This report (including the information in this discussion) contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements involve risks and uncertainties,
including statements regarding the Company's capital needs, business strategy
and expectations, and are being made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Any statements contained
herein that are not statements of historical facts may be deemed to be
forward-looking statements. Terminology such as "may", "will", "should",
"believes", "estimates", "plans", "expects", "attempts", "intends",
"anticipates", "could", "potential" or "continue", the negative of such terms,
or other comparable terminology, are intended to identify forward-looking
statements.
In evaluating any forward-looking statements, you should consider various risk
factors, including those summarized above under ITEM 1A and those described in
other sections of this report, in the other reports the Company files with the
SEC and in the Company's press releases. Such factors may cause the Company's
actual results to differ materially from any forward-looking statement. The
Company disclaims any obligation to publicly update the statements, or disclose
any difference between its actual results and those reflected in the statements.
With respect to all such forward-looking statements, the Company seeks the
protection afforded by the Private Securities Litigation Reform Act of 1995.
Sales of $97.0 million for the year ended September 30, 2006, show a decrease of
$3.7 million when compared to those for the equivalent period last year, while
the operating result has fallen from a profit of $1.8 million in 2005 to a loss
of $7.0 million in 2006. In the year ended September 30, 2006 the loss before
taxes has been further increased by $0.7 million of costs relating to unusual or
infrequent items (2005: net exceptional gains of $2.2 million). The infrequent
items comprise:
* a $3.5 million gain arising on the sale of the residual element of the
Company's Wednesbury facility;
* charges of $3.5 million in respect of a UK manufacturing reorganization
program which was initiated in the year;
* $0.7 million of expenses in relation to the settlement of class and
derivative litigation.
The comparable 2005 figure of $2.2 million included a profit on disposal of land
and buildings of $3.3 million offset by manufacturing and other restructuring
costs of $1.1 million. After crediting taxation of $1.0 million (2005: charging
taxation of $0.5 million) and debiting losses from discontinued operations of
$0.1 million (2005: $0.6 million) the net loss for the year was $6.5 million
(2005: net income of $3.1 million)
These summary financials are presented in tabular form in the "Results of
Operations" section, below.
Sales for the year from continued activities have decreased by $3.7 million
(3.7%). This was primarily due to adverse currency exchange fluctuations in the
year of $3.1 million increased sales rebates of $0.5 million and marginal sales
volume decreases of $0.1 million. Sales volume improvements were recorded in our
Metrology, Magnetics and French divisions, but these were offset by volume
decreases in our other businesses attributable to soft domestic retail demand in
the UK, challenging business conditions in many of our end markets, increasing
pressure from cheap, Far Eastern imports and the weak US dollar.
Gross profit was 30% for the year ended September 30, 2006 compared to 33% in
the previous year. Direct costs are still being adversely affected by cost price
increases in our principal raw materials of steel, plastic, cobalt and nickel,
and increases in basic utility costs. In our Neill Tools division margins have
been further diluted by a mix switch towards factored garden power tools at the
expense of better margins on industrial hand tool product lines. Additionally,
the Company's margins have been further eroded by one-time inventory provisions
of $1.1 million in our UK Garden Tools and Magnetics divisions following the
completion of reorganization programs in those operations.
Selling, general and administrative expenses have increased by $4.7 million
(14.9%) in the year. Reasons for the increase include: increased FAS 87 pension
costs of $4.37 million, general inflationary increases and one-time costs in
setting up our new Chinese facility. These adverse effects have, however, been
mitigated by the impact of movements in the US$/Sterling cross rates in the year
and decreased head office costs.
As a result of the decrease in sales volume, lower gross margins and higher
overhead costs, the Company's operating income has decreased by $8.8 million
(482%) from an income of $1.8 million in 2005 to a loss of $7.0 million in 2006.
The Company has benefited in the year from the $3.5 million gain arising on the
sale of the residual element of its UK manufacturing facility at Wednesbury. The
overall impact on pre-tax profits of this sale has been reduced by the provision
of $3.5 million manufacturing reorganization costs. On January 25 2006, the
Company announced the closure of the remaining element of its manufacturing site
at Wednesbury. All warehouse and distribution operations were transferred to the
Company's principal UK manufacturing site, Atlas, in Sheffield. Additionally, in
the final quarter of the year, the Company performed a review of its remaining
UK manufacturing operations. Further strategies are to be implemented at the
Atlas site and in the Eclipse Magnetics division to reduce the Company's ongoing
cost base and accrual has been made for severance costs, restructuring charges
and fixed asset impairment charges relating to those initiatives.
The Company intends to continue to launch new products and to explore
initiatives to reduce its operational base costs, through improved raw materials
and product sourcing and by more efficient processes, in order to minimize
margin erosion and to retain its competitive edge over cheap foreign imports. As
noted above, the Company's management has already implemented a number of
initiatives to improve profitability and to restructure its UK manufacturing
base. These strategies will continue and further opportunities will be explored.
Such restructuring costs and other initiatives, together with planned investment
in new capital equipment in the UK, are anticipated to achieve improved
efficiencies and reduce labor costs with corresponding improvements in the
ongoing profitability of the Company in the forthcoming year.
On March 23, 2006, Jacuzzi Brands, Inc. ("Jacuzzi") and its subsidiary
undertaking, USI American Holdings, Inc. ("USI" and together with Jacuzzi, the
"Seller") entered into a Stock Purchase Agreement (the "Stock Purchase
Agreement") with United Pacific Industries Limited ("UPI"), a Bermuda
Corporation, to sell its entire holding of 3,543,281 shares of the common stock
(the "Shares") of Spear & Jackson, Inc. ("SJI") to UPI for $1.40 per share for
an aggregate purchase price of $4,960,593. Such shares constitute all of the
shares of SJI owned by the Seller.
The representations, warranties and covenants made by Jacuzzi and UPI were
typical for this type of transaction, and included a covenant that restricted
Jacuzzi from soliciting or negotiating with a third party between the signing
date of the Stock Purchase Agreement and the closing date of the transaction.
Jacuzzi also agreed that in connection with the closing of the transaction, it
would, among other things, cause UPI's designees and one designee of Jacuzzi to
be elected to the Board of Directors of Spear & Jackson, Inc. and would use
commercially reasonable best efforts so that such UPI designees are in
sufficient numbers to give UPI a majority of the Board of Directors of the Spear
& Jackson, Inc. UPI also agreed that neither it nor any of its affiliates would
purchase any additional Common Stock during the period from the signing date of
the Stock Purchase Agreement through one year following the closing at a price
less than $1.40 per share.
The purchase of the Shares by UPI contemplated by the Stock Purchase Agreement
was subject to the receipt of a number of closing conditions, including approval
by UPI's shareholders and the United Kingdom Pensions Regulator, and the receipt
of certain other regulatory approvals as well as other customary closing
conditions.
The Seller and UPI then announced that they had entered into Amendment No. 1
dated May 4, 2006, ("Amendment No. 1 to the Stock Purchase Agreement") to extend
the date by which the Seller and UPI were required to lodge the clearance
application with the UK Pensions Regulator. The Seller and UPI subsequently
received a comfort letter dated July 5, 2006, issued by the UK Pensions
Regulator (the "Comfort Letter"). The Seller and UPI agreed to waive the
condition contained in the Stock Purchase Agreement for a clearance from the UK
Pensions Regulator and to accept the Comfort Letter in satisfaction of that
condition.
