UK: Surveying OFRs And Narrative Reporting In Annual Reports - Part 3

Last Updated: 8 November 2005
Most Read Contributor in UK, August 2017
This article is part of a series: Click Surveying OFRs And Narrative Reporting In Annual Reports - Part 2 for the previous article.

Article by Martyn Jones, Sarah Kershaw, Ian Krieger, Alice Patrick, Kirsty Searles, Isobel Sharp and David Viles


This illustrative Operating and Financial Review was developed to provide good examples of the typical disclosures which will be required of a UK quoted company which is complying with Reporting Standard 1.

The Operating and Financial Review is based on a hypothetical company which is the parent of a group of companies. The wording used in this Operating and Financial Review is purely illustrative and in practice will need to be modified to reflect the circumstances of a Group and its business. Similarly, the structure of the illustrative OFR set out below will not necessarily be appropriate for all companies and therefore the structure of other OFRs is likely to be different. In places, the illustrative OFR utilises examples set out in the illustrative guidance to RS 1. It will probably also contain internal consistencies.

Operating and Financial Review

To the members of Delto plc
[Insert suitable wording to the effect that the OFR is only prepared to fulfil a statutory obligation to provide information to shareholders and that the OFR should not be relied on by any other party or for any other purpose.]

[Insert suitable wording to clarify that the OFR contains certain forward-looking statements and that (a) these statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report and that (b) these statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward looking information.]

This Operating and Financial Review has been prepared in accordance with the ASBs Reporting Standard 1: Operating and Financial Review. [Add disclosures of any departures from the Standard]. This Operating and Financial Review has been prepared for the Group as a whole and therefore gives greater emphasis to those matters which are significant to Delto plc and its subsidiary undertakings when viewed as a whole.

The Operating and Financial Review discusses the following areas:

  • Long term strategy and business objectives
  • Results for 2006 financial year
  • Future outlook
  • Operations
  • Risks and uncertainties
  • Resources
  • Financial review

Long term strategy and business objectives
Delto is a manufacturer of products used in the X and X industries for X. The Group operates in a total of over X countries in three main geographical markets: Europe, the Americas and Asia Pacific. Its core products are X, X and X. A detailed analysis of current operations is set out in the Operations section below.

There are three key elements to Deltos strategy for accelerating growth and creating real shareholder value. They are:

  • achievement of leading positions in markets capable of long-term growth;
  • targeted investment in new product development, innovation and marketing to support strong organic growth and profitability; and
  • focused acquisitions which meet strict rate of return criteria.

We implement and monitor our performance against the strategy by having the following strategic objectives:

  • to attain an overall return on capital employed for the Group of X% per year;
  • to achieve a total market share across our markets of X% by 2009;
  • to maintain a gross margin of X%; and
  • to earn X% of revenue from new products each year.

These financial objectives are supported by non-financial objectives which are:

  • to minimise waste by reducing the amount of packaging used with our products to below the levels of 2000, being Xkg packaging waste per X sales; and
  • to reduce lost time injury frequency rate (LTIFR) by X% per year.

We have made significant progress in the year on the three key elements of our strategy. We have gained market share in X of our X market. We have invested Xm (2005: Xm) in our core products and have launched a number of new products in the year including X and X. Further new products are nearing completion and are due to be launched in the next year. We also acquired Company X in the USA to grow our market strength and have restructured this part of our business following the acquisition to consolidate our positions in this territory.

Our progress on our strategic objectives is monitored by the Board of Directors by reference to six key performance indicators applied on a Group wide basis. These same indicators are used by in executive management appraisal on a global and regional basis. Performance in 2006 against these targets is set out in the table below, together with the prior year performance data. No changes have been made to the source of data or calculation methods used in the year.

