MOLINS PLC Annual report and accounts Innovative solutions on a global basis

Transcription

1 MOLINS PLC Annual report and accounts 2009 Innovative solutions on a global basis

2 MOLINS AN INTERNATIONAL BUSINESS PROVIDING HIGH PERFORMANCE MACHINERY AND SERVICES FOR THE PRODUCTION AND PACKAGING OF CONSUMER PRODUCTS. INNOVATIVE SOLUTIONS DELIVERED ON A GLOBAL BASIS. Tobacco MACHINERY MOLINS TOBACCO MACHINERY designs, manufactures, markets and services specialist machinery for the tobacco industry and serves its customers from its extensive international base. 01 FINANCIAL SUMMARY 02 chairman s statement 03 operating review 03 tobacco machinery 04 packaging machinery 04 scientific services 06 financial review 11 board of directors 12 directors report 15 remuneration report 19 corporate governance 22 AUditors report 24 STATEMENT OF DIRECTORS RESPONSIBILITIES 25 Consolidated income statement 26 Statements of comprehensive income 27 statements of changes in equity 28 StATEMENTS OF FINANCIAL POSITION 29 statements of cash flows 30 accounting policies 35 notes to the accounts 61 five year record 62 principal divisions and subsidiaries 63 notice of meeting IBC corporate information

3 MOLINS PLC 01 Financial summary b Increase in underlying earnings b Strong cash flows, resulting in net funds of 5.0m b Funding plan for UK pension scheme agreed b Higher level of order book entering 2010 b Full year dividends maintained at 5.0p per share sales 83.8m (2008: 91.5m) underlying operating profit (continuing operations before exceptional items) 3.5m (2008: 3.0m) net cash from operating activities 8.0m (2008: 3.2m outflow) PACKAGING MACHINERY SCIENTIFIC SERVICES ITCM, based in Coventry, UK, is a specialist engineering supplier, developing innovative products and associated production and packaging machinery for blue chip customers. Langen Packaging GROUP, based in Mississauga, Ontario, Canada and Wijchen, the Netherlands, is a designer and manufacturer of cartoning machinery, case packers, end of line and robotic solutions, as well as a provider of complete turnkey projects involving design and integration of packaging systems. Arista Laboratories, based in Richmond, Virginia, USA, and Kingston upon Thames, UK, is an independent tobacco and smoke constituent analytical laboratory. Cerulean, based in Milton Keynes, UK, develops, assembles, sells and maintains process and quality control instruments for the tobacco industry. Cerulean Packing Machinery, based in Milton Keynes, UK, is a designer and manufacturer of specialist equipment for the handling and packing of tubular products.

4 02 MOLINS PLC chairman s statement JONATHAN AZIS Chairman I am pleased to report that despite difficult economic circumstances, underlying operating profit (continuing operations before exceptional items) improved to 3.5m (2008: 3.0m), even though sales were lower at 83.8m (2008: 91.5m). Underlying earnings per share (continuing operations before exceptional items and net financing income/expense on pension scheme balances) amounted to 11.3p (2008: 10.9p). Basic earnings per share amounted to 5.8p (2008: 35.2p). The Group ended 2009 with net funds of 5.0m (2008: 0.4m net debt), which was the result of strong operating cash flow in the year of 8.0m. The Group started 2010 with an improved order book, although there is continuing uncertainty in all markets. The Tobacco Machinery division s new Octave cigarette making machine has generated good levels of interest with a number of significant orders received in the year. The management of the Langen Packaging Group, part of the Packaging Machinery division which had a disappointing year, has been reorganised so as to benefit from the different experiences of the North American and European markets and to serve better its global customers. The Scientific Services division performed strongly and improved its trading in the year. UK Pension Scheme We are almost at the end of the regular triennial actuarial funding valuation of Molins UK defined benefit pension scheme as at 30 June Using assumptions appropriate for the scheme s circumstances the trustee has valued the scheme at a funding level of 96%, which equates to a deficit of 12.1m. The Company and the trustee have agreed a deficit recovery plan under which the Company will pay 1.2m per annum to the scheme, in monthly instalments commencing July This translates to a nine year recovery plan, subject to review at the next triennial valuation in Both the valuation and the recovery plan are, in the normal way, subject to review by the Pensions Regulator. To assist shareholders we now show within underlying operating profit a charge for the service cost of providing pension benefits to employees of 1.0m (2008: 1.4m). This had previously been excluded from the definition of underlying operating profit. The Company continues to balance its responsibilities to all stakeholders, as it takes actions to strengthen the business. EMPLOYEES The employees in all parts of the Group have continued to contribute strongly in difficult economic circumstances, and I would like to thank each of them for their commitment in the year. Outlook and Dividends As stated we have entered the year with a higher level of order book than twelve months earlier and expect that sales will improve in the current year. We will remain vigilant in respect of the cost base and continue to monitor it closely. However in 2009 performance in Tobacco Machinery and Scientific Services each benefited from a favourable sales mix and we expect that both divisions will find it challenging to maintain the same level of performance this year. Overall, we expect performance to be similar in the current year with that of last year. The Board is recommending maintaining the final dividend of 2.5p, making a total of 5.0p for the year (2008: 5.0p). JONATHAN AZIS Chairman 26 February 2010

