FINANCIAL REVIEW
Profits
The profits earned by
the business, split by half year, are as follows:
Operating profit - £m
*Operating profit prepared under IFRS
Cash generation
The Group generated £15.8m (2005: £21.2m) of cash from operations during the year, and after capital expenditure of £9.2m we had net borrowings at the year end of £2.2m (2005: net funds of £3.4m). Our inventories at the end of the year
were slightly above normal levels due to the downturn in sales. We believe that the May 2004 levels, which showed a year
end stock turn of 4.1 times (2006: 2.7 times), represent a more normal level of stockholding for the business. Our capital
additions were in the following asset categories:
| 2006 £m |
2005 £m |
|
|---|---|---|
| Shop fits for new and existing stores | 1.5 | 1.9 |
| Production equipment and tooling | 4.5 | 4.0 |
| Computer equipment and software | 1.6 | 2.0 |
| Office facilities | 0.9 | 1.9 |
| Building developments - Nottingham | 0.1 | 2.5 |
 |
||
| Total capital additions | 8.6 | 12.3 |
 |
||
Now that the investment in the Nottingham building and supply chain developments is complete, we do not expect to make any further major investments of this nature for several years. For the foreseeable future we therefore expect that capital expenditure will be broadly similar to the level of annual depreciation/amortisation of capital assets.
Interest
Our interest costs have risen in 2006 as we have continued to invest in capital assets, as described above, while our
profits have declined. Our working capital cycle requires us to build inventories and receivables in the first half.
Accordingly, we typically run an overdraft between September and December of each year. As the business has grown, so
the absolute amount of this working capital swing has increased.
The Group's exposure to interest rate fluctuations is reviewed periodically by the board; this exposure has not been significant in recent years.
Taxation
The effective rate of tax for the year is 45.4% (2005: 35.1%). This rate is higher than that of a business with activities
based only in the UK due to higher overseas tax rates and unrecognised overseas losses. The increase this year is due to the disproportionate impact of
the unrecognised overseas losses on a lower pre-tax result for the year.
| 2006 £m |
2005 £m |
|
|---|---|---|
| UK taxation | 0.5 | 3.7 |
| Overseas taxation | 1.1 | 1.8 |
|
||
| Current taxation | 1.6 | 5.5 |
| Deferred taxation | 0.1 | (0.6) |
|
||
| 1.7 | 4.9 | |
|
||
Dividend
Our long-term aim is to maintain a progressive dividend policy based principally on the growth in the Company's earnings per share.
For the current year we have decided to recommend holding the dividend in spite of the reduction in earnings per share. While recognising that this results in an uncovered dividend, in view of the fundamentally profitable and cash generative nature of Games Workshop's business and of the relatively low level of debt, the board believes that it is appropriate to accept an uncovered dividend in such circumstances.
Accordingly, at the forthcoming annual general meeting the board is proposing that the 2006 final dividend be maintained at 14.025 pence per share.
Dividend reinvestment plan
We also offer investors the opportunity automatically to reinvest their cash dividends in the Company's shares. The
dividend reinvestment plan is a simple and economic way to increase holdings and is administered by Lloyds TSB
Registrars.
Currency exposures
The principal exchange rates used to translate our earnings and our balance sheet are as follows:
euro |
US dollar |
|||
2006 |
2005 |
2006 |
2005 |
|
| Year end rate used for the balance sheet | 1.46 |
1.46 |
1.86 |
1.82 |
| Average rate used for earnings | 1.46 |
1.46 |
1.77 |
1.86 |
The net impact of these fluctuations on our results for the year was slightly unfavourable to our earnings when converted into sterling. If our results for 2006 had been converted at the rates used in 2005, they would have been higher by some £0.1m.
As each of our overseas businesses pays our manufacturing operation in foreign currency (primarily US dollar and euro), we have continued our policy of managing this transactional exposure through the use of forward currency contracts covering a proportion of our estimated non-sterling receipts for a prospective 12 month rolling period. The balance sheets of our euro denominated subsidiaries are partially hedged by using euro borrowings. Translational exposures for the trading results of non-sterling denominated subsidiaries are not hedged.
There are no other exposures which the Group manages with financial instruments.
Share based commitments
The only share scheme operated by the Group is a sharesave scheme which is made available on equal terms to all our
staff.
Share buy-back programme
In 2001, having considered the potential uses of our surplus cash, we commenced a programme of share buy-backs.
During the year under review we did not purchase any shares as our surplus cash was expended on our supply chain investment
programme. We intend to continue the share buy-back programme when our cash
generation once again renders this possible.
Bank facilities
We have a three year unsecured revolving credit facility of £10m and a working capital facility of £10m (£15m between
1 September and 31 January). The covenants are based on interest cover and gearing. Interest was paid at floating
rates, which equated to 5.3% during the year.
International Financial Reporting Standards (IFRS)
This is our first set of accounts prepared under IFRS. The detailed reconciliations of the impact of the adoption of IFRS
as compared to UK GAAP are set out in the notes to these accounts. The main area of judgement introduced by the
new standards relates to the capitalisation of development costs in our design and pre-production activities, which has
resulted in the introduction of an asset of 1.7m. This represents mainly salary costs relating to products which have yet
to be commercially released. We have introduced time recording and project tracking systems to enable the underlying
data to be collected. The impact of the adoption of IFRS has not introduced any significant distortion to year on year profit
trends.
Michael Sherwin
Finance Director
24 July 2006
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