Key performance indicatorsTarget 2006 2005
Return on capital employed(1) X% X% X%
Market share(2)X%* X% X%
Gross margin(3)X% X% X%
Percentage of revenue from new products(4) X% X% X%
Packaging waste rate(5) X% X% X%
Lost time injury frequency rate (injuries per X hours worked) (6) X% X% X%

(1)ROCE = Operating result as a percentage of Capital employed
Operating result as per financial statements.
Capital employed being Intangible assets plus property, plant and equipment plus investments plus trade accounts receivable less noninterest bearing provisions and liabilities.
(2)Market share = Revenue as a percentage of Market revenues
Revenue as per consolidated income statement in financial statements.
No external verifiable source for market share exists. Accordingly data for market revenues are internal estimates based on information available in each market.
* - target is to achieve this share by 2009.
(3)Gross Margin = Gross Profit as a percentage of Revenue
Gross profit and revenue both as per consolidated income statement in financial statements.
(4)% Revenue from new products = Revenue from new products as a percentage of Revenue
Revenue derived from new products is per internal company data.
Revenue as per consolidated income statement in financial statements.
(5)Packaging waste rate = Total packaging in kg x X/Revenue
Total packaging in kg as per internal company data.
Revenue as per consolidated income statement in financial statements.
(6)Lost time injury frequency rate (LTIFR) = Number of injuries x X hours/total hours worked

Source of underlying data: Injury and hours data per returns from 100% owned facilities only.

The results in the table show that we met our targets for three of our six objectives. One objective (market share) is to be achieved by 2009 so is in progress and the two objectives for which we did not meet our targets were gross margin and packaging waste rate. The directors believe that, having achieved a market share of X% in 2006, the group is still well placed to achieve the 2009 target for market share. Each of our financial objectives is discussed in the Results section below and the non-financial objectives are discussed in the Risks and Uncertainties (Packaging waste rate) and Resources (LTIFR) sections below. Whilst other performance measures are discussed in this Review, it is the above six measures that the directors utilise and apply as the Groups KPIs.

Results for 2006 financial year

A summary of key financial results is set out in the table below and discussed in this section. A detailed review of each divisions operations is included in Operations on page X.

Key Financials Revenue Gross Margin % Underlying Operating Profit*
2006 2005 2006 2005 2006 2005
m m m m m m
Europe X X X% X% X X
Americas X X X% X% (X) X
Asia Pacific X X X% X% X X
Group Total X X X% X% X X

*Underlying Operating Profit is profit before interest, tax and one-off items and is reconciled to the financial statements as follows.

2006 2005
m m
Profit from operations per financial statements X X
Exchange differences X (X)
Goodwill impairment X X
Underlying operating profit X X

Delto made further progress towards its stated objectives in 2006. In last years OFR we predicted that the performance of the Group (in terms of both profit and market share) would increase due to the launch of new products and this has been borne out in the year. Total group revenue was up X% on 2005 to Xm. Despite a decline in gross margin percentage in 2006 by X percentage points to X%, underlying operating profit before interest, tax and one-off items increased by Xm to Xm.

Eliminating the effect of currency movements, revenue growth was strong. The Group sees market share as a key performance indicator as it allows us to assess how the company is growing in relation to its competitors. We stated in our previous annual report that the Group aims to achieve a market share of X% within 4 years (i.e. by 2009). During the year we achieved a market share of X% which was up from X% in 2005. We are therefore making progress in this area although the growth in 2006 was not as high as previously expected due to the fall in sales of product X in the year, price pressures in Europe and to the problems experienced in the American division. There are a number of new product launches scheduled in 2007 and therefore the directors expect that our market share will increase and that the target of X% within four years is still achievable.

The Group launched X new products in 2006 which contributed revenue of Xm.

Percentage of revenue from new products
To continue to grow in the fast paced market, the Group needs to ensure that it is continually renewing its product portfolio. We measure our success in this area by a KPI that looks at the percentage of revenue generated by new products. Percentage of revenue from new products = revenue from those products launched over the past two years over total revenue for the year.

Our target was to achieve X% of revenue from new products per annum. We have achieved this target for the first time in 2006 with a result of X%.

Applying a constant currency basis, Europe and Asia Pacific achieved a growth in profit of X% and X% respectively. The growth in Europe was partly attributable to the acquisition of Company X in France early in the year which had an immediate effect on our market share. Growth of X% in Asia Pacific was almost entirely organic growth with only X% of this increase being attributable to acquisitions. A small loss was made in Americas due to weaker sales, continuing delays in the integration of several small acquisitions made in 2004/5 and to problems in the management of the US offices in Boston.

