Final Results
Bodycote International PLC
01 March 2005
EMBARGOED UNTIL 0700 HRS: 1 MARCH 2005
BODYCOTE INTERNATIONAL PLC
PRELIMINARY RESULTS ANNOUNCEMENT
FOR THE YEAR ENDED 31 DECEMBER 2004
• Sales up 2% to £457.2m after the impact of currency translation and
disposals
• Operating profit up 74% to £43.6m
• Free cash flow up 88% to £57.1m
• Net capital expenditure maintained at 0.8x depreciation
• Debt reduced by £121.8m to £88.5m
• Headline earnings per share 11.3p* (2003: 9.1p as restated**)
• Dividend for the year increased to 6.1p per share (2003: 5.7p as
restated**)
SUMMARY OF RESULTS Year to Year to
31 Dec 2004 31 Dec 2003
£m £m
Turnover 457.2 448.4
Headline Operating Profit * 52.1 41.7
Operating Profit 43.6 25.1
Non-operating exceptional charges (net) 11.2 26.5
Headline Profit before taxation* 44.2 32.0
Profit/(loss) before taxation 24.5 (11.1)
Headline earnings per share* 11.3p Restated** 9.1p
Basic earnings/(loss) per share 6.1p Restated** (6.3)p
Dividend per share 6.1p Restated** 5.7p
* Expressed before amortisation of goodwill (2004: £8.5m; 2003: £9.1m) and
exceptional items (2004: £11.2m; 2003: £34.0m)
** Adjusted for the bonus element of the 1 for 4 rights issue completed in
March 2004
Commenting on the results, John Hubbard, Chief Executive said:
'Bodycote delivered an encouraging performance in 2004. Our 'self-help'
programme and restructuring initiatives ensured that the Group was well
positioned to benefit from the pick-up in Aerospace and Industrial Gas Turbine
markets. As a result operating profit grew by 74% on a modest increase in
sales. We continued to gain new outsourcing contracts, with Strategic
Partnerships and Long Term Agreements now accounting for 17% of Group turnover.
Our successful rights issue provided additional financial flexibility and
management's focus on improving cash flow and return on capital continued. 2005
has begun in line with our expectations and we anticipate that the Group will
continue to progress through ongoing 'self help' programmes, improving market
demand, disciplined capital investment and value enhancing acquisitions.'
CHAIRMAN'S STATEMENT 2004
Introduction
It has been an encouraging year. There has been a good recovery in our overall
trading performance with consequent improvement in our profitability. The
pressure on pricing and cost increases continued and the extent of the
underlying operating improvement has been masked by the impact of currency
movements, particularly in respect of the US dollar.
Trading
Turnover in the year improved by 2.0% to £457.2m (2003: £448.4m) and operating
profit increased by 73.7% to £43.6m (2003: £25.1m). Our profit before taxation,
goodwill and exceptional items was £44.2m compared to £32.0m in 2003. Goodwill
amortisation was £8.5m (2003: £9.1m) and exceptional items were £11.2m (2003:
£34.0m).
All our Strategic Business Units (SBUs) experienced an increase in sales and in
the main this translated into improved profitability. Of the £8.8m sales
growth, all but £1.8m of our growth in sales has been organic as the
acquisitions that we have made occurred late in the year.
The disposal of electroplating has largely been completed and all the loss
making plants have either been sold or closed. The increasing profitability of
the anodising and organics businesses in Scandinavia and Germany supports the
decision to retain them in the Group. Under the current accounting rules we are
not able to treat the electroplating activities as discontinued until the
process is completed, which we anticipate will be in the current year.
We made four modest acquisitions in the year at a cost of £4.7m. In addition,
in November, we transferred our PVD businesses into a strategic alliance with
IonBond, creating an operation with strong technical skills and wide geographic
scope which will be expanded by acquisition and leveraging its advanced coating
technologies.
Our ongoing tight control of capital expenditure brought about a further
reduction in the year to £34.0m (2003: £38.3m).
The £62.0m net proceeds from the rights issue in March greatly improved the
strength of our balance sheet and gave us the financial flexibility to further
develop the business. We have also generated free cash flow of £57.1m from
trading and this has been complemented by £20.8m from our disposal programme.
Consequently there has been a significant reduction in our net borrowings which
have fallen from £210.3m to £88.5m.
Operating Exceptionals and Exceptional charges
Exceptional costs of £7.4m were incurred in 2004 in connection with the
electroplating disposals. There was also an £3.8m exceptional charge in respect
of transferring our PVD business into the IonBond strategic alliance.
Dividend
A final dividend of 3.85p is being recommended by the Directors, which together
with the interim dividend, will make a total payment of 6.1p per share which is
an increase of 7% (2003: 5.7p after adjustment for bonus element of the rights
issue). The dividend will be paid on 6 July 2005 to all shareholders on the
register at the close of business on 10 June 2005.
Governance
Apart from some minor areas which are explained in the Directors' report,
Bodycote is in compliance with the 2003 FRC Combined Code. This mirrors the
high level of compliance achieved by Bodycote in relation to the 1998 Code in
the period 1999 to 2003. Plans are in place for reporting future results under
International Financial Reporting Standards starting with our Interim Report in
August 2005.
Employees
We have in the past emphasised the dedication and professionalism of our staff
and it is pleasing that this year we can show very positive financial benefits
from their efforts which complement the additional investment that was made by
our shareholders.
