Final Results
Bodycote International PLC
28 February 2006
EMBARGOED UNTIL 0700 HOURS: 28 FEBRUARY 2006
BODYCOTE INTERNATIONAL PLC
PRELIMINARY RESULTS
FOR THE YEAR ENDED 31 DECEMBER 2005
Financial Highlights
• Revenue from continuing operations increased by 10% to £470.9 million
(2004: £426.4 million)
• Headline operating profit 1, 2 increased by 28% to £67.8 million
(2004: £53.1 million)
• Operating profit improved by 10% to £61.0 million (2004: £55.5
million)
• Headline profit before tax 1 up 26% to £58.8 million (2004: £46.7
million)
• Profit before tax ahead by 13% to £52.7 million (2004: £46.7 million)
• Headline earnings per share 3 increased to 14.6p (2004: 11.7p)
• Basic earnings per share improved to 12.7p (2004: 12.2p)
• Full year dividend 6.4 pence per share (2004: 6.1p), up 5%
Operational Review
• ROCE improved by 30% to 9.9% (2004: 7.6%)
• Testing enters 2006 at £100m annualised sales rate
• 14 bolt-on acquisitions completed during 2005 for £31.8 million
• Outsourcing agreements grew 35% to 20% of Group revenue (2004: 16%)
1 expressed pre impairment of goodwill (£5.8m: 2004 £nil), amortisation of
acquired intangibles (£0.2m: 2004: £nil) and restructuring costs (£nil:
2004 £2.4m).
2 expressed before interest and tax on associates (£0.8m: 2004 £nil).
3 a detailed breakdown of EPS can be found in note 4 on page 26
Chief Executive John D. Hubbard, commenting on the results said:
'2005 was another year of solid achievement for Bodycote. The combination of
growth in the aerospace market, continuing strong demand from the industrial gas
turbine sector, new outsourcing business, increased market share and the
majority of energy cost increases having been recovered meant that we were able
to improve sales, margins and profits.'
'We completed 10 acquisitions in Testing, which, combined with organic growth,
saw the division enter 2006 with annualised sales in excess of £100m. We
expanded our Heat Treatment operations into Eastern Europe (Poland and Romania)
and lifted margins despite the impact of energy cost increases. The combination
of our continuous self-help programmes, improving market demand, disciplined
capital investments and value enhancing acquisitions mean that we face 2006 with
confidence.'
For further information, please contact:
Bodycote International, plc
John Hubbard, Chief Executive 020 7831 3113
David Landless, Group Finance Director 020 7831 3113
Financial Dynamics
Jon Simmons 020 7831 3113
CHAIRMAN'S STATEMENT
2005 was another year of solid achievement for Bodycote. Revenue from
continuing operations rose in the year by 10% to £470.9m (2004: £426.4m). We
achieved strong organic growth of 5% and a further 5% from a series of bolt-on
acquisitions.
Profits and cash flow have continued their upward progression in all the
regions, both in terms of local currency and after translating into Sterling.
Headline operating profit 1, 2 increased by 28% to £67.8m (2004: £53.1 m). Our
headline profit before taxation 1 showed an increase of 26% to £58.8m (2004:
£46.7m). Operating profit improved by 10% to £61.0m (2004: £55.5m), whilst
profit before taxation was £52.7m compared to £46.7m in 2004. Our balance sheet
is strong
I am pleased to report that the Board is recommending an increase of 5% for the
final dividend to 4.05p per share (2004: 3.85p), to be paid on 5 July 2006 to
those shareholders on the register at the close of business on 9 June 2006. The
total dividend for the year is therefore up 5% at 6.4p (2004: 6.1p) and is
covered 2.3 times by headline earnings.
This year we have improved our return on capital employed (including all
goodwill previously written off) from 7.6% to 9.9% at the pre-tax level, whilst
at the same time continuing to invest in projects that will bring a longer term
benefit to the Group.
IonBond, in which the Group has a 20% shareholding following the transfer of our
PVD coatings business, also had a good year having grown sales by 25%,
principally by acquisition from £53m to £66m.
We are continuing the expansion of our Testing business both in terms of service
offerings and geographical coverage. Further profitable growth is forecast in
this Strategic Business Unit (SBU) for 2006. During the year ten testing
acquisitions were made by the Testing SBU at a cost of £21.9m. In the current
year to date we have made four further acquisitions at a cost of £22.1m.