The trustees of Spear & Jackson, Inc.'s UK Pension Plan confirmed by a letter
dated July 6, 2006 their acceptance of the UK Pensions Regulator's
determination. The Seller and UPI subsequently announced that they had entered
into Amendment No. 2 dated July 10, 2006, ("Amendment No. 2 to the Stock
Purchase Agreement") to waive their respective requirements for a clearance from
the UK Pensions Regulator and to accept in its place the Comfort Letter which
stated that the UK Pensions Regulator was of the view, based on the information
supplied to him in connection with the clearance application, that the change of
control as a result of the sale by the Seller of all of its shares of Spear &
Jackson, Inc. to UPI was not detrimental to the UK pension plan and that the UK
Pensions Regulator believed that a clearance was not necessary for the
transaction.
In addition, pursuant to the terms of Amendment No. 2 to the Stock Purchase
Agreement, UPI agreed, subject to the Closing having occurred, to indemnify the
Seller and JBI Holdings Limited (the "Jacuzzi Indemnified Parties") should the
UK Pensions Regulator, regardless of the Comfort Letter, require any of the
Jacuzzi Indemnified Parties to make a contribution or provide financial support
in relation to the potential pension plan liabilities of SJI or its
subsidiaries. In addition, UPI also agreed that for a period of twelve months
from the Closing Date, that it will not, (and will use its best efforts to
ensure that neither Spear & Jackson, Inc. nor any of its subsidiaries will) take
any action or omit to take any action that causes the UK Pensions Regulator, as
a result of such action or omission, to issue a contribution notice against the
Jacuzzi Indemnified Parties in relation to any UK pension plan in which Spear &
Jackson, Inc. or any subsidiary of Spear & Jackson, Inc. is an employer.
Further, UPI agreed that for a period of twelve months from the Closing Date,
that it will not (and will use its best efforts to ensure that neither Spear &
Jackson, Inc. nor any subsidiary of Spear & Jackson, Inc. will) engage in any
action or inaction which in relation to any such UK pension plan would fall
within the UK Pension Regulation clearance guidance note dated April 2005 as a
'Type A' event unless UPI procures that clearance is issued by the UK Pensions
Regulator in relation to such event in terms which confirm that no Jacuzzi
Indemnified Party shall be linked to a financial support direction or
contribution notice in respect of such event.
On June 22, 2006, Jacuzzi and UPI filed a preliminary Form 14C with the SEC
announcing notice of change in control and of a majority of directors pursuant
to section 14(f) of the Securities Exchange Act of 1934 and Rule 14f-1
thereunder. The 14C indicated that three new directors would be designated by
and elected to the Board of directors by UPI, to serve until the Company's next
annual meeting. The 14C became effective on August 7, 2006, and the three new
directors would replace the incumbent directors on about August 27, 2006. In the
interim, the Board by resolution, appointed the three new directors Lewis Hon
Ching Ho, Andy Yan Wai Poon and Maria Yuen Man Lam to the Board effective August
9, 2006.
Brian C. Beazer, the Chairman of UPI, is a director of Jacuzzi and holds
approximately 24.56% of the shares of UPI. David H. Clarke is a director of UPI
and holds approximately 22.88% of the shares of UPI. Until his retirement from
all positions with Jacuzzi in September 2006, Mr. Clarke was the Chairman and
Chief Executive Officer of that company. Mr. Clarke also holds approximately
28,350 shares of common stock of Spear & Jackson, Inc., representing
approximately 0.49% of the shares of Spear & Jackson, Inc. but the shares of
Spear & Jackson, Inc. owned by Mr. Clarke are not being purchased at the time of
the sale of the Shares by the Seller to UPI.
As previously reported, a number of class action lawsuits were initiated in the
US District Court for the Southern District of Florida by Company shareholders
against the Company, Sherb & Co LLP, the Company's former independent auditor,
and certain of the Company's directors and officers.
These various class action suits were subsequently consolidated. Thereafter, the
defendants filed certain Motions to Dismiss with regard to the Complaint and on
October 19, 2005, the U.S. District Court for the Southern District of Florida
in Re Spear & Jackson Securities Litigation entered its Order regarding these
Motions. The Order denied the Company's motion as well as that of Mr. Crowley,
the former Chief Executive Officer of Spear & Jackson. The Court granted the
Motion to Dismiss on behalf of Mr. Fletcher, the Company's interim Chief
Executive Officer, and also granted the Motion to Dismiss on behalf of the
Company's former independent auditor, Sherb & Co., LLP. The class plaintiff has
since filed an appeal regarding the trial court's decision to dismiss the case
against Sherb & Co., LLP, which appeal is presently pending. No appeal was filed
with respect to the decision to dismiss the case against Mr. Fletcher.
On July 7, 2006 the Company, Dennis Crowley and the Class Plaintiff reached a
Memorandum of Understanding ("MOU"), which confirmed that the plaintiffs, the
Company and Dennis Crowley had reached an agreement in principle for the
settlement of this litigation, subject to Court approval. According to the terms
of the MOU, the Company deposited $650,000 into a Qualified Settlement Fund,
disbursement pending approval of the Court. Subsequent to this Sherb & Co. also
agreed to the terms of the Settlement agreeing to contribute an additional
$125,000.
On November 9, 2006, the Stipulation of Settlement was filed with the Court for
preliminary approval. Assuming that the preliminary approval is granted, the
next step will be to notice the Class of the settlement and to set the approval
process for final hearing and final approval before the Court. The matter will
not be finally settled until the Court issues a final judgment approving the
settlement.
Following the execution of the MOU, the lead plaintiffs commenced discovery
procedures to confirm the fairness and reasonableness of the Settlement. The
plaintiffs retain the right to terminate the Settlement if such discovery
reveals that the Settlement is not fair, reasonable and adequate. Subject to
these discovery procedures confirming the adequacy of the Settlement, all
parties have agreed to use their best efforts to finalize an appropriate
Stipulation of Settlement and any other relevant documentation necessary to
obtain approval by the Court of the settlement of this action.
If the Settlement outlined in the MOU is not approved by the Court or, if
subsequently terminated, the terms of the above Settlement will be without
prejudice, any settlement amounts already paid will be returned and parties will
revert to their litigation positions immediately prior to the MOU.
Should the class action settlement be approved, to facilitate the distribution
of the funds from the class suit to the class shareholders and keep
administrative costs to a minimum, the SEC Claim's Administrator applied to the
Court on January 9, 2007 for permission to combine the class action funds with
the funds derived in the SEC litigation, and allow for the SEC's Claim's
Administrator to disburse the collective funds.
On September 6, 2005, the Company was served with a Shareholder Derivative
Complaint filed on June 1, 2005 in the Circuit Court for Palm Beach County,
Florida (Case No. CA005068). The suit names the Company as nominal
defendant. Also named as defendants were former directors, Robert Dinerman,
William Fletcher and John Harrington, in addition to Dennis Crowley and the
Company's prior independent auditors, Sherb & Co. LLP. The suit contains
essentially the same factual allegations as an SEC suit, which was filed in
April 2004 in the U.S. District Court for the Southern District of Florida, and
the series of class actions claims initiated in the U.S. District Court, but
additionally alleges state law claims of breaches of fiduciary duty, abuse of
control, gross mismanagement, waste of corporate assets, unjust enrichment and
lack of reasonable care by various or all the defendants.
Due to ongoing settlement discussions with the plaintiff's attorney, the Company
had not responded to the Complaint. In August 2006 the Company entered into a
settlement agreement with the plaintiff by agreeing to accept certain changes to
its corporate governance procedures and the payment of up to $75,000 in legal
fees. The settlement was filed with the Court in early November 2006 and, if
approved by the Court, will result in a dismissal of the suit and release the
Company and the former director defendants Messrs Robert Dinerman, William
Fletcher and John Harrington. A Preliminary Approval hearing is scheduled on
February 4, 2007. Dennis Crowley and Sherb & Co. continue as defendants in this
suit.