Current Trading and Prospects
We are pleased with the current trading at the start of 2005, which is in line
with our expectations. We look forward to the rest of 2005 with a degree of
confidence that we can further improve our trading performance. As well as
continuing to gain new outsourcing contracts we also expect to expand the Group
with carefully chosen bolt-on acquisitions which will strengthen our existing
businesses and extend their geographic spread.
We have the essential ingredients of a strong balance sheet, capable people,
productive facilities and systems to ensure the delivery of exceptional quality
and service which should enable us to give a good account of ourselves in the
changing market place. The strategy of the Group remains directed towards
consistently delivering a pre-tax return on capital employed in the mid teens.
J A S Wallace
1 March 2005
CHIEF EXECUTIVE'S STATEMENT 2004
INTRODUCTION
I am pleased to report a welcome improvement in performance during 2004. We have
divested the loss making electroplating operations and poor performing
facilities have been sold, transferred or closed. Our PVD businesses have been
consolidated into a strategic alliance to provide critical mass in this growing
market. We have sharpened our Key Performance Indicator (KPI) metrics,
standardised our reporting and improved benchmarking across the Group. All of
these actions are helping to rebuild ROCE. Meanwhile, our successful rights
issue strengthened the balance sheet. We have closed or sold 42 facilities in
the past 3 years (13 in 2004) and acquired 10 new businesses (4 in 2004). We
now have 261 facilities operating in 26 countries.
Sales at £457.2m were 2.0% ahead of 2003. Excluding the disposed electroplating
and PVD sales and using constant currency exchange rates, sales grew 8.5%
compared to 2003, of which 8.0% points were an organic increase. With stable
automotive markets, improved demand from general manufacturers, a strong rebound
from the Industrial Gas Turbines (IGT) sector, new outsourcing business and
increased market share, we were more able to offset cost pressures which
resulted from normal wage and benefit increases and volatile energy costs.
Operating profit (before goodwill amortisation and exceptional items) grew 25.0%
to £52.1m compared with £41.7m a year ago. Without our self help programme and
improved sales effort we would not have been able to post such an improvement in
performance. I thank all the people in Bodycote who have helped deliver these
improving results.
STRATEGY
Our strategy is based on disciplined investments in technologies with a good
future, along with continued support of outsourced business from strong
manufacturers focusing on their core competencies. Rapidly growing
manufacturing demand in Eastern Europe and Asia will support the continued
geographic expansion of the Group over the medium term. In addition, our
Materials Testing Group is positioned to accelerate its growth by technology
transfer, new outsourced programmes and acquisitions.
OPERATIONAL REVIEW
Securing major outsourcing opportunities remains a strategic focus to support
our top line growth and margin enhancement. Bodycote's outsourcing initiative
offers manufacturers lower total cost, equal or better quality and quick
turnaround. The key is our technical expertise in niche technologies which are
not core to most manufacturers and our highly productive model where we operate
at optimum efficiency. As predicted, the trend to outsourcing and closure of
in-house facilities, which is well established in Europe, is accelerating in
North America, particularly in automotive. Outsourced work from Strategic
Partnerships (SP) and Long Term Agreements (LTA) accounted for 17% of Group
turnover as compared to 13% in 2003.
Technology transfer initiatives continue to be successful, with niche
capabilities being transferred geographically to existing facilities. These
high value added services enhance customer satisfaction and lead to additional
revenue.
The cross selling and bundling of multiple services creates a unique offering
which appeals to those manufacturers that wish to optimise their performance by
focusing on core competencies. Our geographic and market spread reduces the
risk associated with any one account. Our top ten customers accounted for
approximately 10% of total turnover, compared to 9% in 2003.
Heat Treatment
At constant currency rates, Group wide sales grew 6.7% and operating profit
improved 12.0%.
North America
At constant currency rates, sales increased 7.0% and operating profit was up
13.0%.
Aerospace, IGT, and Oil & Gas all saw improved demand from a combination of
market pickup and new outsourcing. The locations which are heavily automotive
related saw a decline in the second half which, based on industry forecasts,
will continue into 2005. The combination of price pressure and increases in
energy and employee benefit costs continues to squeeze margins. We are now able
to offer several high value added services (Low Pressure Carburising, EB Welding
and Kolsterizing of stainless steel) to complement existing heat treating and
brazing services thus helping to improve margins in the oversupplied North
American market.
Central European Group (CEG)
At constant currency rates, sales grew 8.1% and operating profit was ahead
17.2%.
Although a difficult environment for the manufacturing sector of the economies
served by this SBU our strategies of pursuing outsourcing work, transferring
technology and optimising operational efficiencies paid off. The targeted
capital investment in equipment and people has allowed us to gain market share
while improving the mix of work processed.
All automotive focused facilities are now certified to the stringent TS 16959
while most facilities will achieve ISO 14001 environmental certification by the
end of 2005. This positions us in line with quality and responsibility
expectations of world class manufacturers.
Our network of East European facilities was expanded at the start of 2005 by the
commissioning of a facility in Poland which targets the high end aerospace and
tooling markets. We today announced the acquisition of four well-resourced
plants in Poland. We anticipate continued growth in our Eastern European
operations during 2005 both organically and by acquisition.
France, Belgium, Italy (FBI)
At constant currency rates, sales improved by 1.2% but operating profit was
flat.
The challenges we face in France in particular are market migration, price
pressures, mix change and cost creep. All facilities in France are now ISO
9000-2000 certified. In addition we now have several plants qualified to the
aerospace mandated quality program ACMA-PRO which will be incorporated into the
North American originated equivalent Nadcap in 2005. Belgium delivered modest
sales growth and moved into profit after rationalisation of 3 facilities into 2.
