TYPE CORRESP
FILER
FILER-CIK 0000838877
FILER-CCC XXXXXXXX
FILER
SUBMISSION-CONTACT
CONTACT-NAME Denise Burton
CONTACT-PHONE 44 (0)20 8877 5195
SUBMISSION-CONTACT
NOTIFY-INTERNET dburton@tomkins.co.uk
RETURN-COPY NO
Michael Fay Esq
Branch Chief Accountant
Division of Corporation Finance
Securities and Exchange Commission
Washington, D.C. 20549
September 2, 2005
Re: Tomkins plc ("the Company")
Form 20-F for the year ended January 1, 2005
File No. 001-13634
Filed June 28, 2005
Dear Mr Fay
I am pleased to submit the Company's responses to the Staff's comments on its
Annual Report on Form 20-F for the year ended January 1, 2005 (the "2004 Annual
Report"), as set out in your letter to our Chief Executive Officer, James Nicol,
dated July 25, 2005. The Company does not intend to file an amended 2004 Annual
Report to reflect its responses to the Staff's comments, but will reflect them
as appropriate, in its future Annual Reports on Form 20-F ("Future Annual
Reports"), beginning with its Annual Report for the year ending December 31,
2005.
For your convenience, the numbered paragraphs of this letter correspond to the
numbered paragraphs of the comment letter and we have repeated the comments set
forth in the comment letter.
Consolidated Statements of Changes in Shareholders' Equity, page F-5
1. We note that the amount of comprehensive income differs materially
from net income in each period, as significant amounts are recognized
for the minimum pension liability and exchange translation
adjustments. In accordance with the guidance in paragraph 14 of
FAS130, please disclose a total amount of comprehensive income in the
consolidated statement of changes in stockholders' equity.
All components of comprehensive income have been disclosed in each
period in accordance with paragraph 14 of FAS130: however, the
sub-total erroneously includes items that do not form part of
comprehensive income. We will present a separate total amount of
comprehensive income for all periods presented, in Future Annual
Reports.
Note 2 - Summary of Significant Accounting Policies, page F-7
Revenue Recognition, page F-7
2. We note your use of the percentage of completion method of accounting
for long-term contracts. Please tell us how significant the revenues
are under this method of accounting. In addition, tell us why you
have not provided the additional disclosures required for long-term
contract accounting under SOP81-1. Examples of such disclosures might
include the method of measuring the extent of progress toward
completion, the criteria used to determine substantial completion,
and the effect of significant revisions in contract estimates. For
additional guidance, you may also refer to Accounting Research
Bulletin 45 (ARB45). In addition, please provide the disclosures
required by Rule 5-02(3) (c) of Regulation S-X for receivables due
under long-term contracts.
Long-term contracts arise only in the Group's materials handling
businesses. Revenue recognized on long-term contracts was as follows:
Percent of
(1) Continuing (2) Discontinued Group
operations operations Total revenue
$ million $ million $ million
------------------------------------------------------------------------------------------------------
Year ended January 1, 2005 118.0 31.5 149.5 2.7%
Year ended January 3, 2004 96.0 68.8 164.8 3.2%
Eight months ended December 31, 2002 44.9 47.8 92.7 2.9%
Year ended April 30, 2002 114.9 85.9 200.8 4.2%
------------------------------------------------------------------------------------------------------
(1) Dearborn (see response to Question 5 below)
(2) Mayfran International Inc. and Unified Industries Inc. sold in
fiscal 2004 (see Note 4 on page F-11)
Management did not include the disclosures referred to by the Staff in
the 2004 Annual Report because, as illustrated by the table above, it
does not regard these businesses as significant in the context of the
Company's consolidated financial statements.
In Future Annual Reports the Company will continue to consider the
significance of long-term contracts to its business and will provide
the additional disclosures if appropriate.
Product warranties, page F-9
3. Your accounting policy solely describes product warranties with no
policy or discussion on product recalls and its associated liability.
Along with original equipment automotive manufacturers and others, it
would appear that the company may also incur liability on product
recalls. In this regard, we note that some companies accrue a
liability for product recalls at the date of sale, while others accrue
a liability when the recall is announced. It is presumed that these
two alternatives arise as the guidance in paragraph 26 of FAS5
provides views on whether it is probable claims will arise and such
amount is reasonably estimable (e.g. depending on a company's
experience of other information that enables one to make a reasonable
estimate before a recall is announced). Please provide appropriate
disclosure and tell us your accounting treatment in this area.
Product recalls rarely occur within our businesses. Since there is no
regular or recurring pattern of recalls, management considers that the
cost of unspecified future product recalls cannot be reasonably
estimated. Accordingly, in accordance with paragraph 8 of FAS5, no
provision is recognized in respect of unspecified future product
recalls, but a provision would be recognized if management considered
it probable that it would be necessary to recall a specific product
and the amount could be reasonably estimated.
