688 – 3,688 Goodwill impairment loss – – – 5,654 – 5,654 Hedge ineffectiveness (1,357) – (1,357) (1,880) – (1,880) Tax relating to the amortisation of acquired intangibles and hedge ineffectiveness (1,676) – (1,676) (542) – (542) Profit after tax on disposal of discontinued operation – (2,039) (2,039) – – – 75,069 2,650 77,719 61,944 2,162 64,106
Weighted average number of shares: 2006 2005 Number Number For basic earnings per share 122,560,171 121,625,474 Exercise of share options 1,287,923 1,970,146 For diluted earnings per share 123,848,094 123,595,620
2006 2005 Earnings per share Basic earnings per share – continuing operations 58.1p 45.2p Basic earnings per share – discontinued operation 3.8p 1.8p Total basic earnings per share 61.9p 47.0p
Diluted earnings per share – continuing operations 57.5p 44.5p Diluted earnings per share – discontinued operation 3.8p 1.7p Total diluted earnings per share 61.2p 46.3p
Earnings per share before amortisation of acquired intangibles, goodwill impairment, hedge ineffectiveness and profit on disposal of discontinued operation Basic earnings per share – continuing operations 61.3p 50.9p Basic earnings per share – discontinued operation 2.2p 1.8p Total basic earnings per share 63.4p 52.7p
Diluted earnings per share – continuing operations 60.6p 50.1p Diluted earnings per share – discontinued operation 2.1p 1.7p Total diluted earnings per share 62.8p 51.9p
70 SIG plc Annual Report and Accounts 2006
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05/04/2007 11:01:02 71 2005 2005 £000’s £000’s (1,880) Weighted 542 3,688 5,654 9,342 3,688 1,808 average exercise 2006 – – N/A 2006 2006 £000’s £000’s 1,676 6,942 6,942 6,942 5,585 (1,357) 902,602 260.5
Options price (p)
1,470,817 207.7
37,761 797.0
(605,976) 165.8 Annual Report and Accounts plc Annual Report SIG
CONTINUED Income Statement entitled “other items”: entitled “other items”. “other items”.
Of the above share options outstanding at the 2,862 end are of exercisable the year, at 31 December 2006. options The outstanding SAYE at 31 December 2006 had a weighted average exercise price of 260.5p and a weighted average remaining contractual life of 1.75 years. Outstanding at beginning of the year Outstanding at the end of the year SAYE options (issued SAYE after 7 November 2002) – as at 31 December 2006 of £1.089m (2005: £0.736m) in the year relating to equity-settled share-based payment transactions issued after 7 November 2002 with a corresponding 9. SHARE-BASED PAYMENTS corresponding a with 2002 November 7 after issued transactions payment The Group had five share-based share-based payment schemes in existence during the year ended 31 December 2006. The equity-settled Group to recognised a total charge relating year the in £0.736m) (2005: £1.089m of entry to the share option reserve. The weighted average fair value of each option granted in the year was £6.67 (2005: £4.89). Details of each of the schemes are provided below: scheme Earn a) Save (“SAYE”) As You The Company operates scheme a within SAYE the UK which is open to all UK employees and is linked to a monthly savings contract over three and five year periods. Options have been granted to scheme participants at 80% of the prevailing market price. The market price is taken approximately one month to the exercise attached conditions are 17 since There no May 2002 in performance have existed Ireland. arrangements Similar date. grant to prior the official of these options. These options may be exercised within a fixed six month period three or five years from the date of grant. under 2006 in and 2005 of half second the in options share issued has Company the Instead, 2006. or 2005 in UK the in granted been have options SAYE No a Share Investment Plan (“SIP”) as approved at the 2004 Annual General Meeting (see page options 74). were SAYE granted in Ireland in 2005 and 2006. Amortisation of acquired intangibles
Amortisation of acquired intangibles 8. EARNINGS PER SHARE Earnings per share before amortisation of acquired intangibles, goodwill impairment, hedge ineffectiveness and profit on disposal of discontinued operation is disclosed in order to present the underlying performance of the Group. The following disclosures reconcile these adjustments to the disclosures made on the face of the Consolidated Income Statement: Amortisation of acquired intangibles and goodwill impairment losses are included as part of operating expenses within a) the column of the Consolidated
The profit on disposal of discontinued operation of £2.039m is stated after tax. d) Both the amortisation of acquired intangibles and the hedge ineffectiveness give rise to tax at a rate of 30% d) (2005: 30%): c) Profit after Profit tax on disposal of discontinued operation of £2.039m is disclosed separately on the face of c) the Consolidated Income Statement in the column Goodwill impairment loss Operating expenses Hedge ineffectiveness of £1.357m (2005: £1.880m) is included as finance income within the column of the Consolidated Income Statement b) entitled Hedge ineffectiveness Income tax at 30% Granted during the year Lapsed Lapsed during the year Exercised during the year _1_SIG_ar06_back.indd 18 NOTES TO THE ACCOUNTS CONTINUED
9. SHARE-BASED PAYMENTS CONTINUED a) Save As You Earn (“SAYE”) scheme continued The assumptions used in the Black-Scholes model are as follows: Shares granted in 2004 2005 2006 Share price (on date of official grant) 346p 656p 967p (10 May 2004) (21 October 2005) (10 November 2006) Exercise price 300p 571p 797p Expected volatility 31.0% 29.8% 13.1% Actual life 3 and 5 years 3 and 5 years 3 and 5 years Risk free rate 5.0% 4.5% 4.5% Dividend 12.4p 14.0p 16.8p Expected percentage options exercised versus granted: – 3 years 68% 68% 64% – 5 years 65% 65% 64% The expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected percentage of total options exercised is based on the Directors’ best estimate for effects of behavioural conditions. b) Executive Share Option Schemes (“ESOS”) Under the existing ESOS (for which the last options were granted in 2003), Executives can be awarded an annual grant of share options at market price, provided that the total amount payable by the individual to exercise options under the ESOS or any other share option scheme of the Group (excluding savings related schemes) granted during the immediately preceding ten years does not exceed four times base salary, bonus and benefits. Share options under the ESOS are exercisable between three and ten years for the Inland Revenue approved scheme and three and seven years for the unapproved scheme from the date of grant. The award would vest in full if, over a consecutive three year period, the growth in the Group’s earnings per share (“EPS”) is 6% higher than the percentage increase in the Retail Price Index. None of the award would vest if the growth in EPS is less than 6% above the percentage increase in the Retail Price Index over the same period. ESOS (issued after 7 November 2002) – as at 31 December 2006 Weighted average exercise Options price (p) Outstanding at beginning of the year 194,500 205.5 Lapsed during the year (24,000) 205.5 Exercised during the year (108,938) 205.5 Outstanding at the end of the year 61,562 205.5 All of the above share options outstanding at the end of the year are exercisable at 31 December 2006. No ESOS options were granted in 2004, 2005 or 2006. The options outstanding at 31 December 2006 had a weighted average exercise price of 205.5p and are all exercisable at the balance sheet date. The assumptions used in the Black-Scholes model are as follows: 2003 ESOS Share price on 11 April 2003 (date of official grant) 205.5p Exercise price 205.5p Expected volatility 31.8% Actual life 3 years Risk free rate 4.2% Dividend 11.6p Expected percentage options exercised versus granted 95% Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected percentage of total options exercised is based on the Directors’ best estimate for effects of behavioural conditions.
72 SIG plc Annual Report and Accounts 2006
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05/04/2007 11:01:03 73 0p 2006 98% 898p 4.5% 16.8p 13.1% 3 years (13 April 2006) Weighted
average exercise 2006 30% of award vests 100% of award vests Percentage of award Percentage vesting None of the award vests 425,716 4.58 Options price (p)
460,179 7.2
100,835 0.0 (4,489) 10.0 (130,809) 10.0 0p 2005 98% 601p 4.5% 14.0p 29.8% 3 years Annual Report and Accounts plc Annual Report SIG Shares granted in (19 April 2005)
10p 2004 93% 355p 5.0% 12.4p 31.0% 3 years
(11 May 2004) 2004) May (11
CONTINUED
c) Long Term Incentive Plan (“LTIP”) c) Long Term
the percentage growth in the Index Retail Price over the same period by: – less than 3% per annum compounded – 3% per annum compounded – between 3% and 10% per annum compounded – 10% per annum compounded No retesting of the performance criteria will occur. Award vests proportionately between 30% and 100% Expected percentage options exercised versus granted Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected percentage of total options exercised is based on the Directors’ best estimate for effects of behavioural considerations. Share price (on date of official grant) Exercise price Expected volatility Actual life Risk free rate Dividend Outstanding at the end of the year Of the above share options outstanding at the 4,469 end are of exercisable the year, at 31 December 2006. years. 1.2 life of contractual remaining of price and average 4.58p a exercise weighted at 2006 had average a 31 December weighted outstanding The options The assumptions used in the Black-Scholes model are as follows: LTIP options (issued LTIP after 7 November 2002) – as at 31 December 2006 Outstanding at beginning of the year 2004/2005/2006 LTIP criteria 2004/2005/2006 LTIP Awards under the 2004, 2005 are and exercisable 2006 between LTIPs three and ten years from the date of grant. The award vests if the following criteria are met: growth in Percentage the Company’s EPS over the three year period from Awards under the are 2003 exercisable LTIP between three and seven years from the date of grant. the Provided individual’s performance criteria are met the award vests over if, a consecutive three year period, the growth in the Group’s EPS is 10% higher than the percentage increase in the Index. Retail Price None of the award vests if the growth in EPS is less than 6% above the percentage increase in the Index Retail Price over the same period. Between these two limits, the The awards right vest to proportionately. exercise options terminates upon the employee ceasing to hold office with the Group, subject to certain exceptions and the discretion of the Board. If the 6% minimum growth performance target is not met, the performance period is extended by one year and the minimum growth in the Group’s EPS, over a consecutive four year period, is increased to 8% over the percentage increase in the Index Retail Price over the same period. The target for the full award to vest is 13.33%. 9. SHARE-BASED PAYMENTS 9. SHARE-BASED PAYMENTS Executives Under can the be policy, existing awarded LTIP an annual grant of nil paid share options up to a maximum value of 70% of base salary. criteria 2003 LTIP the commencement of the financial year in which the award is made exceeds Granted during the year Lapsed Lapsed during the year Exercised during the year _1_SIG_ar06_back.indd 20 NOTES TO THE ACCOUNTS CONTINUED
9. SHARE-BASED PAYMENTS CONTINUED d) Deferred Annual Bonus Scheme (“DABS”) Options were granted under the DABS scheme for the first time in 2005. The DABS operates by inviting participants including Executive Directors to use up to 50% of their annual performance related cash bonus (after tax and national insurance) in respect of the preceding financial year to purchase shares in the Company. Providing certain criteria are met, participants purchasing such shares will be eligible to receive nil cost matching shares up to a maximum of one per share purchased by the participant. The criteria are as follows: Percentage of award vesting Percentage growth in the Company’s EPS over the three year period from the commencement of the financial year in which the award is made exceeds the percentage growth in the Retail Price Index over the same period by: – less than 3% per annum compounded None of the award vests – 3% per annum compounded 50% of award vests – between 3% and 5% per annum compounded Award vests proportionately between 50% and 100% – 5% per annum compounded 100% of award vests
DABS (issued after 7 November 2002) – as at 31 December 2006 Options Outstanding at beginning of the year 17,520 Granted during the year 17,262 Lapsed during the year – Exercised during the year – Granted and outstanding at the end of the year 34,782 None of the above share options outstanding at the end of the year are exercisable at 31 December 2006. All DABS are nil paid options and therefore the options outstanding at 31 December 2006 had a weighted average exercise price of nilp, and a weighted average remaining contractual life of 1.8 years. The assumptions used in the Black-Scholes model are as follows: Shares granted in 2005 2006 Share price (on date of official grant) 601p 898p (19 April 2005) (13 April 2006) Exercise price of matching shares 0p 0p Expected volatility 29.8% 13.1% Actual life 3 years 3 years Risk free rate 4.5% 4.5% Dividend 14.0p 16.8p Expected percentage options exercised versus granted 100% 100% Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected percentage of total options exercised is based on the Directors’ best estimate for effects of behavioural considerations. e) Share Incentive Plan (“SIP”) Shares were granted under the SIP scheme for the first time in 2005. The SIP is a HM Revenue and Customs approved scheme and operates by inviting participants including Executive Directors to purchase shares in the Company in a tax efficient manner on a monthly basis. For each share purchased by the employee, the Company will match one free share up to a maximum of four free shares per month. No performance criteria is attached to these matching shares other than to avoid forfeiture they must remain within the plan for a minimum of two years. In 2006, 50,547 matching shares were granted during the year. Given the nature of the scheme, the fair value of the matching shares equates to the cost of the Company acquiring these shares.