5 MOLINS PLC 03 operating review DICK HUNTER Chief Executive TOBACCO MACHINERY The division delivered sales of 36.0m in the year (2008: 34.9m as reported, 36.6m at constant exchange rates) and operating profit, before exceptional items, increased to 2.9m (2008: 2.3m). This level of performance was achieved despite uncertainties in the market and benefited from a favourable aftermarket sales mix. Order intake was 15% higher than in the previous year (on constant exchange rates), with the increase mainly as a result of a significant order for the division s new Octave cigarette making machine, following successful completion of its full production trial. These machines will be delivered in a phased manner, during 2010 and 2011, although at lower profit margins than would be expected on an ongoing basis, as the division develops its logistics and assembly operations for this machine. Orders have also been received from other customers for this machine, which represents a promising product launch. Although orders for rebuild machines were down, demand for aftermarket products was maintained at similar levels to last year, although this was supported by a few one-off equipment upgrade projects. Sales were maintained at broadly similar levels across the product range. Geographically, lower sales in North and South America were compensated for by increases in the rest of the world. Demand in North America, which is serviced by the division s sales and service operation in Richmond, USA, showed some signs of weakness in the year, with very limited sales of machinery, but aftermarket was supported by strong sales of performance enhancement kits. Sales in South America, from the division s service and manufacturing facility in Brazil, were impacted by uncertainty created in the Brazilian market from increases in the taxation of tobacco consumer products. This led to a number of customers delaying investment activities and as a result sales of rebuild machines were lower than in the previous year. The business responded by reducing its headcount in the year by some 25% at a cost of 0.2m (reported within exceptional items), with overall divisional headcount reduced by 9% in the year. Sales in the Asia Pacific region, which is serviced from the division s operation in Singapore, showed growth in the year, with particularly strong sales into China, partly as a result of demand created by the major overhaul and upgrading of a customer s factory. However, local sourcing by customers of spare parts in China continues, which presents challenges in respect of maintaining sales levels in this territory. The Asia Pacific sales team, which is based out of the division s operation in Singapore, continues to provide support and service to a wide range of existing customers, as well as developing new leads with businesses that are seeking to upgrade their factories into more automated production facilities. The Europe, Middle East and African region is serviced from the division s UK operation at Saunderton. Sales in these territories were strong in the period, with increased sales of machines offsetting a small decline in aftermarket sales. The UK remains the engineering and logistics centre of the division, and further development and improvement of existing products and of the supply chain progressed in the year. Having resided on the Saunderton site for over 50 years, the UK business, which includes the division s main warehousing activities, will relocate to new leased premises a few miles away in Princes Risborough by the end of the first half of The division s profitability was strongly supported by the manufacturing and assembly facility in Plzen, Czech Republic. The combination of a strong and balanced factory loading, as well as continued operational efficiency improvements, contributed to lower unit costs and helped the division maintain profit margins despite a slightly adverse sales mix compared with the previous year. This was despite the further strengthening of the average value of the Czech currency in the period, which continues to put pressure on cost rates. Having developed the Octave machine in the UK, much work has centred on the development of the assembly skills for this machine in the Czech Republic, which has progressed well. Many challenges continue to face the tobacco industry and these have led to consolidation of manufacturers and rationalisation of their production capacity, which in turn leads to uncertain market conditions. The division has focused on the quality of its service performance, as well as engineering developments aimed at enhancing its core product offering, and this has contributed to a strong performance in the year. Performance in 2010 will be partly dependent on timing of orders for new machinery and repair and overhaul.