Nordic, UK (NUK)
At constant currency rates, NUK sales increased 11.7% and operating profit grew
36.0%. The sales growth was driven by recovery of the IGT market and an
increase in outsourced work. All UK facilities are now registered to the ISO
14001 environmental standard. We now have 9 facilities Nadcap UK accredited to
meet mandates from several key customers such as Rolls-Royce and Boeing.
Materials Testing
At constant currency rates, sales grew 11.2% and operating profit grew 13.3%.
By concentrating on the high value added services, cross border selling and an
industry specific approach we have been able to gain market share at most of our
laboratories. Sales increased in all geographies and margins were maintained or
improved, with progress in Canada being notable.
The USA saw an improvement in demand for aerospace, high end automotive and oil
& gas testing but the gains were eroded by increased people costs and price
pressures. We have won several significant outsourcing contracts.
In the Middle East we successfully integrated the laboratories acquired from
Carillion plc in 2003 resulting in a 45.0% sales growth year on year. Operating
margin in the region was somewhat reduced from last year as 2004 had the tail
end benefits of a major construction project that had run beyond the contractors
completion date. All facilities are now ISO 17025 accredited; such standards
are unique in the Gulf region and give us a competitive advantage as blue chip
clients are increasingly insisting on these high standards to protect their
major investments in construction projects such as the Dubai airport expansion.
The Canadian Group won significant outsourced contracts from major aerospace,
automotive prime and first tier suppliers while managing their costs well. In
support of stringent new emission controls stipulated by the Environmental
Protection Agency regulations due to come in force in 2007, we have invested in
two advanced Heavy Duty Transient Cells for testing emission compliance in the
heavy diesel engine market. This investment will start to generate revenue near
the end of 2005.
UK and Europe had good sales growth based on IGT, Oil & Gas, Health Sciences,
and Environmental markets.
HIP
At constant currency rates, sales increased 23.9% and operating profit was up
113.4%.
The sales growth was driven by an unexpectedly large increase in IGT demand for
new and replacement parts. Aerospace demand picked up slightly in the second
half of the year and is expected to maintain this trend throughout 2005. The
very high operational gearing, evident in HIP during the downturn in 2002 and
2003, rebounded in our favour. Although margins recovered from 13.0% to 22.5%
we still have work to do because the high investment in a HIP facility require
yet higher margins in order to achieve an acceptable return on capital employed.
We continue to work on innovative new applications in the powder consolidation
sector. The ALON ceramic project saw sales increase 100% in 2004 but well
behind original expectations. Demand for Densal(R) treatment of aluminium
castings showed excellent progress in the European automotive sector. Two large
HIP units which were out of service for a large part of the year will return to
service in the first half of 2005. A used HIP unit, previously acquired at low
cost, will be brought into service by the first part of 2006 in anticipation of
continued increasing demand for IGT and recovering aerospace.
Surface Engineering
At constant currency rates and excluding PVD and discontinued electroplating,
sales grew 7.5% and operating profit improved 49.6%.
Anodising and Organics
We are focused on developing this business by transferring know-how and
processes between facilities and approaching customers in a more organised
manner to gain market share based on technical capability.
Diffusion Bonding
Our K-Tech coatings continue to find more applications in the oil & gas, textile
and steel rolling sectors. Being an engineered solutions business, we invest
heavily in developing and proving application benefits.
The CoatAlloy(R) process, which dramatically improves the performance and life
of furnace tubes in ethylene production plants, started up in the second half of
2004. We experienced the usual teething problems associated with new processes.
Technical issues are now resolved with deliveries expected to commence in the
first half of 2005.
Our two Sherardizing facilities were consolidated into Wolverhampton, UK and are
now fully functional. This will improve capacity utilisation, technical support
and profitability. We have several opportunities under development with
customers in other geographies of our network which could see us install our
first Sherardizing process capabilities outside the UK. To enhance our market
coverage we are installing for start up in the first half of 2005 the Distek
process, a modification to Sherardizing which allows a thicker yet ductile layer
to be diffused onto the substrate. This process will offer customers an
environmentally friendly alternative to galvanizing.
We invested in expanded plasma spray capacity in France to satisfy contracts
with suppliers to Airbus for plasma spray of titanium honeycomb parts and expect
sales to start next year. We are planning to transfer this technology to our UK
facilities in 2005.
ACQUISITIONS, STRATEGIC ALLIANCES AND DIVESTITURES
Several modest acquisitions were made during the year, at a cost of £4.7m, with
the emphasis being to expand our Materials Testing operations. Two oil and gas
laboratories were acquired in Canada with Hoogensen Metallurgical Engineering
Limited and an environmental laboratory was added with Clyde Analytical Limited
of Greenock, Scotland. After the year end, four UK environmental and
occupational hygiene sites were acquired with Ensecon Laboratories Limited,
expanding our health science operations. A controlling interest was also taken
in a civil engineering test laboratory in Qatar.
Haustrup Haerderi A/S heat treating in Denmark strengthened our existing market
position and enabled us to rationalise our facilities and provide access into
the Northern German market.
Bird Electron Beam Corporation in Connecticut, USA adds expanded know-how to our
North American Group in a technology that has proven to be of value to key
customers in Europe.