74 SIG plc Annual Report and Accounts 2006
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05/04/2007 11:01:03 75 Total £000’s
2006 £000’s Short Plant and £000’s Annual Report and Accounts plc Annual Report SIG
– (257) (3,416) (3,673) – (361) (4,155) (4,516) £000’s Land Land and buildings 8,797 3,786 64,017 76,600 38,850 16,213 79,880 134,943 47,647 19,999 143,897 211,543 Freehold leasehold machinery
24,192 9,366 68,535 102,093 20,729 8,296 105,378 134,403 6,683 1,972 51,267 59,922
(422) (72) (674) (1,168) 1,707 1,135 18,977 21,819 11,711 868 4,581 17,160 (123) (43) (252) (418) 441 3,354 30,752 34,547 (14) (308) (11,739) (12,061) (14) (324) (13,249) (13,587) 8,253 2,756 58,253 69,262 32,445 12,122 126,788 171,355 738 1,463 21,902 24,103 (305) (128) (1,389) (1,822) (98) (87) (931) (1,116) 5,443 3,314 5,323 14,080 (96) (89) (11,791) (11,976) 10,165 5,168 30,468 45,801 (101) (116) (13,138) (13,355)
At 31 December 2005 At 31 December 2006 Net book value At 31 December 2006 Accumulated depreciation and impairment At 1 January 2005 At 31 December 2006 Cost or valuation At 1 January 2005 10. PROPERTY, PLANT AND EQUIPMENT 10. PROPERTY, The movement in the year and the preceding year was as follows:
The net book value of plant and machinery includes an amount of £2.302m (2005: £1.542m) in respect of assets held under finance leases and hire purchase agreements. Exchange difference Charge for the year Businesses acquired Exchange difference Additions Eliminated on disposals Disposals At 31 December 2005 At 31 December 2005 Charge for the year Exchange difference Exchange difference Businesses acquired Disposal of discontinued operation Eliminated on disposals Additions Disposal of discontinued operation Disposals _1_SIG_ar06_back.indd 22 NOTES TO THE ACCOUNTS CONTINUED
11. GOODWILL £000’s Cost At 1 January 2005 128,297 Exchange difference (834) Recognised on acquisition of businesses 57,581 At 31 December 2005 185,044 Exchange difference (1,084) Recognised on acquisition of businesses (Note 13) 55,361 Disposal of discontinued operation (USA) (4,016) At 31 December 2006 235,305
Accumulated impairment losses At 1 January 2005 14,830 Exchange difference (115) Impairment loss for the year 5,654 At 31 December 2005 20,369 Exchange difference (179) Impairment loss for the year – Disposal of discontinued operation (USA) (1,142) At 31 December 2006 19,048
Net book value At 31 December 2006 216,257 At 31 December 2005 164,675 Goodwill acquired in a business combination is allocated at the date of acquisition to the cash-generating units (“CGU”) that are expected to benefit from that business combination. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for these value in use calculations are those regarding discount rates, growth rates and expected changes to selling prices and direct costs. The Directors’ estimate discount rates using pre tax rates that reflect current market assessments of the time value of money and the risks specific to the individual CGU. The Group prepares cash flow forecasts using the following years operating budget approved by the Directors and an appropriate projection of cash flows based upon industry expectations for up to five years. After this period, the growth rates applied to the cash flow forecasts are no more than 2% and do not exceed the long term average growth rate for the industry. The discount rates applied to all impairment reviews represent pre tax rates and ranged between 11.7% and 13.2%. In 2005, the Group recognised a goodwill impairment loss of £5.654m on its Screenbase division, therefore writing the goodwill attributable to this business to nil net book value. Further details on this impairment loss can be found in the Group’s 2005 Annual Report and Accounts. There have been no instances of goodwill impairment noted from the annual impairment tests performed in 2006. The carrying amount of goodwill of £216.257m has been allocated across multiple CGUs. Individual amounts of goodwill allocated to a CGU that are significant in comparison to the overall carrying amount of goodwill are as follows: 2006 £000’s UK Insulation 34,826 UK Roofing and Building Plastics 64,483 UK Specialist Construction Products 28,930 LS Group 13,251 Ireland 34,758 Poland 8,277 German Roofing 5,345 189,870 In addition, the Group has an indefinite life intangible asset (LS Group brand) of £12.646m. Further details of impairment reviews performed on this asset are provided in Note 12.
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05/04/2007 11:01:03 77 (7) (1) (1) Total £000’s
2006 – 81,925 – 15,348 – 49,252 – 634 – – – 6,942 – (14) – 39,628 – books £000’s – – – – – – – – 7 7 136 3,688 7 136 4,321 7 14 136 38,232 14 136 53,573 14 136 11,262 14 136 93,187 £000’s Annual Report and Accounts plc Annual Report SIG – – – – 53 Non- Specific £000’s compete customer Order-
– 1,019 – 599 – – – 322 – – 375 – 644 – – – 1,763 £000’s
(7) (1) (1) £000’s 67,013 12,646 2,266 77,106 12,646 3,285 Customer relationships Brands clauses contracts
10,093
35,452 12,646 1,147 14,749 581
3,223
24,513 12,646 923 39,255 12,646 1,522 3,803 6,291 (14)
37,865
Net book value At 31 December 2006 At 31 December 2005 At 1 January 2005 At 31 December 2006 At 31 December 2006 Amortisation Cost At 1 January 2005 12. INTANGIBLE ASSETS 12. INTANGIBLE recognition the separate as IFRS 3 arise These a of requires which result applying intangibles. to acquired entirely relate below presented assets The intangible 3 not retrospectively to IFRS the has Group elected apply Policies, Accounting of in Significant As the Statement detailed from goodwill. intangibles acquired of to acquisitions that took place before 1 January 2004. During 2005 and 2006, the Group owned purchased intangible assets with an insignificant book value (mainly software separable from any associated hardware) and these have not been plant reclassified and from equipment property, on the grounds of materiality.
Exchange difference Amortisation of acquired intangibles is included in the Consolidated Income Statement as part of operating expenses and is classified within the middle column column the middle within and is classified expenses as of part operating Statement Income in is the Consolidated included intangibles of acquired Amortisation entitled “other items”. The weighted average amortisation period for each category of intangible asset is disclosed in the Statement of Significant on Accounting page Policies 60. In the opinion of the Directors, the only intangible asset which has an indefinite useful life is the brand attributable to the acquisition of LS Group Limited. The carrying value of the LS brand at the balance sheet date is £12.646m. An indefinite useful life has been determined for the LS brand on the basis that it is expected to be maintained indefinitely and is expected to continue to drive value for the Group. The recoverable value of the brand is based upon value in use calculations. Further information on value in use calculations is provided within Note each 11.of the Thekey assumptions in Directorsthe value in use calculation havefor the LS usedbrand. The growth pastrates assumed are experience in line with industry expectations and, in for periods determining beyond those covered by its management forecasts, do not exceed the long term average growth rate The for discount the rate industry. applied is 11.7%, equivalent to its pre tax weighted average cost of capital. Charge for the year Exchange difference Additions At 31 December 2005 At 31 December 2005 Charge for the year Exchange difference Exchange difference Additions _1_SIG_ar06_back.indd 24 NOTES TO THE ACCOUNTS CONTINUED
13. ACQUISITIONS MADE IN THE YEAR During 2006 the Group acquired the following companies: % of share capital Country of Acquisition name acquired Acquisition date incorporation Principal activity W.W. Fixings Limited 100% 17 March 2006 United Kingdom Distribution of specialist construction products Isotec SAS 100% 22 March 2006 France Distribution of insulating materials and associated products Acoustic and Insulation 100% 16 May 2006 United Kingdom Fabrication and distribution of insulating materials Manufacturing Limited and associated products Exton Construction Supplies Limited 100% 26 June 2006 United Kingdom Distribution of insulating materials and associated products Border Slate Suppliers Limited 100% 17 July 2006 United Kingdom Distribution of roofing materials and associated products Melle Dachbaustoffe GmbH (formerly Tectum Beteiligungs GmbH) (“Melle”) 100% 21 July 2006 Germany Distribution of roofing materials and associated products William Smith & Sons (Roofing) Limited 100% 31 July 2006 United Kingdom Distribution of roofing materials and associated products Cladding and Fascia Supplies Limited 100% 8 August 2006 United Kingdom Distribution of roofing materials and associated products Ceiling System Supplies Limited 100% 9 August 2006 United Kingdom Distribution of commercial interiors products Leicester Ceiling Supplies Limited 100% 29 September 2006 United Kingdom Distribution of commercial interiors products Turner Fixings Limited 100% 9 October 2006 United Kingdom Distribution of specialist construction products Wodan Sp. zo.o./WIG Sp. zo.o. 100% 16 October 2006 Poland Distribution of insulating, commercial interiors and specialist construction products Davies & Tate plc 100% 24 October 2006 United Kingdom Distribution of roofing materials and associated products Long Construction Services Limited 100% 1 November 2006 Ireland Distribution of specialist construction products Roplas (Humberside) Limited 100% 6 November 2006 United Kingdom Distribution of roofing materials and associated products Euroform Products Limited 100% 15 November 2006 United Kingdom Fabrication and distribution of insulating materials and associated products Beaver 84 Limited 100% 4 December 2006 United Kingdom Distribution of specialist construction products
The Group also acquired the trade and certain assets and liabilities of the following companies/businesses: Country of Acquisition name Acquisition date operation Principal activity Toogood plastics 17 January 2006 United Kingdom Distribution of roofing materials and associated products Project Plastics 21 February 2006 United Kingdom Distribution of roofing materials and associated products Plastic Building Materials Limited 20 June 2006 United Kingdom Distribution of roofing materials and associated products CHD (Whittlesey) Limited 6 October 2006 United Kingdom Distribution of insulating materials and associated products Cornish Fixings Co 2 November 2006 United Kingdom Distribution of specialist construction products Saftair 8 December 2006 France Distribution of insulating materials and associated products
78 SIG plc Annual Report and Accounts 2006
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05/04/2007 11:01:04 – 79 483 Total £000’s 1,387 1,763 4,587 88,674 90,061 14,080 14,080 20,742 13,054 86,905 63,208 23,697 37,865 15,437 (13,054) (11,888) 106,798 101,728 106,798 101,728 (13,054) 106,798 109,181 39,029 55,361
2006 – Fair value £000’s 36,314 1,644 (11,387) 93,688 (12,491) 82,047 88,618 76,127 50,016 93,688 88,618 93,688 850 (12,491)
4,587 483 – 12,491 £000’s Annual Report and Accounts plc Annual Report SIG Other acquisitions
51 (51) value adjustments Book value Fair £000’s
– – – Fair Fair value £000’s
1,551 119 (501) 13,110 (563) 27,134 13,110 12,547
5,345 13,110 13,110 13,110 14,587 – 563 12,491 £000’s Melle
value adjustments Book value Fair £000’s CONTINUED
1,298 8,710 (1,298) 8,820 (674) 563 27,739 (384) 8,036 21,480 (1,300) 8,436 (1,637) 6,311 26,439 14,017 19,843 (267) 63,694 (1,711) 41,167 6,044 (3,228) 12,306 2,198 60,466 43,365 6,259 337 6,596 22,527 (5,426) 17,101