Cash levels were down by Xm from Xm at the end of 2005 to Xm at the end of the current financial year. Although profits increased in 2006, cash inflows from operating activities were offset by restructuring costs and higher interest payments on debt that was drawn down to fund further acquisitions in the year. Net interest payable was Xm (2005: Xm).

Return on Capital Employed
The Groups key measure of the effective use of resources is Return on Capital Employed (ROCE). ROCE demonstrates the effectiveness of our managers in utilising the assets of the business to deliver profits to provide a return to our shareholders. ROCE is calculated as the operating result [explain which figure and reconcile to FS] divided by total capital employed (invested) in the business and is expressed as a percentage.

The Group has a target ROCE of X% per year. We again met this target in 2006, achieving a ROCE of X% which represents a small increase on the 2005 figure of X%. This improvement was largely due to the strong performance in the Asia Pacific market which drove Group profits up by Xm.

Future outlook
While the external commercial environment is expected to remain competitive in 2007, we have good momentum across both Europe and Asia Pacific and we believe that we have now taken the necessary actions, and put in place processes, to implement the restructuring of the American business.

In Europe, we expect continued price pressure from our competitors in the more developed markets. This will push gross margins downwards, a trend that is likely to continue for the next two to three years until the current consolidation activity in the market slows. We anticipate that, despite our efficient manufacturing process, our margins in Europe in 2007 will decline. In unit terms, we expect continued sales growth for the year as a whole and we are now aiming to launch new product X in this market in the second half of the year. This launch was delayed by the regulatory approval process which took longer than anticipated due to the testing of new product features. The Group acquired X% of Company X in the Czech Republic after year end, representing only our second investment in Eastern Europe. We view the Eastern European markets as critical to maintaining our competitive strength across Europe and we expect to make further acquisitions in these markets and to achieve high growth rates as a result over the coming years.

In Asia Pacific, we expect our portfolio to perform well but sustaining the outstanding growth rates we saw in 2006 will be challenging. We have not identified further acquisition targets at this stage but will continue to watch closely the emerging players in our existing and other related markets.

We expect that the benefits of restructuring our business in the Americas may take one to two years to be realised and we therefore anticipate that like-for-like sales in this division may decline further in the first half of 2007 before recovering to 2006 levels for the second half of the year. Gross margins should benefit from the faster and more efficient manufacturing process at our new facility in Texas and costs across the American business should be lower in 2007 following the restructuring of the business including the consolidation of our east coast operations into one head office (rather than two offices previously) for that division. We anticipate that this business will return to profitability in the second half of 2007 so that it should break even for the full year.

We believe that the Group has an advantage in terms of its business model within the sector as we are positioned in the more attractive, growing product markets and a significant portion of our unique product portfolio is sold through higher margin distribution channels. We have a strong management team committed to winning in the market place and have clear goals and priorities which focus the business on delivering improvements in growth and efficiency. Our efficiency programmes implemented across the business in 2005 are now providing the necessary additional funds to enable us to invest in our commercial programmes and capabilities so that we can better exploit the full potential of the portfolio we now have. This should enable us to deliver superior business performance which will in turn drive shareholder returns.

Delto manufactures innovative, high quality products for the X and X industries. These products are used by our customers in a variety of systems which perform functions such as X and X. Our product portfolio includes lines such as the Product X range and the Product X range and our key brands include X, X and X. We are a global player in our market and we are in the top 5 players in X of the X countries in which we operate. We distribute our products via our cross border sales offices and also through distributor agents in some markets.

Competitive environment

Many of the specific markets in which Delto operates experience a high degree of competition. Globally, Deltos key competitors are X, X, and X. Over the years we have developed a creative, innovative, competitive culture and a reputation for advanced functionality and superior product quality. However, we continue to experience price pressure from our competitors in the more developed markets which impacts our products at the top end of the market range. There has been much consolidation occurring in the newer markets as the key players seek to gain market share by acquiring smaller, local operators.

Regulatory environment
The key regulations which affect Delto and its products are the X regulations and the X regulations. The proposed European Directive on X means that we anticipate further regulatory requirements to be enforced in our EU markets although the Directive is not due to be implemented until 2008 at the earliest. Delto monitors developments in the regulatory environment to stay abreast of any changes and acts in a timely and efficient manner to comply and to avoid infringing law or regulation and incurring fines as a result. There are no changes expected in the coming year which would influence Deltos ability to continue to supply its products worldwide.

