LAIRD GROUP

YEAR-END REPORT JANUARY - DECEMBER 2001

Laird Security Systems is a leader in the design, development, manufacture and distribution of innovative solutions to improve performance and enhance security for the home improvement and residential building markets. It supplies a comprehensive range of security, hardware and sealing products for windows and doors in the UK and North America.

In the UK, where Laird Security Systems is the overall market leader in window and door hardware, the business has been developed both organically and by a number of acquisitions in the 1990s. With plants in the North, Midlands and South East of England, it now comprises an integrated design, manufacturing, distribution and sales organisation, providing high quality security and hardware products serving customers in both the replacement and new build sectors.

The business has grown by supplying individually designed security products for the growing uPVC window market, which in the UK now dominates the replacement market and is taking a significant share in the new build sector. Laird Security Systems supplies a complete range of seals and hardware products which include all the components for residential windows from reinforcement, spacer bars, hinges and handles, to security stays and multi-point locking systems. The range also includes door and window locks and uPVC profiles.

In the USA, Laird Security Systems is a leading supplier of balance systems for sash windows with an increasing range of hardware products. It is also a leader in the supply of seals for doors and windows. Acquisitions in North America, such as Fastek in 2000 and Sash Controls in 2001, together with plant expansions, have strengthened the market position both in terms of product offering and geographic penetration. There is an increasing requirement for a higher level of service and more sophisticated product offerings as the industry consolidates into a smaller number of large fabricators.

Laird Security Systems’ manufacturing plants in both the UK and North America have been supplemented by two new plants in Eastern China. These provide optimal management of the supply chain to meet customers’ needs, while also providing the most cost-effective solutions.

Leading-edge design capability and the ability to provide total component packages are core to Laird Security Systems’ business strategy, which is pursued via a focused product development programme. Design centres of excellence have been established in the UK, North America and Asia to ensure an ongoing stream of innovative new products allowing Laird Security Systems to maintain its leadership position, while being fully responsive to the needs of local markets and customers.

Laird Security Systems, with its strong market positions in the UK and North America, plus its low-cost component manufacture and sourcing from Asia and its ability to serve those growing local markets, is well placed to continue its expansion, providing innovative and cost-effective products, component packages and systems solutions to its customers.


Chairmans Statement

Laird’s strategy is to focus on specialist markets where, through technology and customer service, a competitive edge can be achieved and where there are opportunities for growth. Laird Technologies is now the global leader in the Electromagnetic Interference Shielding market; Laird Security Systems holds leading market positions in the supply of window and door hardware and seals for the UK and USA housing industries; in Laird Services, Fullarton manufactures and assembles enclosures for major global electronics companies and Laird Plastics is the largest independent distributor of plastics in North America. A large proportion of the activities are now in the USA and the Group has a growing presence in Asia.


2001 represents the first full year’s results since the major repositioning of the Group carried out during 2000. The automotive businesses, which represented over 40% of the Group’s turnover, were sold at the end of that year and Instrument Specialties, which is now part of Laird Technologies, was acquired in August 2000.

The unprecedented downturn and resultant destocking seen in the electronics industries and the Group’s exposure to the US economy held back Laird Technologies and significantly reduced turnover and profits in Laird Services. In contrast, Laird Security Systems had an excellent year increasing turnover, profits and margins in relatively static markets.

Profits for the year before exceptional items, goodwill amortisation and tax were £25.2m, against £42.2m from continuing operations in 2000. Earnings per share on the same basis were 13.2 pence compared with 20.0 pence in 2000.
Prompt and decisive actions were taken to bring costs down into line with the sharply reduced level of activity in the Group’s electronics businesses and employee numbers in Europe and the USA were reduced by over 25%.

Exceptional charges of £6.6m were incurred as a result. Manufacturing capacity continues to be repositioned to bring it into line with future demand and to take account of the higher rates of growth expected in Asia. This will result in a significant permanent improvement in the cost base.

Laird has a sound financial base and continues to maintain substantial undrawn committed borrowing facilities. Net borrowings at the year end were £66.7m, 25% of Shareholders’ Funds. Interest cover for the year was 5.2 times before exceptional costs and, despite the lower profits, there was a trading cash inflow for the year of £31m before the net cash effects of acquisitions, disposals and dividend payments, compared with a net outflow of £6m in 2000.
Laird’s conservative financial policies, pursued over long periods of time, are also reflected in the satisfactory position of the Group’s defined benefit pension schemes. In accordance with the much publicised accounting standard FRS 17, the assets and liabilities of these schemes have been reviewed as at the end of 2001 and this shows a net surplus, although this surplus has not been included in the Group’s balance sheet this year.