RESULTS OF OPERATIONS
GENERAL
The results discussed below compare the years and quarters ended September 30,
2006, 2005 and 2004. As explained in note 3 to the financial statements, the
acquisition of Spear & Jackson plc and Bowers Group plc (together "S&J") by
Megapro Tools, Inc. (now Spear & Jackson, Inc.) on September 6, 2002 has been
accounted for as a reverse acquisition. In these financial statements, S&J is
the operating entity for financial reporting purposes and the financial
statements for all periods represent S&J's financial position and results of
operations.
Following their sales in September 2003 and February 2006, respectively, the
operating results of the Company's Megapro screwdriver division and those of its
Coventry Gauge thread gauge measuring division are disclosed under "Discontinued
Operations".
SUMMARY
A summary of the results of operations is as follows:
Years Ended Quarters Ended
September 30 September 30
2006 2005 2004 2006 2005 2004
$m $m $m $m $m $m
Sales ............................... 97.0 100.7 99.5 21.8 22.3 24.0
---- ----- ---- ---- ---- ----
Gross profit ........................ 29.1 33.2 31.9 5.7 7.5 8.4
Operating costs ..................... 36.1 31.4 29.7 8.3 7.0 7.2
---- ----- ---- ---- ---- ----
Operating (loss) income ............. (7.0) 1.8 2.2 (2.6) 0.5 1.2
Other income/(expenses) ............. 0.3 0.2 (0.2) 0.2 0.1 -
Unusual or infrequent events ........ (0.7) 2.2 - 1.8 (0.1) -
---- ----- ---- ---- ---- ----
(Loss) income from continuing
operations before income taxes ..... (7.4) 4.2 2.0 (0.6) 0.5 1.2
Income tax benefit (provision) ...... 1.0 (0.5) (1.2) 0.7 0.2 (0.5)
---- ----- ---- ---- ---- ----
(Loss)/income from continuing
operations ......................... (6.4) 3.7 0.8 0.1 0.7 0.7
Discontinued operations ............. (0.1) (0.6) (0.4) - (0.2) (0.2)
---- ----- ---- ---- ---- ----
Net (loss) income ................... (6.5) 3.1 0.4 0.1 0.5 0.5
==== ===== ==== ==== ==== ====
|
32
SALES
2006 COMPARED TO 2005
Sales from continuing activities decreased by $3.7 million (3.7%) from $100.7
million in the year ended September 30, 2005 to $97.0 million for the year ended
September 30, 2006. Sales of $21.8 million for the quarter ended September 30,
2006 were $0.5 million (1.97%) lower than sales of $22.3 million recorded for
the comparable period last year.
The net decreases in sales for the year and the quarter ended September 30, 2006
over the comparable periods in the prior year are analyzed as follows:
Year Quarter
ended ended
September 30, September 30,
2006 2006
Note $m $m
Effect of exchange rate movements... (a) (3.1) 0.7
Sales volumes decreases............. (b) (0.1) (0.9)
Increased rebates................... (c) (0.5) (0.3)
---- ----
(3.7) (0.5)
==== ====
|
Analyzed by principal business segment, the net revenue increases and decreases
over prior periods can be summarized as follows:-
Year Quarter
ended ended
September 30, September 30,
2006 2006
Note $m $m
a) Hand and garden tools
Effect of exchange rate
movements..................... (a) (2.3) 0.5
Sales volume decreases......... (b) (2.0) (1.4)
Rebates........................ (c) (0.4) (0.2)
---- ----
(4.7) (1.1)
---- ----
b) Metrology tools
Effect of exchange rate
movements..................... (a) (0.5) 0.1
Sales volume increases......... (b) 1.4 0.4
Rebates........................ (c) (0.1) (0.1)
---- ----
0.8 0.4
---- ----
c) Magnetic products
Effect of exchange rate
movements..................... (a) (0.3) 0.1
Sales volume increases......... (b) 0.5 0.1
---- ----
0.2 0.2
---- ----
Total (3.7) (0.5)
==== ====
|
Notes:
(a) The functional currencies of the group's revenues are UK sterling, the
Euro, the Australian and New Zealand dollar and the Chinese Yuan. The
principal functional currency is sterling and the variation in the average
US$/L cross rate in the year to September 30, 2006 compared to the
comparable period last year has had a significant adverse impact on the US
dollar value of the group's sales. In contrast, the movement in the average
cross rate for the quarter to September 30, 2006 has had a material
favorable effect on the US dollar value of the group's sales when compared
to last year. The average US$/L cross rates in the periods under review can
be summarized as:
33
Average Cross Rates
-------------------
2006 2005 % Movement
Year ended September 30........ 1.7956 1.8511 (2.99%)
Quarter ended September 30..... 1.874 1.785 4.99%
|
(b) The trading environment in our principal markets was again challenging as a
result of flat consumer demand, continuing competition from rival suppliers
across a number of product ranges and the increasing practice of major
retail customers promoting own label offerings sourced from the Far East at
the expense of S & J Company product.
Within the UK, Neill Tools and Robert Sorby have witnessed increasingly
difficult trading conditions in the fourth quarter and for the year as a
whole. Likewise, trading conditions have been equally competitive in our
French and Australasian New Zealand divisions. The French market is
becoming increasingly problematic because of the steady increase in Far
Eastern imports. In New Zealand, sales have been negatively impacted by the
loss of a major retail customer but such losses were mitigated by increased
sales of air, masonry and hand tools in its sister Australian division.
Despite the less than favorable market conditions in the Metrology and
Magnetics products divisions, sales volumes increased over the prior year
by $0.95 million. This increase arose from incremental sales growth in the
Metrology division's facilities in Maastricht (first full year of trading)
and Shanghai (business start up in the year) and increases in home and
export sales in Eclipse Magnetics with both the filtration and separation
ranges featuring prominently.
(c) Sales rebates charged in the year ended September 30, 2006 amounted to $4.8
million and $1.2 million of rebates were expensed in the quarter ending on
that date. The level of rebates in the year ended September 30, 2006 has
increased by 9.6% over the comparable period last year. This is due to
increased trading volumes in Australia and the offering of increased
rebates in the Neill Tools division and in France as an additional customer
incentive in highly competitive sales markets.
2005 COMPARED TO 2004
Sales from continued activities increased by $1.2 million (1.2%) from $99.5
million in the year ended September 30, 2004 to $100.7 million for the year
ended September 30, 2005. Sales of $22.3 million for the quarter ended September
30, 2005 were $1.7 million (6.9%) lower than sales of $24.0 million recorded for
the comparable period last year.