Macro-economic environment
In the X, our biggest single market in both revenue and profit terms, the economic environment over the last year has been relatively stable, with a high level of growth. GDP growth is estimated to have been X% in 2006, the highest for four years. However, this is forecast to drop back slightly in 2006 and 2007. In the rest of Europe, growth has been lower at an average of X% for 2006 and this rate of growth is not expected to change significantly in 2007. In the Americas, the economy strengthened during 2006 after three years of poor performance. The Asia Pacific market continues to grow at a fast pace driven largely by growth in China and India.

Review by division
We are organised around three regional units supported by the group global functions. Each region has an operating director who is responsible for meeting the key targets set for the region.

The performance of each region in terms of 2006 revenue growth and contribution to Group revenues is shown in the charts below.

Europe is our strongest market contributing over X% of our total Group revenues for 2006 (2005: X%). We are now present in X markets in Europe having added Hungary and the Czech Republic to our territories since the end of the 2005 financial year. Our key brands in Europe are X and X and our main products are X and X. Our product X is the fastest growing new launch in our portfolio having contributed Xm to revenue since its launch in the first quarter of 2006. We also continue to grow the share of this market achieved by Products X and X. However, the replacement of Product X globally by its updated version (which adds the X functionality) was delayed when the regulator X imposed further testing requirements on the new version. This impacted our European business with sales of this line down X% from 2005 to Xm. The new launch is now expected to occur in the first quarter of 2007.

Our position within the largest six markets in Europe within industry X together with our 2006 market share of revenues is set out below.

Market Market position Market share (%)
Industry X Industry X
UK 1 X%
France 2 X%
Spain 4 X%
Germany 2 X%
Italy 5 X%
Holland 3 X%

Our businesses in the European sector achieved record revenues of Xm during 2006 despite an increasingly competitive environment dominated by multinational players. Underlying profits were also slightly ahead at Xm.

Revenue growth was largely a result of an increase in unit sales and of the major acquisition made in 2005 of Company X in France which moved us from 4th in the market to 2nd and which contributed Xm to revenues. We achieved double-digit growth of X% in France. There has been significant price pressure in the more developed markets (UK, France, Germany and Spain) resulting in little growth in like-for-like sales in these markets and a drop in gross margin from X% in 2005 to X% in the current year. Despite such market pressures, we maintained our market share in most markets by aggressive marketing of existing products and through the launch of Product X.

We will continue to experience pressure on margins but expect that we will maintain if not grow market share through further acquisitions, largely in Eastern Europe.

Asia Pacific
The Asia Pacific sector is our newest but fastest growing division and we now have operations in Australia, India, Japan, China and Malaysia. We are the market leader in Australia and India and rank 3rd and 4th in Malaysia and Japan respectively. We acquired Company X in China 2005 in order to sell Product X and this gives us an important foothold from which we plan to launch products X and X in the next two years.

The Asia Pacific sector reported underlying operating profit of X million on revenue of X million.

Overall, 2006 was an excellent year for the Asia Pacific business, with very strong growth starting in the second quarter and continuing throughout the second half. Like-for-like sales growth of X% was driven by Product X and Product X where sales were X% and X% ahead respectively. We restructured the production facilities in our Chinese business, which was acquired in 2005. These facilities now meet our rigorous internal standards for efficiency and for environmental and social impact. We expect this to benefit gross and operating margins from 2007.

Reported operating profit for the Asia Pacific business was up X% on 2005 to Xm. Exchange rate movements reduced revenues by X% to the reported figures of Xm and similarly underlying operating profit was reduced by X% to X million as reported in the financial statements.

The Groups operations in the Americas are based in San Francisco (sales office), Boston (sales and back office functions) and Texas (manufacturing facility). The Board believed that the two Boston offices (one of which was acquired with Company X in 2004) were not run efficiently and that the potential synergies identified as critical to the success of various acquisitions made since 2003 had not been achieved. The directors therefore appointed a new Operations Director for the American division and the two Boston offices have now been consolidated into one head office at a cost of Xm.