The Board has carefully considered its future dividend policy in the light of Laird’s current results, the economic environment and the markets in which the Group operates where value creating investment opportunities exist which have the potential to accelerate the future growth of the business. The Board has concluded that the recent distribution level is no longer appropriate and that a new level of half the previous total (16.5 pence) should be established for the future. As a result, a final dividend of 5.4 pence per share is being recommended, which is half the final dividend paid last year. This will provide a total dividend for the year of 11.1 pence per share compared with 16.5 pence for the previous year. The total dividend for 2001 will be covered 1.2 times by earnings before exceptional items and goodwill amortisation.

Laird now commands leading market positions across the majority of its businesses and, notwithstanding the severe adverse trading conditions experienced during the year, is increasingly well placed for the future through the actions it has taken during the downturn. Further measures have been and are being implemented across the Group in 2002. These will strengthen its competitive position and expand the Group’s presence in the growing markets in Asia.

A reorganisation of Laird Technologies’ plants in the USA was undertaken early in 2002, as operations were repositioned in line with growing Asian demand. In China, a second plant will be brought on stream this year and the original facility is being expanded. As a result of its leading market and technology positions, Laird Technologies will benefit from a return to growth in the electronics industries and the increasing requirements for shielding. There are also good opportunities to expand the product range and to provide additional solutions for customers, both for shielding and for other applications.

The markets served by Laird Security Systems in both the UK and the USA are consolidating and demand, particularly in the replacement sector, remains encouraging. This is creating additional requirements for Laird Security Systems’ high level of service and its ability to provide total packages of hardware and seals for specific door and window applications. New product development programmes, supported by further selective bolt-on acquisitions, will strengthen and expand the products and services which are provided to customers. The successful development in the sourcing of components and products, both from its own plants in China and from subcontractors in Asia, will also support future profitable growth.

In Laird Services, Fullarton has been impacted adversely by the severe downturn in the electronics industries and the migration by a number of customers to Asia and Eastern Europe. Fullarton has a number of very important supply positions with global OEMs which it services from its existing facilities in Europe and the USA and which in the future it will also supply from its plant in China. However, current performance remains unsatisfactory and a review is being undertaken of Fullarton’s manufacturing capacity taking account of new contracts starting in 2002. The strategic options for the business as a whole are also being reassessed.

The focus of Laird Plastics’ business is to take maximum advantage of the changes in the distribution market in North America where it is the leading independent supplier. As part of the continuous development of its network, a number of branches were amalgamated early in 2002 and opportunities to improve distribution efficiencies are being pursued.

Ian Arnott steps down as Chief Executive with effect from 13 March 2002 and will retire from the Board at the Annual General Meeting in May. He joined Laird in 1980 and has been Chief Executive since 1994. He has made an enormous contribution to the success and development of the Group over more than 20 years and in particular oversaw its repositioning in 2000.

As already announced, Peter Hill, formerly President of the Air Systems Division of Invensys plc, joined the Board on 1 November 2001 as Managing Director. He succeeds Ian Arnott as Chief Executive.

Geoffrey Drabble, Managing Director of Laird Security Systems, joined the Board as an Executive Director on 3 August 2001.

Geoffrey Wilkinson and Bryan Ronan stood down from the Board as Executive Directors on 31 August 2001 and 31 December 2001 respectively. Martin Bell and Alan Miller, both Non-executive Directors, have announced their intention to retire from the Board at the Annual General Meeting. We would like to thank them all for their valuable service to the Group.

The trading environment remains challenging. However, there are signs of conditions stabilising and of destocking in the electronics industries coming to an end. Laird’s long established conservative financial policies have ensured that the development of the Group has continued in 2001, despite the difficult trading conditions. Operational and financial performance continues to be tightly managed, with an intense focus on improving the returns from the existing businesses. The actions taken during the year, and the further steps being implemented in 2002, will ensure that Laird can take full advantage of a return to growth, especially in the electronics industries, when it occurs.

Nigel Keen
Chairman
 



Chief Executives Review

After the major repositioning of the Group in 2000 a large proportion of Laird’s activities are now in the USA and in the electronics industries whereas previously over 40% of the Group’s turnover arose from the automotive industry mainly in Continental Europe.

The lower levels of economic activity in the USA and the severe decline and destocking in the electronics industries had a significant adverse impact on the Group’s results in 2001. In contrast the Group’s businesses which supply the UK and USA housing markets performed well.

Profit before exceptional items, goodwill amortisation and tax was £25.2m against £42.2m from continuing operations in the previous year. Turnover for the year, which benefited from a full year’s contribution from acquisitions made in 2000, was £581m compared with £602m for continuing operations in 2000. Including the results from discontinued operations, total turnover in 2000 was £1,096m and on the same basis profits were £56.5m before exceptional items, goodwill amortisation and tax.

