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Chairman's Statement

Operational Review

Financial Review

Board of Directors
*

Overview

I am delighted to announce that the Group has had another record year with underlying profit before tax (before amortisation of acquired intangible assets of £2.2m and the valuation of derivative financial instruments of £2.39m) of £42.95m and importantly a record order book of £455m.
This underlines the financial strength of the Group and its long term prospects.
In a year of significant activity, including the acquisition of Fisher Engineering, this presents an excellent base for growth in the current year.

Revenue of £300.66 m and underlying profit before tax of £42.95m have increased 1.9% and 41.8% respectively over the figures achieved in 2006.

Basic earnings per share, based on the underlying profit after tax, increased by 39.39% to 35.74p.
Consequently, it is recommended that the total dividend for the year is increased by 40.35% to 20.0p per share, giving a dividend cover of 1.8 times.

Retained profit after tax of £26.4m (2006: £20.9m) has been transferred to reserves.

Following the acquisition of Fisher Engineering and the significant capital expenditure in the period, we ended the year with net borrowings of £48.1m.

Share Split

In October 2007 the Company’s share capital was subject to a 4:1 share split which increased the number of shares in issue to 88,607,876 shares of 2.5p each.
Consequently, where previous years comparative figures are shown in this review they have been amended, where appropriate, to reflect the share split.

Revenue

Group revenue increased by 1.9% to a record level of £300.66 m. The relatively small increase in revenue, despite the Fisher Engineering acquisition in October 2007, reflects the following during the year:
  • In 2006 revenue increased to £295.08m from £236.72m in 2005, reflecting the Group’s approach towards its optimum output levels. In 2007 revenue increased only marginally despite continuing high capacity utilisation, due to a change in work mix which in turn generated significantly higher margins.
  • During 2007 there was a lower level of externally sourced products and services which generate incremental revenue in addition to the revenue generated by steel.
    Examples include decking, cladding and staircases, etc.
  • Production at the Group’s facility at Rowen Structures Limited in Nottinghamshire ceased in July 2007 with the fabrication being carried out at other more efficient Group companies, thus generating higher margins.
  • The Group continues to follow its strategic objective of increasing its own in-house capabilities to provide client services, eg Fabsec beams, intumescent paint and staircases.
  • At 31 December 2007 stock/work in progress was £14.60m higher than at the end of 2006 reflecting the timing of project valuations and thus producing a lower level of revenue.

Operating Profit

The Group's underlying operating profit increased by 46.6% to £42.68m.
We are particularly pleased that underlying operating margins, expressed as a percentage of revenue, have continued to increase significantly to 14.20% from the 9.87% achieved in 2006.

These figures continue to incorporate the Group’s two associated companies, Kennedy Watts Partnership Limited and Fabsec Limited, of which the Group owns 25.1% and 25% respectively.
The Group's operating profit for the year includes its share of these two companies' results which amounted to a net profit of £58,000 (2006: £10,000).

Finance Costs

Net interest receivable for the Group amounted to £266,000 (2006: £1,168,000).
The reduction reflects the interest payable on the borrowings taken out to help fund the acquisition of Fisher Engineering in October.

Profit Before Tax

The table below provides a summary of the profit before tax:

 
2007
2006
  
 
£000
£000
  
Underlying profit before tax;
Continuing Operations
42,950
30,286
 Excludes non-underlying items;
(see below)
Non-underlying Items
(4,590)
-
 See section below for
explanation
Profit Before Tax;
Continuing Operations
38,360
30,286
  


The underlying profit before tax has increased to £42.95m, an increase of 41.8% over the previous year.
Margins, at this level, expressed as a percentage of revenue, increased to 14.29% (2006:10.26%).

Non-Underlying Items

Non-underlying items are included within the “other items” column of the Consolidated Income Statement and amount to £4.59m (2006: Nil) which relate to:
  • Amortisation of acquired intangibles - £2.2m (2006: Nil).
  • Forward contract valuations - £2.39m (2006: Nil).
    The Group, particularly through Fisher Engineering, is increasingly selling in to the Euro zone (principally Eire) and locks in the contract profit at the time of accepting this work.
    Due to the weakening of Sterling against the Euro between the date when the forward exchange contracts were put in place during the year and the year end a negative fair value has arisen on these contracts.
    IAS 39 requires the movement in the fair value to be included as a charge in the Consolidated Income Statement with an associated liability in the balance sheet.