We purchased a new facility in Texas during the financial year at a cost of Xm and fitted it with the latest technology for manufacture of Products X, X and X at a cost of Xm. Where it did not compromise the quality of the new factory lines, equipment from the old facility was refurbished and transferred to the new factory. This upgrade of facilities was vital to recover our product quality and reliability and the new facility is also closer to the airports that are key to our shipping channel. We made a small loss of Xm on disposal of the old facility.

The Americas branch of the business had a poor year with revenue down by X% to Xm for the year. Our market share fell from X% in 2005 to X% for 2006. This, together with increased operating costs contributed to a divisional loss of Xm being made for the first time (2005: profit of Xm). Operating costs were up by Xm of which Xm is attributable to restructuring of the east coast business including the integration of several small acquisitions from which we expect to achieve annual cost synergies going forward of Xm.

The acquisition of Company X in America last year helped us increase our market strength in the supply of products in the X market where Company X was a market leader. However, gross margins were X% which is down on 2005 (X%). The replacement of our manufacturing equipment in Texas will benefit margins next year. Company X was acquired in November 2006 and therefore the full impact of the acquisition will be seen in 2007.

With the ongoing effects of new management, the benefits of the restructuring now implemented and the full year effect of Company Xs results, we expect a return to profitability in the second half of 2007.

Risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Groups long term performance.

Competitor risk
The Group operates in a highly competitive market with significant product innovations. We are subject to the threat of our competitors launching new products in our markets (including the updating of their existing product lines) before we make corresponding updates and developments to our own range. This could render our products out-of-date and could result in rapid loss of market share. To reduce this risk, we undertake market research to ensure that our own products continue to meet the needs of our customers and we invest heavily in new product development to ensure that we have products at various stages of the product life cycle.

Competitor risk also manifests itself in price pressures which are usually experienced in the more developed markets. This results not only in downward pressure on our gross margins but also in the risk that our products are not considered to represent value-for-money. Our sales teams therefore monitor market prices on an ongoing basis and we have delegated full responsibility for pricing to local management for orders less than a total value of Xm. Our bonus scheme for sales employees includes an element based on gross margin percentage achieved as well as on sales volume.

Finally, in certain markets, there is a risk that our competitors beat us to key strategic acquisition targets which results in high lost opportunity costs and reduction in market share. To mitigate this risk, we have a dedicated mergers and acquisitions team which assists local management in identifying, negotiating and completing acquisitions according to strict returns criteria. In certain markets (e.g. X) we only consider deals where we can acquire overall control because we believe that in most cases, due to cultural issues, joint control is not workable.

Commercial relationships
The Group benefits from close commercial relationships with a number of key customers and suppliers. Damage to or loss of any of these relationships could have a direct and detrimental effect on the Groups results and, as some of these relationships span several markets, the impact of losing one relationship can be material to the Group as a whole. To manage this risk the Group hosts local supplier and customer reviews to ensure that we continue to meet their respective needs and members of the Board meet with individual management from our strategic partners on at least an annual basis.

The Groups manufacturing facilities could be disrupted for reasons beyond the Groups control such as fire, work force actions or other issues. As such the Group prepares detailed recovery plans for the most likely situations so that at all our facilities business continuity procedures are in place and staff are appropriately trained to implement them should these situations occur.

Due to the rapid advancement in manufacturing technology, facilities can also become outdated affecting efficiency and product quality which in turn has a detrimental impact on cost of sales and profit margins. Our production management team keep the Board up-to-date on the availability of and need for new manufacturing technologies and this is an area in which the Group invests heavily.

Environmental risk
The manufacture of our products has a direct impact on the environment, especially in terms of the packaging used in both the raw materials entering our production lines and in the finished goods that we dispatch to customers. There is a risk that, if packaging levels increase or indeed remain at the current levels, we will breach government regulations which may lead to heavy penalties in terms of both cash fines and damage to the Groups reputation. Although the Group is not currently in breach of environmental standards, we have put in place a programme to monitor and reduce our known impact on the environment, particularly the packaging waste that results from our operations.