Exceptional costs of £6.6m were incurred in reorganising production capacity and reducing employment numbers by 1,700 to bring costs into line with the much lower levels of demand in the Group’s electronics businesses. After these exceptional costs and amortisation of goodwill amounting to £10.4m there was a net profit for the year before tax of £8.2m against a loss of £12.9m in 2000.

Laird Technologies
Laird Technologies is the leading supplier of EMI shielding solutions and products to the electronics industries worldwide. It was established in 2000 after the merger of the Group’s existing business, APM, with Instrument Specialties Company, Inc. which was acquired in August 2000. The integration of the two businesses continued in 2001 focusing on maximising the benefits of the complementary product lines and the combined global marketing, engineering and manufacturing presence. However, the severe decline in the telecommunications and data communications equipment markets and the presence of very high inventories in the supply and distribution channels for these products, had a harsh impact on orders from customers. This particularly affected the second quarter of the year, when orders fell by over 50% compared with those in the same period in 2000. There was a small improvement in orders in the second half of the year, which was helped by important supply positions on new PC models.

Turnover in 2001 was £99m which was 33% down on the previous year if, for the purposes of this comparison, Instrument Specialties is assumed to have been owned by the Group for the whole of 2000. On the same basis operating profits before exceptional items, fell from £32m in 2000 to £9.8m. The comparative results for 2000 reported in the Group Accounts do not include those for Instrument Specialties before it was acquired in August of that year.

With the sharp decline in orders, costs were controlled by short time working and a reduction in employment levels in North America and Europe by 25%. The Californian plant was downsized, the UK operations were merged into one location and the management organisation was restructured. This resulted in exceptional costs of £1.3m.
The presence in the growing Asian markets was expanded during the year. Fabric over foam production was successfully started in a new plant in Southern China to augment the Group’s facilities in Taiwan and Singapore. The plant is being extended in 2002 for the manufacture of beryllium copper fingerstock and other products. A second plant in China is also being set up to manufacture conductive elastomers and to support the growing telecommunications industries in Northern China.

Product development is being focused on meeting the rising requirement for shielding as clock speeds increase and the use of more powerful microprocessors in electronic equipment continues to grow. The acquisition of R&F Products for £3.4m in November 2001 has brought access to absorption techniques for shielding which are currently used mainly for military applications and for which the commercial requirements are expected to rise in the future.

Security Systems
Security Systems, which supplies hardware and seals for windows and doors to the housing industries in the UK and North America, had a very successful year, increasing operating profits by over 30% to £21.4m against £15.7m in the previous year. Turnover rose to £191.5m from £174.2m. The improved results reflected market share gains in the USA and a recovery in profits in the UK after the steps taken in 2000 to rationalise manufacturing facilities and lower costs. The higher profits were achieved against a decline in new housing starts in the USA and an unexpected small improvement in the UK replacement market.

The policy of growing market share by offering high levels of service and innovative products to provide the most cost efficient solutions for customers has been particularly successful in the USA where the industry is consolidating into fewer window and door fabricators. Based on the strong market position in balances for sash windows, the product range in hardware has been extended by new product launches and the successful integration of Fastek, which was acquired for £18m in May 2000 and Sash Controls which was acquired in 2001 for £5m. These acquisitions have both increased the capability to provide full hardware product packages for specific requirements such as patio doors.

2001 was a year of consolidation in the UK after the major manufacturing plant reorganisations in the previous year. A new plant was opened in the Midlands to consolidate a number of manufacturing locations and to provide additional capacity for the growing demand for window reinforcers. Sales of the new extruded PVC window system doubled, although there were initial production problems. A new multi-point door lock and a special range of corrosion free hardware, specially developed for conservatories, were launched during the year. It is planned to introduce a number of important new products in 2002.

Following the successful start-up of the new plant in China, a second plant was commissioned during the year and will be fully on stream in 2002. These two plants and the development of subcontractors in Asia, are providing a flexible and low cost manufacturing base to support the planned future growth of the business in both the UK and the USA.

Service Industries
Both Fullarton, which supplies enclosures and assemblies to the electronics industries, and Laird Plastics, which is the largest independent distributor of plastics in North America, experienced very difficult trading conditions in 2001. Combined turnover was down from £354m in 2000 to £284m and the operating result was break even against profits of £13.8m in 2000.

The repositioning of Fullarton continued in 2001, but the severe downturn in the electronics industry not only reduced volumes on existing contracts, but also accelerated the trend for OEMs to source a larger proportion of their high volume enclosure requirements from lower cost countries.

The full box assembly activities in Scotland continued to perform well benefiting from improved productivity and some short term contracts. However, the fall in demand for PC enclosures required a downsizing and reorganisation of the facilities in Scotland. Fullarton broke even in the year before exceptional reorganisation costs of over £5m.