In addition, a significant strategic event was the formation of the second
largest global Physical Vapour Deposition (PVD) Group resulting from the sale of
our 10 PVD operations to IonBond for £25.1m net of costs, with Bodycote taking
an initial 15% equity position in the enlarged Group, which was increased to 20%
in early 2005 at a total cost of £7.3m. This move is in line with our strategy
of growing high value niche businesses whilst managing the risk. The combined
Group will trade under the IonBond name (capital 'B' in IonBond being the red
centred Bodycote 'B' trademark) and has pro forma sales in 2004 of £53.2m and
operates from 30 locations in 12 countries with more than 600 employees. A
long-term cross selling agreement has been put in place under which Bodycote
will continue to offer IonBond's PVD services to our extensive multinational
client base and IonBond will market Bodycote's heat treatment, materials testing
and hot isostatic pressing services. The strategic alliance establishes the
technical skills and geographic scope to provide global blue-chip manufacturers
with critical solutions. PVD is used in manufacturing to improve mechanical,
tribological and decorative properties of components beyond those achievable by
traditional methods and in an environmentally safe manner. Market and customer
synergies between PVD and heat treating will be enhanced through the additional
coverage offered by this focused strategic alliance, which has made an
encouraging start.
The divestiture of electroplating has almost been completed with the major loss
making facilities divested in the first half and the remainder sold in the
second half. Sales and losses before goodwill amortisation and exceptional
items were £19.4m and £3.0m respectively compared to £26.0m and £6.8m in 2003.
A total £37.4m exceptional write down has been taken of which £7.4m has been
charged in the 2004 accounts, the balance of £30.0m having been provided in
2003. During 2004 disposal proceeds net of costs were £1.9m. We have retained
the 5 highly successful anodising and organic coating businesses located in
Sweden, Finland and Germany and will continue to develop this small specialised
coatings Group. We believe anodising has significant growth potential due to
the highly fragmented market and increased use of aluminium in manufacturing.
SAFETY, HEALTH AND ENVIRONMENTAL (SHE)
SHE has always been of major importance in our business and in 2004 we initiated
an enhanced Group wide measurement and benchmarking system to help us better
understand the reasons and root cause of accidents occurring within the Group,
improve awareness among the employees, change behaviour and drive our accident
rate towards our ultimate goal: zero. The unfortunate loss of life by two of
our key team members at the Hereford HIP operation underlines the necessity of
constant vigilance on the part of all of us. Just as in every other area of our
business, we work on continuously improving our understanding and consistent
application of safety procedures throughout the Group. We are funding a
research project with the University of Southern California to advance safety
procedures.
CURRENT TRADING AND PROSPECTS
The New Year has started as expected. With IGT markets having recovered
strongly in 2004 we anticipate this sector will show more modest growth in 2005.
Aerospace showed a slight increase in 2004 and we anticipate the pace of
growth will remain steady throughout 2005. Automotive, which has been forecast
to turn down for some time, saw a slowdown in North America, in particular in
the second half of 2004, and we anticipate demand in 2005 will remain soft for
that market. The Tooling market has continued to decline due to manufacturing
of tools and dies being transferred to areas of lower cost where Bodycote does
not currently have a significant presence.
People are our number one resource. We will continue to focus our management
efforts on improving the productivity and effectiveness of our human resources.
Energy, our number two cost, is anticipated to remain relatively high but we
expect to continue to pass most of these costs on to our customers.
Overall we expect to continue our performance recovery through our continuous
self help programmes, improving market demand and disciplined investments in
capital and value enhancing acquisitions.
John D. Hubbard
1 March 2005
GROUP FINANCE DIRECTOR'S STATEMENT
Sales and Operating Profit
The Group recorded sales of £457.2m, compared to £448.4m in 2003. Trading
conditions improved in most of the Group's markets and although the headline
turnover increased by only 2%, the improvement was 6.3%, at constant exchange
rates. Excluding the discontinuing electroplating and transferred PVD
businesses, local currency sales were ahead 8.6%. Existing operations accounted
for £455.4m, whilst acquisitions added £1.8m.
Sales Operating Profit* Margin
£m £m £m £m % %
2004 2003 2004 2003 2004 2003
Heat Treatment 309.0 302.5 34.2 31.5 11.1 10.4
Materials Testing 65.6 61.2 12.4 11.4 18.9 18.6
Hot Isostatic Pressing 32.1 27.6 7.0 3.6 21.8 13.0
Surface Engineering 19.4 18.4 3.3 2.3 17.0 12.5
Electroplating (discontinuing) 19.4 26.0 (3.0) (6.8) (15.5) (26.2)
Head Office - - (2.7) (1.6)
Continuing operations 445.5 435.7 51.2 40.4 11.5 9.3
PVD (discontinued) 11.7 12.7 0.9 1.3 7.7 10.2
457.2 448.4 52.1 41.7 11.4 9.3
* before amortisation of goodwill of £8.5m (2003: £9.1m) and exceptional items
of £11.2m (2003: £34.0m)
As the year progressed, demand for the Group's services increased, following
more than two years of difficult conditions. The improvement has been gradual
and although less difficult than in recent years, the pricing environment
remained challenging. Labour rates have been contained at a rate below
inflation and the impact has been mitigated by improved productivity. Energy
costs have been stable in continental Europe, but have increased during the
autumn in the US and the UK by up to 20%. A majority of the additional cost has
been recovered in selling prices. The benefits of our restructuring plans are
being seen across the Group, but particularly with the exit from the
electroplating businesses, which is essentially complete. Operating losses* in
electroplating of £6.8m in 2003 were reduced to £3.0m in 2004, of which only
£0.3m was incurred in the second half. £7.4m was charged as an exceptional item
in respect of closure and divestment costs bringing the total to £37.4m in 2003
and 2004. Overall Group operating profit* increased from £41.7m to £52.1m.