The net increase in sales for the year and the decrease in the quarter ended
September 30, 2005 over the comparable periods in the prior year are analyzed as
follows:
Year Quarter
ended ended
September 30, September 30,
2005 2005
Note $m $m
Effect of exchange rate movements... (a) 4.0 0.3
Sales volumes decreases............. (b) (2.3) (1.6)
Increased rebates................... (c) (0.5) (0.4)
---- ----
1.2 (1.7)
==== ====
|
34
Analyzed by principal business segment, the net revenue increases and decreases
over prior periods can be summarized as follows:-
Year Quarter
ended ended
September 30, September 30,
2005 2005
Note $m $m
a) Hand and garden tools
Effect of exchange rate
movements..................... (a) 3.1 0.3
Sales volume decreases......... (b) (4.7) (2.0)
Rebates........................ (c) (0.5) (0.4)
---- ----
(2.1) (2.1)
---- ----
b) Metrology tools
Effect of exchange rate
movements..................... (a) 0.5 -
Sales volume increases......... (b) 1.4 0.4
---- ----
1.9 0.4
---- ----
c) Magnetic products
Effect of exchange rate
movements..................... (a) 0.4 -
Sales volume increases......... (b) 1.0 -
---- ----
1.4 0.0
---- ----
Total.......................... 1.2 (1.7)
==== ====
|
Notes:
(a) In both 2004 and 2005, the functional currencies of the group's revenues
were sterling, the Euro and the Australian and New Zealand dollar. The
principal functional currency was sterling and the variation in the US$/L
cross rate in the year, and to a lesser extent, the quarter ended September
30, 2005 compared to the comparable periods last year had a significant
favorable impact on the US dollar value of the group's sales. The average
US$/L cross rates in the periods under review can be summarized as:
Average Cross Rates
-------------------
2005 2004 % Movement
Year ended September 30...... 1.8511 1.787 +3.6%
Quarter ended September 30... 1.785 1.788 (0.2%)
|
Although in the quarter ended 30 September, 2005 the US$/L cross rate
decreased when compared to the previous year, the Company still benefited
from favorable exchange gains. This was due to the fact that there was a
significant movement in the $/Aus $ cross rate in the last quarter of 2005
when compared to the same quarter of the prior year which had a significant
effect on the translation of the Australian division's sales from
Australian dollars to $. The $0.4 million favorable variance on the $/Aus $
cross rate more than compensated for the adverse US$/L exchange variances
in the UK based operating divisions.
(b) Business conditions in many of our end markets remained challenging as a
result of continued competition from rival suppliers in a number of our
product ranges, increasing pressure from cheaper Far Eastern imports, the
weak US dollar and poor retailing conditions in the UK and Australasia.
35
Within the UK, Neill Tools witnessed increasingly difficult trading
conditions in the fourth quarter of the fiscal year where sales were 11.1%
lower than the comparable period last year. Buoyant hand tools demand from
the Middle East in previous quarters eased and UK sales of garden tools
were adversely affected by depressed order intake from major retail
outlets. Likewise, Australia and New Zealand continued to show volume
decreases ($3.0 million for the year and $0.8 million in the last quarter)
which were primarily attributable to increased levels of competition from
foreign imports and a slow down in consumer spending.
While similar market pressures were experienced over the year in the
Metrology and Magnetics products divisions, volume increases over the prior
year of $2.3 million cumulatively and $0.4 respectively were still
achieved. This was attributable to growth in the Metrology distribution
facility in Maastricht and increases in export sales in Eclipse Magnetics
following the establishment of new distribution channels.
(c) Sales rebates charged in the year ended September 30, 2005 amounted to $4.4
million and $0.9 million of rebates were expensed in the quarter ending on
that date. The level of rebates in the year ended September 30, 2005
increased by 13.6% over the comparable period last year. This was due to:
increased trading volumes in France; the offering of increased rebates in
the UK in the Company's Neill Tools division as an additional customer
incentive in a highly competitive sales market; and adverse movements in
the L/US$ cross rate.
SEGMENTAL REVIEW OF SALES
We aim to maintain and develop the sales levels of our businesses through the
launch of new products, the improvement of existing ranges and the continued
marketing of our portfolio of brands in order to retain and gain market share.
Sales and revenue details on a segment basis are as follows:
NEILL TOOLS
2006 COMPARED TO 2005
Sales for the year to September 30, 2006 of $41.2 million showed a reduction of
$2.7 million (6.2%) over last year's total of $43.9 million. The decrease was
attributable to adverse volumes of $1.3 million, unfavorable exchange rates of
$1.3 million and increased rebates of $0.1 million.
Neill Tools continued to experience particularly tough trading conditions in the
year in both its export and home markets. Last year's export demand, bolstered
by the huge construction programs that were put in place following the conflicts
in the Middle East, has now declined. Additionally, our sales into the Middle
East have been affected by parallel imports into the UAE from Kuwait and
Indonesia. This issue further highlighted the fact that within the industrial
tools business, export markets continue to be driven by demand for our hacksaw
blades. Sales of these products now represent 60% of our industrial tools'
revenues and strategies are being prepared to spread this sales concentration
risk through the development of higher margin product ranges, brand presence and
new product development.
At home, the UK retail market continued a downward trend, especially in the
multiple retail sector, which, once again, is experiencing a downturn in
consumer spending. This increasingly soft retail demand together with industrial
and retail sales erosion through increased private label penetration had a
direct impact on our Hand & Garden sales in the UK and remains a cause for
concern. Overall, annual sales losses were mitigated, however, by the securing
of a $1.8 million agreement with a major retail chain for the Spear & Jackson
power garden tools during the first half of the year.
Gross margins continued to be depressed. The main drivers behind this reduction
were a mix switch toward Garden Power products at the expense of higher margin
product lines, increases of more than 50% in gas and electricity supply costs,
and, following the implementation of various manufacturing reorganization
initiatives, one-time stock provisions against obsolete, slow moving and
discontinued inventories.
36
Improvements in manufacturing costs continue to be the focus of management to
improve competitiveness in new and existing markets. As previously reported, on
January 25, 2006, the company announced the closure of the remaining element of
its manufacturing site at Wednesbury, England. The site closure forms a key part
of the Company's UK manufacturing strategy to regenerate and modernize key areas
of the hand and garden tools businesses. All warehouse and distribution
operations previously performed at this location have now been transferred to
the Atlas site in Sheffield. The manufacturing and assembly functions formally
carried out at the Wednesbury site have been outsourced to suppliers based
outside the UK. The transfer of operations from Wednesbury to Sheffield was
completed by November 30, 2006 and, when fully integrated, will help to ensure
that the UK hand and garden business will deliver improved customer service and
satisfaction.
As a further element of its UK reorganization program, in the third quarter of
fiscal 2006 the company announced that certain manufacturing operations carried
out at its Atlas site would also cease.
Going forward, the main challenges for the business centre in the continuing
reduction of the manufacturing cost base and driving innovation and new product
development in line with our core brands and competences. In addition, the
Company is recruiting key people with the experience and skills to deliver new
product development strategy and focused product and brand management.
2005 COMPARED TO 2004
Sales for the year to September 30, 2005 of $43.9 million showed a reduction of
$0.5 million (1%) over the 2004 figure of $44.4 million. The decrease was
attributable to adverse volumes of $1.7 million and increased rebates of $0.3
million offset by favorable exchange movements of $1.5 million.
Despite a promising start in the first half of the year Neill Tools witnessed
particularly difficult trading conditions in the third and fourth quarters of
the year. The UK retail market continued a downward trend, especially in the
multiple retail sector, and market indicators recorded UK retail sales at their
lowest for over 20 years. Additionally, export sales, which in the first half of
the year had exceeded expectations, saw an easing in demand. Our strong export
sales performance at the beginning of the year was bolstered by the demand
generated by the huge construction programs that were put in place following the
conflicts in the Middle East, but this demand slowed in the latter part of the
year. In addition, Neill Tools experienced a weakening of its order book with
Middle Eastern countries during quarters three and four. The continued worldwide
terrorist activity affected the appetite for business travel and as a
consequence sales orders declined.
UK trading conditions, especially in the garden tools market, deteriorated due
to increasingly soft demand in the multiple retail sector. Despite the resultant
sales shortfalls in our gardening business, the "Predator" woodsaw range, which
was so successful in fiscal 2004, continued to sell strongly. Capital investment
of approximately $0.9 million in new woodsaw and hacksaw blade plant was
approved and implemented, ensuring that the record levels of productivity
experienced in the year could be sustained.