an assessment of all provisions and payables to ensure they are accurately reflected in accordance with the Group’s policies. the review of the carrying value of all non-current assets to ensure that they accurately reflect their market value; the alignment of valuation and provisioning methodologies to those adopted by the Group; and
Included within goodwill are staff acquired as part of the business and strategic acquisition synergies which are specifically excluded in the identification of intangible assets on acquisition by the relevant accounting standards. The pre-acquisition revenue and operating profit for Melle, which was acquired on 21 July 2006, for the seven months ended 21 July 2006 amounted to £37.716m The and 2006 £0.462m Consolidated respectively. Income Statement includes the following amounts in respect of Melle: revenue £46.185m, cost of sales £37.081m and operating expenses £6.235m giving an operating profit of £2.869m. The Directors estimate the pre-acquisition revenue and operating profit for the other acquisitionsacquisition dates amounted forto £109.200m The and the2006 £9.300m Consolidated respectively. Income periodStatement includes the fromfollowing amounts in 1respect January 2006 to the respective respectively. £14.467m of the and other acquisitions: revenue £46.965m, cost of sales £240.066m £33.817m to and operating expenses £11.312m giving an amounted operating profit of £1.836m. acquisitions 2006 all for 2006 December 31 ending year the for profit operating and Revenue Net cash outflow from 2006 and prior year acquisitions All contingent consideration is included within provisions (Note 19). Due to the proximity of the timing of a number of the acquisitions close to the year end, the Directors have made a provisional assessment of the fair value of the net assets acquired. Any further adjustments arising will be accounted for in 2007. The fair value adjustments above relate primarily to: Total consideration (including assumed net debt) Total Acquisition cash flows during the year: Cash paid for 2006 acquisitions during the year Net cash and cash equivalents acquired with 2006 acquisitions Net cash outflow from 2006 acquisitions Contingent consideration paid on 2005 acquisitions (563) Loan Loan notes consideration Total The total consideration including assumed debt and net of cash and cash equivalents acquired is as follows: consideration (as above) Total Add debt acquired Less cash and cash equivalents acquired Intangible assets – non-compete clauses Deferred tax liability on acquired intangible assets Goodwill consideration Total Represented by: Contingent consideration Cash Inventories and other receivables Trade Cash and cash equivalents assets Total Liabilities Net assets Intangible assets – customer relationships 9,646 (242) 9,404 30,875 (1,250) 29,625 Non-current assets plant and equipment Property, Goodwill Current assets 7,412 624 8,036 6,260 (216) 6,044
13. ACQUISITIONS MADE IN THE YEAR
2006 acquisitions summary fair value table _1_SIG_ar06_back.indd 26 NOTES TO THE ACCOUNTS CONTINUED
13. ACQUISITIONS MADE IN THE YEAR CONTINUED Acquisitions made in 2006 (made in 2005) had the following impact on the Group’s cash flows in 2006 (in 2005): cash inflow from operating activities £4.705m (2005: £5.795m), borrowing costs paid £1.718m (2005: £1.389m), purchase of property, plant and equipment £1.760m (2005: £1.018m), repayment of loans £10.134m (2005: £3.247m) and income tax paid £1.770m (2005: £1.034m). Since the balance sheet date and up to the date of approval of the Accounts, the Group has acquired Macgregor & Moir Limited, Drainex Limited, Keydek Roofing Supplies Limited and General Fixings Limited. Information regarding these acquisitions is provided below: Book and fair value £000’s Non-current assets Property, plant and equipment 171 Current assets Inventories 659 Trade and other receivables 1,219 Cash and cash equivalents 338 Total assets 2,387 Liabilities 1,110 Net assets 1,277 Intangible assets – customer relationships 2,354 Deferred tax liability on intangible assets (706) Goodwill 3,131 Total consideration 6,056
Total consideration represented by: Cash 6,056
Acquisition cash flows: Cash paid for acquisitions 6,056 Net cash acquired (338) Net cash outflow from acquisitions 5,718
14. INVENTORIES 2006 2005 £000’s £000’s Raw materials and consumables 5,991 5,115 Work in progress 685 793 Finished goods and goods for resale 145,115 122,193 151,791 128,101 The estimated replacement cost of inventories is not materially different from the balance sheet value stated above.
15. TRADE AND OTHER RECEIVABLES 2006 2005 £000’s £000’s Trade receivables 310,418 281,053 VAT 706 1,354 Other receivables 9,407 4,633 Prepayments and accrued income 10,414 15,758 Other receivables 20,527 21,745 Derivative financial instruments 1,668 – 332,613 302,798 All of the Group’s receivables are due within one year both in 2006 and 2005. The Directors consider that the carrying amount of trade and other receivables approximate to their fair value. Credit risk The Group’s principal financial assets are cash balances and trade and other receivables. The Group’s credit risk is primarily attributable to its trade receivables for which an allowance has been made for the estimated irrecoverable amounts. The credit risk on liquid funds and derivative financial instruments is limited because the counter-parties are banks with high credit ratings assigned by international credit rating agencies. The Group has no significant concentration of credit risk, with exposure spread over a large number of customers.
80 SIG plc Annual Report and Accounts 2006
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05/04/2007 11:01:04 – 81 51 2005 2005 2005 £000’s £000’s £000’s 28,376 58,863 838 521 5,081 70,659 7,507 2,159 26,987 13,695 155,823 145 325 521 136,856 13,271 9,913 5,956 224,859 756 3,211 95,148 2,253 25,483 2,252 353,962 2006 – 61 553 363 483 2006 2006 2006 £000’s £000’s £000’s 1,448 4,703 1,267 3,787 4,703 9,879 1,391 3,302 37,659 17,764 23,633 14,164 15,432 11,598 61,939 50,845 21,366 12,019 193,043 293,681 161,753 350,068
260,601
Annual Report and Accounts plc Annual Report SIG
Deferred tax liabilities (Note 20) The bank loans included above are repayable as follows: – due after one and within two years Obligations under finance leases and hire purchase agreements: – due after one and within two years (Note 21) 17. NON-CURRENT LIABILITIES Current liabilities Trade and other payables Trade 16. CURRENT LIABILITIES and other payables: Trade payables Trade – due after two and within five years
Bank loans Loan notes placement Private notes Derivative financial instruments Other payables Retirement benefit obligations (Note 27d) (Note Provisions 19) – due after five years Of the above bank loans, £1.340m (2005: £0.519m) is secured on certain of the assets of subsidiary undertakings, and is repayable by instalments. The bank loan repayable after more than five years attracts an average fixed interest rate of 3.6% and is repayable in full in 2017. Bills of exchange payable VAT Social security and payroll taxes Accruals and deferred income Obligations under finance leases and hire purchase agreements (Note 21) Bank overdrafts Bank loans Loan notes Derivative financial instruments (Note Provisions 19) £2.500m (2005: £2.186m) of the above Group bank loans and overdrafts are secured on the assets of subsidiary undertakings. The remaining Group balances are unsecured. The bank overdraft is repayable on demand and attracts a floating interest rate which at 31 December 2006 was 4.8% (2005: 3.2%). £9.826m (2005: £55.000m) of the bank loans and loan notes due within one year (after taking into account derivative financial instruments) are at variable rates of interest. £41.502m (2005: £42.401m) of the bank loans and loan notes due within one year (after taking into account derivative financial instruments) attract an average fixed interest rate of 4.8% (2005: 5.1%). payables and accruals and deferred income Trade principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases, on a like for like basis excluding the discontinued operation in both years, is 38 days (2005: 38 days). The Directors consider that the carrying amount of current liabilities approximate to their fair value. Current tax liabilities _1_SIG_ar06_back.indd 28 NOTES TO THE ACCOUNTS CONTINUED
17. NON-CURRENT LIABILITIES CONTINUED Details of the private placement notes are as follows: 2006 2006 2005 2005 fixed fixed interest interest rate* rate* £000’s % £000’s % Repayable in 2008 22,483 7.1% 25,566 7.1% Repayable in 2011 40,258 7.3% 45,093 7.3% Repayable in 2013 25,550 5.9% – – Repayable in 2016 104,752 6.0% – – 193,043 6.4% 70,659 7.2% * Before applying associated derivative financial instruments. The Directors consider that the carrying amount of non-current liabilities approximate to their fair value.
18. DERIVATIVE FINANCIAL INSTRUMENTS The Treasury risk management section of the Business Review on pages 22 and 23 provides an explanation of the role that derivative financial instruments have had during the year in creating or changing the risks the Group faces in its activities. The Group’s financial assets consist of trade and other receivables, cash at bank and derivative financial instruments. The following financial assets form part of the net debt of the Group: 2006 2005 £000’s £000’s Cash at bank (including cash deposits repayable on demand) 62,447 32,120 Derivative financial instruments 1,668 – 64,115 32,120 The Directors consider the fair value of these financial assets to approximate to their book value. 2006 interest rate and currency profile The interest rate and currency profile of the Group’s financial liabilities at 31 December 2006, after taking account of interest rate and currency derivative financial instruments (with the exception of the short term currency swaps noted after the table) was as follows: Effective Weighted fixed average time Floating Fixed interest for which Amount Amount Total rate rate rate rate is fixed secured unsecured Currency £000’s £000’s £000’s % Years £000’s £000’s Private placement notes Sterling 137,999 56,635 81,364 6.2% 7.9 – 137,999 Other borrowings Sterling 40,377 377 40,000 4.8% 2.6 – 40,377 Finance lease contracts Sterling 618 – 618 5.4% 1.0 618 – Private placement notes Euro 93,387 – 93,387 6.1% 4.5 – 93,387 Other borrowings Euro 7,977 2,206 5,771 6.8% 2.6 3,820 4,157 Finance lease contracts Euro 1,987 – 1,987 4.8% 1.3 974 1,013 Finance lease contracts PLN 234 – 234 21.3% 1.8 234 – Other borrowings PLN 10,356 10,356 – N/A N/A 20 10,336 Total 292,935 69,574 223,361 5,666 287,269 In addition to the currency exposures above, the Group has entered into four short term currency derivative financial instruments amounting to an asset of £86.798m and liability of €129.294m. All of these derivative financial instruments were entered into on 29 December 2006 at market rates and therefore their fair value is deemed to equate to their book value of £nil. The expiry date of these derivative financial instruments is 31 December 2007. The Directors consider the fair value of the Group’s floating rate financial liabilities to approximate to the book value shown in the table above. The fair value of the Group’s private placement notes approximates to the amount in the value of the financial liabilities above. £40.000m of the Sterling Other borrowings relates to debt on which the Group has taken out interest rate derivative financial instruments to fix the interest rate and the debt is already carried at approximately its fair value in the table above. The remaining fixed rate debt amounts to £8.610m and relates to finance lease contracts and fixed rate loans. The Directors consider the fair value of these remaining fixed rate debts to approximate to the book values shown above.