Following an approach from SSCP Coating S.a.r.l, Bodycote transferred its PVD
business and assets to IonBond, realising £25.1m net of costs. An exceptional
charge in 2004 of £3.8m, including the transaction costs, was required in
connection with the transaction. As part of the agreement, the Group has also
reinvested £5.2m for a 15% stake in the combined business and a further 5% was
acquired in early 2005 at a cost of £2.1m.
Heat Treatment
The UK heat treatment business saw sales increase 9.7% with operating profits up
18.4%, as demand improved in both the power generation and construction sectors.
The Nordic region produced a significant improvement, with local currency
organic sales up 8.5% and the Haustrups acquisition adding a further 5.3%. New
outsourced work has been gained in automotive and general engineering and, with
improved cost control and the benefit of the new plant in Denmark, operating
profit was ahead by 81.9%. The Central European Group delivered another
excellent set of results as outsourcing gains, particularly in automotive, more
than made up for any underlying macro economic weakness. Sales and operating
profit (at constant exchange rates) advanced 8.1% and 17.2% respectively. The
France/Belgium/Italy business unit suffered the weakest level of demand in the
Group with the twelve-month moving average of sales only beginning to pick up in
quarter four. Consequently sales were ahead marginally and operating profits
(expressed in local currency) were flat year on year. North America saw sales
improve by 7.0%, as demand across most sectors and regions moved up. However,
pricing pressure remains stronger than in Europe due to continuing over capacity
in the market place and, coupled with higher energy costs, margin improvement
was modest.
Materials Testing
The Materials Testing business continues to meet our growth expectations and, at
constant exchange rates, sales increased by 11.2% and net margins were
maintained at 19.0%. Sales were ahead in all regions and with the exception of
a flat performance in the Middle East so was operating profit. In the UK, our
well established metallurgical laboratories saw a relatively weak performance
against a background of soft general engineering demand. However, this was more
than offset by strong IGT demand for radiography and growth in health sciences.
The European laboratories again performed strongly as a result of increased
activity in oil and gas exploration. The business moved ahead in the Middle
East following the acquisition in 2003 of the laboratories from Carillion plc
and the continuing strength in both the construction and oil and gas sectors and
consequently sales were up 44.9%. Canada made a major step forward based on
notable outsourcing contracts in aerospace and automotive engines testing. The
USA also had a good performance helped by a much stronger level of activity in
oil and gas and some improvement in aerospace demand.
Hot Isostatic Pressing
Overall, HIP sales in local currency were up 23.9% and profits a pleasing 113.4%
higher. Consequently margins improved to 22.5%. The UK and particularly the US
saw a notable increase in demand from precision casting customers who serve the
IGT market. The USA had its best ever HIP sales. The European plants were more
mixed as IGT constitutes a small part of their business which is more focused on
powder consolidation and production of near net shapes but all showed
improvement compared to 2003. Densal(R) sales continue to increase,
particularly for automotive and it is likely that additional capacity will be
needed in 2005.
Surface Engineering
Following the decision to exit the electroplating business, the Group is now
focused on nurturing a portfolio of niche coatings businesses which offer
proprietary technology or specialist know-how and which complement our core heat
treatment business. Sales in local currencies increased by 7.5% and operating
profit by 49.6% driven by the specialist anodising plants in Sweden, which offer
services principally to automotive and telecoms customers. We also continued to
expand the use of K-Tech(R) ceramic coatings and established the first
production location for CoatAlloy(R) metallic coatings.
PVD
In the ten months prior to transferring the PVD business into IonBond sales were
up 13.8% at constant exchange rates, as demand from automotive customers for
tribological coatings continued to increase. However, profits were flat due to
increased marketing and development costs. Since the transfer, given the
Group's significant influence on IonBond, profits will be included in the
Group's results on an equity accounting basis. With a 15% shareholding, the
Group's share of operating profits in November and December were immaterial.
Electroplating
The major loss making facilities were sold or closed in the first half of 2004,
which enabled us to operate at close to breakeven (loss £0.3m) in the second
half. We expect the divestiture programme to be completed in early 2005.
Profit Before Tax, Goodwill Amortisation and Exceptional Items
Profit before tax, goodwill amortisation and exceptional items was £44.2m
compared to £32.0m last year. In 2004, the Group recorded exceptional charges
of £11.2m relating to the costs of the disposal of the electroplating business
(£7.4m) and the merger of PVD assets with IonBond (£3.8m). Operating profit
before goodwill amortisation and exceptional items increased from 2003 to 2004
by £10.4m. Foreign exchange movements during the year resulted in a net
reduction to operating profit of £2.5m. The effect of applying current exchange
rates to the 2004 results would be an adverse impact on operating profit of
approximately £0.2m, although this would be entirely offset by interest savings
on dollar borrowings. The Group's interest charge was reduced from £9.7m to
£7.9m reflecting lower borrowings and the benefit of a weaker US dollar.
Goodwill amortisation reduced by £0.6m to £8.5m as a result of the
electroplating and PVD disposals.
Taxation
The effective tax rate in 2004, before the amortisation of goodwill (which is
not generally allowable for tax) was 17% (2003: 69%). The figure is distorted
by the exceptional charges related to the disposal of wet coatings and the
merger of the PVD business with IonBond. Before exceptional charges and
goodwill amortisation, the effective tax rate is 21.4% (2003: 22.3%), reflecting
the mix of taxable profits and losses and the jurisdictions in which the Group
operates.