6 04 MOLINS PLC operating review CONTINUED PACKAGING MACHINERY Performance in the year was substantially lower than in the previous year, with sales of 25.8m (2008: 37.0m as reported, 39.8m at constant exchange rates) and operating loss, before exceptional items, of 1.9m (2008: 0.3m). The division comprises ITCM, based in Coventry, UK, which provides innovative machinery and engineering solutions to packaging and processing needs, Cerulean Packing, based in Milton Keynes, UK, which supplies tube packing machinery and the Langen Packaging Group, based in Mississauga, Canada and in Wijchen, the Netherlands, which supplies highly automated product handling, cartoning and robotic end-of-line machinery and systems. The division entered 2009 with a much lower order book than twelve months earlier, following weak levels of order intake in the second half of Order intake strengthened a little in the first half of 2009 and improved further in the second half, resulting in it being some 30% ahead of the previous year and the order book entering 2010 being considerably higher than twelve months previously. However, this still represents lower levels of prospective activity than has typically been the case in prior years and is a reflection of the continuing difficult economic conditions. This is being felt particularly in North America, where potential orders are still taking a long time to formalise and placement tends to get delayed. The European market is also difficult, but there have been some signs of increased activity in the last few months. The businesses took steps to reduce operating costs, with a reduction in headcount of 15% in the year. However, whilst this helped in balancing resources with the workload, cost over-runs on a number of projects adversely impacted the trading performance of the division. ITCM had a particularly difficult year. Although order intake was ahead of the previous year, a significant proportion of these orders are for delivery in Sales in 2009 were considerably lower than the previous year. Performance was also impacted by two technically challenging projects that incurred significant cost over-runs. One of these projects was successfully commissioned at the customer s factory in the year. Within the Langen Packaging Group much work has been carried out to ensure that the review and risk assessment processes are robust so projects are delivered with the planned profit margins. This has continued to progress, aided by the greater links between the Dutch and Canadian management groups. Nevertheless, a number of projects delivered disappointing profit margins and this remains a major area of focus. Overall the Langen Packaging Group delivered a similar level of performance compared with the previous year, on considerably lower sales. The Canadian business is particularly affected by the strength of the Canadian dollar compared with the US dollar, with the majority of its sales being made in the United States, and work is focused on the logistics process to partly mitigate this effect. Langen Packaging Group has continued to develop its products, with the emphasis placed on harmonisation of the range between the Netherlands and Canada, whilst maintaining the flexibility to meet the most demanding of customers product handling and packaging needs. Cerulean Packing, which forms a small part of the division, delivered a lower level of sales and profit in the year, although prospects for 2010 are a little improved. Overall, a combination of considerably lower sales and cost over-runs on a number of projects resulted in a particularly disappointing performance in the year. Although the order book was higher entering 2010, the market conditions are still weak and the outlook remains uncertain. Management is focused on improving project management processes and reducing the cost base where there is excess capacity whilst maintaining high levels of customer support and service. SCIENTIFIC SERVICES The division, which comprises Cerulean and Arista Laboratories, delivered a strong performance in the year, with sales of 22.0m (2008: 19.6m as reported, 20.8m at constant exchange rates) and operating profit of 2.5m (2008: 1.0m before exceptional items). Cerulean is the market-leading supplier of quality control instruments and analytical smoke constituent capture machinery to the tobacco industry. It is based in Milton Keynes, UK and is complemented by sales and service offices in a number of other key geographical areas in supporting its global customer base.

7 MOLINS PLC 05 SCIENTIFIC SERVICES continued Sales in the year exceeded expectations, with demand being maintained relatively evenly through the year. Whilst all markets remained strong, particular success was achieved in China where Cerulean s work in re-establishing itself in this market resulted in a further increase in sales. Demand rose for smoking machines and quality control instruments, which includes the well established QTM range, the C² range and the newer Quantum range, as well as a series of smaller and more specific instruments developed over the last few years. Additionally, sales into the aftermarket grew in the year, which helped to improve profit margins. Cerulean remains focused on maintaining its product leadership and continues to commit significant resources to development activities. These include not only the enhancement of the current range, but also a widening of the product portfolio, as well as research work in more innovative concepts which may lead to development of future products. Much attention has also been focused this year on the supply chain, as a few suppliers have been affected by the difficult economic conditions, leading to potential disruption to supply. The business has developed further contingency plans in the period to counteract this risk and worked with suppliers to help alleviate any difficulties so that customers have not been affected. Arista Laboratories, based in Richmond, USA and Kingston upon Thames, UK, is an independent tobacco and cigarette smoke constituent testing laboratory, for regulatory, research and product development purposes. Its sales in the year were at similar levels to the previous year, but margins were improved through a more evenly spread distribution of work in the year, thereby helping laboratory efficiency. In June 2009 US legislation was passed placing the regulation of tobacco products with the US Food and Drug Administration (FDA). The full consequences of this, in terms of the required testing regimes, will become understood as the FDA develops its regulatory system. It is expected that this change in regulation will lead to increased business opportunities for Arista in the medium term and consequently it is investing in its systems and infrastructure, as well as maintaining dialogue with those current and prospective customers who will be affected by the legislation. Both businesses in the division operate to short order lead-times which can change their outlook quite quickly. With Cerulean, the market remains quite buoyant currently, although the level of order intake in 2009 was boosted in some markets by both the need to meet specific regulatory requirements and to modernise factory floor instrumentation. As these projects are completed the business expects to see some reduction in the current level of sales activity in these markets. There are no short-term indicators at Arista which would suggest activity levels are likely to change significantly in 2010, although the business is dependent on a number of non-repeating projects in any one year, the level of which is difficult to predict. DICK HUNTER Chief Executive 26 February 2010

