THE CENTRAL SOUTH REPORT 2 010 -...

THE CENTRAL SOUTH REPORT 2010Aggregated accounts for the region’s top 150 companies

HIGHLIGHTS

WHAT’S ON THE HORIZON?

2008 2009

REVENUE £70.9BN £77.9BN

INCREASE IN REVENUE 12% 10%

OPERATING PROFIT £4.5BN £1.6BN

INVESTMENT £9.2BN £3.3BN

PEOPLE EMPLOYED 324,031 315,071

OVERALL EFFECTIVE 23.20% 33.51%TAX CHARGE

The Central South Report 2010 1

This is the third in our series of annual reports which compiles theaccounts of the Central South’s top 150 companies, aggregating thefigures to create a barometer of economic health for our region.

The way we identified and analysed the Central South’s top 150companies is outlined on page 22. Prior year figures are based onthe top 150 companies in our previous Central South Report. As thecomposition of the top 150 has changed slightly, year-on-yearcomparisons may not be like-for-like.We refer to these companiescollectively as ‘the Group’ throughout the document.

We are grateful to Paul Lester and Richard Pearce, who have againagreed to contribute commentary as the Group’s ‘Chairman’ and‘Finance Director’.

CONTENTS

02 Chairman’s statement

04 Finance Director’s review

06 Operating review06 Funding and gearing08 Investment and M&A10 Outlook14 Taxation16 Fraud18 Risk management20 Future growth

22 Basis of preparation

40 The team

41 The 150 Group companies

WELCOME TO THE CENTRAL SOUTH REPORT 2010 PREPARED BY BDO.

“When we thought about our 2010 report we knew the landscape would have changedand we feared the worst. For the most part these fears were confirmed; profits plummeted,net assets fell and indebtedness rose. Encouragingly and surprisingly turnover rose, however,the percentage decrease in people employed is close to the national average. Healthy? No.Happy? No. Rising to the challenges? I think so!” KIM HAYWARD, LEAD PARTNER – BDO SOUTHAMPTON

CHAIRMAN’S STATEMENT

SELLING MORE,MAKING LESS

INEVITABLY, THIS YEAR’S FIGURES REFLECTTHE DOWNTURN IN THE ECONOMY IN 2008.BUT, SOMEWHAT UNEXPECTEDLY, THE GROUPDID NOT SEE BUSINESS DECLINE IN THEIMMEDIATE AFTERMATH OF THE FINANCIALCRISIS: IN FACT, TURNOVER ROSE 10 PER CENT.

While this increase was essentially due to one business, globalchemicals group Ineos, it is pleasing to report that the majority ofGroup companies maintained their trading levels. Unfortunately,the profit story was rather different.

The main problem has been increased cost of sales, reflected inlower gross profit despite revenue increases. This was due almostentirely to Ineos. In addition, we faced a 16 per cent hike inoperating costs. While raw material costs rose, we could onlypass part of the increase on to our customers; and a significantincrease in fuel and energy costs increased both distribution andadministrative costs. Together, these factors resulted in a £2.5bn(73 per cent) drop in pre-tax profits. Net profit was £996m, downfrom £2.7bn in 2008.

The recession had a severe effect on our pension funds, resulting inan aggregate actuarial loss of £2.3bn. In accordance with IFRS thishas been taken to reserves rather than charged through the incomestatement.

Reserves have also been charged with £1.6bn dividend payments.Only two Group companies made significant distributions, whileshareholders invested £1.8bn of new share capital into Groupcompanies, making the movement in shareholders’ funds neutral forthe year. Shire Pharmaceuticals, which last year held significant netassets, relocated out of the region – which accounts for most of thedecrease in Group net assets.

PAUL LESTERChairman

Before becoming Chief Executive of VT Group in 2002, Paul Lesterwas Group Managing Director of Balfour Beatty plc, theinternational engineering, construction and services group. Otherprevious appointments include Chief Executive of Graseby plc andsenior management positions in Schlumberger and the DowtyGroup plc. He is currently President of the Society of MaritimeIndustries. Paul is a non-executive director of Invensys plc andChloride Group plc, and is Chairman of Solent Synergy, which is anot-for-profit company established to help drive the knowledgeeconomy in the Solent area. He is also Chairman of Business in theCommunity Solent area Leadership Team. In 2007 he was awardedthe CBE for services to the defence industry.


In the breakdown of Group revenues by sector, the main change isthe growing contribution from Ineos, which increased chemicalmanufacturing’s share of total revenue from 30 per cent to 36.5 percent. Ineos aside, the picture is little changed. Computer hardware,aerospace & defence and retail increased their shares, although thehome improvement segment of retail suffered with the residentialproperty market. Financial services revenues were hit by thedownturn in the stock market, while the relocation of Shire reducedthe share of biotechnology & drugs.

Apart from the Ineos-driven growth in sales to Continental Europe,the region showing greatest growth was North America – where theincrease in sales from £8.8bn to £10.5bn offset a similar-sizeddecline in the domestic market. Trade with the rest of the world wasfairly consistent, although sales to Asia fell back 8 per cent after theprevious year’s threefold growth.

Only 70 per cent of Group companies made a positive contributionto profit, compared with over 80 per cent last year. They were ledby the top 10 companies, which contributed over 250 per cent ofthe Group’s pre-tax profit compared with 67 per cent in theprevious year. This excellent performance was offset by aggregatelosses of £2.6bn elsewhere in the Group.

The top profit performers were BAE Systems, De La Rue, Eli Lilly,IBM, Servo Group, BAE Systems Electronics, Game Group, Meggittand VT Group. Ineos suffered the largest single loss, at £1bn, whilethe financial sector made a rare appearance among the lossmakers.

This report covers the Group’s underlying businesses for theirfinancial years ending between 1 April 2008 and 31 March 2009,so does not reflect the full impact of the recession. The first sixmonths of the current year are unlikely to show any improvement,and it is difficult to predict how our top 150 companies will havefared by this time next year. In the following sections of our reportwe consider the prospects for the various sectors of the CentralSouth business community while reflecting on their performance inthe past year. We also look ahead to highlight the new industriesthat will impact our economy and potentially the composition ofour Group in the future.

OPERATING PROFIT FELL BY OVER 64 PERCENT, DRIVEN BY A 16 PER CENT HIKEIN OPERATING COSTS AND A REDUCEDGROSS PROFIT.

64%

FINANCE DIRECTOR’S REVIEW

COSTS NOT REINED BACKSOON ENOUGH

THE GROWTH IN SALES WAS NO MATCHFOR RISING COSTS. MARGINS WERESQUEEZED AND PROFITS REDUCED SHARPLY.HOWEVER, THERE IS EVIDENCE THAT GROUPCOMPANIES HAVE BEEN LEARNING TO CUTTHEIR COST BASES DOWN TO SIZE ANDOPERATE LEANER. THIS GIVES SOME CAUSEFOR OPTIMISM THAT THE GROUP WILLNAVIGATE SUCCESSFULLY THROUGH THEREST OF THE RECESSION.

For the third year in succession the Group reported an increase inturnover. However, the increase of £7bn should be weighed againstthe £8bn growth achieved by Ineos alone; the rest of the Group sawa slight reduction overall.

However, the growth in sales was not transmitted to the bottomline. Operating profits decreased from £4.5bn to £1.6bn, grossmargins fell from 23.6 per cent to 20 per cent and gross profit wasdown by £1bn. After isolating Ineos’ results the rest of the Group’smargin remained level, although operating profits still dropped by£1.7bn.

Operating costs increased sharply to £14bn compared to £12.2bn inthe previous year. Staff costs were up by an average of 6 per cent asmost companies delayed introducing stricter cost controls in thisarea until the latter part of the period. Most companies alsoexperienced significant increases in distribution costs caused byhigher fuel prices. Few areas of expenditure saw any reduction, butinvestment in Research and Development investment was down –which may not augur too well for the future.

RICHARD PEARCEFinance Director

Richard Pearce is Chief Financial Officer of Xyratex Ltd and hasplayed a significant role in material acquisition, divestiture andfinancing activities. Before joining Xyratex Ltd, he held a number offinancial positions in IBM over a period of six years. Richard is amember of the Chartered Institute of Management Accountants.


The overall decrease in operating profits of £2.9bn filtered down tothe bottom line profit from continuing operations, although anincrease from discontinued businesses of £249m and a reduction inthe tax charge of £482m softened the overall drop in profit for theyear to £2.0bn.

Although the Group still generated significant profits, net assetssuffered a decrease. This was due partly to Shire’s relocation out ofthe area and partly to some large non-operating items beingcharged to reserves. The most significant of these was a £2.3bnactuarial loss in the Group’s pension schemes.