Taxation

The tax charge of £11.93m represents an effective tax rate of 31.09% compared with 30.92% in the previous year.
The rate is slightly higher than the prevailing rate due to the adjustments made in respect of disallowable expenditure incurred during the year.

During 2007 proposed amendments to the Industrial Buildings Allowance regime were announced.
Due to the fact that these amendments were not substantively enacted as at 31 December 2007, their effects have not been reflected within the Group's results.

The Directors have estimated that should these amendments be substantively enacted during the year ending 31 December 2008, the deferred tax liability held in the consolidated balance sheet would increase by £6.5 m with a corresponding charge to the consolidated income statement.

Earnings per Share

Underlying basic earnings per share was at a record level of 35.74p, an increase of 39.39% over the previous year.
This calculation is based on the underlying profit after tax of £29.74m and 83,218,835 shares, being the weighted average number of shares in issue during the year.

Basic earnings per share, based on profit after tax after non-recurring items is 31.77p.

Underlying diluted earnings per share is 35.70p.
This calculation is based on the underlying profit after tax of £29.74m and 83,297,638 shares, being the weighted average number of shares in issue, allowing for contingent shares under a share based payments scheme.

Diluted earnings per share, based on profit after tax after non-recurring items is 31.73p.

Dividend

The Board will be recommending a final dividend of 13.25p per share (2006: 9.25p) at the Company’s Annual General Meeting on 30 May 2008, bringing the total dividend for the year to 20.0p per share.
This total dividend represents a 40.35% increase over the total dividend of 14.25p per share paid for 2006.
This is in line with the underlying basic earnings per share increase and maintains the total dividend cover at 1.8 times these earnings, a level at which the Board remains comfortable and at which it remains confident of maintaining in the future.

The final dividend will be paid on 16 June 2008 to shareholders on the register on 16 May 2008.
The ex-dividend date will be 14 May 2008.

Acquisitions

The Company made two acquisitions in the year for a total consideration of almost £116m as follows:
  • Action Merchants Limited

    Action Merchants Limited is the non-trading holding company of Fisher Engineering Ltd, a leading steel fabrication company based in Enniskillen in Northern Ireland.
    The total consideration amounted to £92.2m (including £2.2m costs) of which £36.6m was satisfied by the issue of 1,750,000 ordinary shares of 10p each at £20.89 per share, with the balance paid in cash.

    The Income Statement incorporates the result from 8 October 2007, the date of the acquisition of the Action Merchants Limited Group.

    Goodwill arising on the acquisition amounted, before allocation of intangibles, initially to £76m.
    A valuation of any identifiable intangible assets of Action Merchants Limited included in this figure has been carried out to identify and estimate the fair value and estimated useful lives of these intangible assets as required under IFRS 3.
    These intangible assets have been valued at approximately £39m gross of the associated deferred tax liability of £10.92m and are included in the Balance Sheet under “Other Intangible Assets”.
    Goodwill will be subject to an annual impairment review as required under IFRS 3.

    Fisher Engineering has been integrated into the Group very satisfactorily and the results for the three month period of ownership are both very good and encouraging for the future.


  • Dalton Airfield Estate Limited (DAEL)

    DAEL owned the long leasehold title to the Group’s headquarters and the freehold title to over half of Severfield-Reeve Structures Limited’s fabrication facility, both at Dalton Airfield Industrial Estate in North Yorkshire, for which it was paid a rent of approximately £1.6m per annum.
    The Group acquired the freehold reversion of this facility from certain directors and management to regain Severfield-Rowen’s control of this valuable and extensive headquarters and fabrication site.
    The total consideration amounted to £23.5m and was concluded on 9 October 2007.
    The transaction has been included in the accounts as the acquisition of land and buildings.

Balance Sheet

The Group’s Balance Sheet continues to strengthen with shareholders’ funds increasing by £50.60m to £116.83m.
This equates to a total equity value per share at 31 December 2007 of 131.8p, compared with 67.6p at the end of 2006.

The Group’s Balance Sheet now has property, plant and equipment totalling £79.42m.
Depreciation charged in the year amounted to £3.93m.
We continue to invest heavily in our business with capital expenditure in the year of £33.68m made up as follows:

Land and buildings at Dalton, North Yorkshire,
as part of DAEL acquisition		 £23.5 m
Land and extension of production facilities at Dalton £4.0 m
Land and improvements to production facilities at
Watson Steel Structures’ facility at Bolton		 £2.0 m
Improvements to production facilities at
Atlas Ward Structures’ facility in North Yorkshire		 £0.7 m
Mobile cranes for use on sites £1.4 m
Motor vehicles/vans £1.2 m


Expenditure in 2008 is budgeted to be approximately £4m.