The threat to the business from low-cost, Far Eastern economies continued
unchanged. These competitive pressures were exacerbated by the weakness of the
US dollar, price increases imposed by our steel, plastics and utility suppliers,
and the difficulty within a competitive market place of passing on these
increases to customers. Despite this, margins were maintained when compared to
the previous year, as divisional profitability benefited from favorable sales
mixes, the sale of obsolete inventories at amounts above NRV and the successful
implementation of a number of strategic initiatives to reduce the cost of
manufacturing and distribution.
During the year the division announced a reorganization in connection with the
closure of part of one of its manufacturing facilities, and carried out a review
of its UK manufacturing operations, for which costs of $1.5 million were
provided. These initiatives were implemented to reduce the division's reliance
on own-manufactured items and to enable the division to progress the sourcing of
componentry for UK assembly to further reduce costs and improve profitability.
Given the depressed trading conditions, focus was directed towards tight
overhead cost control and reorganizations of certain sales and administrative
functions were undertaken to reduce these costs.
37
ECLIPSE MAGNETICS
2006 COMPARED TO 2005
Revenues for the year increased by $0.2 million (1.9%) from $10.7 million in
2005 to $10.9 million in 2006. This increase was explained by improved trading
volumes of $0.5 million offset by unfavorable exchange differences of $0.3
million.
Overall there has been sales volume growth in both our home and export markets.
The UK market reported a 5% improvement over last year, mainly attributable to
increased sales in the division's separation and core product ranges. Export
sales were also better than last year with lifting, separation and filtration
product ranges showing further improvements in performance. Sales into the US
continued to prosper as we continued to increase our US market share through the
introduction of new products and close key account management.
The Engineered Magnetic Solutions business saw further growth with new products
and technologies being offered for bespoke industry solutions.
Competition from the Far East remains the main threat, whether directly or
through agents, as we continue to see the emergence of more and more companies
in our trading markets offering high quality goods at low market price points.
Gross margins were lower than last year due to an adverse sales mix in the
Industrial sector, higher utility and key primary material costs and one-time
inventory provisions.
Reductions in direct costs and improvements in manufacturing efficiencies
continued therefore, to be the focus of management to improve competitiveness in
new and existing markets.
On August 11, 2006, the company announced both the cessation of certain
manufacturing activities at its site in Sheffield, England and the relocation of
its remaining business to the Atlas site, Sheffield. This site consolidation
forms another part of the Group's strategy to regenerate and modernize
operations and to reduce costs.
Looking forward, the main challenge continues to be the distancing of rival Far
East manufacturers from our key customer base. Our commodity-based business is
under continued threat. To counter this, we continue to promote the
attractiveness of our product by offering added value to our customers through,
for example, additional assembly work. At the same time, however, we are taking
positive steps to improve our manufacturing process and product sourcing. As
part of this strategy, the division enhanced its presence in China in January
2006 when it paid $0.2 million for a 25% equity participation in a recently
formed Chinese Joint Venture.
In addition to the cost control issues, management also continues to follow a
strategy of new product development as a key drive in increasing market share
within key product segments.
2005 COMPARED TO 2004
Revenues for the year increased by $1.4 million (14.8%) from $9.3 million in
2004 to $10.7 million in 2005. This increase was due, in the main, to improved
trading volumes of $1.0 million and favorable exchange differences of $0.4
million.
Sales of both the distribution range of products and the engineered products
line showed a marked improvement when compared to last year helped by new
distribution channels in Europe, and new initiatives in South America.
The higher technology area of the division, "Applied Magnetic Systems" continued
to design and develop new products, mainly driven by the material handling and
separation business. New products were designed, developed and installed within
the food and automation industries, covering liquid processing, conveying and
materials handling industry. In particular, the division was successful in
developing a new range of patented filtration products, 'Micromag', which is
designed to protect expensive pumps and valves.
In the industrial sector, reduced demand was experienced from key sales accounts
as certain customers migrated to Far Eastern manufacturers.
38
The standard low technology area of the business continued to be eroded by good
quality imports at low price points from our competitors in China and the Far
East. This directly impacted on our distribution and industrial markets where
customers switched supply sources to the Far East or redesigned systems and
applications to accommodate newer magnetic materials.
Despite sales price erosion, increases in steel prices and the cost of
utilities, 2005 gross margins were not eroded thanks to the stabilization of raw
material prices for nickel and cobalt (two major alloys used in magnet
manufacturing), an improved mix of products sold within the engineering products
division and improvements in manufacturing costs.
ROBERT SORBY
2006 COMPARED TO 2005
Robert Sorby sales for the year of $4.5 million showed a $0.5 million (9.6%)
decrease from last year's total of $5.0 million. This was attributable to
adverse sales volumes of $0.4 million and adverse exchange movements of $0.1
million.
The year to September 2006 has proved to be one of the most challenging faced by
Robert Sorby for many years. The UK home retail market sales fell by 9% compared
to last year, reflecting the challenging trading conditions and reduced consumer
demand. Two of the division's premier product groups, lathes and lathe chucks,
have felt the combined adverse effect of increased competition and a very
subdued market place.
Export markets, too, suffered softening demand, with a 10% decrease in sales to
North America, our principal export region. Here markets have been affected by
escalating living costs impacting adversely on our typical retiree customer who
lives on a fixed income. Additionally, excess stocks held by one major US
customer have had an adverse effect on the year's sales revenues.
We have continued to switch our focus from dealer selling to direct consumer
marketing, especially in-store demonstrations, woodworkers' club events and
regional exhibitions. One innovation has been the introduction of a series of
master classes in the UK and this concept is to be extended to the US in the
first quarter of the next financial year.
In the light of the sales shortfalls, emphasis has been placed on the control of
manufacturing costs, product development expenses and marketing expenditure.
Towards the end of 2005 we had suffered as a result of the dramatically
escalating price of steel, which is our prime raw material. Those prices have
now dropped significantly from their peak which has eased some of the pressure
on margins. In addition, the move from distribution through numerous UK trade
accounts to sales through our own retail arm, Turners Retreat, served to improve
gross margins as well as giving us more control of our product in the market
place.
Looking forward the business climate remains uncertain. In the UK uncertainty
over pension issues continues to have a negative impact on our typical customer.
In the USA, which, is our single biggest market, the outlook remains unclear
with pressure on personal expenditure. Against this unpromising background our
mail order business continues to flourish and the launch of a new sharpening
system in October has exceeded expectations.
2005 COMPARED TO 2004
Robert Sorby sales for the year showed no movement from last year ($5.0 million
in both years), although favorable exchange movements of $0.2 million were
offset by a volume decrease of $0.2 million.
Robert Sorby suffered from a very challenging market place, especially in the
second half of the year. UK home retail market sales fell by 7% compared to the
prior year, reflecting the challenging trading conditions and reduced consumer
demand. To resist sales dilution, the division's UK marketing effort has
centered on the attendance at national, regional and dealer shows, supported by
specialist magazine advertising. Additionally, Robert Sorby's mail order
operation has now become firmly established and continuing focus is to be placed
here in the future. As a result of strong demand in this sector an e-commerce
web site is currently under construction.
39
Overseas were also disappointing, especially in the US. We have continued to
maintain a strong overseas promotional activity, which is essential in retaining
market share and resisting the efforts of competitors to consolidate their own
market positions.