82 SIG plc Annual Report and Accounts 2006
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05/04/2007 11:01:04 – – – 83 £000’s 2006 – – 30,742 96,841 – 68,002 £000’s
4,299 202,544 Years Years Annual Report and Accounts plc Annual Report SIG
% rate rate is fixed secured unsecured fixed average time
Effective Weighted – N/A N/A 1,111 rate Fixed Fixed interest for which Amount Amount £000’s
– 30,742 7.2% 3.0 – 68,002 6.7% 4.1 – 525 6.1% 2.5 525 – 1,069 5.1% 2.7 1,069 rate £000’s
Floating CONTINUED Total Total 525 £000’s 8,553 1,069 7,883 670 3.4% 12.0 1,594 6,959 68,002 206,843 58,210 148,633
Currency
With With regard to cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised in equity and is subsequently removed and included in the Consolidated Income Statement in the same period the hedged item affects the Consolidated Income Statement. The cash flow hedges described below are expected to impact both profit and loss and cash flow annually over the life of the hedging instrument and the related debt as interest falls due and upon maturity of the debt and related hedging instrument. As at 31 December 2006, the Group had entered into seven cross-currency interest rate derivative financial instruments which swap cross-currency fixed one US into Dollar entered had Group the 2006, December 31 at as addition, In debt. denominated Sterling fixed into UK the in held debt denominated interest rate derivative financial instrument which swaps fixed US Dollar denominated debt held in the UK into variable Sterling denominated debt. These derivative financial instruments form a cash flow hedge as they fix the functional currency cash flows of the Group. At 31 December 2006, these eight derivative financial instruments had a fair value liability of £29.291m (31 December 2005: £16.650m). All of these derivative financial instruments are designated and effective as cash flow hedges and the fair value movement has therefore been deferred in equity via the Consolidated Statement of Recognised Income and Expense. At 31 December 2006, the average maturity date of the these swaps is 8.0 years (2005: 3.8 years). As at 31 December 2006, the Group had entered into two interest rate derivative financial instruments which swap variable rate Sterling debt into fixed rate Sterling debt thereby fixing the functional currency cash flows of the Group. At 31 Decembervalue 2006,asset theseof two£0.684m derivative (31 Decemberfinancial 2005: instruments liability hadof a £0.292m).fair Both of these interest rateas cash flow hedges derivativeand the fair value movement financialhas therefore been deferred in instrumentsequity via the Consolidated Statement of are Recognised Income and designatedExpense. and effective At 31 December 2006, the average maturity date of the these swaps is 2.6 years (2005: 3.6 years). a) Net investment hedges As at 31 December 2006, the Group had entered into four cross-currency interest rate derivative financial instruments which form a net investment hedge of the Group’s Euro denominated trading assets. At 31 December 2006, these four derivative (31financial December instruments2005: £11.434m). had a Offair thisvalue fair liabilityvalue movement,of £8.583m £1.357m has been recognised directly ineffectiveness) and in£1.494m has thebeen recognised directly Consolidatedin equity via the Consolidated Statement Incomeof Recognised Income and StatementExpense. (as hedge b) Cash flow hedges Hedging relationships The Group does not trade in derivative financial instruments for speculative purposes. Where thethe rulesGroup of canIAS demonstrate32 and IASa 39,hedge movementsrelationship in underthe fair values of these derivative financial of Recognised Income and instrumentsExpense. Where the Group does willnot meet these be rules, movements in recognisedthe fair value will be inrecognised as thehedge ineffectiveness Consolidated Statement in the Consolidated Income Statement in the column entitled “other items”. In order to manage the Group’s exposure to interest rate and exchange rate changes, the Group utilises both currency and interest rate derivative financial instruments. The fair value of these derivative financial instruments are calculated by discounting the associated future cash flows to net present values using appropriate market rates prevailing at the balance sheet date. Total In addition to the currency exposures above, the Group had entered into three short term currency derivative financial instruments at 31 December 2005 amounting to an asset of £76.950m and liability of €112.138m. All of these derivative financialmarket instruments rates andwere therefore,entered atinto 31 on December30 December 2005, 2005their atfair value was deemed to equate tofinancial theirinstruments was 29 December book2006. value of £nil. The expiry date of these derivative In both 2006 and 2005, the interest rate on floating rate financial liabilities is linked to UK LIBOR in the case of Sterling liabilities, EURIBOR for Euro liabilities, WIBOR Zloty for liabilities Polish and US prime rate and US LIBOR for US Dollar liabilities. exposures that give rise to net Transactional currency gains and losses recognised in the Consolidated Income Statement are minimal as Group companies do not enter into significant amounts of cross border transactions. The amount arising in the Group during 2006 in respect of transactional exposures amounted to a gain of £179,000 (2005: £132,000). placement Private notes Other borrowings Sterling lease Finance contracts Sterling Sterling 30,742 96,841 49,216 47,625 4.9% 3.3 18. DERIVATIVE FINANCIAL INSTRUMENTS 18. DERIVATIVE The following table discloses the interest rate and currency profile of the Group’s financial liabilities at 31 December 2005, after taking account of interest rate and currency derivative financial instruments was as follows:
2005 interest rate and currency profile Private placement Private notes Euro Other borrowings lease Finance contracts Euro Euro Other borrowings US Dollar 1,111 1,111 _1_SIG_ar06_back.indd 30 NOTES TO THE ACCOUNTS CONTINUED
18. DERIVATIVE FINANCIAL INSTRUMENTS CONTINUED Hedging relationships continued b) Cash flow hedges continued As at 31 December 2006, the Group had entered into three cross-currency derivative financial instruments which swap fixed Sterling denominated debt into fixed Euro denominated debt. The movement in fair value of these derivative financial instruments hedges the post tax Euro cash flows of the Group and thereby fix the functional currency cash flows of the Group. As these derivative financial instruments were entered into on 29 December 2006 at market rates prevailing at that date, the fair value of these derivative financial instruments at 31 December 2006 was £nil. At 31 December 2006, the average maturity date of the these swaps is one year (2005: one year). c) Fair value hedges As set out in Note 27c, on 1 November 2006, the Group raised additional funds through the issue of private placement notes. The transaction was split into two drawdowns on 1 November 2006 and 1 February 2007. On 1 November 2006, the Group entered into three derivative financial instruments which hedged the interest rate exposure on the debt being drawn down on 1 February 2007. As at 31 December 2006, the fair value liability of these derivative financial instruments was £0.469m. As these hedges are fully effective fair value hedges of a firm commitment, the movement in fair value has been taken to the Consolidated Income Statement. This movement is exactly offset by the movement in the firm commitment being hedged which has also been taken to the Consolidated Income Statement. The overall impact on the Consolidated Income Statement is therefore £nil. Maturity of financial liabilities The maturity profile of the Group’s financial liabilities at 31 December 2006 was as follows: 2006 2005 £000’s £000’s In one year or less 56,082 101,368 In more than one year but not more than two years 1,605 654 In more than two years but not more than five years 97,976 40,850 In more than five years 137,272 63,971 Total 292,935 206,843
Borrowing facilities The Group had undrawn committed borrowing facilities at 31 December 2006 as follows: 2006 2005 £000’s £000’s Expiring in more than one year but not more than two years 50,019 13 Expiring in more than two years but not more than five years 63,495 59,919 Expiring in more than five years 424 398 Total 113,938 60,330 In addition, as detailed in Note 27c, the Group is committed to borrowing a further £40m and €60m as part of the private placement notes entered into on 1 November 2006. These facilities have not been included in the undrawn facilities noted above.
19. PROVISIONS FOR LIABILITIES AND CHARGES 2006 2006 2006 2006 2006 Onerous Leasehold Contingent Other leases dilapidations consideration amounts Total £000’s £000’s £000’s £000’s £000’s Beginning of year 4,246 8,960 – 2,741 15,947 Transferred in from accruals – – 7,036 146 7,182 Unused amounts reversed in the period (10) – (1,000) – (1,010) Utilised (1,373) (1,094) (1,387) (1,463) (5,317) Added on acquisition – 2,107 4,587 – 6,694 New provisions 116 2,140 – 464 2,720 Exchange difference (4) (15) – (14) (33) End of year 2,975 12,098 9,236 1,874 26,183
2006 2005 £000’s £000’s Included in current liabilities 12,019 2,252 Included in non-current liabilities 14,164 13,695 26,183 15,947
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05/04/2007 11:01:05 85 2005 2005 £000’s £000’s 13,578 13,578 (38) 3,788 (7,823) 1,477 56 563 596 13,578 (7,507) 1,769 8,059 14,840 3,869 21,085 2006 – (66) 871 2006 2006 (387) (966) (323) £000’s £000’s (1,329) (7,789) (1,329) 16,435 (13,165)
(1,064) 6,653 (1,329) 13,578 (17,764)
Annual Report and Accounts plc Annual Report SIG
CONTINUED
The movement during the year in the net deferred tax asset/(liability) was as follows: Beginning of year Onerous leases Deferred tax analysis: Capital allowances in excess of depreciation Deferred tax assets Contingent consideration relates to the amounts due to vendors of current and prior year acquisitions providing certain future profit targets are met. The transfer of economic benefit is expected to be made within two years. Other amounts Other amounts relate principally to claim provisions. The transfer of economic benefit is expected to be made between one and three years. 20. DEFERRED TAX The net deferred tax (liability)/asset at the end of the year is analysed as follows: Leasehold dilapidations This provision relates to contractual obligations to reinstate leasehold properties into their original state of repair at the end of the lease. The provision is calculated with reference to the expired portion of individual lease agreements where such a clause exists in the lease contract. The transfer of economic benefits will be made at the end of the leases as set out in Note 27b. Contingent consideration 19. PROVISIONS FOR LIABILITIES AND CHARGES The Group has provided for the rental payments due over the remaining term of existing operating lease contracts where a period of vacancy is ongoing. The provision has been calculated after taking into account both the periods over which properties are likely to remain vacant and the likely income from existing and future sub lease agreements on a contract by contract basis. The provision covers potential transfer of economic benefit over the full range of current lease commitments disclosed in Note 27b.
The net deferred tax (liability)/asset is made up of the following elements: Short term timing differences Losses (Charge)/credit for the year Exchange differences On retirement benefit obligations Deferred tax on share options End of year Given current trading the Directors consider that recognition of the deferred tax assets above is appropriate. At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries with a lower rate of corporation tax than that suffered in the UK, for which no deferred tax liabilities have been recognised, was £40.568m (2005: £29.396m). No liability has been recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. Net deferred tax (liability)/asset On retirement benefit obligations Net deferred tax (liability)/asset IFRS transitional adjustment at 1 January 2005 On acquisition of subsidiaries Deferred tax liabilities _1_SIG_ar06_back.indd 32 NOTES TO THE ACCOUNTS CONTINUED
21. OBLIGATIONS UNDER FINANCE LEASES AND HIRE PURCHASE CONTRACTS Minimum Present value of lease payments minimum lease payments
2006 2005 2006 2005 £000’s £000’s £000’s £000’s Amounts payable under finance leases: – within one year 1,492 797 1,391 756 – in the second to fifth years 1,539 861 1,448 838 3,031 1,658 2,839 1,594 Less: future finance charges 192 64 Present value of lease obligations 2,839 1,594 The Group leases a small number of its fixtures, equipment and motor vehicles under finance leases. The average remaining lease term is 1.3 years (2005: 2.6 years). For the year ended 31 December 2006, the average effective borrowing rate was 6.3% (2005: 5.4%). Interest rates are fixed at the contract date. The carrying amount of the Group’s lease obligations approximates to their fair value.
