Financial Review
DISCONTINUED OPERATIONS
Discontinued operations primarily represent the UK linen and workwear business plus the UK, Canadian, Belgian and US Manned Guarding businesses. Trading from these operations, together with a small adjustment for prior year disposals, produced losses after taxation of £3.1 million in the year. These were offset by profits on disposal of £95.9 million, leaving profit for the year from discontinued operations at £92.8 million (2005: £166.4 million).
UK linen and workwear was closed on 30 April 2006. The discontinued business incurred a trading loss of £3.8 million in the year net of profit on sale of surplus properties. The 2006 loss was reduced by some £3 million as a result of the reduced depreciation following the asset impairment charge recognised in 2005.
The sales of the four Manned Guarding businesses were completed during the year for a gross consideration of £150.0 million. These businesses made operating losses of £7.2 million up to the dates of disposal and produced a profit on disposal of £95.9 million.
INTEREST
The group’s net interest charge for 2006 was £52.0 million compared with £54.9 million in 2005. Net interest on bank and bond debt and finance leases was £50.2 million compared with £52.0 million for the prior year. Average net debt in 2006 was £149 million lower than 2005 reflecting the proceeds from the sale of Style Conferences at the end of 2005 and the sale of Manned Guarding in the first half of 2006, although these proceeds were offset by the £200 million special contribution into the pension fund in December 2005. The purchase of Target Express for £213 million in November 2006 had only a limited impact on the interest charge for the year, although it will have a more significant effect in 2007. The effect of lower average net debt was offset by an increase in average interest rates as a result of the ten year sterling bond issue in March 2006 and the general upward trend in interest rates over the course of the year. This latter effect was, however, mitigated by the interest rate hedges that were in place during the year but the cost of debt is expected to rise in 2007. The balance of the interest charge reflects the notional net interest on pension scheme assets and liabilities and various mark-to-market adjustments on treasury transactions. Further details are given in notes 6 and 7 to the income statement.
PROFIT BEFORE TAX
After interest of £52.0 million and one-off items totalling £23.6 million (2005: £30.5 million), pre-tax profit reduced by £18.3 million to £199.1 million.
TAX
The income statement tax charge for the year was £44.8 million (2005: £59.4 million) representing an effective tax rate of 22.5% compared with 27.3% for 2005. However, the reported tax charge for both years was affected by the release of tax provisions in respect of previous periods which are no longer required following agreement of the relevant liabilities with fiscal authorities. The underlying effective tax rate, before such provision releases, was 29.9% in 2006 compared with 32.7% in 2005, the decrease mainly due to a reduction in disallowable costs.
The weighted headline tax rates appropriate to the countries in which the group operated was 30.7% for 2006 compared with 30.9% in 2005. It exceeds the UK rate of 30% as substantial profits are earned in France, Belgium and Germany where tax rates range from 34% to 38%.
EARNINGS PER SHARE AND DIVIDENDS
Profit for the year attributable to equity holders was £245.1 million (2005: £321.5 million). At 8.43 pence, basic earnings per share for continuing businesses were 2% lower than 2005. Basic earnings per share for total operations were down 24% on 2005 at 13.57 pence per share.
An interim dividend of 2.13 pence per share was paid on 27 October 2006. A final dividend of 5.25 pence per share will be proposed at the Annual General Meeting in May 2007, maintaining the full year dividend at 7.38 pence per share. This is in line with the statement made in the 2005 preliminary results announcement and subsequently that a cautious approach would continue to be taken to dividend growth until it was clear that the recovery in the businesses was well established.
CASH FLOW
Operating cash flow for the year of £211.0 million (2005: £287.0 million) was £76.0 million below last year with operating profit before depreciation, amortisation, impairment charges and non-cash items accounting for £95.2 million of the reduction. Working capital outflows accounted for another £11.0 million with a large part of this due to the higher level of business in the last quarter. Capex was £30.2 million below last year, reflecting the disposal of the Manned Guarding businesses earlier in the year, the relatively capital intensive Style Conferences business sold in the fourth quarter of 2005 and the disposal of surplus properties following the closure of the UK linen and workwear business.
Lower tax cash flows, as a result of lower profits and pension payments, partly compensated for the lower operating cash flows to leave free cash flow £31.8 million below last year at £128.6 million. Net debt increased by £247.9 million over the year reflecting the relatively high acquisition spend primarily for Target Express, JC Ehrlich, the Asia Pacific division and the acquisition of City Link franchises.