8 06 MOLINS PLC financial review DAVID COWEN Group Finance Director underlying earnings per share (continuing operations before exceptional items and net financing income/expense on pension scheme balances) 11.3p (2008: 10.9p) net funds 5.0m (2008: 0.4m net debt) dividends per share 5.0p (2008: 5.0p) Profit in the period was 1.1m (2008: 6.7m). Underlying operating profit (continuing operations before exceptional items) was 3.5m (2008: 3.0m) and underlying earnings per share (continuing operations before exceptional items and net financing income/expense on pension scheme balances) amounted to 11.3p (2008: 10.9p). Basic earnings per share (continuing operations) amounted to 6.3p (2008: 35.2p). Net funds at the end of the year were 5.0m, following strong operating cash flows (2008: 0.4m net debt). To aid the understanding of the Group s performance, the definition of underlying operating profit has been changed this year to include the service cost of providing pension benefits to employees. Similarly, the underlying earnings per share definition has been changed to only exclude exceptional items and net financing income/expense on pension scheme balances, as well as discontinued operations. All comparative figures have been restated accordingly. In addition, the Group has formally adopted IFRIC 14 IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction for the year ended 31 December 2009, although had applied its principles in The interpretation of the accounting treatment of tax under IFRIC 14 has changed and consequently the results for the year ended 31 December 2008 have been restated and the Group s tax liability on the UK pension scheme surplus has been reclassified from employee benefits to deferred tax liabilities. The effect of these changes has been to increase the taxation charge in the income statement for the year ended 31 December 2008 by 1.9m. This amount was previously recognised through the statement of recognised income and expense. The tax liability of 0.9m at 31 December 2008 on the UK pension scheme surplus has been reclassified from employee benefits to deferred tax liabilities. As a consequence of the restatement, and in accordance with IAS 1 (revised) Presentation of financial statements, the financial statements include the statement of financial position as at 31 December OPERATING RESULTS The trading performance of the Group is discussed in the Operating review. Group revenue was 83.8m, compared with 91.5m in Sales in the Tobacco Machinery division were 36.0m (2008: 34.9m) and operating profit before exceptional items was 2.9m (2008: 2.3m). Packaging Machinery division sales decreased to 25.8m (2008: 37.0m) and the operating loss before exceptional items was 1.9m (2008: 0.3m). Scientific Services division sales increased to 22.0m (2008: 19.6m) and operating profit before exceptional items increased to 2.5m (2008: 1.0m). EXCEPTIONAL ITEMS The Group incurred net exceptional charges of 0.4m in the year (2008: 1.7m profit), before tax. This comprised reorganisation costs of 0.7m (2008: 1.4m), reflecting redundancies made within the Tobacco Machinery and Packaging Machinery divisions, and net profit in respect of property of 0.3m (2008: 3.1m), comprising 0.4m profit from the sale of the Langen Packaging Group property in the Netherlands for a sum of 1.0m, less costs of 0.1m associated with the preparation for the move from the Saunderton site.

9 MOLINS PLC 07 EXCEPTIONAL ITEMS continued Following the sale of the Company s former site at Saunderton in December 2008, notice was served to the Company in June 2009 for the tobacco machinery business that still operates from there to vacate the site within twelve months in accordance with the sale agreement. This resulted in a payment of 0.4m to the Company as compensation for the loss of the agreed rent-free occupation of the site until December The Company also received a final payment of 0.1m in respect of the sale of the site. Alternative premises have been located within the vicinity of Saunderton and the Company entered into a lease agreement prior to the end of the year. The business will be relocated during the first half of 2010, for which a non-capital cost provision of 0.6m was held at the end of the year. In addition the business is expected to incur capital leasehold improvement expenditure of approximately 1.2m in INTEREST AND TAXATION Net interest expense in 2009 was 1.0m (2008: 4.1m net interest income). Included within net interest is the net financing expense on pension scheme balances of 0.9m (2008: 4.8m net financing income), which is explained in the Pension Valuations paragraph on page 8. Non-pension related net interest expense was 0.1m, compared with 0.7m in the previous year. The tax charge on underlying profits (continuing operations before exceptional items and net financing income/expense on pension scheme balances) was 1.2m, an effective rate of 35% (2008: 9%, reflecting a number of non-recurring credits). The total taxation charge on the Group s profit before tax on continuing operations was 0.9m (2008: 2.1m), an effective rate of 43% (2008: 24%). The effective rate of tax was impacted by permanent differences and losses in jurisdictions where no related deferred tax asset has been recognised, partly mitigated by tax incentives. EARNINGS PER SHARE Basic earnings per share amounted to 5.8p (2008: 35.2p). Basic earnings per share for continuing operations amounted to 6.3p (2008: 35.2p) and underlying earnings per share (continuing operations before exceptional items and net financing income/expense on pension scheme balances) amounted to 11.3p (2008: 10.9p). DIVIDENDS The Board is recommending a final dividend of 2.5p per ordinary share which, together with the interim dividend of 2.5p paid in October 2009, results in a total dividend of 5.0p per ordinary share in respect of 2009 (2008: 5.0p per ordinary share). The dividend will be paid on 14 May 2010 to shareholders registered at the close of business on 23 April CASH, TREASURY AND FUNDING ACTIVITIES Group net funds were 5.0m at the end of the year (2008: 0.4m net debt). Net cash inflow from operating activities was 8.0m (2008: 3.2m outflow), which benefited from a positive working capital movement of 2.7m (2008: 6.8m adverse) and is after payments of 1.2m in respect of reorganisation costs, including pension related payments of 0.5m in respect of redundancies carried out in 2008 and 0.1m in respect of redundancies in 2009, and net taxation payments of 0.2m (2008: 0.7m). Capital expenditure of 1.6m (2008: 1.2m) and capitalised product development expenditure of 1.1m (2008: 1.5m) were incurred in the year. The Group received in aggregate 1.5m in respect of the sale in 2008 of the site at Saunderton and the sale in the year of property in the Netherlands. The sale of surplus plant and equipment returned cash receipts of 0.1m (2008: 0.2m). Net interest of 0.1m (2008: 0.7m) and dividends of 1.0m (2008: 1.5m) were also paid in the year. The net cash outflow in respect of discontinued businesses that were sold in 2006 was 0.4m (2008: 0.4m). There were no significant changes during the year in the financial risks, principally currency risks and interest rate movements, to which the business is exposed and the Group treasury policy has remained unchanged. The Group does not trade in financial instruments and enters into derivatives (principally forward foreign exchange contracts) solely for the purpose of minimising currency exposures on sales or purchases in other than the functional currencies of its various operations. The Group maintains bank facilities appropriate to its expected needs. In the UK, at 31 December 2009 these comprised secured, committed borrowing facilities with Lloyds TSB Bank plc and Fortis Bank SA/NV of 11.1m. These facilities, which are committed until December 2012, are subject to covenants covering earnings, interest cover and tangible net worth, and are both sterling and multi-currency denominated. The Group is operating well within covenant levels. Additionally, the Group maintains a committed facility overseas of 3.1m, denominated in US dollars. Short-term overdrafts and borrowings are utilised in certain parts of the Group to meet local cash requirements and these are typically denominated in local currencies. Foreign currency borrowings are used to hedge investments in overseas subsidiaries where appropriate.