Non-current assets decreased by £7.9bn, with assets held byfinancial institutions accounting for all of the change. The net bookvalues of property, plant and equipment remained little changed ascompanies matched their depreciation charges with a similar levelof re-investment. Although there was net investment in intangibleassets, the Shire relocation left the Group with a decrease inintangible assets.

The £6.8bn increase in current assets mainly reflected tradedebtors, which increased by 30 per cent as customers took longer topay. There was also an increase in amounts due from Groupcompanies outside the region.

Overall creditors increased by £2bn. There appeared to be asignificant shift towards long-term debt rather than short-termoverdrafts and loans, with an actual increase in borrowings of £3.1bn.

Cash flow movements were neutral. The main elements were a cashincrease from financing activities of £1.7bn, decrease from investingactivities of £3.3bn and a surplus from operations of £1.8bn. Thereduction in investment activities reflects the absence of any largeacquisition deals; after £4.8bn of such acquisitions in the previousyear, Group companies confined their investment to smaller scaleopportunities.

OUTLOOK

The results reported this year reflect the start of the downturn inthe economy and in particular the high energy costs of 2008.The recession continued well into 2009, forcing companies acrossthe region to look closely at their business operations to eliminateunprofitable elements or undertake carefully managed restructuringplans. However, the real benefit of these actions is unlikely be feltuntil 2010 or – in all likelihood – 2011.

It is very difficult to predict the outlook for the Group in 2010 untilthere is more evidence of the green shoots that will take theeconomy out of recession. However, the evidence that companiesare putting renewed emphasis on operating leaner with lower costsbases gives some room for optimism that the Group can manageitself through these difficult times.

DESPITE THE INCREASE IN TURNOVER, THEIMPACT OF HIGHER COSTS HAS SEEN A DROPIN PROFITS OF £2BN.

£2bn

OPERATING REVIEW

FUNDING AND GEARINGRAMPING IT UP A LITTLE TOO FAR?

JUST TWO YEARS AGO WE WERE DESCRIBING GROUP DEBTLEVELS AS ‘RISK AVERSE’ AND ‘CONSERVATIVE’. NOT ANYMORE. LAST YEAR WE REPORTED THAT THE GROUP HADPLUNGED FROM NET CASH TO NET DEBT. SINCE THEN, THATDEBT HAS BALLOONED. BUT A CLOSER LOOK SUGGESTSTHAT THE GROUP HAS TWO DISTINCT DIVISIONS WHEN ITCOMES TO DEBT: SOME WHO ARE OVERGEARED AND MANYWHO ARE ULTRA-CONSERVATIVE.


Last year the Group continued to increase its borrowings, piling-onan additional £3.3bn to take total net debt at the year end to£15.3bn. Quite a contrast with the net cash of £3.7bn it held justtwo years ago!

As last year, this debt mountain is actually moderated by theinclusion of the Group’s financial institutions. Exclude these, and wesee that last year the rest of the Group increased its net debt by£5.6bn to £17.7bn. This 46 per cent uplift significantly diminishesthe strength of the collective balance sheet.

WITH THIS FURTHER LEAP IN INDEBTEDNESS,THE GROUP COULD HARDLY BE DESCRIBEDAS RISK AVERSE NOW: COMPARED TO ITSHISTORICALLY CONSERVATIVE APPROACH,IT IS LOOKING DISTINCTLY OVERGEARED.EXCLUDING FINANCIAL INSTITUTIONS,GEARING REACHED 114 PER CENT AT THEYEAR-END − COMPARED TO AN ALREADYAGGRESSIVE 81 PER CENT A YEAR EARLIER.

With gearing at this level, the Group is clearly stretching itsavailable funding. It will need to be careful to ensure that thisdoes not interfere with future investment and growth strategies.As discussed in Investment and M&A on page 9, many companieshave continued to invest despite the current uncertainty − whichhas left a number of them in a somewhat precarious position.

But this borrow-and-spend approach is far from universal across thepiece. In fact, Group companies are pretty evenly divided betweenthe spenders and those with their hands firmly in their pockets. Atthe year-end, 49 per cent of the Group had net cash positions, upfrom 41 per cent the previous year.

Looking forward, the Group will need to manage its debt carefullyto ensure it weathers the recession and is adequately positioned tocapitalise on the upturn. As the economy begins to grow again,many companies will need access to additional funding forexpanding working capital requirements and further investment.The more highly geared Group businesses will need to start lookingrather more conservative, or they may struggle to access thefunding they seek − and could miss out on some of the growthopportunities that lie just around the corner.

"The findings in this chapter are interesting – if notsomewhat surprising – considering the climatebusinesses have been operating in over the last 18months. I would suggest the sizeable increase in 2009’sdebt is perhaps borne out of the uncertainty caused bymacro economic conditions which saw many businessesentering into refinancing negotiations earlier than usualand often seeking larger holds to ensure they had thenecessary funds available to them.

Considering where we are in early 2010, HSBC believesthat confidence is returning among UK businesses andalthough tough times have often demanded a short-term approach to doing business, now is the time forthe Group to take a forward view if the economicrecovery is going to become reality. One of the fewpositives of the downturn is that it has helpedcompanies to become leaner and fitter and we wouldencourage the Group to re-evaluate its needs now –financial and strategic – to really drive the businessmodel forward.

We've been working with some very impressivecompanies recently to ensure their finances are rightto allow them to grow. We’re urging businesses to talkto their banks and review their financial options tomake themselves fighting fit to go about the businessof recovery and flourish over the short, medium andlong term.”

MARK FRETTINGHAM, HSBC HEAD OFCORPORATE BANKING, SOUTH.

OPERATING REVIEW

INVESTMENT AND M&AORGANIC GROWTH IS BACK IN STYLE

AS FORECAST LAST YEAR, THE GROUP’S OVERALL NETINVESTMENT HAS PLUMMETED. MEGA ACQUISITIONS AREOUT AND INVESTMENT IN GOOD OLD-FASHIONED ORGANICGROWTH IS BACK IN FAVOUR. THERE’S ALSO BEEN A SURGEIN DISPOSALS AS MANY GROUP COMPANIES HAVE SOUGHTTO BOLSTER THEIR CASH POSITIONS.


After the previous year’s acquisition spree, the Group’s overall netinvestment fell back by two-thirds to £3.3bn. The main driver: astaggering 81 per cent slump in net spend on M&A.

This was partially offset by a 28 per cent increase in capitalinvestment, suggesting that Group companies had rediscovered thevalue of growing their existing businesses. Factor in a 12 per centfall in capex disposals to £842m, and the net increase in capitalinvestment was even steeper – up 73 per cent. Clearly, there’s beena big shift in investment focus.

Acquisitions – an eye-catching but not always cost-effective wayfor CEOs to drive rapid change − were no longer flavour of themonth. A 59 per cent fall in acquisition spend was compounded bya 14-fold increase in disposals to £1.9bn, resulting in that 81 percent reduction in net M&A spend. Such a large rise in disposalssuggests that many businesses were shedding non-core assets tofree-up cash for tougher times ahead.

Against a backdrop of economic uncertainty and restrictedavailability of finance, the drop in overall investment is no realsurprise. What’s encouraging is the Group’s willingness to reinvest inreinvigorating existing businesses: hopefully, this will pay dividendsas markets recover.

ALTHOUGH M&A SPENDING WAS SHARPLYDOWN, THE LEVEL OF PARTICIPATION INCORPORATE ACTIVITY WAS LITTLE CHANGED.OF THE GROUP’S 150 COMPANIES, 36 TOOKPART IN M&A ACTIVITY (DOWN FROM 37 INTHE PREVIOUS YEAR). OF THESE, 26 (22)MADE ACQUISITIONS, SEVEN (SIX) MADEDISPOSALS AND THREE (NINE) WERE BUSYON BOTH SIDES OF THE FENCE.

There appear to have been a fair number of relatively small deals.The year’s tough economic conditions threw up some temptingbargains, and a number of Group businesses made good use of theirresources to make opportunistic buys.

The previous year included several mega-deals valued at over £1bn,which somewhat skew year-on-year comparisons. Exclude these(totalling £4.8bn in 2009) and the reduction in investment isnotably less dramatic − although net overall investment and netM&A investment still reduced by 25 per cent and 56 per centrespectively.

Looking forward, as capital markets recover their nerve and debtmarkets remember their purpose, we can expect acquisition activityto revive. Investors will certainly be looking for strategic growthstories and there are still relative bargains to be had. Privatecompany valuations may be starting to recover, but boomtimeprices are still a long way off.

One small caveat: since no one can predict how long the economywill take to recover fully, the Group may well maintain its newfoundconservative stance a little longer. Continuing to invest in itsexisting business might be a prudent strategy for now − riskiergrowth by acquisition can wait for more buoyant times.