BOWERS
2006 COMPARED TO 2005
Sales for the year showed an increase of $0.8 million (5.3%) from $15.6 million
in 2005 to $16.4 million in 2006. $1.4 million of this increase is attributable
to increased sales volume offset by $0.5 million of adverse exchange rate
variances and $0.1 million of increased sales rebates.
The increase is mainly attributable to the continued expansion of the new sales
and distribution facility set up in Maastricht, Holland, that was established in
fiscal 2005 and, to a lesser extent, sales from our new Shanghai based facility
which commenced trading in the second quarter of the current year.
Growth in the UK based divisions has been rather more subdued. Here, the home UK
market remains the main concern, with the double threat of competition from low
cost imports and a shrinking industrial market place. Continuing factory
closures in the automotive market, including Rover and Peugeot, are,
unfortunately, not being offset by expansion in other UK factories such as
Honda, Nissan and Toyota. While the automotive sector has remained stagnant the
aerospace sector has performed well as has the offshore sector, where suppliers
have made significant investment in new equipment for this industry. In
particular, Bowers "Gagemaker" range of products has witnessed a 40% increase
during the year.
The core Bowers export business has been positive with the USA and German
markets performing strongly due to companies making significant investment in
machine tools, the key driver for stimulating purchase demand for metrology
equipment. We do anticipate a leveling off in expansion in these two markets in
fiscal 2007, although we expect this to be offset by expansion in Europe and
Asia.
The Shanghai facility is currently operating as a quality control and
administration centre for products being shipped to Europe. A complete range of
bench hardness testers has been introduced and a distributor network has been
established in Europe for these products with further distributors now appointed
in Asia for both the bench and portable hardness testers.
Bowers Shanghai has obtained a trading license to sell within the PRC and
preparations are now underway to commence direct selling activities in the
second quarter of Fiscal 2007. The activities in Shanghai will be further
enhanced when manufacturing operations commence in quarter 2 of Fiscal 2006/7.
Gross margins have been sustained during the year. Increased energy costs have
been offset by favorable exchange gains on imported products denominated in US
dollars and a price increase in July was successfully implemented.
Looking forward, demand for our own manufactured hand tools will continue to
face further pressure from cheap Far East imports. The company recognizes that
new products are the key drivers for growth in the business and several
significant new products are due to be launched during the 2006/7 fiscal year.
The main threats are a larger than expected slowdown in the US and any
significant adverse changes in exchange rates.
2005 COMPARED TO 2004
Sales for the year showed an increase of $1.9 million (14.3%) from $13.7 million
in 2004 to $15.6 million in 2005. $1.4 million of this increase is attributable
to increased sales volume with the remaining $0.5 million due to favorable
exchange rate variances.
Quarter 4 results were in line with forecast but a larger than normal slowdown
in sales to the USA over the summer months and manufacturing capacity issues in
the UK resulted in the division being unable to recover EBIT shortfalls in
quarters 1 and 2.
40
The new sales and distribution facility set up in Maastricht, Holland, became
fully operational during the year and continued to have a favorable impact on
trading volumes. This new facility, specializing in the distribution of portable
hardness testing equipment manufactured in China and the sale of general
engineers hand tools, has excellent connections in mainland Europe. The
division's earnings were depressed by considerable set-up costs but it is
anticipated that its profitability will be increased once these one-time charges
are eliminated. An allied manufacturing, quality control and distribution centre
is being established in Shanghai, China and this is expected to improve
divisional margins further once the business is fully functional during Q2 of
fiscal 2006. Currently the quality control operation for these hand tools is
being carried out in Maastricht but this will be transferred to Shanghai where
the division will benefit from lower labor costs.
Other successes in the year included solid performances in the USA, although the
growth experienced during the first three quarters of the year slowed down in
the last quarter. High sales levels of the new Smart Plug 2-point product were
also encouraging. Good progress was made in new markets throughout the year and
new or additional distributors were appointed in Turkey, Australia, Mexico, Hong
Kong and Russia.
Overheads were strictly controlled throughout the year which helped to
compensate for lower than expected revenues. A restructuring of the UK sales
operation was completed in quarter 4 as a means to further reduce overheads in
the 2006 financial year.
Margins showed marginal deteriorations due to efficiency problems at one of the
UK manufacturing sites but this will be addressed through a new capital
expenditure initiative which is to be implemented in Q1 of fiscal 2006.
Mitigating these adverse margin impacts was the slight strengthening of the $
which lowered the cost of factored items purchased from the Far East.
S&J FRANCE
2006 COMPARED TO 2005
Sales in the year decreased by $0.3 million (2.6%) from $10.4 million in 2005 to
$10.1 million in 2006, the decrease being attributable to adverse exchange rate
variances of 0.4 million offset by volume increases of $0.1 million.
The French economy remains subdued and business conditions in the Company's
principal markets have continued to mirror this depressed retail environment.
Competition remains intense in the French garden products market with a number
of suppliers trying to secure business with a shrinking base of retail outlets.
This competition inevitably leads to pressure on margins and the situation is
exacerbated by our sales profile where 40% of our turnover is concentrated on
two customers. This makes price negotiations difficult and can result in
additional incentives, e.g. rebates being offered, as a matter of course, in
order to gain orders. Sales rebate levels were particularly high in the period
under review.
We continue to feel the effects from the increasing flow of cheap Asian and Far
Eastern imports which puts pressure on turnover and margins. These pressures
were intensified by increases in direct costs, particularly raw materials and
payroll. This margin dilution could be further increased by the opening of
specialist cut-price garden stores in the course of the forthcoming year.
In order to relieve these margin pressures the Company continues to look for new
suppliers in China and India in order to drive down product cost. The Company
will continue to concentrate on marketing activity to promote its principal
brands and to secure new listings. Such activity will centre on the publication
of a new 2007 product catalogue, improvements to the Company web site,
advertising, newsletters, etc.
It is clear that in order to increase the success of new product ranges it is
essential that we are able to offer quality products at lower price points. We
will therefore focus on new product development as a way of both improving
margins and eliminating the seasonal peaks that are typical of the garden
products business. During 2006 the Company has extended its private ranges of
tools and introduced new snow, garden cutting and bonsai tools.
41
2005 COMPARED TO 2004
Sales in the year increased by $0.8 million (7.8%) from $9.6 million in 2004 to
$10.4 million in 2005, the increase being attributable to favorable exchange
rate variances of 0.5 million and volume increases of $0.3 million.
On a macro level the French economy remained depressed with increased
unemployment rates, lower consumer confidence and reduced spending levels.
Business conditions in the company's markets reflected the sluggish retail
environment with price competition and consolidation of competitors putting
pressure on margins. Additionally, the company suffers from a large amount of
French garden product turnover being concentrated in a small number of retail
outlets, which makes price negotiations very difficult. As a result of this, the
company forced to offer higher rebate levels to stimulate sales
Significant marketing activity was undertaken during the year to promote the
Company's principal brands and new listings continued to make an important
impact especially brass ornaments, thermometer and weather station ranges,
culture products, extensions to the garden product and hand tool range and
plastic shovels. Given the seasonal nature of garden product sales, the
marketing and promotional activity undertaken in the year (new design and
packaging for the company's principal brands; creation of new web site) together
with the impact of new ranges played an important role in the French division.
Gross margins in the year to September 30, 2005 improved by two percentage
points over the comparable period last year as a result of production
efficiencies and the negotiation of more favorable supplier terms. An overhead
reduction program was also successfully implemented.
