Financial Review

Consolidated income statement

The key items in the consolidated income statement are further highlighted in the sections below.

Underlying revenue and profit performance

On a constant currency basis, underlying sales and profits before tax, amortisation and non-recurring items were 15% and 22% ahead of last year respectively as set out below.

	Revenue	Pre-tax Profits
2009	£304.8m	£15.8m
FX movements	£(6.1)m	£(0.5)m
Underlying improvement	£45.9m	£3.3m
2010	£344.6m	£18.6m

Interest charges

Interest charges before non-recurring items were marginally higher than last year at £4.9m (2009: £4.8m). Notional pension interest (under IAS 19) increased from £1.5m to £2.3m during the year.

Non-recurring items

Non-recurring costs of £1.6m were incurred during the year. Costs relating to the restructuring of the Yarns business totalled £7.0m, including £0.6m of start up costs for the Abu Dhabi production site in which we have a 75% economic share. These costs have been partially offset by a release of £5.4m in relation to the provision set up in 2008 to cover anticipated liabilities associated with a possible failure to properly equalise the retirement ages of men and women for members of the Group’s main UK pension scheme following the “Barber decision” in 1990. In April 2010, the Scottish Court of Session determined that equalisation had been effective.

Taxation

The overall tax charge on the profit before tax was £3.8m (2009: £1.9m). The tax charge on underlying profit was £5.8m (2009: £5.0m), a rate of 31% (2009: 32%). The underlying tax rate for 2011 is expected to be around 31% as previously indicated.

The operation of most tax systems, including the availability of specific tax deductions, means that there is often a delay between the Group tax charge and the related tax payments, to the benefit of cash flow. Cash payments in relation to tax were £3.3m (2009: £5.4m).

The Group operates internationally and is subject to tax in many differing jurisdictions. As a consequence, the Group is routinely subject to tax audits and examinations which, by their nature, can take a considerable period to conclude. Provision is made for known issues based on management’s interpretation of country specific legislation and the likely outcome of negotiation or litigation. The Group believes that it has a duty to shareholders to seek to minimise its tax burden but to do so in a manner which is consistent with its commercial objectives and meets its legal obligations and ethical standards. The Group has regard for the intention of the legislation concerned rather than just the wording itself.

The Group is committed to building open relationships with tax authorities and to follow a policy of full disclosure in order to effect the timely settlement of its tax affairs and to remove uncertainty in its business transactions. Where appropriate, the Group enters into consultation with tax authorities to help shape proposed legislation and future tax policy.

Headline corporate tax rates in our major operating territories were:

UK	28.0%
Germany	30.0%
Czech Republic	20.0%
Netherlands	25.5%
USA	36.5%

Cash

There was a net cash inflow of £5.4m (2009: £6.9m, excluding proceeds from share issues) during the year, decreasing net bank borrowings from £67.4m to £62.0m. The overall external debt of the Group, including derivative liabilities, also reduced from £103.6m to £77.9m, reflecting a partial settlement of the derivative liabilities totalling £9.3m and the strengthening of the Euro which provided an overall reduction of £10.4m to the Group’s total external debt.

The analysis of the Group’s total external debt is as follows:

	2010 £m	2009 £m
Cash and cash equivalents	11.6	16.2
Total bank debt	(73.6)	(83.6)
Net bank debt	(62.0)	(67.4)
Net derivative liabilities	(15.9)	(36.2)
Total external debt	(77.9)	(103.6)

Cash generated from operations totalled £36.6m (2009: £46.0m). Working capital reduced by £0.5m (2009: £17.1m), with further improvements in management control offsetting volume pressure during a period of increased trading activity. This improvement reduced the funds tied up in net trade working capital to 22% of revenues from 28% last year. Capital expenditure totalled £7.4m, compared with £8.2m in the prior year.

Treasury management

The Group finances its operations through a mixture of shareholders’ funds, bank borrowings and operating leases. The Group operates centralised treasury management over its financial risks within a strong control environment. The Group uses various financial instruments in order to manage the exposures that arise from its operations. It is the Group’s policy not to trade financial instruments or to engage in speculative transactions. All funding is properly recognised on the balance sheet. The Board has approved the treasury policy and receives regular reports on compliance. The objectives of the Group’s treasury policy are summarised as follows:

To meet the liquidity requirements of the Group cost effectively. The Group aims to maintain undrawn committed facilities at a level sufficient to ensure that the Group has available funds to meet its medium-term funding needs and to minimise the level of surplus cash balances. The Group operates a conservative investment policy and shortterm deposits are placed with highly rated counterparties.