EARLY SIGNS OF M&A RECOVERY IN THE UK?

The number of transactions completed in Q4 2009declined for the eighth successive quarter to 445acquisitions – a 20 per cent fall on both Q3 2009 and thesame period in 2008. However, we’ve seen a prettydramatic recovery in public market multiples, particularlyduring the second half of 2009, as well as a mini recoveryin private company valuations.

This recovery is due to rising public company valuationsgiving buyers greater confidence to pay higher prices;a lack of supply of quality assets; and a pent up supplyof private equity capital. At the same time, althoughavailability of credit has improved during 2009, it is stillonly available for the very best assets, and even then,at a significantly higher cost.

Buyers might be faced with election uncertainty, cuts topublic spending and tax increases and their impact onthe pace of recovery, but there are plenty of positives.Improvements in the debt markets are likely to continue,and there will be a degree of catch up following destockingduring 2009. Also, stability in pricing will help marry upthe expectations of buyers and sellers.

Finally, many private equity houses, which in most caseshave funds with predetermined investment periods, havemissed 18 months of deal activity. They will be looking toinvest and make up for lost time, as well as potentiallyrealise some of their more mature investments.

OPERATING REVIEW

OUTLOOKCAUTIOUSLY OPTIMISTIC

THE TOUGHEST RECESSION SINCE RECORDS BEGANOFFICIALLY ENDED IN JANUARY 2010. BUT RECOVERYWON’T BE QUICK, AND BOTH UNEMPLOYMENT AND THERATE OF BUSINESS FAILURE ARE LIKELY TO GET WORSEBEFORE THEY GET BETTER. BUT GROUP COMPANIESARE EXPRESSING CAUTIOUS OPTIMISM. SO HOWGOOD DO THEIR PROSPECTS LOOK, SECTORBY SECTOR?


PROFITS ARE DOWN AND CASH IS IN SHORTSUPPLY. BUT THE GROUP HAS CUT COSTSSHARPLY AND IS FARING BETTER THANORIGINALLY EXPECTED. MANY COMPANIESARE STARTING TO EXPRESS CONFIDENCE ANDOPTIMISM. ARE THEY RIGHT?

The national context in which they operate is hardly encouraging.Both public and consumer spending are becoming increasinglydifficult to predict. Exchange rates are still affecting costs adversely,although their impact is offset by interest rates at an all time low.The total number of business failures in 2009 was around 28,000 –23 per cent higher than 2008.

Although Government policies, including quantitative easing, havesoftened the impact of the recession, we should not be lulled into afalse sense of security. While many businesses have taken advantageof HMRC’s ‘time to pay’ schemes, deferred tax needs to be paideventually. In addition the Revenue’s patience is becomingstretched as the level of cash outstanding now exceeds £28bn –money the Government badly needs.

However, positive signs are beginning to emerge. The final twoquarters of 2009 suggested that business failures may have peaked;and while unemployment is still rising, the rate at which people arelosing their jobs has slowed. At the year-end, the Group had315,000 employees, down from 324,000 a year earlier. A further fallis likely in 2009/10, but the jobs market is showing signs ofrecovery and some companies are recruiting again.

So what are the prospects for key Group sectors?

BUSINESS SERVICES

The number of failures in business services is expected to continuerising throughout 2010 before easing in 2011. This sector employslarge numbers of people in the region, and increased redundanciesare likely to hurt the Central South economy.

“You’ve got to be prepared to considernew ways of doing something, even if you’recomfortable with the status quo and theway the business is working. We’ve beenlooking at expanding by teaming up withother manufacturers to win business fromprime contractors as a strategic alliance.We are also sharing an office in the MiddleEast to see if there are any opportunities forus out there, because to spread the riskyou’ve got to look at a global market now.” SIMON ESCOTT, MANAGING DIRECTOR, PORTSMOUTH AVIATION

MANUFACTURING

One positive to come out of the recession is the rediscovery of ourmanufacturing sector. It has been seen as a resilient and reliablepart of the economy, robust enough to see off global challenges.Manufacturers in the Central South have faced the same challengesas other sector groups, particularly in managing a global supplychain, but with notable success. They tend to deal in niche and highvalue markets where they can offer levels of quality, design, productand service which continue to be in demand worldwide.

As a result, they are generally facing the future with renewedoptimism. Customers are rebuilding their run-down inventories.Hard decisions have been made, supplier risks have been managed,skills have been preserved, and an innovative and competitivemanufacturing sector should emerge from the recession.

ECONOMIC INDICATORS

How will key economic factors impact on businesssurvival rates in 2010?

GDP �Sluggish recovery = still plenty ofsurplus capacity

£ exchange rate �Continuing weakness good forexports and tourism

Energy prices �Continuing high = tough fortransport costs

Business confidence �Business and consumers stilloptimistic

Consumer spending �Slower growth = tough forleisure, retail and personalservices

Housing market �House price recovery should helpconstruction

Tourism �Weak £ makes UK attractive =good for leisure and retail

Business investment �Financing difficulty will hurt TMTand construction most

Source: BDO

OPERATING REVIEW

MOTOR

Notwithstanding gloomy media coverage of the motor industry,2009 has been an unexpectedly prosperous year for the vastmajority of motor retailers. Sales have been buoyed by thereduction in VAT, the success of the Government’s scrappagescheme and rising used car residual values after significant drops in2008. Companies are seeing the full benefit of cost cutting exercisesundertaken towards the end of 2008 and continuing into 2009.

However, the outlook is less cheerful. The end of the VAT reductionand scrappage schemes, uncertainty around the General Election,and the forthcoming World Cup may all keep customers out of theshowrooms.

LEISURE AND TOURISM

The South Coast, with its heavy reliance on leisure and tourism,may not have seen the worst yet. Late bookings, poor weather andreduced spending by domestic tourists have cut margins, whilecosts have risen due to increases in the minimum wage andlegislative changes over the treatment of tips.

Declining disposable incomes and changing consumer spendinghabits are likely to keep the sector shrinking well into 2010 andprobably beyond. Hotels suffered the most during 2009, butrestaurants and bars also saw a double digit increase in their failurerate. National chains as well as local independents have all beenaffected.

The exchange rate may make the UK more attractive for overseasvisitors during 2010, but this may not be enough to helpsignificantly.

PROPERTY AND CONSTRUCTION

On the commercial property front, an increase in investor activitybrought signs of recovery in the latter half of 2009. This is expectedto continue in 2010. However, a further correction should not beruled out, perhaps in 2011. Financing continues to be a significantissue in the Central South: although the number of mortgageapprovals is increasing steadily month on month, tough lendingcriteria will continue to affect new property investors − and alsoany refinancings due in 2010, particularly where lending has beenon poorer quality property.

Trading for construction companies was mixed in 2009, with thespeed of the economic downturn affecting a number of companiesin the Central South. Cost cuts and management of working capitalhave been the order of the day. Decline in the private sector hasmeant increasing reliance on public sector work; and while PublicPrivate Partnerships are likely to produce further opportunities in2010, the Government’s need to reduce borrowing will curb publicsector opportunities over the longer term.

RETAIL

The British Retail Consortium (BRC) has warned that retailers facea tough 2010, although there was some comfort to be drawn fromthe Christmas trading period: most companies reported buoyantsales and the BRC reported the strongest December sales growthsince 2005.

Even so, consumer spending is predicted to fall at the start of 2010.Retailers are viewing any signs of recovery warily, and continue tofreeze capex budgets. Although many high street brands have faredunexpectedly well against the online onslaught, there were still big-name failures over the year. Continued cutbacks in consumerspending and a possible rise in inflation are likely to lead to anincrease in failures during 2010.

The survivors will continue to be those with well defined targetmarkets and loyal customers. The recession has fundamentallychanged consumers, who are now expected to shun retailers withhigh/low strategies in favour of those with authentic low costoperating models that embrace sustainability.

SECTOR BY SECTOR

Turnover by sector

n Manufacturing (includesAerospace and Defence)51.81%

n Business Services 5.08%n Retail 10.12%n TMT 13.55%n Financial Services 4.81%n Biotechnology & Healthcare

2.60%n Construction & Real Estate

3.08%n Other 8.95%

Prospects by sector (UK)

Manufacturing Weak £ will help as internationaltrade revives

Retail & wholesale Eroding consumer spending powerwill hurt

Business services Sluggish growth and governmentcuts will keep life tough

Property & Failures have probably peaked, butconstruction recent growth may slow

Technology, media Lack of investment will hurt until &telecoms (TMT) economy picks up

Personal services Small firms will struggle whileconsumer spending stays tight

Leisure Still too much capacity whiledisposable incomes stagnate

Transport Demand rising in line witheconomy, but costs up too

Source: BDO


TECHNOLOGY, MEDIA AND TELECOMS (TMT)

The impact of the recession on this sector has been uneven, andmany start-up companies are thriving as they secure new contracts.The sector is still struggling to attract investment and cash atpresent, but Central South companies have again begun to lookoverseas to exploit their intellectual property and take advantage ofthe wider market opportunities.