AUSTRALASIA
2006 COMPARED TO 2005
Sales decreased from $15.0 million in 2005 to $13.8 million in 2006, the $1.2
million (7.8%) decrease being attributable to sales volume decreases of $0.35
million, increased sales rebate levels of $0.35 million and adverse exchange
variances of $0.5 million.
The sales volume decreases have all occurred within our New Zealand division
while Australia has witnessed some modest increases.
The Australian market recorded economic growth during the third and fourth
quarters despite an increase in domestic interest rates in May 2006 and
escalating fuel costs. The economy also recorded a 30-year low in its
unemployment rate giving early evidence that the increase in interest rates had
a less than anticipated impact on economic activity. Against this macro economic
backdrop, the division's sales were adversely affected by increased competition,
a rise in rival imported house brands, declining price points and the loss of
garden ranges with a major retail and agency line. Such losses were offset,
however, by increased sales in air, masonry, hand tools and metal products.
In New Zealand, sales levels were down on the previous year this being
attributable to increased levels of competition from Asian imported power and
air tool products, the loss of business with a major retail group in fiscal 2005
and a slowing of the New Zealand economy and declining consumer demand when
compared to the previous year.
In addition, the Australian and New Zealand markets continue to be extremely
price competitive with many of our retail customers sourcing their "house
brands" directly from Asia in direct competition with S&J. This practice has
placed, and will continue to place, added pressure on our sales, margins and
market share. Despite these pressures, margins in Australia were 3 points higher
than those achieved in the previous fiscal year as a result of improved product
sourcing and successful price increases. In contrast, margins in New Zealand
fell by two points as a result of adverse sales mixes and the clearance of slow
moving inventory at reduced prices.
Overall, sales to our major customers reflect the continued expansion and
domination of the market by the major corporate retailers who continue to expand
their market share at the expense of the traditional independent retail groups.
As such, our sales mix reflects this trend with sales growth continuing in the
corporate sector whilst sales within the independents continue to decline. Our
objective going forward is to spread our exposure to the corporate sector by
increasing our sales and market share in the independent and industrial markets.
42
A major focus going forward will be the promotion and marketing of Spear &
Jackson brands to gain incremental sales and profit growth. The division will
also continue to develop and introduce new and extended ranges under the S&J
brand as a further lever to generate additional revenues.
2005 COMPARED TO 2004
Sales decreased from $17.4 million in 2004 to $15.0 million in 2005, the $2.4
million (13.8%) decrease being attributable to sales volume decreases of $3.0
million and increased sales rebate levels of $0.3 million offset by favorable
exchange variances of $0.9 million.
The sales revenues of the Australian division continued to suffer in comparison
to the prior year due to the loss of business with a major Australian retailer,
increased levels of competition and a softening in retail demand spurred by
increases in domestic interest rates which negatively impacted on consumer
spending.
In New Zealand, lower than expected sales levels were attributable to increased
levels of competition from Asian imported power and air tool products and the
loss of business with a major retail group. As in Australia, increased domestic
interest rates and speculation concerning further rate hikes dented consumer
confidence and slowed demand.
Margins in both Australia and New Zealand remained under pressure given the
sluggish retail demand, the increased promotional and marketing costs necessary
to maintain sales levels, unfavorable sales mixes and reduced exchange gains
from a weakening Australian dollar. These adverse effects were mitigated, where
possible, by improved product sourcing.
Offsetting the margin dilution were overhead reductions in excess of 20%
compared to the prior year across all cost centers in the two Australasian
units.
Competition from imported Asian products and the increasing trend of the large
Australian retailers to import and develop their own home brands continued to
place pressure on the sales and margins of the business. To counter this trend,
the division instigated aggressive pricing policies to help maintain and improve
existing sales volumes and market share in all categories in which it competes.
The division also remained focused on re-establishing and consolidating its
trading relationships with retail customers and suppliers and on maximizing the
selling opportunities of Spear & Jackson branded products. In this regard,
management introduced a number of new and extended ranges and promotional
programs across the digging, garden cutting, handsaw and air tool ranges. In
addition, the division concentrated on improved product sourcing to ensure that
all S&J branded product meets customers' expectations and is positioned within
the appropriate price points. At the end of fiscal 2005, not all of these
initiatives had reached their full potential but efforts to generate incremental
sales and margin growth would continue into fiscal 2006. In addition, management
initiated a series of cost cutting measures, including the restructuring of the
workforce, in order to meet the slow down in sales demand.
COSTS OF GOODS SOLD AND GROSS PROFIT
Summary details regarding costs of goods sold as a percentage of sales and gross
profit margins in the periods under review are as follows:
Years ended September 30 Qtrs ended September 30
2006 2005 2004 2006 2004 2003
% % % % % %
Cost of goods sold..... 70.00 66.99 67.92 73.93 66.59 64.83
as a % of sales
Gross profit margin.... 30.00 33.01 32.08 26.07 33.41 35.17
|
Costs of goods sold increased to $67.9 million in the year to September 30, 2006
from $67.5 million in 2005. In the quarter to September 30, 2006 the cost of
goods sold was $16.1 million compared to $14.8 million in 2005, an increase of
8.78%.
43
COMPARISON OF 2006 TO 2005
Margins have continued to suffer from the adverse effects of raw material
(principally steel) and utility price hikes together with increases in the cost
of fuel used to operate our manufacturing processes. In the Neill Tools division
a main driver behind decreased margins has been the mix switch towards factored
garden power tools at the expense of better margins on industrial hand tool
product lines. Significantly, in the last quarter, margins have also been eroded
in both our Neill Tools and Eclipse divisions as a result of one-time inventory
provisioning against old and obsolete lines.
We will continue to evaluate means of maintaining and improving current sales
mixes and of further reducing costs of goods sold across all of our principal
trading operations to avoid margin erosion. Improvements in manufacturing
efficiency and the reduction of direct costs continue to be the focus of
management as a means to improve competitiveness in new and existing markets.
The UK manufacturing reorganization program, initiated in the last quarter of
2005, and continued in the second and subsequent quarters of Fiscal 2006 with
the announcement of the closure of our manufacturing site at Wednesbury in the
UK, the relocation of the UK central warehouse to the Atlas site in Sheffield
and the cessation of certain manufacturing activities in the UK magnetics
division has had, and will have, a beneficial effect on margins.
Own-manufactured product will be progressively replaced with factored items
sourced from overseas thereby reducing costs and increasing profitability.
Further pressure is exerted on our margins by the weak dollar and, to retain
competitiveness, additional discounts have been offered in certain markets where
our sales are transacted in that currency.
The Company's position is not, however, unique in this respect since the trading
issues crystallized by the weakening value of the dollar are currently faced by
many other UK companies with material export sales interests.
COMPARISON OF 2005 TO 2004
Despite continuing raw material (principally steel and plastic) and utility
price increases, together with increases in the cost of fuel used to operate our
manufacturing processes, gross margins continued to show improvements over
Fiscal 2004, as a result of:
- exchange gains realized on the purchase of factored products denominated in
US dollars from suppliers in the Far East;
- a more favorable and advantageous sales mix;
- further increase in selling directly to customers rather than via
intermediaries;
- improved product sourcing and increased factoring and production
efficiencies;
- negotiated price increases; and
- sale of slow moving inventories at amounts in excess of their net
realizable value.
EXPENSES
2006 COMPARED TO 2005
Selling, general and administrative (SG&A) expenses increased by $4.7 million
(14.9%) from $31.4 million in the year ended September 30, 2005 to $36.1 million
in the year ended September 30, 2006. SG&A expenses for the quarter ended
September 30, 2006 were $8.3 million, an increase of $1.3 million (18.6%) over
the expenses charged in the equivalent period last year.