22. CALLED UP SHARE CAPITAL 2006 2005 £000’s £000’s Authorised: 190,000,000 ordinary shares of 10p each (2005: 190,000,000) 19,000 19,000
Allotted, called up and fully paid: 123,104,025 ordinary shares of 10p each (2005: 121,886,129) 12,310 12,189 Cash consideration received by the Company for shares allotted during the year amounted to £1.874m (2005: £1.140m). The Company has one class of ordinary share which carries no right to fixed income. At 31 December 2006 the following share options were outstanding: Number of shares Exercise dates
Date Date At At Option from which on which 31 December 31 December price per option may option Scheme and date of grant 2005 Granted Exercised Lapsed 2006 10p share be exercised expires Deferred Annual Bonus Scheme 19/04/2005 17,520 – – – 17,520 0.0p 19/04/2008 18/04/2015 13/04/2006 – 17,262 – – 17,262 0.0p 13/04/2009 12/04/2016 Long Term Incentive Plan 11/04/2000 3,508 – (3,508) – – 10.0p 11/04/2003 10/04/2007 17/04/2001 26,443 – (26,443) – – 10.0p 17/04/2004 17/04/2008 19/04/2002 45,521 – (45,521) – – 10.0p 19/04/2005 19/04/2009 01/10/2002 15,168 – (15,168) – – 10.0p 02/10/2005 02/10/2009 11/04/2003 139,767 – (130,809) (4,489) 4,469 10.0p 11/04/2006 10/04/2010 11/05/2004 190,447 – – – 190,447 10.0p 11/05/2007 10/05/2011 19/04/2005 129,965 – – – 129,965 0.0p 19/04/2008 18/04/2012 13/04/2006 – 100,835 – – 100,835 0.0p 13/04/2009 12/04/2016 1997 Executive Share Option Scheme 30/05/1997 37,789 – (19,789) (500) 17,500 309.5p 30/05/2000 29/05/2007 27/04/1998 13,557 – (2,000) (1,500) 10,057 212.5p 27/04/2001 26/04/2008 01/04/1999 23,000 – (23,000) – – 158.5p 01/04/2002 31/03/2009 11/04/2000 27,402 – (23,402) – 4,000 232.5p 11/04/2003 10/04/2010 19/04/2002 83,800 – (50,800) (9,000) 24,000 321.0p 19/04/2005 19/04/2012 11/04/2003 194,500 – (108,938) (24,000) 61,562 205.5p 11/04/2006 11/04/2013 Savings Related Schemes 02/05/2000 1,449 – – (1,449) – 186.0p 01/07/2003 31/12/2005 04/05/2001 166,986 – (160,887) (2,072) 4,027 201.0p 01/07/2004 31/12/2006 17/05/2002 139,005 – (1,655) (3,014) 134,336 257.0p 01/07/2005 31/12/2007 07/05/2003 1,069,478 – (602,289) – 467,189 165.0p 01/07/2006 31/12/2008 10/05/2004 369,489 – (3,687) – 365,802 300.0p 01/07/2007 31/12/2009 21/10/2005 31,850 – – – 31,850 571.0p 01/11/2008 31/05/2011 10/11/2006 – 37,761 – – 37,761 797.0p 01/01/2010 01/01/2012 Total 2,726,644 155,858 (1,217,896) (46,024) 1,618,582
86 SIG plc Annual Report and Accounts 2006
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05/04/2007 11:01:05 87
2006
Minority Total
Annual Report and Accounts plc Annual Report SIG Share Hedging and 12,310 19,636 347 22,113 1,786 (4,570) 299,887 351,509 1,153 352,662
– – – – – – – – – – – – 57,186 (17,861) 57,186 (17,861) 956 – 58,142 (17,861) – – – – – – – – (719) (719) – – – – – – – – – – – – – – – – – – – – – – – – 3,869 (572) – – 3,869 75,849 (572) (21,719) 75,849 (21,719) – 673 – 3,869 76,522 (21,719) – – – – – – (1,885) (1,885) – (1,885) – – – – – – 2,214 2,214 – 2,214 – – – – – – 596 596 – 596 – – – – – – 3,292 3,292 – 3,292 – – – – – – (966) (966) – (966) – – – – – – – – 243 243 – – – – – – 563 563 – 563 Called up Share Capital share £000’s premium redemption £000’s Special £000’s option translation £000’s Retained £000’s £000’s £000’s £000’s £000’s £000’s capital account reserve reserve reserve reserve profits Total interests equity
goodwill and intangibles) Exchange and fair value movements – – – – – (3,980) – (3,980) – (3,980) goodwill and intangibles) Exchange and fair value movements – – – – – (1,669) – (1,669) – (1,669) financial instruments Current and deferred tax – – – – – (1,078) – (1,078) – (1,078) financial instruments Current and deferred tax – – – – – (639) – (639) – (639) Deferred tax movement associated pension schemes arising on borrowings and derivative on certain transitional adjustments arising on borrowings and derivative derivative financial instruments charge on exchange difference Tax – – – – – 3,688 3,024 6,712 – 6,712 derivative financial instruments charge on exchange difference Tax – – – – – 1,111 – 1,111 – 1,111 on share options Actuarial gain on defined benefit on share options Credit to share option reserve Actuarial loss on defined benefit – – – – 736 – – 736 – 736 Deferred tax movement associated pension schemes with actuarial gain Credit to share option reserve Exercise of share options to minority Payment interest – – – – – – – 1,089 – (678) – – 1,089 678 – – 1,089 – – on acquisition adjustment to adopt Transitional with actuarial loss to minority Payment interest IAS 32 and IAS 39 at 1 January 2005 Recognition of deferred tax assets – – – – – – (6,625) (6,625) – (6,625) At 31 December 2006 associated with borrowings and associated with borrowings and At 31 December 2004 after Profit tax 12,139 16,793 347 22,113 639 (360) 201,672 253,343 572 253,915 23. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY STATEMENT 23. CONSOLIDATED Dividends New share capital issued Exchange difference on 50 1,090 – – – – – 1,140 – 1,140 retranslation of foreign currency retranslation of foreign currency goodwill and intangibles Exchange difference on net investments (excluding – – – – – (918) – (918) – (918) retranslation of foreign currency retranslation of foreign currency goodwill and intangibles Exchange difference on net investments (excluding – – – – – (725) – (725) – (725)
shareholder shareholder Recognition of minority interest at 1 January 2005 At 31 December 2005 after Profit tax Dividends New share capital issued 12,189 Exchange difference on 17,883 121 347 22,113 1,753 1,375 (2,282) – 237,515 289,140 – 1,199 290,339 – – – 1,874 – 1,874
_1_SIG_ar06_back.indd 34 NOTES TO THE ACCOUNTS CONTINUED
23. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONTINUED The special reserve arises as a result of a number of transfers from the Group’s share premium reserve up until 1996. Goodwill arising on a number of historic acquisitions was then written off against this special reserve. The cumulative amount of goodwill resulting from acquisitions in earlier years which has been written off directly against reserves, net of goodwill relating to undertakings disposed of, is £131.431m (2005: £131.431m). The share option reserve represents the cumulative share option charge under IFRS 2 less the value of any share options that have been exercised. The hedging and translation reserve represents movements in the Consolidated Balance Sheet as a result of movements in exchange rates which are taken directly to reserves as detailed in the Statement of Significant Accounting Policies on pages 59 to 62.
24. RECONCILIATION OF OPERATING PROFIT TO CASH INFLOW FROM OPERATING ACTIVITIES 2006 2005 Note £000’s £000’s Operating profit from continuing operations 114,459 89,753 Operating profit from discontinued operation 28 3,758 3,008 Operating profit 118,217 92,761 Depreciation charge 24,103 21,819 Amortisation of acquired intangibles 6,942 3,688 Goodwill impairment loss – 5,654 Profit on sale of property, plant and equipment (630) (572) Share-based payments 1,089 736 Increase in inventories (14,896) (5,066) Increase in receivables (4,320) (10,043) Increase in payables 1,850 4,604 Cash inflow from operating activities 132,355 113,581 Included within the increase in payables is a cash outflow relating to defined benefit pension contributions being £0.589m (2005: £0.863m) greater than the amount charged to operating profit.
25. RECONCILIATION OF NET CASH FLOW TO MOVEMENTS IN NET DEBT 2006 2005 £000’s £000’s Increase in cash and cash equivalents in the year 30,723 12,670 Cash flow from increase in debt (75,846) (62,156) Increase in net debt resulting from cash flows (45,123) (49,486) Debt acquired with acquisitions* (15,920) (21,270) Non-cash items† 5,911 (271) IFRS transitional adjustment – (6,625) Exchange differences 1,035 1,247 Increase in net debt in the year (54,097) (76,405) Net debt at beginning of year (174,723) (98,318) Net debt at end of year (228,820) (174,723) * Including loan notes issued. † Non-cash items relate to the fair value movement of debt recognised in the year which does not give rise to a cash inflow or outflow.
26. ANALYSIS OF NET DEBT At Debt At 31 December Cash acquired with Non-cash Exchange 31 December 2005 flows acquisitions* items† differences 2006 £000’s £000’s £000’s £000’s £000’s £000’s Cash and cash equivalents 32,120 30,868 – – (541) 62,447 Overdrafts (3,211) (145) – – 54 (3,302) 28,909 30,723 – – (487) 59,145 Financial assets – derivative financial instruments – – – 1,668 – 1,668 Debts due within one year (97,401) 60,059 (14,048) – 1 (51,389) Debts due after one year (104,637) (136,509) – 4,243 1,498 (235,405) Finance leases and hire purchase agreements (1,594) 604 (1,872) – 23 (2,839) (174,723) (45,123) (15,920) 5,911 1,035 (228,820) * Including loan notes issued. † Non-cash items relate to the fair value movement of debt recognised in the year which does not give rise to a cash inflow or outflow.