The expected consolidation in the industry has not yet materialised.Many companies are succeeding on their own, and the latestSunday Times Tech Track 100 listing showed profit and growth levelsmaintained at similar levels to previous years. Many in the sectorbelieve that the digital revolution is still in its early stages and thegreatest transformations – in the technology we use and theindustry itself – are still to come.

“The last 12 months have been extremely difficult for most retailers, with consumerconfidence hitting all-time lows and the fear of unemployment affecting consumer spendingacross the board. We have found the behaviour of the customer has become much moredifficult to predict and have had to become increasingly flexible to ensure we react quickly toour customer demands, delivering an exceptional experience, and also managing our stocklevels effectively. By adopting this approach, we are delighted to have delivered positive salesgrowth over the last year. We have also been in a position to take advantage of better propertydeals and anticipate being able to open stores much more cost-effectively over the next 12months, which will increase our presence nationally and put us in a strong position to takeadvantage of the upturn when it eventually arrives.” SHAUN WILLS, FINANCE DIRECTOR, FATFACE LTD

SURVIVAL OF THE FOCUSED

As the market drags through the middle of the ‘W-shaped’recovery, it is unlikely that this long drag phase in 2010 willprove to be a source of confidence for businesses in thearea. The source of confidence will need to come fromwithin the business.

John Rosling, CEO Shirlaws (UK) Ltd, suggests thatbusinesses need to confront the challenge of strategic focus.

“There will not be many, but there will be a few businessesin 2010 that go from good to great or even from great tooutstanding.

n These businesses will have an unambiguousunderstanding of the core IP of the business (“in theorywhat could we trademark”) from which futurerepackaging or extensions can be built.

n These businesses will have a laser focus on what thebusiness is famous for, understood by ‘channel’ partnersand prospective customers.

n They will know what they are brilliant at and they willcharge for it.

n They will have investigated and understood the corecapability gaps that the business needs to invest in.

n They won’t be selling the same thing they were sellingtwo years ago (ie a boom product in a drag market).

Many businesses will survive a tough 2010 but there will bea few who will build the foundations and platforms oftomorrow’s brilliant businesses.”

OPERATING REVIEW

TAXATIONNOT MUCH RELIEF AHEAD

THE GROUP TAX CHARGE DROPPED LAST YEAR; BUT NOTIN LINE WITH PROFITS, SO THE EFFECTIVE TAX RATEINCREASED. AND THE YEAR AHEAD IS LIKELY TO SEE TAXDEMANDS BECOMING INCREASINGLY ONEROUS. COMPANIESARE FACING ADDITIONAL COMPLIANCE BURDENS, ANDHIGHER EARNERS HAVE A NEW 50 PER CENT INCOME TAXRATE TO LOOK FORWARD TO.


Group pre-tax profits tumbled by 72.9 per cent in 2009 as a resultof the economic downturn. Actual tax charges to the P&L were alsodown, though only by 60.9 per cent.

The effective tax rate was 33.5 per cent. This represented a return tothe levels reported two years ago – albeit on a lower profit base –despite the reduction in the standard rate of corporation tax from30 per cent to 28 per cent. The low rate of 23 per cent reported in2008 was an exceptional figure resulting largely from changes in theGroup’s composition and individual companies’ group structures.

The year’s high effective tax rate was partly due to losses arising inthe period not being recognised in deferred tax. The Group saw amassive swing in deferred tax for the period: a credit of £592mcompared with a credit of £10m in the previous year. Thismovement relates predominantly to the Group’s financialinstitutions, and a prior year adjustment credit to deferred tax of£119m suggests that the prior year’s £10m figure was significantlyunderstated.

Of course, there is a silver lining: the increase in losses carriedforward at the year-end offers the prospect of future tax savingswhen profits begin to rise.

CURRENT DEVELOPMENTS

HMRC’s risk assessment programme is now well underway, andmany companies are having to go through the burdensome task ofgaining a fair risk rating.

The introduction of the Senior Accounting Officer regulations formany large companies will require the most senior finance officialto sign a certificate confirming that internal controls are sufficientto produce accurate tax filings and payments. Failures can result inlarge fines for the individual as well as the company – an innovationthat has not been warmly received.

The world-wide debt cap legislation came into force on 1 January2010. This can restrict interest deductions for groups and mayimpact heavily on the tax position of UK companies, particularly ifthey are highly geared. Large groups need to consider theimplications of this as soon as possible in order to implement anyplanning required to mitigate the impact on their tax charge.

For all companies a severe new penalty regime for all taxes is nowin force, so attention to compliance requirements is moreimportant than ever to minimise costs.

OVER THE PAST YEAR, GROUP BUSINESSESREDUCED THEIR INVESTMENT IN R&D.THIS MAKES IT ALL THE MORE IMPORTANTFOR THEM TO MAXIMISE TAX RELIEF ON THEMONEY THAT IS BEING SPENT, TO REDUCETHE EFFECTIVE TAX RATE AND POTENTIALLYINCREASE CASH FLOW.

The Business Payment Support Service introduced last year toenable businesses to defer tax payments has been well used and isstill in place. However, HMRC is now taking a stricter line ondeferrals and companies seeking to delay paying significant debtsmay need to commission a full financial report on their business.

A TAXING YEAR AHEAD

So what does the year ahead hold?

The Government has announced increases in NationalInsurance contributions for companies and individuals,and a 50 per cent income tax rate for individuals withincome over £150,000 a year, as well as the withdrawalof higher rate tax relief on pension contributions for high earners.

Group shareholders and officers on high incomes shouldbe looking for planning opportunities to minimise their taxexposure in the coming year. We have already seen a largenumber of individuals adopting tax planning ideas inpreparation of the introduction of the 50 per cent rate inApril 2010.

All Group companies should be looking at ways of reducingtheir employment tax costs, particularly in the light of theNIC increases from 6 April 2011, by using tax-efficientremuneration schemes such as share schemes and salarysacrifice arrangements.

OPERATING REVIEW

FRAUDTHE LOSSES THAT GO UNREPORTED

SOME 80 PER CENT OF GROUP BUSINESSES SUFFERED ATLEAST ONE ECONOMIC FRAUD LAST YEAR. AT LEAST, THAT ISWHAT FRAUD EXPERTS ESTIMATE. AS USUAL, THE SUBJECT OFFRAUD IS CONSPICUOUSLY ABSENT FROM GROUPREPORTING.


In corporate reporting, fraud is something of a taboo subject. Annualreports rarely mention it, even though its incidence is widespreadand often damaging. Perhaps directors fear for their companies’reputation – or their own. According to research by BDO, only 84per cent of frauds are reported to the board, and only 69 per centare reported to the police. So perhaps it is hardly surprising that sofew are reported to shareholders.

IN THE DEPTHS OF A RECESSION, DIRECTORSMAY REGARD FRAUD AS THE LEAST OF THEIRWORRIES. YET THE RISK IS AT ITS GREATEST INA DOWNTURN, AND ANY RELAXATION OFVIGILANCE CAN ONLY FERMENT THE LETHALCOCKTAIL OF MOTIVATION ANDOPPORTUNITY TO COMMIT FRAUD.

BDO research among UK business leaders last year found thatthree-quarters of businesses surveyed had reduced headcount,through natural attrition or formal redundancy programmes. It isprecisely such cost-cutting measures that can increase vulnerabilityto fraud. And while the research found that the recession hadprompted greater discussion of risk in general, many companies hadnot looked closely at the risks they might face as a result of actionto cut costs and share financial risks.

Losses caused by fraud can exacerbate recession-inducedconstraints on cash flow, liquidity and profits. Coping with even asmall fraud will consume financial and management resources whenthese are already stretched. The consequences can be devastating,damaging larger companies and destroying smaller ones.

Facts and figures are difficult to compile because so much fraudgoes unreported. But BDO’s Southampton Forensic Accountingteam has noted a significant increase in fraud enquiries receivedover the past year. In all cases, the team has identified a lack ofeffective internal controls to prevent and detect the fraud at anearly stage. It strongly recommends that all companies shouldimplement these simple measures:

n Segregate duties to eliminate opportunities to cover theft.

n Stage surprise audits or counts to deter fraud.

n Introduce additional checks for signing-off payments orauthorising purchases.

n Check-up on suppliers, contractors and significant customersto confirm their identities and ensure they are delivering valuefor money.

n Monitor bank and credit card statements for unusualtransactions.

n Communicate staff expense policies and procedures − andmonitor compliance.

n Check invoices against original purchase orders and thegoods supplied.

n Check references for all new staff.

n Ensure business premises have adequate physical securityprotection including locks, keypads and alarms.