44
The principal reasons for the movements are as follows:
Increase/(Decrease) over Prior Years
Year ended Quarter ended
September 30, September 30
2006 2006
$m $m
a) Impact of movements in average
US$/sterling cross rates in the period. (0.94) 0.2
b) Increased FAS87 pension costs.......... 4.37 1.22
c) Inflationary increases net of foreign
exchange gains and losses on trading
transactions........................... 0.80 0.20
d) Decreased head office costs relating to
reduced legal and professional fees,
monitor fees and associated costs...... (0.29) (0.02)
e) One-time costs in setting up the
Metrology facility in Shanghai......... 0.10 0.00
f) Other net increases(decreases)......... 0.66 (0.3)
---- ----
Total increase in SG&A expenses............. 4.7 1.3
==== ====
|
2005 COMPARED TO 2004
Selling, general and administrative (SG&A) expenses increased by $1.7 million
(5.6%) from $29.7 million in the year ended September 30, 2004 to $31.4 million
in the year ended September 30, 2005. SG&A expenses for the quarter ended
September 30, 2005 were $7.0 million, a decrease of $0.2 million (3.3%) over the
expenses charged in the equivalent period last year.
The principal reasons for the movements are as follows:
Increase/(Decrease) over Prior Years
Year ended Quarter ended
September 30, September 30
2005 2005
$m $m
a) Impact of movements in average
US$/sterling cross rates in the period. 1.10 (0.1)
b) Increased FAS87 pension costs.......... 2.69 0.63
c) Inflationary increases net of foreign
exchange gains and losses on trading
transactions........................... 0.50 0.10
d) Decreased head office costs relating to
reduced legal and professional fees,
monitor fees and associated costs...... (0.7) (0.3)
e) Increased UK warehouse and distribution
costs following the change to direct
sales.................................. 0.40 0.10
f) Release of excess provision associated
with settlement of severance
compensation payable to former Managing
Director............................... (0.75) (0.25)
g) Cost savings in Australia.............. (1.1) (0.3)
h) Other net decreases in SG&A expenses... (0.44) (0.08)
----- -----
Total increase (decrease) in SG&A expenses.. 1.70 (0.2)
===== =====
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45
OTHER INCOME AND EXPENSES
Other income and expenses has moved from a charge in 2004 of $0.2 million to
credits in 2005 and 2006 of $0.2 million and $0.3 million respectively.
The increase in 2006 over 2005 is due to the inclusion of income of $0.1 million
relating to the Group's share of earnings in Ningbo Hightec Magnetic Assemblies
Co. Ltd., a joint venture company in which the company holds a 25% stake.
Interest receivable levels in 2006 were slightly lower when compared to 2005.
Although the Group has benefited in the year from the sale proceeds ($4.8
million) attributable to the disposal of the remaining element of its
manufacturing facility in Wednesbury, England, this inflow has been offset not
only by restructuring and other costs associated with the closure of the site
but also by higher UK pension contributions. This has reduced interest
receivable on the UK net bank balances.
The $0.4 improvement in net income when comparing 2005 to 2004 is attributable
to bank interest receivable in the Company's UK businesses in Fiscal 2005.
During 2004 cash balances in the UK were negatively impacted by the cash
outflows relating to the purchase of land and buildings at Wednesbury, England
for $3.2 million. This resulted in increased interest charges during 2004. The
sales of both the excess element of the Wednesbury site for $5.2 million in
January 2005 and the $3.4 million derived from the disposition of the Company's
warehouse in Boca Raton increased cash balances in fiscal 2005 and generated
higher interest income in that year.
UNUSUAL OR INFREQUENT EVENTS
Unusual or infrequent events comprise:
Note Years ended September 30,
2006 2005
Lm Lm
Gain on sale of land and buildings........... (a) 3.5 3.3
Manufacturing and other reorganization costs. (b) (3.5) (1.1)
Settlement of class and derivative action
litigation.................................. (0.7)
---- ----
Total........................................ (0.7) 2.2
==== ====
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(a) Gain on sale of land and buildings
In the year to September 30, 2006 the Company recorded a net gain of $3.5
million on the sale of land and buildings. This was derived from the sale, on
July 27, 2006, of the remaining part of its industrial site at St. Paul's Road,
Wednesbury, England as follows:
$m
Sale proceeds................................................... 4.8
Less net book value............................................. (1.1)
Less deferred element of the gain relating to the future........ (0.2)
----
Market value of rentals......................................... 3.5
====
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In the year to September 30, 2005 the Company recorded net gains of $3.3 million
on the sale of land and buildings. On January 28, 2005 the Company completed the
sale of part of the Wednesbury site and on February 15, 2005 the Company also
concluded the disposal of its warehouse and office facility in Boca Raton,
Florida. Details of these sales are as follows:
Wednesbury Boca Raton Total
England Florida
$m $m $m
Sale proceeds........... 5.2 3.5 8.7
Less net book value..... (2.2) (3.2) (5.4)
--- --- ---
3.0 0.3 3.3
=== === ===
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46
(b) Manufacturing reorganization costs
2006
Manufacturing reorganization costs comprise:
Note $m
Manufacturing reorganization and relocation... (i) 1.1
Severance costs............................... (i) 1.7
Fixed asset impairment write-downs............ (ii) 1.2
Release of provisions......................... (iii) (0.5)
---
(3.5)
---
|
(i) On January 25, 2006 the Company announced the closure of the remaining
element of its manufacturing site at Wednesbury, England. With effect from
November 30, 2006 all warehouse and distribution operations previously performed
at this location were transferred to the Company's principal UK manufacturing
site in Sheffield ("Atlas"). The costs of closure of the Wednesbury site are
anticipated to be approximately $1.2 million. These costs include employee
severance payments, site closure costs, factory reorganization expenses, plant
transfer costs and associated capita expenditure.
In addition to the above, the Company announced that certain manufacturing
operations carried out at Atlas would also cease. Provisions for employee
severance costs in respect of the closure of these manufacturing operations were
made in the quarter ended June 30, 2006.
On August 11, 2006, the Company's UK subsidiary, Eclipse Magnetics Limited,
("Eclipse"), announced the cessation of certain manufacturing activities at its
UK site in Sheffield. Eclipse also announced that it would be relocating its
remaining business to the Atlas site. The cessation of manufacturing and site
relocation were completed by November 30, 2006 and provisions were made at
September 30, 2006 in respect of severance costs, relocation expenses and future
years rental costs relating to the vacated premises.
The Wednesbury site closure, the production rationalization at Atlas and the
restructuring at Eclipse form part of the Company's UK manufacturing
reorganization program which was initiated to regenerate and modernize key areas
of the hand and garden tools business. These closures will enable the Company to
consolidate its UK hand and garden tool and magnetic products manufacturing
sites and will allow the Company to develop a modern manufacturing, warehouse
and distribution facility which will be well placed to meet the current and
future needs of its customers.
Costs provided in respect of the Wednesbury site closure and the Atlas
reorganization were $2.2 million. Costs provided in respect of the Eclipse move
were $0.6 million.
(ii) Following the announcement of the reorganizations detailed above, the
Company carried out a detailed review of the ongoing utilization and remaining
asset lives review of the plant and machinery involved in the restructured
operations. As a result of this review, impairment write-downs of $1.2 million
have been made in the year.
(iii) As explained below, a surplus element of the Wednesbury site was sold in
the first quarter of Fiscal 2005 and provision was made at March 31, 2005 for
various site reorganization costs that were to be incurred as a result of that
partial sale. Certain of those costs were not incurred followi
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