10 08 MOLINS PLC financial review CONTINUED PENSION VALUATIONS Significant progress has been made on the scheme specific funding valuation of the Group s defined benefit scheme in the UK as at 30 June The trustee of the scheme has set assumptions for this valuation, having consulted with the Company as appropriate. The valuation shows a funding level of 96% of liabilities, which represents a deficit of 12.1m. The previous valuation in 2006 resulted in a funding level of 102% of liabilities, the decline being mainly as a consequence of changed financial conditions in the global economy and the impact on asset values, as well as a further strengthening of the mortality assumptions in line with empirical evidence. The solvency position of the fund, which reflects the scheme s position if it was wound up at that date, shows a funding level of 60%. Valuations are extremely sensitive to a number of factors outside the control of the Group, including discount rates. The trustee of the scheme and the Company have agreed a deficit recovery plan, which commits the Company to paying to the scheme 1.2m per annum, in monthly instalments, commencing July The deficit recovery period is estimated to be nine years, which is scheduled to be formally reassessed as at 30 June In addition to the deficit recovery payments, Company contributions from 1 July 2010 for ongoing benefits will be 3.3% in respect of members who joined the scheme after March 2006 and 7.9% for the majority of other members, reduced from the current rates of 5% and 11% respectively. The valuation and deficit recovery plan will shortly be submitted to the Pensions Regulator for its review, which is the standard process for all such valuations. The Group has adopted IAS 19 (revised) as its basis of accounting for pension costs. The 2009 accounting valuation of the UK fund s assets and liabilities was undertaken as at 31 December 2009 based on the detailed funding valuation work carried out as at 30 June 2009, updated to reflect conditions existing at the 2009 year end and to reflect the specific requirements of IAS 19 (revised). The smaller US defined benefit schemes were valued at 31 December 2009, using actuarial data as of 1 January 2009, updated for conditions existing at the year end. Under IAS 19 (revised) the Group has elected to recognise all actuarial gains and losses outside of the income statement. The IAS 19 (revised) valuation of the UK scheme showed a net deficit of 11.4m at 31 December 2009 (2008: 2.7m surplus), before tax. The value of the scheme s assets at 31 December 2009 was 313.0m (2008: 283.8m), but this increase was more than offset by an increase in the value of the scheme s liabilities as the discount rate has decreased reflecting the fall in corporate bond yields. The accounting valuations of the US pension schemes showed an aggregated net deficit of 3.1m (2008: 3.8m), all amounts being before tax, with assets of 13.5m (2008: 13.4m). In previous years the net accounting charge/credit in respect of the defined benefit schemes, which comprises the service cost of providing such benefits each year, the interest cost on scheme obligations (IOO) and the expected return on scheme assets (ERA), has been charged/credited within operating profit in the income statement. As an alternative to this treatment, IAS 19 (revised) allows for the IOO and the ERA to be charged/credited to financial income and expense in the income statement, which, to provide greater clarity of the impact of the Group s defined benefit schemes on the income statement, the Group has chosen to do from this year. Comparative figures for prior years have been restated accordingly. In 2009, the pension service cost charged to operating profit was 1.0m (2008: 1.4m), before curtailment costs. Net financing expense in respect of the schemes was 0.9m (2008: 4.8m income), comprising IOO of 18.6m (2008: 19.7m) and ERA of 17.7m (2008: 24.5m). Mainly as a result of the increase in the value of the schemes assets since the beginning of 2009, the Group expects to report net financing income on pension scheme balances in 2010 of around 2m, which compares to net financing expense of 0.9m in During the year the Company made payments to the UK defined benefit scheme of 0.8m for the regular cost of benefits and 0.6m for pension augmentation costs relating to redundancies announced in 2008 and Only negligible payments were made to the US schemes. EQUITY Group equity at 31 December 2009 was 31.3m (2008: 40.2m). The movement arises from profit for the period of 1.1m, favourable movements on the fair value of cash flow hedges of 0.5m (net of tax), less actuarial losses, net of tax, in respect of the Group s defined benefit schemes of 9.3m, dividend payments of 1.0m and equity-settled share-based transactions of 0.2m.