These measures could radically reduce Group companies’ exposureto asset misappropriation fraud. Will they be taken? We hope so.And will the resulting sharp fall in fraud losses be reported toshareholders? That seems less likely.

FRAUD – A GROWING PROBLEM

Reported fraud in the UK exploded in 2009 and broke the£2bn barrier for the first time according to FraudTrack,BDO’s authoritative survey of reported incidents.

The amount lost by businesses and the public sector tolarger frauds increased last year by a startling 76 per centduring the recession, with both the number and size offrauds increasing dramatically.

The total fraud figure for the Central South region wasapproximately £8.8m for the period 1st December 2008 to30 November 2009. This represented only 0.42 per cent oftotal reported fraud for the whole of the UK. There were 9records out of the 363 records that related to the CentralSouth region, with the locations identified as: Bournemouth,Portsmouth and Southampton.

The region with the most reported fraud was Londonand the South East which accounted for 77 per cent, with avalue of £1,619m.

The table below shows the most predominant fraud types:

FRAUD TYPES 2009

n Breach of regulations 0%n Corruption 0%n Counterfeiting 3%n Employee fraud 2%n Management fraud

(financial statements) 24%n Money laundering 3%n Mortgage fraud 18%n Non-corporate 11%n Tax fraud 15%n Third party fraud (suppliers,

customers, etc.) 12%n Unauthorised use/misuse

of assets 12%

OPERATING REVIEW

RISK MANAGEMENTGRAPPLING WITH UNCERTAINTY

KEY RISK TABLES ARE BECOMING AN INTERESTING SOURCEOF INSIGHTS INTO WHAT’S ON BOARDS’ MINDS. IT’S NOSURPRISE THAT GROUP COMPANIES’ DIRECTORS ARE STILLWATCHING FUNDING AND LIQUIDITY CLOSELY.


It’s also good to see they’re concerned about whether the previousyear’s acquisitions will deliver value. Meanwhile, employees will bepleased that staff recruitment and retention are moving back up theboard’s agenda.

As the recession dragged on last year, Group businesses had tostrike strategic balances − between debt and cash, betweencutting costs and investing for future growth − with little certaintyabout future prospects to guide them. In such conditions, it is morevital than ever to make each decision in full knowledge of the risksit entails.

Risk management helps decision makers to strike an appropriatebalance between realising opportunities and minimising thepotential for adverse impacts. It’s never going to eliminate riskentirely, but it does give a board the information and process toweigh pros and cons and make better decisions. Importantly, it alsomakes decisions more transparent – especially for investors, ifrelevant information is disclosed in annual reports.

Across the Group, the great majority of companies’ annual reportsnow articulate clearly the risks they face. Those most commonlymentioned are listed in the panel right. As in the previous year,concerns over funding and cash flow remained high on the list forvirtually all companies. These financial uncertainties continued torank with the traditionally dominant business risks, such as theeconomic environment and competition, which are also currentlylooming larger than usual.

Two risk areas have begun to rise up the agenda. Staff recruitmentand retention is more of a concern, suggesting both some increasedactivity in the jobs market and a recognition that competitivenessin tough market conditions depends on having high-calibre people.Post-merger integration risks are also weighing more heavily ondirectors’ minds. Following the previous year’s relatively high levelof M&A activity, failure to realise the expected benefits ofacquisitions looks like a more significant risk.

BOARDS ARE FOCUSED ON BOTH SHORTTERM OPERATIONAL AND LONGER TERMSTRATEGIC RISKS, AND IT IS RIGHT THATTHESE ARE BALANCED. WHEN FUNDING ISTIGHT, IT IS AN EVEN GREATER CHALLENGETO SIFT OUT OPPORTUNITIES TO GROWAND DEVELOP BUSINESS (FOR EXAMPLETHROUGH RESEARCH, DEVELOPING NEWPROJECTS OR EXPANSION), AND TO MANAGETHE ASSOCIATED RISKS, WHILE STILL KEEPINGAN EYE ON EVERYDAY OPERATIONALEFFICIENCY.

Before the current financial crisis began, many companies still sawrisk management as more of a compliance issue than a corecompetence. The shifting priorities in Group companies’ key risktables reflect their recognition that those days are over. Now thereis general recognition that effective risk management doesn’t justhelp protect a company’s reputation; it can make a real difference inimproving financial and operational performance and ensuring thatthe business is better placed to survive the recession and come outfighting as the upturn begins.

KEY RISKS AND UNCERTAINTIES

These are the key risks and uncertainties most commonlyidentified by Group companies:

n Economic and market risks − currently exacerbated bythe tough macroeconomic climate and weak marketconditions.

n Funding and liquidity risks:

– Uncertainty over exchange and interest rates. – Access to credit and ability to comply with

funding conditions. – Liquidity and cash management.

n Competition − seen as fierce across all sectors.

n Staff recruitment and retention − moving up the agenda.

n Post-merger integration − also moving up.

OPERATING REVIEW

FUTURE GROWTHPLAYING TO OUR STRENGTHS

ARGUABLY, THE POST-RECESSION WORLD WILL BE VERYDIFFERENT FROM THE ONE WE KNEW BEFORE THE CRISISBEGAN. IN WHICH CASE, THE GROUP MAY HAVE TO EVOLVERAPIDLY AND RADICALLY, IN RESPONSE TO NEWOPPORTUNITIES AND THREATS. WHERE DO ITS BESTPROSPECTS FOR GROWTH LIE? HERE ARE A FEWSUGGESTIONS…


The economic crisis and subsequent recession are likely to changethe UK’s business landscape profoundly. Sectors and markets thatwere traditional mainstays of our economy may never recover theirformer importance.

In their place, what activities will generate significant wealth for thenation? We will need to play to our strengths. We remain innovativeand entrepreneurial. We have an outstanding higher educationsystem with some of the world’s best universities. Their research,often in conjunction with world-class businesses, puts us on a parwith the US and ahead of most other major economies in bothscale and quality.

The world is going to need our innovation and knowledge. Its risingpopulation is consuming more natural resources, energy, water andfoodstuffs. In the developed economies, rising life expectancy ismaking it harder for nations to house their people, provide for themand keep them as healthy as they expect. So there will be growingdemand for our skills in fields such as:

n Digital technology

n Biotechnology

n Stem cell research

n Robotics and cybernetics

n Nanotechnology

n Renewable energies

n Neutraceuticals and food science

n Marine science

n The creative industries, such as film, fashion and media.

Many of the businesses exploiting these sectors could be very small− perhaps even virtual businesses needing little real estate orinfrastructure. The post-recession era will spawn new ways ofpartnering and collaborating for profit. It will enable a number ofbusinesses that are going nowhere today to find new ways ofdeveloping products and solutions, producing them and taking themto market. Our high labour costs make it unlikely that we will bethe volume producer of much that emerges from our knowledgebase; most production will take place in the Far East or EasternEurope. Many of the end retailers or wholesalers, such as big

pharmaceutical companies, may not be British either; what mattersis that we earn enough from licensing or selling our intellectualproperty to reinvest in staying ahead of the competition.

In parallel with this, we need to pursue growth opportunistically infields where we excel. In this region we have strength in defenceelectronics, homeland security and related support services andtraining. We still have considerable marine and maritime expertisefrom centuries of sailing and trading. Tourism and leisure shouldalso continue to be major wealth generators: our historical legacy,our proximity to Europe and the US, our cultural diversity and oursporting aptitudes will always attract millions of tourists needing tobe accommodated, fed and entertained.

THE CENTRAL SOUTH REGION IS WELLPLACED TO THRIVE IN THIS LANDSCAPE.IT HAS EXCELLENT UNIVERSITIES ANDSIGNIFICANT CLUSTERS IN SEVERAL KEYSECTORS. ITS LOCAL GOVERNMENTS ARECOLLABORATING INCREASINGLY EFFECTIVELYAND ORGANISATIONS SUCH AS SOLENTSYNERGY AND SOLENT INNOVATIONGROWTH NETWORK ARE EMERGING TOBROKER THE INTERACTIONS NEEDEDBETWEEN THE EDUCATION SECTOR, SMESAND LARGE BUSINESSES. IN 10 YEARS’ TIMETHE GROUP MAY LOOK VERY DIFFERENT –BUT IT SHOULD BE THRIVING.