Earnings Per Share
Headline earnings per share were 11.3p (2003: 9.1p as restated), with basic
diluted earnings per share being 6.1p (2003: loss per share 6.3p restated). The
Board is recommending a final dividend of 3.85p (2003: 3.6p after adjusting for
the Rights Issue) per share. The dividend is covered 1.9 (2003: 1.6) times by
headline earnings. Interest was covered 6.6 (2003: 4.3) times by operating
profit before goodwill and exceptional items.
Capital Expenditure
Net capital expenditure for the year was £34.0m compared to £38.3m in 2003. The
multiple of depreciation (net capital expenditure divided by depreciation) has
remained at 0.8 times as the Group continues to maximise the benefit from
previous investments.
Major projects undertaken during the year included an additional fully automated
sealed quench furnace line in Vasteras, Sweden, re-location and expansion of our
Materials Testing laboratories in Houston, USA (to be completed in 2005),
completion of a new facility specialising in low pressure carburising in
Livonia, USA and the start-up of an installation of a Kolsterising line in
London, USA.
Cash Flow and Borrowings
After allowing for capital expenditure, interest and tax the Group generated
free cash flow of £57.1m compared to £30.3m in 2003 and cash flow from
operations increased to £104.3m from £83.9m in 2003. There has been continued
focus on cash collection, which has seen debtor days maintained at 65.
Acquisitions, along with the investment in IonBond, resulted in net cash
payments of £9.9m. In March 2004 the Group successfully completed a 1 for 4
Rights Issue which raised £62.0m net of expenses. Net borrowings ended the year
at £88.5m, a reduction in the year of £121.8m; gearing was reduced from 56.7% to
20.3%.
Treasury
Treasury is managed centrally covering borrowings and its components. The
objective is to minimise risk through a balanced approach. Funds are obtained
via privately placed bonds and from banks. The Group aims to have a range of
maturities, both committed and uncommitted, currently ranging from 364 day
facilities to the five years remaining on the private placement senior notes.
The Group also aims to have a mix of fixed and floating rate debt to achieve the
desired profile and to manage interest rate volatility. During 2004 the balance
has been weighted towards floating allowing the Group to benefit from continued
low rates. Funding of overseas activities is generally via local currency
borrowings so as to provide a partial hedge against the impact of exchange rate
volatility on asset values as translated into Sterling on consolidation.
Pensions
The Group has elected to adopt the transitional provisions of FRS 17 (Retirement
Benefits) and consequently there is no impact on the 2004 figures. If FRS 17
had been fully adopted in 2004, the Group would have recorded an additional
liability, net of deferred tax, in its balance sheet of £15.5m (2003: £10.0 m)
relating to defined benefit schemes in the UK, France and USA of which the UK
plan accounted for £14.5m (2003: £8.7m). The US plans were inherited with the
acquisition of Lindberg. Three of these plans have been closed and no further
benefits are accruing. A further two remain open under the terms of union
agreement. The actuaries to the UK scheme have advised that contributions to
that plan be increased by £0.4m in 2005.
International Financial Reporting Standards
Following the EU's adoption of Regulation No. 1606/2002 on the use of
International Financial Reporting Standards (IFRS) by EU-listed companies, the
Group is implementing IFRS from 1 January 2005.
The first financial information to be reported by the Group in accordance with
IFRS will be for the six months ending 30 June 2005 but the requirement to
present comparative information means that a balance sheet as at 31 December
2003 and primary statements for 2004 prepared in accordance with IFRS will also
be required. The Group has continued to report its consolidated accounts in
accordance with UK GAAP for 2004.
The Group plans to provide a separate reconciliation of the UK GAAP 2004 results
and the balance sheet at 31 December 2003 to IFRS during the second quarter of
2005. At that time a full explanation of the known impacts of IFRS will be given
as well as details of the accounting policies that are expected to be adopted
under IFRS as from 1 January 2005.
This analysis of the impact of IFRS is being prepared by the Directors using
their best knowledge of the expected standards and interpretations expected to
be effective, and the accounting policies expected to be adopted, when the
Directors prepare the company's first complete set of IFRS financial statements
as at 31 December 2005. Therefore, as these interpretations develop, there is a
possibility that the analysis may evolve further before constituting the final
IFRS balance sheet as at 31 December 2005 when the Company prepares its first
complete set of IFRS financial statements.
Our work to date has identified that the following areas will impact the Group's
accounts:
Retirement Benefits
Under UK GAAP, the Group currently accounts for defined benefit pension schemes
in accordance with SSAP 24 Accounting for Pension Costs (SSAP 24). The Group
also reports the transitional disclosures required in accordance with FRS 17
Retirement Benefits (FRS 17), including the adjustment from the figures reported
under SSAP 24 which would be required if FRS 17 was adopted in the financial
statements.
The methodology and assumptions used to calculate the value of pension assets
and liabilities under FRS 17 are substantially consistent with the requirements
of IAS 19 Employee Benefits (IAS 19).
Proposed Dividends
Under SSAP 17 Post Balance Sheet Events, proposed dividends are accrued for as
an adjusting post balance sheet event in the accounting period to which they
relate. Under IAS 10 Events after the Balance Sheet Date, dividends are
recognised in the accounting period in which they are declared. Accordingly, the
Group will reverse the accrual for its final dividend and report it in the
consolidated IFRS accounts for the following period.
Intangible Assets - goodwill
Under UK GAAP, the Group's policy is to capitalise goodwill in respect of
businesses acquired and amortise it on a straight line basis over its estimated
useful economic life, which has been assessed as 20 years for all acquisitions
to date.
On transition to IFRS, IFRS 1 requires the Group to review the carrying value of
capitalised goodwill at 31 December 2003 for potential impairments.