11 MOLINS PLC 09 RISKS The Board regularly considers the main risks that the Group faces and how to mitigate those risks. The principal risks and uncertainties to which the business is exposed are summarised as follows: b The Group undertakes a number of large, one-off engineering projects for its customers each year. Several risks follow from the nature of this type of business, including the potential for cost over-runs and delays in performing the contract, with a consequent impact on cash flows and profits. The Group mitigates these risks by its implementation of good project management practices, which have been the subject of further review in the year, including regular technical and commercial reviews of its major projects. Also, the Group is prone to potentially large fluctuations in business levels, as demand can be quite volatile. The Group mitigates these risks by careful planning of its resource capacity and review of its order prospects lists; b Loss of a key customer. The Group has a relatively diversified base of customers and the customer that accounts for the largest proportion of sales, excluding one-off projects, is routinely responsible for no more than 5% of total sales in any year. The loss of a number of these contracts could have an adverse effect on the Group s operating results and financial condition. In the case of certain subsidiaries, the loss of a contract individually material to that subsidiary could affect its viability and this could have an adverse effect on the Group s operating results and financial condition; b Availability of funding. The Group has access from its UK banks to borrowing facilities of 11.1m, which are committed until 21 December 2012, as long as the Group continues to meet the agreed covenants. In addition these facilities provide the Group with access to other financial instruments for carrying out its activities, including bank guarantees and forward foreign exchange contracts. The Group also has a committed borrowing facility, subject to covenants, in the USA of $5.0m which expires on 31 July The Group expects to continue to operate within its borrowing facilities and covenants and accordingly has adopted the going concern basis in preparing its financial statements. Given the current global economic circumstances and availability of credit finance in the market, if a breach of covenant was to occur it may result in the Group experiencing difficulty in funding its activities; b Economic and market cycles. A considerable proportion of the Group s turnover is derived from the tobacco industry and is potentially affected by changes in the commercial, industrial and legislative environments of that industry. However, the customer base is geographically diverse and the Group sells a range of products and services to the industry, including those that relate to the regulation and quality control of cigarettes, as well as those that relate directly to the manufacture of cigarettes. The Group is also potentially affected by economic cycles and changes in other industrial sectors more generally. Given the current global economic circumstances, the risk of trading partners, including both customers and suppliers, ceasing to operate has increased. The Group monitors such risks and mitigates them as and where appropriate, but the loss of any such partner could have an adverse effect on the Group s operating results and financial condition. The prices received for the Group s products and services depend on numerous factors, some of which are beyond its control and the exact effect of which cannot be accurately predicted. Such factors include general economic and political activities, including the extent of any governmental regulation and taxation; b Loss of a key facility. The Group operates a number of businesses around the world and the loss of any one of them would interrupt a revenue stream and could potentially have an adverse effect on the Group s operating results and financial condition. The Group mitigates these risks by having appropriate disaster recovery plans in place for each business and by having minimal inter-dependent IT infrastructures across the Group, thereby not exposing a number of facilities to the failure of one central system;