THE FUTURE BUSINESS LANDSCAPE IS CHANGING

What will the post-recession landscape look like? Workingwith a leading think-tank, the Centre for Future Studies,BDO enlisted a panel of over 65 organisations andindependent experts to gaze into the crystal ball. The keyshifts they forecast were:

n A new economic world order in favour of the BRICcountries - Brazil, Russia, India and China – to challengethe US for global supremacy.

n Capitalism will be more socialised and the emphasis willbe on social stability, responsibility and shared capacitiesto take risks.

n A new regulatory environment as governments aroundthe world take stakes in companies to safeguard themand lend directly to businesses to address the liquiditycrunch, questions around governance are likely to beasked in every sector. The focus will move from lighttouch risk-based regulation to ‘right-touch’.

n Successful companies will expand their view of successand redefine it in terms of lasting positive impacts forbusiness, society, and the environment downturn.

n A permanent cultural shift in consumer attitudes awayfrom aspiration towards value for money, simplicity anddeeper evaluation of what really matters.

n New corporate cultures of creativity, innovation andchallenge, responding to the desire of both customersand employees to deal with companies that inspirethem.

n A transition to digital era growth industries: digitaltechnologies, renewable energies, nanotechnology,cybernetics, biotechnology, stem cell research and thecreative industries.

For further information about the series of ‘Transitions’reports please visit www.freedomtothink.biz

BASIS OF PREPARATION

HOW WE COMPILEDTHIS REPORT

SOURCE OF INFORMATION

The companies included in this report were selected by conductingan initial search on OneSource© using the following input criteria:

n Company location as either Hampshire, Isle of Wight, Dorset,South Wiltshire or Chichester and surrounding area.

n Turnover in excess of £40m.

This produced over 400 companies and copies of most recentfinancial statements were obtained from Companies House filings.Companies were eliminated whose registered office, as recorded inthe financial statements, was not in the specified region. In additionsubsidiaries of parent companies producing group accounts whereboth were included in the population were deleted to eliminateduplication.

This produced the final population of 150 companies. The publishedaccounts (see below for year ends), obtained from CompaniesHouse filings, were used to provide the financial informationincluded in this report.

YEAR ENDS

The year ends included in the ‘current period’ financial informationin this report range from 1 April 2008 to 31 March 2009 being themost recent accounts filed at Companies House at the time of thecompilation of this report. For companies with December year ends(96 in the population) the ‘current period’ will be the year ended 31December 2008. For January and February year ends (9) the currentperiod is that ending in 2009. For April to November year endcompanies (34), due to the restrictions of the filing deadlines atCompanies House and the timescale of compilation of this reportthe current periods are predominantly those ending in 2008although (11) 2009 March year ends were included.

AGGREGATION

The published accounts of the 150 companies identified by theabove processes have been combined by a simple aggregation toproduce the financial information in this report. No consolidationadjustments have been made and in particular no adjustments havebeen made to reflect the non-coterminous year ends of thecompanies.

As the population in the Central South Report 2010 differs fromthat in last year’s Report, adjustments were required to cash flow,reserves and non current assets to reconcile the opening positionsin the current period to the closing positions in the Central SouthReport 2009. Further more the allocation of costs betweendistribution, administrative and other operating costs including R&Din the comparative figures have been adjusted to reflect aconsistent approach with the current year figures.

IFRS AND UK GAAP

Of the 150 companies, 33 have prepared their accounts underIFRS and the remainder under UK GAAP. However, as those 33companies represent 21.2 per cent of total revenue and as theimplementation of IFRS will increase in future we have decided topresent the financial information in a format more consistent withIFRS than UK GAAP. We have made no attempt to adjust UK GAAPnumbers to comply with IFRS, we have merely represented the UKGAAP numbers in a format similar to IFRS. Consequently a numberof allocation judgements were required that may impact thecomparability of the financial information.


DISCONTINUED OPERATIONS/NON OPERATING ITEMS

No distinction has been made between continuing anddiscontinued operations due to the variety of judgements andpresentational approaches taken by relevant companies. Where ithas been possible to identify such items, all ‘exceptional’ or similaritems reflected outside operating profit have been aggregated andnot analysed further, as ‘non operating items’.

CASH FLOW STATEMENT

Whilst some of the individual line items on the cash flow statementhave been obtained from the aggregation of cash flows, the cashflow statements have been largely derived from the simplisticapproach of reconciling the movements between the balancesheets. This was to ensure that the changes in cash and cashequivalents in the cash flow statement reconciled with the balancesheets which they do not in the aggregation due to the differencesin starting points, definitions of cash and cash equivalents and thetreatment of debt in all the companies.

FINANCIAL INSTITUTIONS

A number of financial institutions (banks and building societies)are included in the aggregation. Three main assumptions havebeen made in aggregating the results of these companies with thewider population.

n Interest income has been included in revenue in the aggregationwith interest expense in cost of sales to reflect the interestmargin as gross profit.

n Cash and cash equivalents in the balance sheet for suchinstitutions have been made to equal cash and cash equivalentsas defined in the cash flow statements.

n Balances specific to financial institutions, eg customer accounts,share accounts, deposits have where possible been identified andanalysed by maturity and presented accordingly in current/noncurrent categories identified in the financial information asamounts relating to financial institutions.

DISCLAIMER

The financial information in this report has been compiledexclusively from publicly available information under the keyassumptions and limitations outlined above. It has been designedsolely for illustrative purposes to highlight trends in the financialperformance of a representative sample of companies in the region.

BDO has made a number of judgments in aggregating theinformation into a consistent format BDO does not, and cannot,warrant the completeness or accuracy of such adjustments.Furthermore in adjusting the presentation adopted in publishedaccounts to meet the specific requirements of this report, BDO isnot making any judgement nor giving any opinion on thepresentation adopted in those published accounts.

BDO has not carried out any verification work on the financialinformation in this report and give no opinion on the financialinformation. The financial information was not compiled with theintention that it should be used for any purpose save for thatdescribed above. We do not accept responsibility for the financialinformation to any person or for any purpose other than that forwhich it was prepared.

24 The Central South Report 2010

FINANCIAL INFORMATION

SUMMARISED CONSOLIDATED INCOME STATEMENT

Note Current period Prior period £m £m

Revenue 1 77,890 70,937 Cost of sales (62,130 (54,206

Gross profit 15,760 16,731 Distribution costs (3,145 (2,600 Administrative expenses (9,315 (8,900 Other operating items (1,685 (728

Operating profit 2 1,615 4,503 Share of profits of Associates and joint ventures 114 123 Non-operating items 199 145

Profit before finance costs 1,928 4,771 Finance costs 5 (2,979 (2,382 Finance income 5 1,973 1,016

Profit before tax 922 3,405 Tax expense 6 (309 (791

Profit for the year from continuing operations 613 2,614

Discontinued operations Profit for the year from discontinued operations 383 134

Profit for the year 996 2,748

Attributable to: Equity holders of the parent 983 2,726 Minority interest 13 22

996 2,748

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SUMMARISED CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE

Current period Prior period £m £m

Profit for the year 996 2,748 Foreign exchange gains/(losses) on retranslation of overseas operations 417 (58 Actuarial (losses)/gains on pension schemes (2,263 694 Other items reflected directly in equity (93 6 Tax effect of gains and losses recognised directly in equity 355 (163 Revaluation of fixed assets (144 90 Movement on available for sale assets 43 (8

Total recognised income and expense for the year (689 3,309

Effect of prior year adjustments (25 48

(714 3,357

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SUMMARISED CONSOLIDATED BALANCE SHEET AT THE PERIOD END

Note Current period Prior period £m £m £m £m

Assets Non-current assets Property, plant and equipment 8 15,817 15,169 Intangible assets 9 12,851 14,301 Financial institution non-current assets 30.487 38,132 Investments 2,694 2,075 Deferred tax assets 927 916 Other non-current assets 899 990

Total non-current assets 63,675 71,583

Current assets Inventories 5,757 6,415 Trade and other receivables 10 37,697 28,521 Other financial assets 5,320 6,819 Cash and cash equivalents 5,402 5,666

Total current assets 54,176 47,421

Assets classified as held for sale 186 35

Total assets 118,037 119,039


SUMMARISED CONSOLIDATED BALANCE SHEET AT THE PERIOD END (CONTINUED)

Note Current period Prior period £m £m £m £m

Liabilities Current liabilities Loans and bank overdrafts 11 (3,493 (1,962 Trade and other payables 12 (68,827 (68,872 Current tax liabilities (1,064 (965 Provisions 15 (257 (175

Total current liabilities (73,641 (71,974

Non-current liabilities Loans and bank overdrafts 13 (17,176 (15,645 Trade and other payables 14 (5,037 (7,013 Employee benefits (2,562 (562 Deferred tax liability (878 (2,020 Provisions 15 (1,676 (1,295

