Other financial items

Research and development

Applied research and development is important to the Group’s manufacturing businesses and there are development centres in Japan, Europe and the US that focus on the introduction of new and improved products, the application of technology to reduce unit and operating costs and to improve services to customers. The Group’s expenditure on research and development was £49.4 million (2006: £46.8 million) and £0.2 million was capitalised (2006: £0.3 million).

Restructuring initiatives

Restructuring initiatives include major projects undertaken to rationalise and improve the cost competitiveness of the Group. They comprise expenses incurred in the course of strategic cost management and restructuring projects and gains and losses arising on the exit and disposal of businesses and properties as a result of the initiatives. Adjusted operating profit excludes restructuring initiatives in order to present a more consistent measure of underlying year-on-year performance.

Restructuring costs were £13.8 million (2006: £13.0 million). These costs principally related to the rationalisation of production facilities in the Lasco Bathware and Philips Products businesses in the US, the outsourcing of information technology services and initiatives within Fluid Power and Air Systems Components that began in 2006. In 2006 the costs related to the transfer of Fluid Power’s facility at St. Neots, UK to new facilities in the Czech Republic, the closure of Stackpole’s pump components facility and rationalisation of production facilities within Air Systems Components.

During 2007, the Group recognised a gain of £32.6 million on the disposal of Lasco Fittings Inc. and a gain of £6.7 million on the disposal of Dearborn Mid-West. In addition a gain of £7.7 million was recognised on the disposal of corporate property.

In 2008, restructuring costs for projects in progress are likely to be in the order of £20 million.

Net finance costs

Net finance costs decreased from £38.5 million in 2006 to £30.4 million in 2007. This includes the net finance cost recognised in relation to the post-employment benefits liability of £0.5 million (2006: £3.6 million). The movement in financing costs during the year is due to a lower average net debt, partially offset by higher average interest rates, and a reduction of £4.8 million in the dividend paid on the preference shares that were redeemed in July 2007.

Interest expense

Discontinued operations

The loss for the year from discontinued operations was £33.3 million (2006: £11.6 million). Discontinued operations comprise Trico, the Group’s Wiper Systems business, which was sold on 29 June 2007 for US$104.1 million (£51.9 million).

The Group recognised a loss of £29.8 million on this disposal (including an impairment loss of £17.2 million that was recognised in the first quarter of 2007).

Taxation

The overall objective of the Group tax function is to plan and manage the tax affairs of the Group efficiently within the various local tax jurisdictions in which we operate, so as to achieve the lowest tax cash cost consistent with compliance with the local tax regulations.

The tax charge attributable to continuing operations of £69.9 million for 2007 (2006: £35.8 million) represents an effective tax rate of 26.6% (2006: 14.6%) applied to profit before tax from continuing operations of £262.6 million (2006: £244.7 million).

During 2007, the effective tax rate was impacted by non-recurring tax benefits of £12.9 million. Prior to these adjustments the total tax charge for 2007 would have been £82.8 million representing an effective tax rate of 31.5% applied to profit before tax from continuing operations.

In 2006 the effective tax rate was impacted by the release of provisions for uncertain tax positions of £50.6 million. This followed the successful resolution of outstanding tax issues in the US, the change in certain tax laws and the change in views on the likely outcome of challenges of the various tax authorities. In addition during 2006 there were other non-recurring tax charges of £7.2 million included in arriving at the overall charge for the Group. Prior to these adjustments the total tax charge for 2006 would have been £79.2 million representing an effective tax rate of 32.4% applied to profit before tax from continuing operations.

We will continue to plan the Group’s tax affairs efficiently to minimise the tax cash cost but a gradual increase over time is likely as countries around the world increase their focus on taxation as a means of raising revenue for their local economies.

The effective tax rate for 2008 is expected to be around 31%.

Tax rates

Cash flow

Funding for sustaining investment and investment for organic growth is met initially from internally generated cash flow (cash flow after interest, tax and preference dividends). The net cash flow available for equity holders after organic investment, together with debt finance available within the debt capacity of the Group, will determine the funding available for acquisitions and distributions. The debt capacity of the Group is determined by our objective to maintain a stable capital structure and the Group’s investment grade debt rating.

Operating cash flow in 2007 was slightly improved at £220.8 million (2006: £219.0 million). Net income from acquisitions and disposals in the year was £101.0 million (2006: expenditure of £104.5 million) and primarily relates to the sales of Trico, Lasco Fittings and Dearborn Mid-West. These funds were used to repay drawings under the Group’s revolving credit facility.

On 24 July 2007 the Group exercised its right to redeem all of the remaining preference shares. Dividends payable during 2007 were £0.6 million (2006: £5.4 million), and 2,600,973 shares were converted during the year into 25,411,499 ordinary shares. 24,165 preference shares were redeemed in cash for £0.6 million on 24 July 2007.

Ordinary dividend payments were higher at £122.0 million (2006: £115.3 million) due to the increase in the number of ordinary shares following the conversion of preference shares. The net debt movement was affected by a negative foreign currency movement of £13.3 million due to the continued weakening of the US dollar and other currencies. Overall, net debt amounted to £296.8 million. The components of net debt are set out in note 16 of the Group financial statements.

The table below shows the movement in net debt for the year:

A reconciliation of the table above to the consolidated cash flow statement is included in the Group financial statements.

Earnings per share

The profit for the period attributable to equity shareholders is £146.9 million (2006: £186.1 million) and the diluted earnings per share from continuing operations is 20.45p (2006: 22.98p).

Funding, distribution policy and dividends

The Board has recommended a final dividend of 8.57 pence per ordinary share, which together with the interim dividend of 5.32 pence paid on 15 November 2007, maintains the dividend at 13.89 pence per share.
The dividend earnings cover was 1.2 times and cash cover was 1.2 times. Cash cover is based on free cash flow to equity shareholders compared to ordinary dividends paid. 

  
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