In accordance with IFRS 3 Business Combinations, no amortisation of goodwill
will be charged in the Group's consolidated IFRS accounts from 1 January 2004.
Instead, annual reviews of the goodwill will be performed to test for potential
impairments.
Share-based Payments
Under UK GAAP, the cost of share options is based on the intrinsic value in the
option at the date of grant, meaning that options granted to employees at market
price or allowable discount do not generate an expense. Under IFRS 2 Share-based
Payments, the Group is required to measure the cost of all share options granted
since November 2002 using fair value models. As a result, additional expense
will be recognised in the IFRS profit and loss account in respect of options
issued in September 2003.
Deferred Tax
Under IAS 12 Income Taxes, deferred tax liabilities may not be discounted to
present value, whereas FRS19 allows this. The Group currently uses the
discounting method and accordingly the Group will restate its deferred tax
liability under IFRS.
D F Landless
1 March 2005
Consolidated profit and loss account
for the year ended 31 December 2004
2004 2003
£m £m
Turnover
Existing operations 443.7 435.7
Acquisitions 1.8 -
Continuing operations 445.5 435.7
Discontinued operations 11.7 12.7
457.2 448.4
Operating profit
Existing operations 42.5 23.8
Acquisitions 0.2 -
Continuing operations 42.7 23.8
Discontinued operations 0.9 1.3
Total operations
- Trading 52.1 41.7
- Operating exceptional items arising from restructuring and
asset write downs - (7.5)
- Goodwill amortisation (8.5) (9.1)
Operating profit 43.6 25.1
Exceptional items
(Loss)/profit on disposal of discontinued operations (3.8) 3.5
Loss on termination of operations (7.4) (30.0)
Profit/(loss) on ordinary activities before interest and
taxation 32.4 (1.4)
Net interest payable (7.9) (9.7)
Profit/(loss) on ordinary activities before taxation 24.5 (11.1)
Tax on profit/(loss) on ordinary activities (5.6) (6.2)
Profit/(loss) on ordinary activities after taxation 18.9 (17.3)
Minority interests - equity (0.2) (0.1)
Profit/(loss) for the financial year 18.7 (17.4)
Dividends - paid and proposed (19.6) (15.6)
Retained loss for the financial year (0.9) (33.0)
Restated
Earnings/(loss) per share (Note 4)
Headline 11.3p 9.1p
Headline - diluted 11.3p 9.1p
Basic 6.1p (6.3)p
Basic - diluted 6.1p (6.3)p
Consolidated balance sheet
as at 31 December 2004
2004 2003
£m £m
Fixed assets
Intangible assets - goodwill 131.4 137.5
Tangible assets 428.7 478.7
Investments 6.2 0.9
566.3 617.1
Current assets
Stocks 13.4 18.2
Debtors 108.4 102.7
Cash at bank and in hand 142.1 35.2
263.9 156.1
Creditors
Amounts falling due within one year (117.2) (119.1)
Net current assets 146.7 37.0
Total assets less current liabilities 713.0 654.1
Creditors
Amounts falling due after more than one year (234.2) (239.5)
Provisions for liabilities and charges (42.9) (42.8)
Net assets 435.9 371.8
Capital and reserves
Called-up share capital 32.1 25.7
Share premium account 300.0 244.4
Currency and other reserves 17.1 14.2
Profit and loss account 85.7 86.6
Shareholders' funds - equity 434.9 370.9
Minority interests - equity 1.0 0.9
435.9 371.8
Consolidated cash flow statement
for the year ended 31 December 2004
2004 2004 2003 2003
£m £m £m £m
Operating profit 43.6 25.1
Depreciation charges 43.7 45.7
Amortisation of goodwill 8.5 9.1
Loss on sale of tangible fixed assets 0.3 0.1
Fixed assets written off on restructuring - 3.5
Decrease in stocks 3.8 -
(Increase)/decrease in debtors (2.1) 12.1
Increase/(decrease) in creditors and provisions 6.5 (11.7)
Net cash inflow from operating activities 104.3 83.9
Returns on investment and servicing of finance (7.8) (10.3)
Taxation (5.4) (4.9)
Capital expenditure and financial investment (34.0) (38.3)
Acquisitions and disposals 10.5 1.3
Equity dividends paid (15.6) (15.6)
Cash inflow before management of liquid resources
and financing 52.0 16.1
Management of liquid resources (70.9) 5.9
Financing 56.3 (23.5)
Increase/(decrease) in cash in the year 37.4 (1.5)
Reconciliation of net cash flow to movement in net
debt
Increase/(decrease) in cash in the year 37.4 (1.5)
Cash inflow from increase in debt and lease
financing 5.7 23.7
Cash outflow/(inflow) from movement in liquid
resources 70.9 (5.9)
Change in net debt resulting from cash flows 114.0 16.3
Debt acquired with subsidiaries (1.7) -
Debt disposed of 1.0 -
Currency adjustments 8.5 7.6
Movement in net debt in the year 121.8 23.9
Net debt at 1 January (210.3) (234.2)
Net debt at 31 December (88.5) (210.3)
Consolidated statement of total recognised gains and losses
for the year ended 31 December 2004
2004 2003
£m £m
Profit/(loss) for the financial year 18.7 (17.4)
Currency adjustments 2.9 14.4
Total recognised gains and losses relating to the year 21.6 (3.0)
Reconciliation of movements in
Group shareholders' funds 2004 2003