Total non-current liabilities (27,329 (26,535

Total liabilities (100,970 (98,509

TOTAL NET ASSETS 17,067 20,530

Capital and reserves attributable to equity holders Share capital 16 5,157 5,323 Share premium 5,531 3,882 Merger reserve 63 100 Other reserves 1,091 3,343 Retained earnings 5,042 7,707

17 16,884 20,355

Minority interest 183 175

TOTAL EQUITY 17,067 20,530

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ILLUSTRATIVE CONSOLIDATED CASH FLOW STATEMENT FOR THE PERIOD

Current period Prior period £m £m £m £m

Operating activities Profit for the year 996 2,748Adjustments for: Depreciation and amortisation 2,671 2,548Interest paid 2,979 2,382Interest received (1,973 (1,016Income tax expense 309 791Other adjustments (2,180 1,480

Operating profit before changes in working capital and provisions 2,802 8,933 Changes in working capital and provisions (308 (11,842 Income taxes paid (741 813

Cash flows from operating activities 1,753 (2,096 Investing activities Purchase of subsidiaries and investments (3,427 (8,444 Disposal of subsidiaries and investments 1,868 123 Purchases of PPE (2,331 (1,817 Sale of PPE 842 956 Development costs capitalised (259 -

(3,307 (9,182

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ILLUSTRATIVE CONSOLIDATED CASH FLOW STATEMENT FOR THE PERIOD (CONTINUED)

Current period Prior period £m £m £m £m

Financing activities Issue of ordinary shares 1,842 1,060Purchase of own shares (55 (111Net movement on debt and other financing 3,062 (1,012Interest paid (1,614 (1,366Dividends paid (1,547 (2,044

1,688 (3,473

Change in cash and cash equivalents 134 (14,751 Cash and cash equivalants brought forward 5,666 19,699 Opening adjustments (398 718

Cash and cash equivalents carried forward 5,402 5,666

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NOTES FORMING PART OF THE FINANCIAL STATEMENTS FOR THE PERIOD

1 Revenue Current period Prior period £m £m

Geographical analysis: United Kingdom 31,948 33,514 Continental Europe 28,813 21,814 North America 10,492 8,833 Asia 2,985 3,252 Africa 149 235 Australasia 455 - Rest of the world 3,048 3,289

77,890 70,937

Current period Prior period £m £m Sector analysis: Chemical Manufacturing - Including Ineos Group 28,421 20,546 Business Services 3,956 3,823 Retail (Home Improvement) 3,683 3,912 Computer Hardware 5,059 4,302 Aerospace and Defence 8,477 6,907 Retail (Other) 4,200 3,166 Misc. Financial Services 3,750 4,318 Biotechnology and Drugs 936 3,014 Others 19,408 20,949

77,890 70,937

Revenue by destination


NOTES FORMING PART OF THE FINANCIAL STATEMENTS FOR THE PERIOD (CONTINUED)

2 Operating profit Current period Prior period £m £m

This has been arrived at after charging/(crediting): Deprecation and impairment charges of property, plant and equipment 2,018 1,847 Amortisation and impairment charges of intangible fixed assets 653 701 Operating lease expense - Plant and machinery 620 429 - Property 637 579 Auditors remuneration - audit 32 26 Auditors remuneration - non-audit services 21 23 Research and Development 1,242 590

3 Staff costs Current period Prior period £m £m

Staff costs (including directors) comprise: Wages and salaries 9,726 9,246 Social security costs 1,061 942 Share option cost 83 97 Other staff costs 26 27 Other pension costs 908 822

11,804 11,134

Average number of employees 315,071 324,031 Average pay per employee (£000) 37 34



4 Directors’ emoluments Current period Prior period £m £m

Emoluments: Salaries and fees 98 99 Benefits 2 2 Bonuses 12 11 Compensation for loss of office 7 2 Pension contributions 7 5 Other - 2

126 121

Current period Prior period Number of executive directors 774 692 Number of non executive directors 96 122

870 814

Average emoluments per director (£000) 163 175 Average emoluments per highest paid director (£000) 410 461

Age range of executive directors 33-84 31-82 Average age of executive directors 56 51 Age range of non executive directors 34-78 41-80 Average age of non executive directors 66 59 Male/female analysis – executive directors 715/59 638/54 Male/female analysis – non executive directors 90/6 112/10



5 Finance income and expense Current period Prior period £m £m

Finance costs Interest payable 2,610 1,884 Other finance expense 369 498

2,979 2,382

Finance income Interest receivable (925 (809 Other finance income (1,048 (207

(1,973 (1,016

Net finance costs 1,006 1,366

6 Tax expense Current period Prior period £m £m £m £m

Current tax expense: UK corporation tax and income tax of overseas operations on profits for the year 1,020 778

Deferred tax expense Current period (592 (10 Adjustment for under/(over) provision in prior periods (119 23

(711 13

Total tax charge 309 791

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6 Tax expense (continued)

The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the UK applied to profits for the year are as follows:

Current period Prior period £m £m

Profit before tax 922 3,405 Expected tax charge based on the standard rate of corporation tax in the UK of 28% (prior period 30%) 258 1,022 Expenses not deductible for tax purposes 119 174 Utilisation of previously unrecognised tax losses/losses not utilised 133 31 Tax exempt income (89 (173 Other (net) (112 (263

Total tax charge 309 791

7 Dividends Current period Prior period £m £m

Dividends paid in the period 1,609 2,044

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8 Property, plant and equipment Plant, machinery, Land and and motor Fixtures and buildings vehicles fittings Total £m £m £m £m

Cost or valuation: At start of period 6,674 15,456 1,980 24,110 Exchange differences 121 (153 27 (5 Additions at cost 311 1,720 200 2,231 Acquisitions 35 780 8 823 Disposals and transfers (2 (1,702 (71 (1,775 Revaluations (210 - - (210 Opening adjustment (bal fig) (532 1,736 (139 1,065

At end of period 6,397 17,837 2,005 26,239

Depreciation: At start of period 1,135 6,651 1,155 8,941 Disposals and transfers (218 (620 (95 (933 Acquisitions 78 33 328 439 Charge for the period 883 823 184 1,890 Impairment charges 19 107 2 128 Exchange differences (54 147 17 110 Revaluation (4 - - (4 Opening adjustment (bal fig) 2,042 (1,795 (396 (149

At end of period 3,881 5,346 1,195 10,422

Net book value At end of period 2,516 12,491 810 15,817

At beginning of period 5,539 8,805 825 15,169

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9 Intangible assets Development Goodwill costs Other Total £m £m £m £m

Cost or valuation: At start of period 11,849 423 5,243 17,515 Additions 477 111 131 719 Business combinations 656 17 733 1,406 Disposals (22 (19 (29 (70 Other adjustments 703 62 440 1,205 Opening adjustments (bal fig) (3,047 (45 (2,842 (5,934

At end of period 10,616 549 3,676 14,841

Amortisation: At start of period 2,210 122 882 3,214 Disposals (7 (8 (19 (34 Charge for the period 280 35 303 618 Impairment charges 9 18 8 35 Other adjustments 16 4 40 60 Opening adjustments (bal fig) (1,442 (46 (415 (1,903

At end of period 1,066 125 799 1,990 Net book value

At end of period 9,550 424 2,877 12,851

At beginning of period 9,639 301 4,361 14,301

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10 Trade and other receivables Current period Prior period £m £m

Trade debtors - non financial institutions 10,680 8,165 Other debtors 3,490 2,293 Amounts owed by group undertakings 22,171 16,714 Prepayments and accrued income 1,356 1,349

37,697 28,521

11 Loans and bank overdrafts - current Current period Prior period £m £m

Bank loans and overdrafts 2,442 878

Other loans 1,051 1,084

3,493 1,962

12 Trade and other payables - current Current period Prior period £m £m

Trade creditors 30,002 37,035 Other taxes and social security 565 615 Other creditors 15,594 11,531 Obligations under finance leases 88 88 Amounts owed to group undertakings 16,712 14,229 Accruals and deferred income 5,866 5,374

68,827 68,872



13 Loans and bank overdrafts - non current Current period Prior period £m £m

Bank loans 15,182 7,036 Other loans 1,994 8,609

17,176 15,645

14 Trade and other payables - non current Current period Prior period £m £m

Trade creditors - 78 Other creditors 1,470 3,348 Obligations under finance leases 336 315 Amounts owed to group undertakings 2,889 3,085 Accruals and deferred income 342 187

5,037 7,013

15 Provisions £m

At start of period 1,470 Opening adjustment (123 Charged to profit and loss 206 On acquisition 35 Utilised in year (135 Other movements 480

At period end 1,933

Included within this figure are: £m

Long term provisions 1,676 Current provisions 257

1,933

The provisions were largely due to financial institutions.