The value of goodwill on the Balance Sheet of £54.71m is made up primarily as follows:
  • Acquisition of Action Merchants Limited (Fisher Engineering) in 2007 - £47.98m.
    The goodwill is subject to an annual impairment review under IFRS 3.
    Given the excellent performance of the company since acquisition no impairment existed at 31 December 2007.
  • Acquisition of the Atlas Ward Group of Companies in 2005 - £6.6m.
    Subject to an annual impairment review under IFRS 3.
    Given the excellent performance of Atlas Ward in the year no impairment existed at 31 December 2007.
Other intangible assets on the Balance Sheet, amounting to £39.04m, represents the capitalisation of the Group’s costs in the development of a pedestal mounted powered work platform for use on sites in the erection of steel, which is now being used on sites in London of £2.24m and the gross value of the intangible assets arising on the Fisher acquisition, after amortisation in the year of £2.2m, of £36.80m.

Unlike the rest of the Group, Atlas Ward has a defined benefit pension scheme which, although closed to new members, had an IAS 19 deficit of £7.29m as at 31 December 2006. At 31 December 2007, largely as a result of the contributions paid over during the year, the deficit decreased slightly to £6.75m and is shown as a liability in the Group Balance Sheet, with the remaining movement going through the Statement of Recognised Income and Expense as required under IFRS.

The provision made in the accounts to 31 December 2006 of £2.6m in respect of an alleged leak to a roof of a contract carried out by Atlas Ward Structures Limited has been under regular review during the year by the Directors.
Although the case went to adjudication no real progress was made with no further indication of the likely outcome.
Consequently, it was decided that the provision should remain in place.

Cash Flow

Management of the Group's cash has always been of prime importance to the Board and this remains the case with cash being tightly controlled.
During the year a significant amount of borrowings were taken out to fund the acquisitions in October of Action Merchants Ltd and DAEL.
Consequently the Group ended the year with net borrowings of £48.06m (2006: positive cash £38.30m).
The Group has a revolving credit facility of £70m with RBS and National Australia Bank as joint lenders until August 2010.
The current level of borrowings leaves the Group comfortably within the limits of its facility.

During the year £22.99m was generated from operations.

Outflows of cash during the year included dividends of £13.06m, corporation tax paid of £9.13m and the purchase of property, plant and equipment, net of sale proceeds, of £32.12m.

The cash outflow required for the Fisher acquisition, after cash and cash equivalents acquired, amounted to £54.96m, including costs.

Due to the acquisitions the Group ended the year with borrowings for the first time in many years and gearing of 41.14% (2006: Nil).

Treasury

Group treasury activities are managed and controlled centrally.
Risks to assets and potential liabilities to customers, employees and the public continue to be insured.
The Group maintains its low risk financial management policy by insuring all significant trade debtors.
The Group had a very successful year with revenue, profit before tax, earnings per share and dividends per share once again reaching record levels.

The treasury function seeks to reduce the Group's exposure to any interest rate, foreign exchange and other financial risks, to ensure that adequate, secure and cost effective funding arrangements are maintained to finance current and planned future activities and to invest cash assets safely and profitably.

Following the acquisition of Fisher Engineering Ltd and the award to the Group of a large contract at Dublin Airport, the Group now has more exposure to the exchange rate fluctuations between Sterling and the Euro.
In order to maintain the projected level of profit budgeted on contracts foreign exchange contracts are taken out to convert into Sterling at the expected date of receipt.
As the exchange rate between Sterling/Euro moved against us between the time the foreign exchange contracts were taken out in 2007 and the year end, IAS 39 requires the company to provide for an accounting and non-cash flow loss to the Income Statement of £2.39m which is shown as a nonunderlying item under “other items” on the Statement.

The Group remains committed to strong financial controls, cash management and appropriate accounting and treasury policies.

Summary

The Group has had a very successful year with revenue, underlying profit before tax, earnings per share and dividends per share once again reaching record levels.

The acquisition of Fisher Engineering Ltd has proven to be very successful with the company fitting into the Group very well.

The Group has continued to improve its already healthy financial position which, together with its record order book of £455m, means it is well placed for future growth and cash generation.

Peter Davison
Finance Director
02 April 2008

 
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