We are seeking to reduce our packaging waste rate (see Long term strategy and business objectives above) to the 2000 levels (Xkg per 1,000 sales) or below. This programme includes a requirement that each of our production facilities and each supplier of raw materials worth over Xm per annum completes an environmental return outlining the weight of packaging used, the extent to which they utilise recycled materials and the steps that they are taking to reduce the levels and environmental impact of packaging materials.

This policy has already resulted in a reduction in waste from Xkg per 1,000 sales in 2005 to Xkg in 2006 but we have not yet reached our target of 2000 levels. However the Group is committed to reducing this further in 2007 and beyond.

Foreign exchange and treasury policy
The Group has significant operations outside the UK and as such is exposed to movements in exchange rates. To protect cash flows against the high level of exchange rate risk, the Group enters into forward exchange contracts to hedge foreign exchange exposures arising on forecast receipts and payments. The Groups treasury policy is to keep X% of borrowing at fixed rates to provide long term protection against fluctuating interest rates.

The Groups risk management policies and procedures are also discussed in the Corporate Governance statement.

The Group has the following key resources which assist it in the pursuit of its key objectives:

  • patents over a number of its main products including X and X which account for X% of Group revenue;
  • employees who have extensive knowledge of the key markets and therefore can assist in research and development of new products; and
  • strong corporate reputation for quality products which is based upon our advanced manufacturing technology.

Product patents
The Group maintains a significant number of patents to support its businesses and to protect its competitive advantage. Much of the intellectual property and product innovation developed by our research and development function results in new patents being secured. We monitor market developments closely to identify any potential violations of our patents and take appropriate legal action where considered necessary.

Our people
We have consistently sought to recruit and retain the best employees in our market and this has contributed to our success in developing, manufacturing and selling our products across the globe. To achieve our long term strategies we need to continue to implement this recruitment policy and therefore, in addition to using conventional recruitment channels such as the press and search agencies, our business have responded to the significant importance of the internet in marketing positions. Each division has its own approach to identifying and attracting the skills and expertise it needs, in line with both its own and the Groups strategy and requirements.

The Group has a policy of equal opportunities which applies in relation to recruitment of all new employees and to the management of existing personnel. We offer all of our staff training relevant to their roles and we believe that this has contributed to an increase in employee motivation and satisfaction as evidence by an overall improvement in the Groups employee retention rate in 2006 and recent years (an increase from X% in 2002 to X% in 2006).

The Group also encourages its employees to give something back to their local community. Our policy in this area is that all employees can have up to X days per year to invest in community projects. As such over X employees took part in local community projects in the year. We also operate a payroll giving in Europe and America and are seeking to introduce a similar scheme in Asia in 2007.

As Delto is involved in the manufacture of our wide product range, and the industry involves large and complex production equipment, safety is a core value of the Group and is a major priority for management. As such, one of our KPIs is the ''lost time injury frequency rate'' (LTIFR the number of lost-time injuries per million hours worked) which we monitor across all of our businesses. We aim to reduce our LTIFR by 10% per annum through careful selection of the suppliers of our manufacturing equipment and ongoing training of all our production employees. In addition, our Production Managers in each facility are assessed partly on the LTIFR at their facility. As a Group, we achieved our target reduction in 2006 with LTIFR falling by 16% from 10 injuries/million hours worked in 2005 to 8.4 injuries/million hours worked in 2006.

Manufacturing technology
A key differentiator for our products is our manufacturing technology which not only maximises the efficiency of our production processes but also means that we have a reputation for high quality products with a relatively low level of product returns in the market. To reinforce this competitive advantage, in 2006 we refurbished our facilities in China and bought a new modern facility in Texas which has been custom fitted with the latest technology.

Financial review

Group revenue, as reported for the year, was Xm, up X% on 2005 (Xm) with growth achieved in Europe (X%) and Asia Pacific (X%) but a decline of X% in Americas. Excluding the net impact of foreign currency effects (-Xm) and acquisitions (+Xm), underlying revenue was higher at Xm representing like-for-like growth of X% on 2005 (Xm).

Of our four biggest contributing products (in revenue terms), Product X delivered X% comparable sales growth for the year, with Product X and Product X contributing growth of X% and X% respectively. However, Product Xs sales were X% below last year due to the delay in the launch of its replacement version following prolonged regulatory testing. This launch is now expected to occur in the first quarter of 2007.