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16 Share capital Current period Prior period £m £m

Equity 5,157 5,323

17 Reconciliation of movements in capital and reserves attributable to equity holders £m

Total recognised income and expense (689 Prior year adjustments (25 Issue of equity shares 1,861 Redemption or cancellation of equity shares (153 Other movements 120 Equity dividends paid (1,609

(495 Capital and reserves attributable to equity holders at the beginning of the period 20,355 Opening adjustments (2,976

Capital and reserves attributable to equity holders at the end of the period 16,884

18 Net debt and gearing Current period Prior period £m £m

Net debt comprises: Loans and bank overdrafts due within one year (3,493 (1,962 Loans and bank overdrafts due after more than one year (17,176 (15,645

(20,669 (17,607 Cash and cash equivalents 5,402 5,666

Net (debt)/Net cash (15,267 (11,941

Total equity 17,067 20,530 Debt/Equity 121% 86%

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THE TEAM

THIS REPORT HAS BEEN PRODUCED BY THEBDO TEAM IN SOUTHAMPTON

THANKS ALSO GO TO OUR RESEARCHER JAMES BRICKNELL AND EVERYONE WHOCONTRIBUTED TO THE REPORT.

Kim Hayward – Audit and Office Lead Partner023 8088 1897 [email protected]

Paul Bricknell – Audit023 8088 1889 [email protected]

Paul Lawton – Audit023 8088 1891 [email protected]

Ruth Ireland – Risk and Advisory Services023 8088 1735 [email protected]

Erin Davis – Tax023 8088 1866 [email protected]

David Wilkinson – Corporate Finance023 8088 1791 [email protected]

David Smithson – Business Restructuring023 8088 1785 [email protected]

Paul Duckworth – Tax023 8088 1867 [email protected]

Mike Mason – Forensic023 8088 1765 [email protected]

Cheryl Martin – Sales and Client Services023 8088 1754 [email protected]

Emma Wareham – Marketing Communications023 8088 1753 [email protected]


Adams-Morey Limited

Advanced Resource ManagersHoldings Limited

AIM Group Plc

Alberto-Culver Group Limited

Alphabet (Gb) Limited

AON Consulting Limited

Apollo Fire Detectors Limited

Automobile AssociationDevelopments Limited

Automobile Association InsuranceServices Limited

Aviation Training International Limited

B&Q Plc

Bacardi-Martini Limited

BAE Systems (Operations) Limited

BAE Systems Electronics Limited

BAE Systems Integrated SystemTechnologies Limited

BAE Systems Land Systems(Munitions & Ordnance) Limited

BAE Systems Land Systems(Weapons & Vehicles) Limited

BAE Systems Marine Limited

Balfour Beatty Ground EngineeringLimited

Barclays Mercantile BusinessFinance Limited

Barfoots Of Botley Limited

Bartholomews (Holdings) Limited

BMW Financial Services (GB) Limited

Bourne Group Holdings Limited

Carisbrooke Shipping Holdings Limited

Carte Blanche Greetings Limited

CDI Anderselite Limited

Chemring Group Plc

Cibavision (U.K.) Limited

City Motor Holdings Limited

ClC Group Limited

Cobham Plc

Cognis UK Limited

Colt Investments Limited

Coopervision Limited

Coopervision Manufacturing Limited

Covidien (UK) Commercial Limited

CRI/Criterion Catalyst Company Limited

David Cover And Son Limited

De La Rue Plc

Draper Tool Group Limited (The)

Dyer & Butler Holdings Limited

Eli Lilly And Company Limited

Euphony Holdings Limited

Fat Face World Limited

First Drinks Brands Limited

Fitness First Group Limited

Foray Holdings Limited

Fortis Insurance Limited

Fyffes Group Limited

Garmin (Europe) Limited

GE Aviation Systems AerostructuresHamble Limited

Gemalto UK Limited

Genus Plc

Geoffrey Osborne Limited

Getronics UK Limited

GKN Aerospace Services Limited

Gurit (UK) Limited

Hall & Woodhouse Limited

Hammer Plc

Hamworthy Plc

Hendy Holdings Limited

Heritage Automotive Limited

Hogg Robinson Group Plc

Holtzbrinck Publishers Holdings Limited

Huhtamaki (UK) Limited

IBM United Kingdom FinancialServices Limited

IBM United Kingdom Limited

Industrial Acoustics Company Limited

Ineos Group Holdings Plc

John Wiley & Sons Limited

Johnson Controls Limited

Kenwood Limited

Koch Media Limited

Kofax Plc

Linde Material Handling (UK) Limited

Liverpool Victoria FriendlySociety Limited

Loders Motor Group Limited

Lucite International GroupHoldings Limited

Lush Cosmetics Limited

Macmillan Publishers Limited

Macquarie UK BroadcastHoldings Limited

MAHLE Filter Systems UK Limited

Manitou UK Limited

Matchtech Group Plc

MDL Marinas Group Plc

Meggitt Plc

Micheldever Group Limited

Miland Development 2004 Limited

Motorola Limited

NICE CTI Systems UK Limited

Nokia UK Limited

Pall Europe Limited

Peters & May Limited

Polimeri Europa UK Limited

Prysmian Cables & Systems Limited

Purple Foodservice Solutions Limited

R.N.L.I. (Trading) Limited

Raymarine Plc

Raymond Brown Limited

RIAS Plc

Ringmerit Limited

Saftdwin Limited

Sanden International (Europe) Limited

Scottish Widows Unit Trust ManagersLimited

SD Marine Services Limited

Selecta UK Limited

Serco Group Plc

Seward (Bournemouth) Limited

Siemens Vai Metals Technologies Limited

Sigma-Aldrich Company Limited

Simplyhealth Group LimIted

Skandia Life Assurance Company Limited

Skandia Life Business Services Limited

Skandia Multifunds Assurance Limited

Skandia Multifunds Limited

SMR Automotive Mirrors UK Limited

Snows Motor Group Limited

Southampton Container TerminalsLimited

SSI Schaefer Limited

Stanbridge Group Limited

Standard Life Healthcare Limited

Stannah Lifts Holdings Limited

Sumika Polymer Compounds(Europe) Limited

Sun Life Assurance Company of Canada(U.K.) Limited

Sunseeker International(Holdings) Limited

TAG Aviation Group (UK) Limited

Talaris Topco Limited

Tandberg Television Limited

Taylor Made Golf Limited

TDL Infomedia Limited

Teachers Provident Society Limited

Technical Aid Corporation UK Limited

The Chitty Food Group Limited

The Game Group Plc

The Innovation Group Plc

The Nuance Group (UK) Limited

Trant Holdings Limited

Tridonicatco UK Limited

Vestas Blades UK Limited

Vitacress Salads Limited

VT Group Plc

Warings Contractors Limited

Wella (U.K.) Limited

Westminster Dredging Company Limited

Westover Holdings Limited

Wilhelmsen Lines Car Carriers Limited

World Flowers Limited

Xyratex Technology Limited

Zurich UK General Services Limited

THE 150 GROUP COMPANIES

HOW WE CAN HELP YOUIf you would like further information about this publication or our wide range of services, please contact Cheryl Martin.

BDO LLPArcadia House, Maritime Walk, Ocean Village, Southampton SO14 3TLTel: 023 8088 1754Email: [email protected]

BDO LLP is the UK Member Firm of BDO, the world's fifth largest accountancy network, with more than 1,000 offices in over100 countries*. In the UK we have offices in Birmingham, Bristol, Cambridge, Chelmsford, Epsom, Gatwick, Glasgow, Hatfield, Leeds,London, Manchester, Northern Ireland, Reading and Southampton.

*Including exclusive alliances of BDO Member Firms.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specificsituations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO LLP to discuss these mattersin the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or nottaken by anyone in reliance on the information in this publication or for any decision based on it.

BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and formspart of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP isauthorised and regulated by the Financial Services Authority to conduct investment business.

BDO is the brand name of the BDO network and for each of the BDO Member Firms.

BDO LLP is the Data Controller for any personal data that it holds about you. We may disclose your information, under a confidentiality agreement, to a Data Processor (Shamrock MarketingLtd). To correct your personal details or if you do not wish us to provide you with information that we believe may be of interest to you, please contact Cheryl Martin on 023 8088 1754 oremail [email protected]

Copyright © February 2010. BDO. All rights reserved.

This document is printed on 9lives 80, a paper containing 80 per cent recycled fibre and 20 per cent virgin Totally Chlorine Free (TCF) fibre sourced from sustainable forests. 9lives 80 isproduced by an ISO 14001 accredited supplier.

'Tax Team of the Year' 2009 and 2008'Audit Team of the Year' 2008 'Corporate Finance Deal of the Year' 2008

www.bdo.co.uk

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