In the light of the Company's rare experience of product recalls,
management does not consider that the Company's accounting policy
towards product them is significant and, therefore, did not include
the policy in Note 2 on pages F-7 to F-9 of the Company's 2004 Annual
Report.
Minority interest, page F-8
4. It is not clear from your disclosure of minority interests why your
60% ownership interest in Ideal International SA is considered a
minority interest in your financial statements. Please explain your
accounting treatment for Ideal International SA.
We regret that the disclosure under item (xiv) Minority interests on
page F-8 is incorrect. The last two lines of the note were included
in error and also incorrectly stated our ownership interest in Ideal
International SA at 60% rather than 40%.
Ideal International SA and Schrader Duncan Limited are accounted for
appropriately as non-controlled affiliates, the Company's accounting
policy for which is disclosed on page F-7, under "(i) Basis of
consolidation"
Note 4 - Acquisitions and disposals, page F-11
5. Please disclose the facts and circumstances that led to your decision
not to discontinue/sell Dearborn Mid-West Conveyor Company. In
addition, you should disclose the effect on the results of operations
for the current and prior periods presented. For guidance, refer to
FAS144, paragraph 48.
Having considered the guidance in paragraph 30 of FAS 144, Dearborn
Mid-West Conveyor Company ("Dearborn") was first classified as held
for sale during the third quarter of fiscal 2003. Although the
operations of Dearborn were not significant in the context of the
consolidated financial statements of the Company, it was one of a
number of businesses that met the requirements to be classified as
a discontinued operation and accordingly it was also classified as a
discontinued operation.
The Company had an active program to sell Dearborn for over a year
and was in negotiations with a specific buyer during that time.
However, the company was unable to secure a sale at a price that
management considered close to the fair value of the business.
Consequently, during the final quarter of fiscal 2004, management
decided to withdraw Dearborn from active sale.
Management did not include the disclosures required by FAS 144
paragraph 48 because it did not regard the reclassification
as significant in the context of the Company's consolidated
financial statements as demonstrated by the numbers below.
Percent Eight months Percent Percent
Year ended of Group ended of Group Year ended of Group
January 3, continuing December 31, continuing April 30, continuing
2004 operations 2002 operations 2002 operations
$ million $ million $ million
------------------------------------------------------------------------------------------------------
103.0 2.1 % 49.6 1.7 % 120.7 2.8%
Net sales
------------------------------------------------------------------------------------------------------
Operating income 4.1 1.1 % (6.4) (3.3)% (2.6) (0.8)%
------------------------------------------------------------------------------------------------------
Income/(loss) before
taxes and minority
interest 4.1 (6.4) (2.6)
Income taxes (1.3) 2.4 0.9
------------------------------------------------------------------------------------------------------
Income/(loss) from
continuing operations 2.8 (4.0) (1.7)
------------------------------------------------------------------------------------------------------
6. Please provide additional explanation of the reasons underlying your
reversal in fiscal 2003 of $55.4 million related to fiscal year
2000/01 provisions for disposal of operations and related warranties.
In addition, confirm that the reversal was recorded in "Gain/(loss)
on disposal of discontinued operations" in the consolidated
statements of income.
In July 2000, the Company entered into an agreement to sell its
UK Food Manufacturing business for a consideration of $1,653 million
and, at that time, established a provision of $55.4 million in
respect of representations and warranties given to the purchaser
of the business. The warranties given were extensive, however the
most significant related to taxation and environmental issues.
Environmental claims could be made on Tomkins until; (i) 5 years from
completion (August 31, 2000) in relation to compliance issues at any
property or for claims under the environmental warranties; (ii)
10 years from completion in relation to remedial issues; and (iii)
15 years from completion in relation to former sites. The tax
warranties and indemnities last for 6 years from completion.
During 2001 and 2002 the UK tax authorities conducted a special
investigation of the Company, a significant part of which related
to the UK Food Manufacturing business that had been disposed of.
This investigation was closed in fiscal 2003. Concurrently,
management concluded that there was no other material amount
that was likely to arise in respect of environmental and other
tax issues for which representations and warranties had been
provided to the purchaser. Accordingly, the entire provision was
released in fiscal 2003.
We confirm that the reversal of the provision was included in the
$49.6 million gain on disposal of discontinued operations recognized
in fiscal 2003.
Note 6 - Income Taxes page F-18
7. In view of the materiality on your results of operations, please
provide significant expanded disclosure and explain the nature of
amounts included in "Release of contingency" for fiscal 2004
($27.4 million) and fiscal 2003 ($147.9 million) in your
reconciliation of income taxes at the UK statutory rates to the
provision/(benefit) from income taxes in the consolidated statement
of operations. You should discuss why management believed these
tax provisions were appropriately recognized in prior periods for
financial statement purposes and are now recognized (reversed) as
a tax benefit.