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05/04/2007 11:01:05 89 84 2005 2005 2005 £000’s £000’s £000’s 9,371 3,579 26,147 75,816 86,268 188,231 3,937 5,350 2006 183 2006 2006 2006 £000’s £000’s £000’s 7,742 4,080 7,289 11,552 29,525 87,082 101,552 218,159
Annual Report and Accounts plc Annual Report SIG
Consolidated Income Statement charges The pension charge for the year relating to the main scheme was £2.126m (2005: £1.983m), and was £0.802m£3.948m (2005: £2.839m) in (2005:relation to defined contribution £0.852m)schemes. In accordance with IAS in19 “Retirement Benefits”, relationthe charge for the todefined other schemes benefit schemes has been calculated as the sum of the cost of benefits the accruing increase in in the the year, value of benefits already accrued and the expected return on assets. The actuarial valuations described above have been updated at 31 December 2006 by a qualified actuary using revised assumptions that are consistent with the requirements of IAS 19. Investments have been valued, for this purpose, at fair value. current the method unit projected the under therefore and rising is that profile age an have members, new to closed are schemes benefit defined UK four The service cost will increase as the members of the schemes approach retirement. The two overseas book reserved schemes remain open to new members. Defined benefit pension scheme valuations In accordance with the amendment to IAS 19 which was issued on 16 December 2004, the Group has elected to recognise all actuarial gains and losses in full in the period in which they arise in the Consolidated Statement of Recognised Income and Expense. The actuarial valuations of the defined benefit pension schemes are assessed by an independent actuary every three years who recommends the rate of contribution payable each year. The main actuarial assumptions in the pension assessments were that over the long term the annual investment return would be 2% higher than the annual increase in pensionable salaries, and after retirement 2.5% higher than the annual price inflation-linked increase in pensions. at that 1 2004 and showed were conducted January the scheme) main (including schemes of of benefit three the defined valuations actuarial The last formal the market value of the schemes’ assets were £29.7m, £7.8m and £1.9m and their actuarial values covered 64%, 94% and 70% respectively of the benefits accrued to members after allowing for expected future increases in pensionable salaries. £1.2m was assets scheme’s the of value market the that showed and 2004 6 at April was scheme benefit defined fourth the of valuation actuarial formal last The makes but scheme pension the fund to and its actuarial value assets covered 60% of the benefits accrued separate to members any after allowing for hold expected future not increases in pensionable does salaries. company sponsoring the whereby schemes reserved book are schemes sixth and fifth The a reserve in its accounts. Therefore, these schemes do not hold separate scheme assets. The liabilities of the schemes are met by the sponsoring companies. On 1 November 2006, the Group raised additional funds through the issue of private placement notes. The transaction was split into two drawdowns. On 1 November 2006, the Group received £110m and €40m of these funds. As part of the private placement contract, the Group is committed to drawing down a further £40m and €60m on 1 2007. February d) schemes Pension The Group operates a number of pension schemes, six (2005: six) of which provide defined benefits based on Of final these pensionable schemes, salary. four (2005: four) have assets held in separate trustee administered funds and two (2005: two) are overseas book reserved schemes. The Group also operates a number of defined contribution schemes all of which are independently managed. The defined benefit schemes are herein after referred to as the “main scheme” and “other schemes”, being five smaller schemes. Minimum lease rentals due: – within one year c) Financing commitments
Contracted but not provided for b) Lease commitments The Group leases a number of its premises under operating leases which expire between 2007 and 2049. The rentals payable are subject to renegotiation at various dates. The total future minimum lease rentals under the foregoing leases are as follows: Minimum lease rentals due: – within one year 27. GUARANTEES AND OTHER FINANCIAL COMMITMENTS a) Capital commitments
– after one year and within five years – after five years The Group also leases certain items of plant and machinery whose total future minimum lease rentals under the foregoing leases are as follows: – after one year and within five years – after five years _1_SIG_ar06_back.indd 36 NOTES TO THE ACCOUNTS CONTINUED
27. GUARANTEES AND OTHER FINANCIAL COMMITMENTS CONTINUED d) Pension schemes continued Consolidated Balance Sheet liability The balance sheet position in respect of the six defined benefit schemes can be summarised as follows: 2006 2006 2005 2005 £000’s £000’s £000’s £000’s Deficit in the main scheme (16,969) (19,679) Deficit in the other schemes (6,664) (7,308) Pension liability before taxation (23,633) (26,987) Related deferred tax asset 6,653 8,059 Pension liability after taxation (16,980) (18,928) The actuarial gain of £3.292m (2005 loss: £1.885m) for the year, together with the associated deferred tax debit of £0.966m (2005 tax credit: £0.563m), has been recognised in the Consolidated Statement of Recognised Income and Expense. Of the above pension liability before taxation, £21.176m (2005: £24.864m) relates to wholly or partly funded schemes and £2.457m (2005: £2.123m) relates to unfunded schemes. The movement in the pension liability before taxation in the year can be summarised as follows: 2006 2005 £000’s £000’s Pension liability at beginning of year (26,987) (25,035) Current service cost (2,348) (1,982) Contributions 2,937 2,845 Net finance cost (580) (853) Actuarial gain/(loss) 3,292 (1,885) Exchange difference 53 (77) Pension liability at end of year (23,633) (26,987)
Main scheme disclosure The principal assumptions used for the IAS 19 actuarial valuation of the main scheme were: 2006 2005 2004 % % % Rate of increase in salaries 5.0 4.8 4.8 Rate of fixed increase of pensions in payment 5.0 5.0 5.0 Rate of increase LPI pensions in payment 3.0 2.8 2.8 Discount rate 5.1 4.9 5.4 Inflation assumption 3.0 2.8 2.8 Deferred pensions are revalued to retirement in line with the scheme’s rules and statutory requirements, with the inflation assumption used for LPI revaluation in deferment. The fair value of the assets in the main scheme, the present value of the liabilities in the main scheme and the expected rate of return at each balance sheet date were: 2006 2006 2005 2005 2004 2004 % £000’s % £000’s % £000’s Equities 6.8 32,817 6.7 29,034 7.2 23,518 Bonds 4.6 20,113 4.4 18,655 4.9 15,087 Other 4.1 – 4.0 81 4.5 325 Total fair value of assets 52,930 47,770 38,930 Present value of scheme liabilities (69,899) (67,449) (57,800) Deficit in the scheme (16,969) (19,679) (18,870) Related deferred tax asset 5,390 6,504 6,560 Pension liability after taxation (11,579) (13,175) (12,310) The overall expected rate of return is based upon market conditions at the balance sheet date. Future joint (employer and employee) contribution rates for the main scheme have been agreed at 21.4% of pensionable salaries plus fixed monthly Company contributions of £120,600. Analysis of the amount charged to operating profit under IAS 19 in relation to the main scheme: 2006 2005 £000’s £000’s Current service cost 1,622 1,308
90 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 37 05/04/2007 11:01:06 ACCOUNTS
05/04/2007 11:01:06 91 2005 2005 2005 2005 2005 2004 £000’s £000’s £000’s £000’s £000’s (675) (19,679) (57,800) (1,308) (3,202) (528) (67,449) (635) (3,202) (675) (18,870) (1,308) (1,278) (5,246) 635 38,930 2,527 3,968 2,452 528 47,770 2,527 3,968 (5,246) (1,278) 2,452 2006 – – (4,074) (7%) 899 209 539 209 2005 2006 2006 2006 2006 2006 (504) (539) (899) (504) £000’s £000’s £000’s £000’s £000’s 2,357 2,148 2,832 2,479 2,832 2,148 2,357 2,479 (1,622) (3,336) (3,336) (1,622) 47,770 52,930 (69,899) (19,679)
(1,278) (2%) (8,183) (14%) (16,969) (67,449) 3,968 8% 942 2%
– – – 3% 209 2006 2,357 Annual Report and Accounts plc Annual Report SIG
CONTINUED
continued continued Main scheme disclosure d) Pension d) schemes Pension Difference between the expected and actual return on main scheme assets: Amount (£000’s) value Fair of main scheme assets at beginning of year value Fair of main scheme liabilities at beginning of year Deficit in main scheme at beginning of year Actual return less expected return on assets income Finance – being expected return on pension scheme assets 27. GUARANTEES AND OTHER FINANCIAL COMMITMENTS Analysis of the amount charged to finance income and finance charges under IAS 19 in relation to the main scheme:
Actuarial gain/(loss) Movements in the present value of the main scheme liabilities were as follows: Current service cost Interest on pension scheme liabilities Changes in assumptions Benefits paid Movements in the fair value of the main scheme assets were as follows: value Fair of main scheme assets at end of year Net finance charge The actual return on scheme assets was £3.041m (2005: £6.495m). Analysis of the actuarial gain/(loss) recognised in the Consolidated Statement of Recognised Income and Expense in respect of the main scheme: Current service cost Contributions Percentage of the Percentage present value of main scheme liabilities amount recognised in the Consolidated Statement Total of Recognised Income and Expense: Amount (£000’s) of the Percentage present value of main scheme liabilities Percentage of main Percentage scheme assets Experience gains and losses on main scheme liabilities: Amount (£000’s) Deficit in main scheme at end of year Contributions from scheme members value Fair of main scheme liabilities at end of year Expected return on assets Actual return less expected return on assets Contributions from sponsoring companies Contributions from scheme members Benefits paid History of experience of gains and losses: Finance charges Finance – being interest on pension scheme liabilities Changes in assumptions Actuarial gain/(loss) recognised Movement in deficit during the year in respect of the main scheme: Net finance cost _1_SIG_ar06_back.indd 38 NOTES TO THE ACCOUNTS CONTINUED
27. GUARANTEES AND OTHER FINANCIAL COMMITMENTS CONTINUED d) Pension schemes continued Other schemes’ disclosure The Company also operates a further five defined benefit pension schemes, details of which have been aggregated below and are referred to as “other schemes”. The principal assumptions used for the IAS 19 actuarial valuations of the other schemes can be summarised as follows: 2006 2005 2004 % % % Rate of increase in salaries 5.0 4.8 4.4 Rate of fixed increase of LPI pensions in payment 3.0 2.9 2.7 Discount rate 5.1 4.8 5.4 Inflation assumption 3.0 2.9 2.8
The fair value of the assets, the present value of the liabilities and the expected rate of return at each balance sheet date for the other schemes were: 2006 2006 2005 2005 2004 2004 % £000’s % £000’s % £000’s Equities 6.5 11,230 6.5 12,127 6.7 9,979 Bonds 4.7 3,595 4.4 985 4.3 939 Property 6.5 112 6.5 320 6.7 244 Cash 4.5 69 4.0 392 3.8 518 Total fair value of assets 15,006 13,824 11,680 Present value of scheme liabilities (21,670) (21,132) (17,845) Deficit in the schemes (6,664) (7,308) (6,165) Related deferred tax asset 1,263 1,555 1,373 Pension liability after taxation (5,401) (5,753) (4,792) The overall expected rate of return is based upon market conditions at the balance sheet date. Future joint contribution rates (employers and employees) for two of the other schemes have been agreed at 31.0% and 34.2% of pensionable salaries. Annual joint contributions for another scheme, for which one active member remains, have been agreed at £135,000. For the two overseas book reserved schemes, in accordance with the scheme rules, no contributions are made. Analysis of the amount charged to operating profit under IAS 19 in relation to the other schemes: 2006 2005 £000’s £000’s Current service cost 726 674
Analysis of the amount charged to finance income and finance charges under IAS 19 in relation to the other schemes: 2006 2005 £000’s £000’s Finance income – being expected return on pension scheme assets 807 646 Finance charges – being interest on pension scheme liabilities (883) (824) Net finance charge (76) (178) The actual return on scheme assets was £1.080m (2005: £2.037m). Analysis of the actuarial gain/(loss) recognised in the Consolidated Statement of Recognised Income and Expense in respect of the other schemes: 2006 2005 £000’s £000’s Actual return less expected return on assets 273 1,391 Experience gains and losses on liabilities 133 (7) Changes in assumptions 529 (1,991) Actuarial gain/(Ioss) recognised 935 (607)
Movement in deficit during the year in respect of the other schemes: 2006 2005 £000’s £000’s Deficit in the other schemes at beginning of year (7,308) (6,165) Current service cost (726) (674) Contributions 458 393 Net finance cost (76) (178) Actuarial gain/(loss) 935 (607) Exchange difference 53 (77) Deficit in the other schemes at end of year (6,664) (7,308)
92 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 39 05/04/2007 11:01:06 ACCOUNTS
05/04/2007 11:01:06 93 (7) 59 2005 2005 2004 £000’s £000’s (345) (17,845) (674) (824) (59) (21,132) (1,991) (77) 345 11,680 646 1,391 393 13,824 2006 – 2% (7) 320 53 59 (59) 133 529 415 807 273 458 2005 2006 2006 (726) (883) (415) £000’s £000’s 15,006 13,824 (21,132) (21,670)
1,391 10% 195 2% (607) (3%) (558) (3%)
2% 1% 4% 273 133 935 2006 Annual Report and Accounts plc Annual Report SIG
CONTINUED
continued continued Other schemes’ disclosure d) Pension d) schemes Pension e) Contingent liabilities As at the balance sheet date, the Group had outstanding obligations under customer plc, guarantees, claims, Scotland standby of letters Bank of credit Royal The by and discounted issued bills of credit, of letters standby to related £5.445m) (2005: £7.045m amount, this Of £13.002m). (2005: £8.041m to up in respect of the Group’s insurance arrangements. performance. profit upon its future dependent in is 6.5% share of the for equity LS to a Limited the Group be remaining consideration purchased In addition, The consideration payable varies from a minimum of £1.7m to maximum of £5.2m. At the balance sheet date, it is not possible to accurately determine the likely consideration payable as it is inherently uncertain. Difference between the expected and actual return on the other schemes’ assets: Amount (£000’s) value Fair of the other schemes’ assets at beginning of year value Fair of the other schemes’ liabilities at beginning of year 27. GUARANTEES AND OTHER FINANCIAL COMMITMENTS Movements in the present value of the other schemes’ liabilities were as follows: Benefits paid
Fair value Fair of the other schemes’ assets at end of year Current service cost Interest on pension scheme liabilities Experience gains and losses on liabilities Exchange differences Movements in the fair value of the other schemes’ assets were as follows: Percentage of the Percentage other schemes’ assets Experience gains and losses on the other schemes’ liabilities: Amount (£000’s) of the Percentage present value of the other schemes’ liabilities amount recognised in the Consolidated Statement Total of Recognised Income and Expense Amount (£000’s) of the Percentage present value of the other schemes’ liabilities Changes in assumptions Contributions from scheme members Benefits paid value Fair of the other schemes’ liabilities at end of year Expected return on assets Actual return less expected return on assets Contributions from sponsoring companies Contributions from scheme members History of experience of gains and losses _1_SIG_ar06_back.indd 40 NOTES TO THE ACCOUNTS CONTINUED
28. DISPOSAL OF DISCONTINUED OPERATION a) Profit on disposal of discontinued operation On 20 November 2006, the Group disposed of its USA business to Grey Mountain Partners for a total consideration of $51m (£26.999m equivalent) in cash. This generated a Group profit on disposal after tax of £2.039m. This is calculated as follows: £000’s Consideration 26,999 Disposal expenses incurred (1,672) Net proceeds from sale 25,327 Goodwill disposed of (2,874) Net assets disposed of (excluding goodwill) (20,044) Recycling of hedging and translation reserve movements from 1 January 2004 to date of disposal (462) Profit on disposal of USA business before tax 1,947 Tax credit on profit on disposal 92 Profit after tax on disposal of USA business 2,039
b) Profits generated by the discontinued operation up to the date of disposal The following revenue and profit numbers have been included in the Consolidated Income Statement which represent the contribution of the USA business up to the date of disposal: 2006 2005 £000’s £000’s Revenue 65,228 67,884 Cost of sales 48,480 50,991 Gross profit 16,748 16,893 Operating expenses 12,990 13,885 Operating profit 3,758 3,008 Net finance (income)/costs (16) 12 Profit before tax 3,774 2,996 Income tax expense 1,124 834 Profit after tax 2,650 2,162
c) Cash flows from discontinued operation 2006 2005 £000’s £000’s Net cash flows from operating activities 3,535 (128) Net cash flows from investing activities (360) (287) Net cash flows from financing activities (1,802) (1) 1,373 (416)
29. RELATED PARTY TRANSACTIONS Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and have therefore not been disclosed. Remuneration of key management personnel The remuneration of the Directors who are the key management personnel of the Group is provided in the audited part of the Directors’ Remuneration Report on pages 48 to 51. In addition, the Group recognised a share-based payment charge under IFRS 2 in respect of the Directors of £0.444m (2005: £0.305m).