Gross margin and underlying operating profit
Good comparable unit sales growth was impacted to an extent by price pressures so that overall, the gross margin declined to X% (2005: X%) with gross profit of Xm. Group operating profit for the year was Xm, X% ahead of 2005 (Xm). Underlying operating profit rose in both Europe (X%) and Asia Pacific (X%) but the Americas division made a small loss of Xm (2005: profit of Xm) as a result of operating costs increasing by Xm to Xm in the year.

Revenue, gross margins and underlying operating profit are discussed in more detail on a group and divisional basis in Results for 2006 financial year above.

The net interest cost for the Group for the year was up to Xm compared with Xm for 2005, due to higher average net debt levels resulting from the new debt drawn down in the year (see further Capital Structure below).

Profit before tax
Group profit before tax for the year was Xm, Xm ahead of 2005 Profit before tax.

Taxation was Xm for the year, Xm above last year reflecting the higher profit achieved. The effective tax rate for the Group reduced slightly to X% (2005: X%).

Earnings per share
Basic earnings per share for the year were Xp, compared with Xp in 2005. Diluted earnings per share were Xp compared with Xp for 2005.

Dividend and dividend policy
The Groups dividend policy is that dividends should represent about one third of net profit before one-off items including goodwill impairment. In line with this policy, the Board has recommended a final dividend of Xp, to bring the total dividend for 2006 to Xp (2005: Xp).

Research and development and capital expenditure
The Group invested Xm in the year on research and development and Xm on capital expenditure. There were two major parts of this expenditure. The first was further development of new products X and X. The second related to production with a new manufacturing facility purchased in Texas and a refurbishment of the facilities acquired last year in China to bring these up to our rigorous internal standards. This updating for our facilities should improve our product quality and reliability, and crucially our gross margins, in China and America.

Capital structure
The Group has net debt of Xm (2005: Xm). During the year additional loans of Xm were drawn down. The Group continues to be able to borrow at competitive rates and therefore currently deems this to be the most effective means of raising finance. Acquisitions have therefore been funded by debt financing of Xm in the year.

The Group expects that an additional Xm will be drawn down in 2006 to replace funds spent on the acquisition of Company X in France (see post balance sheet events below).

Cash flow
Net cash inflow from operating activities for 2006 was Xm, Xm below 2005. Higher trading profit for the Group was offset by higher cash outflows in support of the restructuring programme. Interest received and paid resulted in a net outflow of Xm which was Xm higher than 2005, due to additional interest payments on net debt which increased in the year. Investing activities for 2006 resulted in an outflow of Xm which was Xm higher than the corresponding outflow last year. This was due to higher spend on property, plant and equipment and to acquisitions expenditure of Xm, up from Xm last year. Net proceeds from disposals were Xm in 2006 compared with Xm in 2005.

Liquidity and investments
At 31 December 2006 the Group had at its disposal Xm of undrawn, committed borrowing facilities. These comprised Xm maturing in October 2006 and Xm maturing in May 2008. The Groups net debt position has changed over the course of a year, and in particular, short-term debt increased in the early part of the year to fund working capital requirements. These requirements arose principally from the seasonality of the business, which experiences increased sales during the summer months. At 31 December 2006, the Group had Xm of short-term borrowings outstanding.

Post balance sheet events
After the year end the Group purchased Company X in France. The deal was completed for a total cost of Xm and represents a major acquisition for the European division. This purchase will mean that the Group now have a X% share of the market for selling product X in France.

Change in accounting policies
During the year, the company adopted International Financial Reporting Standards for the first time. Full details of the adjustments on transition and of the related accounting policies were published in July 2005 and can be found at

Going Concern
[Insert going concern statement]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click Surveying OFRs And Narrative Reporting In Annual Reports - Part 2 for the previous article.
This article is part of a series: Click Surveying OFRs And Narrative Reporting In Annual Reports - Part 4 for the next article.
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Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.coms content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltds services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with no disclosure in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a users hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friends name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a users personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that users personal data provided to us. This can usually be done at the Your Profile page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.