Management performs a review, at least annually, of tax return
filing positions and ongoing examination by taxing authorities of
all of its subsidiaries around the world. Where management believes,
based on all facts and circumstances, that the Company has a
contingent tax liability, a best estimate of the eventual
liability is recorded.
Release of contingency for Fiscal Year 2004:
During the fiscal year 2004, the Company released a provision of
$27.4million.This release was primarily the result of the expiration
of the general statute of limitations for the fiscal years 1999,
2000 and 2001. The Company reached an agreement with the IRS that
provided for a limited extension of the statute of limitations for
fiscal 1999, 2000 and 2001 only with respect to one issue that was
advancing to the "Fast Track Settlement" stage within the IRS.
Management believed that this constituted a discrete event, and
therefore, amounts previously accrued for exposures related to the
fiscal years 1999, 2000 and 2001, other than the one open issue,
were reversed.
Release of contingency for Fiscal Year 2003 ($147m): Prior to 2003,
management made its best estimate of the likely liability arising
on a "portfolio" of known tax exposures. These tax exposures
covered a large number of items with different likelihoods of
occurrence. Management considered the overall amount of the
provision as a proportion of the gross tax exposures with changes
in the overall level of the provision recorded when there was a
significant discrete event during the period. The most significant
exposure arose because the Company did not record a substantial
part of the benefit associated with certain tax attributes arising
in multiple tax jurisdictions as a result of its international
structure.
In fiscal 2003, with the assistance of third party advisors, Tomkins
undertook an extensive tax risk management study. This resulted in the
adoption of a new framework by which the Company assessed all known
individual tax exposures and provisions were made considering the
likely outcome upon audit by the tax authorities. A substantial part
of the release was attributable to management's reassessment of the
Company's potential tax exposure in multiple tax jurisdictions
relating to its overall international structure. Whilst UK tax
legislation relevant to the assessment of the risk had changed in mid
2000 there had been uncertainty as to the interpretation of this
legislation and its impact on the Group. It was not until fiscal
2003 that management considered it appropriate to substantially
reduce the provisions held in respect of its international operations
and structure. The result of this detailed review was that the
Company released tax provisions in fiscal 2003 of $147million.
In Future Annual Reports the Company will provide additional
disclosure, similar to the following, in respect of its
provisioning policy and the "Release of contingency" in fiscal 2003
and fiscal 2004:
"The Company has a reserve for taxes, disclosed within
'Taxes payable', that may become payable as a result of
audits in future periods with respect to previously filed
tax returns. It is the Company's policy to establish reserves
for taxes that may become payable in future years as a result
of an examination by tax authorities. The Company establishes
the reserves based upon factors such as management's assessment
of exposure associated with permanent tax differences, tax
credits, and interest expense applied to temporary difference
adjustments. The tax reserves are analyzed periodically
(at least annually) and adjustments are made as events occur
to warrant adjustment to the reserve. For example, if the
statutory period for assessing tax on a given tax return or
period lapses, the reserve associated with that period will
be reduced. In addition, the adjustment to the reserve will
reflect additional exposure based on current calculations.
Similarly, if tax authorities provide administrative guidance
or a decision is rendered in the courts, appropriate
adjustments will be made to the tax reserve.
In fiscal 2003 following an extensive tax risk management
study the Company implemented a new methodology to estimate
its provision for tax uncertainties. The principal change
from the methodology used in prior periods was that the
provision recorded was not assessed against a "portfolio"
of tax exposures but instead provisions for tax contingencies
were made on an item-by-item basis. This resulted in a
reduction of the Company's estimate for tax uncertainties
of $147.9 million, which was released to the statement of
operations during the period.
In fiscal 2004 the Company reached an agreement with the
IRS with respect to the examination of the tax returns
of one of its subsidiaries for fiscal years 1999, 2000
and 2001. As a result provisions of $27.4 million were no
longer considered probable and were released to the statement
of operations during the period."
The description of our approach to establishing our reserve for taxes
above is based upon current accounting requirements and therefore
may need to be modified depending upon the outcome of the FASB's
Exposure Draft on uncertain tax positions.
Note 13 - Stock Based Compensation, page F-22
8. Please disclose in future filings whether certain performance
conditions have been met for the Tomkins Executive Share Option
Schemes No. 2, No. 3 and No. 4 and the Ongoing Option for
James Nicol.
We note the Staff's comment and will provide the required
information in future filings.
Acknowledgement
In connection with the Staff's comments on the Company's Annual Report on
Form 20-F for the year ended January 1, 2005, the Company acknowledges that:
* the Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* Staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with respect to the filing; and
* the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Should you wish to discuss the Company's responses, please feel free to
call either myself on +44 20 8877 5140, or Elizabeth Lewzey, Vice-President,
Planning & Reporting, on +44 20 8877 5119.
Yours sincerely
Kenneth Lever
Chief Financial Officer
cc: James Nicol
Chief Executive Officer