30. SUBSIDIARIES Details of the Group’s principal trading subsidiaries, all of which have been included in the Consolidated Accounts, are shown on page 105.
94 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 41 05/04/2007 11:01:06 ACCOUNTS 05/04/2007 11:01:07 95
2006 Annual Report and Accounts plc Annual Report SIG Companies Act 1985; and as at 31 December 2006 and of its profit for the year then ended; the part of the Directors’ Remuneration Report described as having been audited has been properly prepared in accordance with the the information given in the Directors’ Report is consistent with the Group financial statements. the Group financial statements give a true and in fair accordance view, with IFRSs as adopted by the European Union, of the state of the Group’s affairs the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; of Directors’ Responsibilities. Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). report to We you our opinion as to whether the Group financial statements give a true and whether fair the view, Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation and whether the part of the Directors’ Remuneration Report described as having been audited has been properly prepared in accordance with the Companies Act also 1985. report We to you whether in our opinion the information given in the Directors’ Report is consistent with the Group financial statements. In addition we report to you in if, 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. review whether We the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the 2003 Combined Code specified for our review by the Listing Rules of and the we Services Financial report Authority, if it does are not. not We 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. read the We other information contained in the Annual Report as described in the contents section and consider whether it is consistent with the audited Group financial consider statements. the We implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any further information outside the Annual Report. with applicable law and International Reporting Standards Financial (“IFRSs”) as adopted by the European Union are set out in the Statement DELOITTE & DELOITTE TOUCHE LLP Chartered Accountants and Registered Auditors Leeds 13 March 2007 OPINION In our opinion: We conducted our We audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Remuneration Board. Practices An audit Directors’ includes the of part the and statements financial Group the in disclosures and amounts the to relevant evidence of basis, a on test examination, Report to be audited. It also includes an assessment of the significant estimates and judgementsfinancial statements, and madeof whether the byaccounting policies are theappropriate to Directorsthe Group’s circumstances, consistently applied inand adequately thedisclosed. preparation of the Group We planned and performed our audit so as to obtain all the information and explanations which sufficientwe considered evidence necessaryto give in reasonableorder to assuranceprovide thatus withthe Group financial statements and the are free partfrom material misstatement, of whether caused theby fraud Directors’or other In irregularity forming our or opinion error. we Remunerationalso evaluated the overall adequacy Report to be audited of the presentation of information in the Group financial statements and the part of the Directors’ Remuneration Report to be audited. BASIS OF AUDIT OPINION RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the Group financial statements in accordance We have audited We the Group financial statements of SIG plc for the year ended 31 December 2006 which comprise the Consolidated Income Statement, the Consolidated Statement of Recognised Income and Expense, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement, the Statement of Significant Critical Accounting Accounting Policies, Judgements and Key Sources of Estimation Uncertainty and the related Notes 1 to 30. These Group financial statements have been prepared under the accounting policies set out have therein. also We audited the information in the Directors’ Remuneration Report that is described as having been audited. have reported We separately on Company the financial Parent statements of SIG plc for the year ended 31 December 2006. This report is made solely to the Company’s members, in as accordance a with body, section 235 of the Companies Act 1985. purpose. Our audit other no work for and has been report Auditors’ an in them to state to required are we matters those members Company’s the to state might we that so undertaken the fullest extent permitted we by do law, not To accept or assume responsibility to anyone other than the Company and the Company’s members for our audit as a body, work, for this report, or for the opinions we have formed. TO THE MEMBERS OF SIG PLC INDEPENDENT AUDITORS’ REPORT AUDITORS’ INDEPENDENT _1_SIG_ar06_back.indd 42 FIVE YEAR FINANCIAL SUMMARY
UK GAAP IFRS
Continuing operations† 2002 2003 2004 2005 2005 2006 Revenue 1,154,968 1,268,525 1,398,237 1,639,332 1,571,448 1,859,832 Underlying* operating profit 57,903 63,438 77,020 102,103 99,095 121,401 Operating profit 53,379 58,642 76,386 92,761 89,753 114,459 Finance income 4,273 4,078 5,045 8,571 8,571 7,413 Finance costs (11,304) (11,229) (11,202) (14,521) (14,509) (19,200) Underlying* profit before tax 50,872 56,287 70,863 94,273 91,277 108,257 Profit before tax 46,348 51,491 70,229 86,811 83,815 102,672 Profit after tax 31,702 34,705 48,804 58,142 55,980 71,833 Underlying* earnings per share 30.1p 32.5p 40.3p 52.7p 50.9p 61.3p Earnings per share 26.3p 28.6p 39.9p 47.0p 45.2p 58.1p Dividend per share 11.6p 12.4p 14.0p 16.8p 16.8p 20.5p * Underlying figures are stated before the amortisation of acquired intangibles, impairment/amortisation of goodwill, the profit on sale of the USA business and hedge ineffectiveness. † From continuing operations only (i.e. excluding the USA business sold on 20 November 2006). A more detailed five year summary can be found in the investor section of the Company’s website (www.sigplc.co.uk).
96 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 43 05/04/2007 11:01:07 COMPANY ACCOUNTS (PREPARED IN ACCORDANCE WITH UK GAAP) ACCOUNTS
_1_SIG_ar06_back.indd 44 05/04/2007 11:01:07 COMPANY BALANCE SHEET AS AT 31 DECEMBER 2006
2006 2005 Note £000’s £000’s Fixed assets Investments 4 353,632 283,972 Tangible assets 5 49 73 353,681 284,045 Current assets Debtors – due within one year 6 59,392 7,224 Debtors – due after more than one year 6 266,132 314,779 Cash at bank and in hand 7,588 825 333,112 322,828 Creditors: amounts falling due within one year 7 (135,706) (148,089) Net current assets 197,406 174,739 Total assets less current liabilities 551,087 458,784 Creditors: amounts falling due after one year 8 (265,672) (167,559) Net assets 285,415 291,225
Capital and reserves Called up share capital 10 12,310 12,189 Share premium account 10 19,636 17,883 Merger reserve 10 21,655 21,655 Capital redemption reserve 10 347 347 Special reserve 10 130,365 130,365 Share option reserve 10 1,786 1,375 Exchange reserve 10 (214) (214) Profit and loss account 10 99,530 107,625 Shareholders’ funds (all equity) 285,415 291,225
The Accounts were approved by the Board of Directors on 13 March 2007 and signed on its behalf by:
DAVID WILLIAMS GARETH DAVIES Director Director The accompanying Statement of Significant Accounting Policies and Notes to the Accounts are an integral part of this Company Balance Sheet.
98 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 45 05/04/2007 11:01:08 ACCOUNTS 05/04/2007 11:01:08 99 2006 Annual Report and Accounts plc Annual Report SIG INVESTMENTS asset Fixed investments in subsidiaries are shown at cost less provision for impairment. FOREIGN CURRENCY denominated in foreign currencies are recorded Transactions in the local currency at actual exchange rates as of the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year end are reported at the rates of exchange prevailing at the year end. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the and Loss Account. Profit SHARE-BASED PAYMENTS The accounting policy for share-based payments mirrors that of the Group’s accounting policy under IFRS 2 as detailed on page 60. FINANCIAL INSTRUMENTS The accounting policy for financial instruments mirrors that of the Group’s accounting policy under IAS 32 and IAS 39 as detailed on page 61. BASIS OF ACCOUNTING The separate Accounts of the Company are presented as required by the Companies Act 1985. They have been prepared under the historical cost convention and in accordance with applicable United Kingdom Accounting Standards (UK GAAP) and Law. The principal accounting policies are They summarised have below. all been applied consistently throughout the year and the preceding year. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING SIGNIFICANT OF STATEMENT _1_SIG_ar06_back.indd 46 NOTES TO THE ACCOUNTS
1. PROFIT FOR THE YEAR As permitted by section 230 of the Companies Act 1985 the Company has elected not to present its own Profit and Loss Account for the year. SIG plc reported a profit for the financial year ended 31 December 2006 of £9,922,000 (2005: £43,419,000). The Auditors’ remuneration for audit services to the Company was £40,000 (2005: £40,000).
2. SHARE-BASED PAYMENTS The Company had five share-based payment schemes in existence during the year ended 31 December 2006. The Company recognised a total charge of £316,000 (2005: £256,000) in the year relating to equity-settled share-based payment transactions issued after 7 November 2002. Share-based payment charges of £773,000 (2005: £480,000) were transferred to subsidiary undertakings of the Company. The total amount transferred to the share option reserve in the year amounted to £1,089,000 (2005: £736,000). Details of the valuations of each of the five share-based payment schemes can be found in Note 9 to the Group Accounts on pages 71 to 74.
3. STAFF COSTS Particulars of employees (including Directors) are shown below: 2006 2005 £000’s £000’s Employee costs during the year amounted to: Wages and salaries 2,595 2,020 Social security costs 426 231 IFRS 2 share option charge 316 256 Other pension costs 413 291 3,750 2,798
The average monthly number of persons employed by the Company during the year was as follows: 2006 2005 Number Number Administration 23 20
4. FIXED ASSET INVESTMENTS Fixed asset investments comprise investments in subsidiary undertakings, as follows: 2006 2005 £000’s £000’s Cost: Beginning of year 283,999 198,668 Additions 85,000 149,692 Disposals (15,340) (64,361) End of year 353,659 283,999
Provisions at the beginning and end of year (27) (27)
Net book value, beginning of year 283,972 198,641 Net book value, end of year 353,632 283,972 On 6 December 2006, the Company acquired a further 850,000,000 ordinary shares of 10p each at par in a subsidiary company, SIG Trading Limited, for £85.000m. On 20 November 2006, the Company disposed of its USA business. The total investment disposed of amounted to £15.311m. Further information on the disposal of the USA business is detailed in Note 28 of the Group Accounts on page 94. The remaining disposal of £0.029m relates to monies received from vendors relating to prior year investments. Details of the Company’s principal trading subsidiaries are shown on page 105.