12 10 MOLINS PLC financial review CONTINUED KEY PERFORMANCE INDICATORS (as defined below) Performance in the current and prior years is summarised as follows: Underlying profit before tax 3.4m 2.3m Operating cash flow 6.8m (2.5)m Consolidated borrowings cover (0.67) 0.05 Underlying operating return on sales 4.2% 3.3% Underlying EPS 11.3p 10.9p RISKS continued b Exchange rate movements. The majority of the Group s operations are outside of the UK, and therefore a significant portion of its business overseas is conducted in currencies other than sterling. Consequently, its financial performance is affected by fluctuations in foreign exchange rates. As a result, a change in the exchange rates of the US dollar, Canadian dollar, euro, Czech koruna, Brazilian real and other currencies against sterling may affect the sterling value of profits achieved. The Group s competitiveness and profitability is also affected by changes in the relative values of foreign currencies where the Group s operations outside the UK trade with businesses in different foreign jurisdictions; b Liabilities of the Group sponsored pension schemes. The Group operates a defined benefit pension scheme in the UK, which pays a levy to the Pension Protection Fund of an amount outside the control of the Group, as well as three much smaller such schemes in the USA. Changes in the value of the liabilities of the pension schemes, which were valued at 341.0m at 31 December 2009 in accordance with IAS 19 (revised), as a consequence of changes in interest rates and mortality rates, amongst others, and changes in the value of the assets of pension schemes, which were valued at 326.5m at 31 December 2009 at market value, are largely outside the control of the Group. The UK scheme has been subject to a full actuarial funding valuation as at 30 June 2009, which although this has been agreed between the trustee and the Company, together with a deficit recovery plan, is subject to review by the Pensions Regulator. The Group has responsibility for the adequate funding of the pension schemes; b Litigation. The Group from time to time may be subject to claims from third parties in relation to its current and past operations. When confronted with such claims, the Group might face legal costs and rulings against it that could have a material effect on the Group s operating results and financial condition; and b Limitation on the Company s ability to pay dividends. The ability of the Company to pay dividends to shareholders is a function of its profitability and the extent to which, as a matter of law, it has available to it sufficient distributable profits out of which any proposed dividend may be paid. Whilst the Company has historically paid dividends to shareholders, there is no assurance that it will continue to pay a dividend going forward. KEY PERFORMANCE INDICATORS (kpis) The Group monitors the performance of each of its divisions through detailed monthly operational and financial reporting, with comparisons to budgets and updated forecasts being routinely made. In addition the Group maintains regular reviews and dialogue with the management of each of the Group s divisions. At Board level, the most important key performance measures are: b underlying profit before tax, calculated on continuing operations before exceptional items and net financing income/expense on pension scheme balances; b operating cash flow, defined as cash generated from operations before reorganisation less net cash from investing activities (excluding net proceeds from property transactions and interest received); b consolidated borrowings cover, being the ratio of Group net borrowings to Group earnings from continuing operations before interest, tax, depreciation, amortisation, impairment, pension service cost and exceptional items; b underlying operating profit as a percentage of sales (underlying operating return on sales), calculated on continuing operations before exceptional items; and b underlying earnings per share, calculated on continuing operations before exceptional items and net financing income/expense on pension scheme balances. DAVID COWEN Group Finance Director 26 February 2010

13 MOLINS PLC 11 board OF DIRECTORS JONATHAN AZIS MA Solicitor Chairman Jonathan Azis joined the Molins Board on 1 July 2008 as a non-executive director and became Chairman of the Board on 1 February He is also Chairman of the Nomination Committee. He is currently an executive director of Westhouse Holdings plc. He was formerly Chairman of Isotron plc, a non-executive director of Victrex plc and an executive director and Company Secretary of Hanson PLC. Aged 52 years. DICK HUNTER BSc MBA Chief Executive Dick Hunter joined the Company in January 2003, was appointed to the Board on 28 June 2004 and was appointed Chief Executive on 25 January He previously held a number of general management positions within Coats Viyella plc and Dynacast International Ltd in Europe, the US and the Far East. Aged 46 years. DAVID COWEN BSc (Econ) FCA Group Finance Director David Cowen joined the Molins Board as Group Finance Director on 8 February 1999 from Rolls-Royce Motor Cars Ltd where he was Finance Director. He previously held senior financial positions with Vickers PLC. Aged 46 years. JOHN ALLKINS BA FCMA Non-executive Director John Allkins joined the Molins Board on 1 August 2008 as a non-executive director. He is Chairman of the Audit Committee and is the Senior Independent Director. He is also a non-executive director of Renold plc, Intec Telecom Systems PLC, Fairpoint Group plc and Albemarle & Bond Holdings plc. He was formerly Group Finance Director of MyTravel Group plc and a director of Thomas Cook Group plc. Aged 60 years. ANDREW CRIPPS BA ACA Non-executive Director Andrew Cripps joined the Molins Board on 1 August 2008 as a non-executive director. He is Chairman of the Remuneration Committee. He is also a non-executive director of Booker Group plc, Helphire Group plc and Swedish Match AB. He was formerly a senior executive of British American Tobacco plc and a non-executive director of Trifast plc. Aged 52 years. Member of the Audit, Remuneration and Nomination Committees.