Further reorganisation costs are expected in 2002 as contracts for existing PC models are not renewed for the models which replace them. New contracts for complex enclosures for both the IT and office equipment markets are expected to commence in 2002 and should benefit volumes in the second half of the year. In the USA, the plant in Houston was successfully commissioned and is now the worldwide source of enclosures for an important Compaq server unit. Surplus equipment in Europe is being transferred to the new plant in China, which will be commissioned in the second quarter of the year and is well positioned to benefit from the rapidly expanding telecommunications industry in Northern China.

Laird Plastics’ sales in 2001 fell 18% as the downturn in the US economy hit demand from many of its customers, particularly those in the semiconductor and retail sectors. Pressure on margins continued as plastic prices fell and there was destocking as the industry consolidated into fewer distributors. Steps have been taken to reduce costs and improve service levels so the business is in the best position to take advantage of a recovery in the US economy and to benefit from opportunities as competitors reduce their branch locations.

Repositioning of Manufacturing Capacity
As previously described, measures continue to be taken to strengthen the Group’s competitive position. In addition to the focus on new product development and improving productivity, manufacturing capacity in the USA and Europe is being repositioned to bring it more into line with future demand with the highest rates of growth expected in Asia.
It is currently expected that this will result in exceptional charges in 2002 of approximately twice the level incurred last year. These measures will significantly reduce the cost base of the main activities in the Group.

Taxation
The tax charge for the year represents approximately 26% of profits before goodwill amortisation against an underlying rate of 33% in 2000 when the overall charge for the year was adversely impacted by exceptional costs for which there were no immediate tax benefits. The lower taxation charge includes some benefit from recoveries of overseas tax related to previous years but also a continuing lower underlying rate for the Group, partly reflecting the benefit from tax allowances relating to goodwill.

Financial Strength
The Group continues to operate within a sound financial framework. Net borrowings at the year end were £66.7m, 25% of shareholders’ funds of £268.2m. Interest costs in 2001 were covered 5.2 times by profits before exceptional items and goodwill amortisation. The Group has over £250m of committed loan and banking facilities.
The cash generated from operations was over £50m, despite the lower profits, against £62.5m in the previous year. The total cash outflow in the year of £16.9m was after net capital expenditure of £14.7m, net costs on acquisitions and disposals of £16.0m and £31.7m of dividend payments. Three dividends were paid in 2001, as the interim dividend for 2000, which would normally have been paid in December 2000, was paid for tax planning purposes in January 2001. Timing differences relating to the auto disposals completed on 30 December 2000 benefited the cash flow for 2001 by £7m, but these could reverse in the current year.

The most significant part of the goodwill of £192m in the balance sheet relates to the EMI activities of Laird Technologies after the purchase of Instrument Specialties in August 2000. The valuation of the businesses has been reviewed in accordance with the accounting standards for assessing any impairment in the value of purchased goodwill. This has shown valuations in excess of the carrying values reflecting current profitability and good prospects for the business based on the generally expected return to growth in the electronics industry and the higher requirement for EMI shielding.

The conservative policies adopted over many years for the management of the Group’s pension schemes have ensured that the overall risks are minimised and that pension commitments in respect of final salary schemes have been properly funded. These policies have also limited the impact of fluctuations in the value of equity investments on the actuarial valuations. Despite the increasing pressure on funds arising from lower investment returns and increases in life expectancy, estimates of the actuarial valuations as at the end of 2001, prepared under the more demanding new accounting basis of FRS 17, show that the Group’s final salary schemes have a surplus of assets over their liabilities. In accordance with the transitional arrangements, this surplus has not been included in the Group’s balance sheet at 31 December 2001.

Earnings and Dividends
Continuing earnings before exceptional items and the amortisation of goodwill were 13.2p per share compared with 20.0p in 2000. After exceptional items of £6.6m and goodwill amortisation of £10.4m earnings were 2.4p per share compared with a loss of 22.2p per share in 2000. With the inclusion of the results from discontinued operations, the earnings for 2000 were 26.5p per share before exceptional items and the amortisation of goodwill.

An unchanged interim dividend of 5.7p per share was paid to shareholders on 7 December 2001. A final dividend is proposed for 2001 of 5.4p per share compared with 10.8p per share in 2000. This would give a total dividend for the year of 11.1p per share against 16.5p for 2000. Cover from continuing earnings before exceptional items and amortisation of goodwill would be 1.2 times.

The Future
Over many years Laird has encountered numerous changes in the economic climates in the countries where it has operated. It has also seen periods of major and rapid change as the Group has developed and expanded new businesses to replace its interests in sectors where the prospects became less attractive. The unprecedented severe downturn in the global electronics industries and the slowdown in the American economy have overshadowed both the benefits of the major repositioning of the Group in 2000 and the success of its growing activities in the housing industries in the UK and the USA. The Group is well positioned for the future, both financially and commercially and it will continue to change as it develops its interests and adapts to changing market and trading environments.
Ian Arnott
Chief Executive