100 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 47 05/04/2007 11:01:08 ACCOUNTS
05/04/2007 11:01:08 – – – – 8 % 101 73 32 49 rate* fixed Total 2005 2005 2005 2005 £000’s £000’s £000’s £000’s 32,059 interest
3,418 322,003 880 12,663 95,000 8,367 148,089 70,659 28,376 68,524 167,559 317,061 644
2006 – – – 8 40 26 61 22 568 2005 2006 2006 2006 £000’s £000’s £000’s £000’s £000’s 3,079 1,668 9,986 2,549 49,817 75,842 37,659 34,970 325,524 135,706 193,043 265,672 317,660
25,566 45,093 7.1% 7.3% 70,659 7.2%
– 6 % 33 62 228 29 290 188 217 62 236 35 298 27 214 249 rate* fixed 2006 £000’s interest Annual Report and Accounts plc Annual Report SIG
buildings machinery land and Plant and
Freehold
2006 £000’s 22,483 40,258 25,550 7.1% 7.3% 5.9% 104,752 193,043 6.0% 6.4%
Derivative financial instruments
Repayable in 2008 placement Private notes 8. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR 7. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Bank overdrafts Amounts owed by subsidiary undertakings Beginning of year End of year Net book value, beginning of year Net book value, end of year 6. DEBTORS Cost: Beginning of year End of year Depreciation: 5. TANGIBLE FIXED 5. ASSETS TANGIBLE The movement in the year was as follows:
Repayable Repayable in 2011 Repayable in 2013 * Before applying associated derivative financial instruments. All Group derivative financial instruments disclosed in Note 18 on pages 82 to 84 have been entered into by the Company and therefore disclosures have not been repeated within this Note. Repayable Repayable in 2016 Derivative financial instruments and Prepayments accrued income Of the total amount owed to the Company by subsidiary undertakings, £266.132m (2005: £314.779m) is due after more than one year. Bank loans Amounts owed to subsidiary undertakings Accruals and deferred income All the Company’s bank loans and overdrafts are unsecured. Derivative financial instruments Amounts owed to subsidiary undertakings Details of the private placement notes are as follows: Corporation tax recoverable Deferred tax assets (Note 9) Additions Charge for year _1_SIG_ar06_back.indd 48 NOTES TO THE ACCOUNTS CONTINUED
9. DEFERRED TAX 2006 2005 £000’s £000’s Deferred tax assets 3,079 3,418
Deferred tax assets recognised by the Company can be catagorised as follows: 2006 2005 £000’s £000’s Deferred tax analysis: Depreciation in excess of capital allowances 12 11 Short term timing differences 3,067 3,407 Deferred tax asset 3,079 3,418
The movement during the year in the deferred tax asset was as follows: Beginning of year 3,418 – IFRS transitional adjustment at 1 January 2005 – 3,407 Reclassified from prepayments – 183 Charge for the year (339) (172) End of year 3,079 3,418 Given the current profitability of the Company, the Directors consider that recognition of the deferred tax asset above is appropriate.
10. CAPITAL AND RESERVES 2006 2005 £000’s £000’s Called up share capital 12,310 12,189 Share premium account 19,636 17,883 Merger reserve 21,655 21,655 Capital redemption reserve 347 347 Special reserve 130,365 130,365 Share option reserve 1,786 1,375 Exchange reserve (214) (214) Profit and loss account 99,530 107,625 Total reserves 285,415 291,225
The movement in reserves during the year was as follows: Share Share Called up premium option Retained share capital account reserve profits £000’s £000’s £000’s £000’s Beginning of year 12,189 17,883 1,375 107,625 Proceeds on allotments 121 1,753 – – Credit to share option reserve – – 1,089 – Exercise of share options – – (678) 678 Fair value movement on cash flow hedges – – – 3,024 Profit for the period – – – 9,922 Dividends – – – (21,719) End of year 12,310 19,636 1,786 99,530 There was no movement in the merger reserve, capital redemption reserve, special reserve and exchange reserve in the period. Details of the Company’s share capital can be found in Note 22 of the Group Accounts on page 86.
11. GUARANTEES AND OTHER FINANCIAL COMMITMENTS a) Guarantees The Company has cross guaranteed overdrafts of subsidiary undertakings amounting to £11.663m (2005: £18.550m). b) Contingent liabilities As at the balance sheet date, the Company had outstanding obligations under standby letters of credit of up to £7.045m (2005: £5.445m). These standby letters of credit, issued by The Royal Bank of Scotland plc, are in respect of the Group’s insurance arrangements. In addition, the remaining 6.5% share in the equity of LS Group Limited is to be purchased for a variable consideration dependent upon its future profit performance. The consideration payable varies from a minimum of £1.7m to maximum of £5.2m. At the balance sheet date, it is not possible to accurately determine the likely consideration payable as it is inherently uncertain.
102 SIG plc Annual Report and Accounts 2006
_1_SIG_ar06_back.indd 49 05/04/2007 11:01:08 ACCOUNTS 05/04/2007 11:01:08 103 2006 Annual Report and Accounts plc Annual Report SIG of the state of the Company’s affairs as at 31 December 2006; the Parent Company the financial Parent statements have been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors’ Report is consistent with Company the financial Parent statements. the Parent Company the financial Parent statements give a true and in fair accordance view, with United Kingdom Generally Accepted Accounting Practice, DELOITTE & DELOITTE TOUCHE LLP Chartered Accountants and Registered Auditors Leeds 13 March 2007 OPINION In our opinion: BASIS OF AUDIT OPINION conducted our We audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Board. Practices An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in Company the financial Parent statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of Company the financial Parent statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. planned and We performed our audit so as to obtain all fraud by the information caused and explanations whether which we considered necessary misstatement, in order to material provide from us free with are statements financial Company Parent the that assurance reasonable give to evidence sufficient or other In forming irregularity our or opinion error. we also evaluated the overall adequacy of the presentation of information in Company the Parent financial statements. The Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and Company the financial Parent statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting are Practice) set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit Company the financial Parent statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). report to We you our opinion as to whether Company the financial Parent statements give a true and fair view and whether Company the financial Parent statements have been properly prepared in accordance with the Companies Act also 1985. report We to you whether in our opinion the Directors’ Report is consistent with Company the financial Parent statements. In addition we report to you in if, our opinion, the Company has not kept proper accounting records, if we have not received all the information audited the with consistent is it and explanations we whether require for our audit, or if consider information specified and by law regarding Directors’ remuneration section and other transactions is not disclosed. contents the in described as Report Annual the in contained information other the read We Company financial consider statements. Parent the We implications for our report if we become aware Report. of any Annual apparent the misstatements or outside material information further any to extend not do responsibilities Our statements. financial Company Parent the with inconsistencies RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS We have audited We Company the financial Parent statements of SIG plc for the year ended 31 December 2006 which comprise the Balance Sheet, the Statement of Significant and Accounting the Policies related Notes 1 to 11. Company These financial Parent statements have been prepared under the accounting policies set out therein. have reported We separately on the Group financial statements of SIG plc for the year ended 31 December 2006 and on the information in the Directors’ Remuneration Report that is described as having been audited. been has work audit Our 1985. Act Companies the of 235 section with accordance in a as body, members, Company’s the to solely made is report This 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 the fullest extent permitted we by do purpose. law, not To accept or assume responsibility to anyone other than the Company and the Company’s members for as our a audit body, work, for this report, or for the opinions we have formed. TO THE MEMBERS OF SIG PLC INDEPENDENT AUDITORS’ REPORT AUDITORS’ INDEPENDENT _1_SIG_ar06_back.indd 50 PRINCIPAL ADDRESSES
Head Office SIG plc Hillsborough Works, Langsett Road, Sheffield S6 2LW
United Kingdom SIG Trading Limited, trading as:
Sheffield Insulations Komfort Workspace CPD Distribution Whittle Way, Crawley, Hillsborough Works, Langsett Road, West Sussex RH10 2RW Sheffield S6 2LW SIG Roofing Supplies Safety Distribution Roofline Building Plastics Unit 1, Britannia Park, Specialist Construction Products Trident Drive, Wednesbury, Harding Way, St. Ives, West Midlands WS10 7XB Cambridge PE7 4YJ
Miller Pattison Limited Leaderflush + Shapland Limited Unit 3 Park Square, Thorncliffe Park, Milnay Road, Langley Mill, Chapeltown, Sheffield S35 2PH Nottingham NG16 4AZ
Ireland SIG Building Products Limited Insulation Distributors Limited Mount Tallant Ave, Terenure, Unit 15, Parkwest Industrial Estate, Dublin 6W, Ireland Nangor Road, Dublin 12, Ireland
Mainland Europe WeGo Systembaustoffe GmbH & Co.oHG Melle Dachbaustoffe GmbH Société de l’Ouest des Produits Isolants SA Maybachstrasse 14, D–63456 Hanau-Steinheim, An der unteren Sose 36, 37520 Osterode, Zone Industrielle B.P.15, 27460 Alizay, Germany Germany France WKT Polska Sp. zo.o. Wodan Sp. zo.o./WIG Sp. zo.o. SIG Nederland B.V. ul. Wadowicka 8W/14, 30–415 Krakow, ul. Bartycka 26, 00-716 Warszawa, Bedrijfsweg 15, 5061 JX Oisterwijk, Poland Poland The Netherlands
104 SIG plc Annual Report and Accounts 2006
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105
PRODUCTS SPECIALIST AND SAFETY CONSTRUCTION
INTERIORS Annual Report and Accounts 2006 SIG plc Annual Report COMMERCIAL
ROOFING
INSULATION which are registered in England and Wales.
Shapland Limited + PRINCIPAL TRADING SUBSIDIARIES TRADING PRINCIPAL
United Kingdom Limited SIG Trading Limited Miller Pattison Leaderflush + Shapland Limited Ireland SIG Building Limited Products Insulation Distributors Limited Germany Systembaustoffe GmbH WeGo & Co.oHG Melle Dachbaustoffe GmbH France Société de l’Ouest des Isolants Produits SA The Netherlands SIG Nederland B.V. Poland Sp. zo.o. Polska WKT Sp. zo.o./WIG Wodan Sp. zo.o. All of the above companies are registered in the country referred to above, Limited, with Limited Miller the and Pattison exception of SIG Trading Leaderflush SIG European Investments Limited (formerly Insulations Fibreglass Limited) and SIG European Holdings Limited and (formerly Limited) Forward Past together hold the beneficial ownership of SIG Building Systembaustoffe Limited, Products GmbH WeGo & Co.oHG, Melle Dachbaustoffe GmbH, Sp. Société de Sp. zo.o., Polska l’Ouest WKT zo.o. Wodan des and Isolants Produits WIG SA, Sp. SIG zo.o. Nederland B.V., On 20 November 2006, SIG disposed of SIG USA, Inc. The Group owns 80% of the ordinary share capital of Limited. Insulation Distributors Limited, via SIG Trading The Group owns 93.5% of the ordinary share capital of LS Group Limited. This company owns the entire share capital of Leaderflush + Shapland Limited, via Leaderflush + Shapland Holdings Limited. At 31 December 2006 the Company’s principal all of owned are which wholly subsidiaries, trading except where stated, were as follows:
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Annual Report and Accounts 2006 SIG plc
Annual Report and Accounts 2006
SIG plc: Hillsborough Works, Langsett Road, Sheffield S6 2LW, United Kingdom tel: +44 (0) 114 285 6300 fax: +44 (0) 114 285 6385 e-mail: [email protected] web: www.sigplc.co.uk
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