14 12 MOLINS PLC Directors report The directors present their report to shareholders together with the audited accounts for the year ended 31 December PRINCIPAL ACTIVITIES Group companies are engaged principally in the supply of high performance machinery and services for the production and packaging of consumer products. A review of operations and likely future developments is given on pages 3 to 5 and a financial review appears on pages 6 to 10. Further details of the principal divisions and subsidiaries are shown on page 62. RESULTS AND DIVIDENDS The results of the Group are set out in the consolidated income statement on page 25. An interim dividend of 2.5p was paid on 8 October The directors recommend the payment of a final dividend for 2009 of 2.5p per ordinary share. Subject to approval at the Annual General Meeting on 30 April 2010 the final dividend will be paid on 14 May 2010 to ordinary shareholders registered at the close of business on 23 April This will make total dividends in respect of the year of 5.0p per ordinary share (2008: 5.0p), at a cost of 1.0m. Dividends on the 6% preference shares are due for payment on 30 June and 31 December in each year and in 2009 amounted to 54,000 (2008: 54,000). BUSINESS REVIEW The directors are required to provide a business review that complies with European Union legislation. The information the review is required to contain is set out in this report, in the Operating review of the Group s three divisions and the Financial review which includes sections on Risks and Key Performance Indicators. Going concern The directors have considered the trading outlook of the Group, its financial position, including its cash resources and access to borrowings, as set out in notes 20 and 21 to the accounts on pages 45 and 46, and its continuing obligations, including to its defined benefit pension schemes, details of which are set out in note 25 to the accounts on pages 47 to 51. Having made due enquiries the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. RESEARCH AND DEVELOPMENT Group policy is to retain and enhance its market position through the design and development of specialist machinery and support services. To achieve this objective, engineering and product development facilities are maintained in the UK and overseas. Research and development expenditure incurred in 2009, net of third-party income, amounted to 1.5m (2008: 1.9m), of which 0.4m (2008: 0.4m) was charged to the consolidated income statement and 1.1m (2008: 1.5m) was capitalised and included in development costs. SUPPLIER PAYMENT POLICY It is the Group s policy to agree payment terms with its suppliers when it enters into purchase contracts. It then seeks to adhere to these arrangements provided it is satisfied that the supplier has delivered the goods or services in accordance with the agreed terms and conditions. At 31 December 2009 trade payables amounted to the equivalent of 41 days (2008: 47 days) purchases in respect of the Group and 51 days (2008: 46 days) in respect of the Company. DIRECTORS The names of the directors of the Company at the date of this report are shown on page 11. All held office throughout In addition Mr P J Byrom held office until 31 January 2009 and Mr J Wilson until 24 April The director retiring, in accordance with the Articles of Association, at the Annual General Meeting to be held on 30 April 2010 is Mr Hunter who, being eligible, offers himself for re-appointment. Mr Hunter has a service contract which can be terminated on notice of one year.

15 MOLINS PLC 13 DIRECTORS INTERESTS Directors interests in the Company s shares are shown on page 18 in the Remuneration report. There are no shareholding requirements for directors. SUBSTANTIAL SHAREHOLDINGS At 26 February 2010, the Company had been notified, in accordance with the Disclosure and Transparency Rules, of the following interests in the issued ordinary share capital of the Company: Number of ordinary shares Schroders (Schroder Investment Management Limited, Schroder Capital Management International Inc., Schroder Unit Trusts Limited) 5,593, Thameside MBC 1,483, EES Trustees International Limited 1,203, % of issued ordinary shares ENVIRONMENTAL POLICY The Group is committed not only to compliance with environmental legislation but also to the progressive introduction of appropriate measures to limit the adverse effects of its operations upon the environment. In particular, reasonable efforts are made to minimise waste arising from operations, to recycle materials wherever possible and to consider alternative methods of design or operation. The Group aims both to reduce its costs by these means and to promote good practice in use of resources at sustainable levels. SHARE CAPITAL Authority for the purchase of up to 3,000,000 own ordinary shares for cancellation was granted at the 2009 Annual General Meeting and this authority expires on 23 April The directors consider it appropriate to seek further authority from the shareholders at the forthcoming Annual General Meeting for the Company to purchase its own shares. Resolution 8, which will be proposed as a special resolution, will seek the necessary authority to enable the Company to purchase for cancellation ordinary shares in the market for a period of twelve months from the date of the meeting, upon the terms set out in the resolution, up to a maximum number of 3,000,000 ordinary shares representing approximately 15% of the issued ordinary share capital at the date of the notice convening the Annual General Meeting. EES Trustees International Limited holds shares as trustee in connection with the Company s long-term incentive arrangements. The trustee has agreed to waive all dividends and not to exercise voting rights in respect of shares representing 6.0% of the issued share capital. Information about the Company s share capital is given in note 26 to the accounts on page 52. EMPLOYMENT POLICIES The Group is committed to developing its employment policies in line with best practice and providing equal opportunities for all, irrespective of gender, age, marital status, sexual orientation, ethnic origin, religious belief or disability. Full and fair consideration is given to applications for employment from people with disabilities having regard to their aptitudes and abilities. Every reasonable effort is made to support those who become disabled, either in the same job or, if this is not practicable, in suitable alternative work. EMPLOYEE INVOLVEMENT Emphasis is placed on training, effective communication and the involvement of employees in the development of the business. Information is regularly provided on the progress of the Group through local review meetings, briefings and consultative bodies. Involvement in the achievements of the business is encouraged through other means appropriate to each location.

16 14 MOLINS PLC Directors report CONTINUED DONATIONS During the year the Group and the Company made no donations to UK charitable organisations (2008: 130). ANNUAL GENERAL MEETING The Annual General Meeting will take place on 30 April Notice of the meeting can be found on pages 63 to 68. AUDITORS In accordance with section 489 of the Companies Act 2006 a resolution for the reappointment of KPMG Audit Plc as auditors of the Company is to be proposed at the forthcoming Annual General Meeting to be held on 30 April DISCLOSURE OF INFORMATION TO AUDITORS The following applies to those persons who were directors at the time this report was approved: b so far as each director is aware, there is no relevant audit information of which the Company s auditors are unaware; and b each director has taken all steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Company s auditors are aware of that information. By order of the Board MRS S P CANNON Secretary 26 February 2010