for the year ended 31 December 2004 £m £m
Profit/(loss) for the financial year 18.7 (17.4)
Dividends (19.6) (15.6)
Retained loss for the financial year (0.9) (33.0)
Currency adjustments 2.9 14.4
New shares issued 62.0 0.3
Net movement in shareholders' funds 64.0 (18.3)
Shareholders' funds at 1 January 370.9 389.2
Shareholders' funds at 31 December 434.9 370.9
Notes to the financial statements
31 December 2004
1. Segmental analysis
By activity 2004 2004 2003 2003
£m £m £m £m
Restated Restated
Turnover
Heat treatment 309.0 302.5
Materials testing 65.6 61.2
Hot isostatic 32.1 27.6
pressing
Surface engineering 19.4 18.4
Electroplating - 19.4 26.0
discontinuing
445.5 435.7
PVD - discontinued 11.7 12.7
457.2 448.4
Profit/(loss) on
ordinary activities
before taxation
Pre Post Pre Post
goodwill goodwill goodwill goodwill
amortisation amortisation amortisation amortisation
Heat treatment 34.2 26.7 31.5 24.1
Materials testing 12.4 11.7 11.4 10.7
Hot isostatic 7.0 7.0 3.6 3.6
pressing
Surface engineering 3.3 3.0 2.3 1.9
Electroplating - (3.0) (3.0) (6.8) (7.4)
discontinuing
53.9 45.4 42.0 32.9
PVD - discontinued 0.9 0.9 1.3 1.3
54.8 46.3 43.3 34.2
Head office expenses (2.7) (2.7) (1.6) (1.6)
Operating profit 52.1 43.6 41.7 32.6
before exceptional
items
Net interest payable (7.9) (7.9) (9.7) (9.7)
Profit on ordinary
activities before
exceptional items 44.2 35.7 32.0 22.9
Amortisation of (8.5) - (9.1) -
goodwill
Profit on ordinary
activities before
exceptional items 35.7 35.7 22.9 22.9
Operating - (7.5)
exceptional items
Exceptional items (11.2) (26.5)
Profit/(loss) on
ordinary activities
before taxation 24.5 (11.1)
The segmental disclosure by activity for 2003 has been restated to reflect the
transfer of certain business from heat treatment to the PVD division and from
electroplating (formerly wet coatings) to surface engineering (formerly
specialty coatings). The former specialty coatings division has been divided
into surface engineering and PVD.
Notes to the financial statements (continued)
2. Geographical analysis of turnover and profit before taxation by origin
Turnover Profit/(loss) before tax
2004 2003 2004 2003
£m £m £m £m
United Kingdom 62.5 60.6 2.0 (0.9)
Mainland Europe 234.2 229.0 17.8 (5.5)
North America 155.4 154.9 11.2 4.2
Rest of World 5.1 3.9 1.4 0.8
457.2 448.4 32.4 (1.4)
Net interest payable (7.9) (9.7)
Profit/(loss) on ordinary activities before
taxation 24.5 (11.1)
3. Tax on profit/ (loss) on ordinary activities
2004 2003
£m £m
The charge for taxation comprises:
Current tax:
UK corporation tax 0.5 1.4
Overseas tax 6.4 5.0
Adjustments in respect of previous years (2.7) (0.6)
Total current tax 4.2 5.8
Deferred tax:
Origination and reversal of timing differences 0.1 2.1
Decrease/(increase) in discount 1.3 (1.7)
Total deferred tax 1.4 0.4
Total tax on profit/(loss) on ordinary 5.6 6.2
activities
4. Earnings/(loss) per share
2004 2003
£m £m
Profit/(loss) for the financial year 18.7 (17.4)
Goodwill amortisation charge 8.5 9.1
Exceptional items after tax 7.3 33.1
Headline earnings 34.5 24.8
2004 2003
Number Number
Restated
Weighted average number of ordinary shares in issue - 304,605,680 273,921,081
basic
Adjustment in respect of share options 124,007 -
Weighted average number of ordinary shares in issue - 304,729,687 273,921,081
diluted
Adjusted for the bonus element of the 1 for 4 rights issue completed in 2004
Notes to the financial statements (continued)
1 Jan Cash flow Acquisitions Disposals Non-cash Currency 31 Dec
adjustments
2004 changes 2004
£m £m
£m
£m £m £m £m
Cash at bank and in hand 33.7 34.5 - - - 1.5 69.7
Short term deposits 1.5 70.9 - - - - 72.4
Bank overdrafts (5.4) 2.9 - - - (0.8) (3.3)
Bank loans due within one year (9.3) 8.0 (0.1) - (2.4) 0.1 (3.7)
Bank loans due after one year (224.9) (3.9) (1.0) 0.2 2.4 7.7 (219.5)
Finance leases due within one (1.6) 1.3 - 0.2 (1.0) (0.1) (1.2)
year
Finance leases due after one (4.3) 0.3 (0.6) 0.6 1.0 0.1 (2.9)
year
(210.3) 114.0 (1.7) 1.0 - 8.5 (88.5)
Non-statutory financial statements
The financial information set out above does not constitute the Group's statutory financial statements for the year
ended 31 December 2004 or 2003 but is derived from those financial statements. Statutory financial statements for 2003
have been delivered to the Register of Companies and those for 2004 will be delivered following the company's annual
general meeting, which has been convened for 3pm on 25 May 2005. The auditors have reported on those accounts; their
report was unqualified and did not contain any statement under Section 237(2) or (3) of the Companies Act 1985.
The financial information set out above has been prepared under the same accounting policies as the 2003 financial
statements.
This report was approved by the Board of Directors on 1 March 2005.
This information is provided by RNS
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