To deliver the funding demands of the business at low cost. The Group funding requirements are largely driven by capital expenditure and acquisition activity. In September 2010 the Group borrowed €45m through a private placement with Pricoa Capital Group. The funding is unsecured and is repayable in September 2016. The coupon rate is 5.9% per annum and is fixed for the term of the loan. This paved the way for the committed banking facilities to be re-financed and this was completed shortly after year-end. The Group cancelled and repaid its existing bank facilities of £140.4m (2009: £144.9m) and now has a €130m committed loan facility with a syndicate of five leading banks. The facility is unsecured and is committed through to February 2015. The interest rate is variable and the margin varies according to the ratio of net debt to EBITDA and is 1.9% at the current and intended range of operations.

Both the private placement and the new committed loan facility require the Group to operate with an interest cover of at least 3 times and for net debt not to exceed 3 times EBITDA on a 12-month rolling basis. For the year ended 30 November 2010, interest cover was 5.2x (2009: 4.6x) and net debt/ EBITDA was 1.6x (2009: 1.9x). The aim of the Group is to operate below net debt/EBITDA of 2.0x.

To provide reasonable protection against interest rate and foreign currency volatility. The Group’s strategy seeks a balance between fixed and floating rate borrowings, to achieve a reasonable effective interest rate whilst protecting the Group against material adverse changes in interest rates over the medium-term. At 30 November 2010, the Group had fixed the interest rates of £79.4m (2009: £45.7m) of debt representing 89% (2009: 38%) of its total gross external debt, the increase in the year being achieved through the private placement in September 2010.

The Group is exposed to movements in exchange rates for both foreign currency transactions and the translation of net assets and income statements of foreign subsidiaries. The Group regards its interest in overseas subsidiary companies as long-term investments and manages its translational exposures through the matching of assets and liabilities where possible. The private placement and the bank re-financing have provided a much better matching. The matching will be reviewed regularly and appropriate risk mitigation performed where necessary. The Group has exposure to a number of foreign currencies. The most significant transactional currency exposure is Euro/US dollar.

To develop and maintain strong and stable banking relationships. Strong working relationships are maintained with a core group of high-quality banks whose geographical span of operations closely aligns to those of the Group. Five of these banks (The Royal Bank of Scotland, Barclays Corporate, KBC, ING and Comerica Bank) participated in the new €130m loan facility.

Pensions

The charges for pensions are calculated in accordance with the requirement of IAS 19 Employee Benefits. During the year the Group’s UK benefit scheme, which accounts for 69% of the overall net liabilities, continued to adopt a lower risk investment strategy in which the interest rate and inflation risks were more closely hedged and the exposure to equities reduced to around 25% of the scheme’s assets (2009: 29%). The deficit has fallen compared to 2009, principally due to additional cash contributions from the Group of £3.0m (2009: £3.0m) with the increase in expected returns from investments compensating for increasing the allowance for life expectancy.

Acquisitions

There have been no acquisitions or disposals in the period.

Foreign exchange rates

The key foreign exchange rates used by the Group are:

	Year end		Average
	2010	2009	2010	2009
Euro	1.20	1.09	1.16	1.12
US $	1.56	1.64	1.55	1.55

Accounting standards

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU. In 2009/10, the only change which had a significant effect on the Group’s financial statements related to the Amendment to IAS 1. Whilst this amendment changed the presentation of performance reporting, it has not affected the results reported.

A summary of other less significant changes and full details of accounting policies are provided in the Financial Statement section

Share price

During the year, the Company’s share price increased by 26% from 33.5 pence to 42.3 pence, compared to a 10% increase in the FTSE Small Cap index. The Company’s shares ranged in price from 28.8 pence to 49.0 pence and averaged 36.2 pence during the year. The average number of shares in issue was 287.9m (2009: 250.4m), an increase of 15% due to the share issue in March 2009.

Steve Good

8 February 2011

Mike Holt