We are also clearly focussed on growing our Thermal Processing businesses, by
expanding into new geographies as well as targeting specific acquisitions in
existing territories. We made four acquisitions in 2005 at a cost of £9.9m,
established a facility in Poland and are on schedule to open a greenfield plant
in China in mid 2006.
As ever we have continued to make progress in the year on improving the safety
and health of our employees at work. Further improvement remains a constant
focus for all the management team. Similarly there has been significant
progress in addressing the Group's environmental profile and our ISO14001
approval programme is moving ahead well.
These are the first year end accounts that have been prepared under IFRS and, as
previously reported, whilst adoption of IFRS required significant management
resource, except for the fact that goodwill is no longer amortised, the effect
is not significant in terms of pre-tax profits and the balance sheet.
Like many companies we do have pension deficits, principally in the UK.
However, these liabilities at £29.9m are less than 4% of our market
capitalisation and have now been reflected in our balance sheet for the first
time in accordance with IFRS.
The Group continues to press for high standards of governance that are
appropriate for the needs of the business. Since 1999 we have been performing
an annual risk management review and increasing emphasis is placed on risk
assessment throughout the Group. The Board and senior operating board assess
business risk and prioritise actions and resources to mitigate the impact of
identified risks more effectively. The objective is to improve the Group's
overall risk management performance and further embed risk management practices
at all levels of management. During 2006 it is planned to provide more training
for managers in this area.
Our prime objective for delivering value to shareholders is continuing to
improve our return on invested capital. We remain focussed on keeping a close
control on costs and increasing efficiency.
The Group is in good heart and well positioned for future growth, with its wide
customer base, good geographic spread, and a highly committed workforce who are
able to offer our customers an ever improving level of service. Going forward
we are optimistic that markets are growing, particularly in the area of
aerospace, industrial gas turbine (IGT), oil and gas and health sciences. We
expect to continue to benefit from our technological innovation and service
levels to manufacturers as these customers increasingly seek Bodycote's help to
manage their cost base. These strengths and the indications from end markets,
mean that we face 2006 with conviction and confidence for further organic growth
and the completion of a number of bolt-on acquisitions.
J A S Wallace
28 February 2006
1 expressed pre impairment of goodwill (£5.8m: 2004 £nil), amortisation of
acquired intangibles (£0.2m: 2004: £nil) and restructuring costs (£nil:
2004 £2.4m)
2 expressed before interest and tax on associates (£0.8m: 2004 £nil)
CHIEF EXECUTIVE'S REVIEW 2005
INTRODUCTION
I am pleased to report that performance continued to improve in 2005. Group
revenue (excluding the divested coatings businesses) at £470.9m was 10% ahead of
2004. Using constant currency exchange rates, revenue grew 9% compared to 2004,
of which 5% was an organic increase. With growth in the aerospace market, a
continuing strong demand from the IGT sector, new outsourcing business,
increased market share and the majority of energy cost increases having been
recovered, we were able to improve operating margins from 13.0% to 14.4%.
Headline operating profit 1 grew 28% to £67.8m compared with £53.1m a year ago.
Operating profit increased by 10% to £61.0m from £55.5m in 2004. I thank all
the people in Bodycote who have helped deliver these improved results.
OPERATIONAL REVIEW
During the year we made good progress in executing our strategy to rebalance our
portfolio by growing the relative size of our Testing SBU whilst continuing to
expand our Thermal Processing SBU into developing manufacturing economies. We
also increased our investment in our associate undertaking IonBond to 20% by the
exercise of an option negotiated at the time of the transfer of our PVD division
in 2004.
Securing major outsourcing opportunities remains a key element of our strategy.
Outsourcing supports our top line growth, which is typically higher than the
official rate of increase in the level of manufacturing activity and enhances
margins through increased facility utilisation. Bodycote's outsourcing
initiative offers manufacturers lower total cost, equal or better quality and
fast, reliable turnaround. The key to our outsourcing success is our technical
expertise in niche technologies which are critical but 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) grew 35% and now accounts for
21% of Group revenue compared with 16% in 2004. Several new SPs will start
generating revenue in 2006.
Technology transfer initiatives continue to be successful. The extension of
these high value added services enhances customer satisfaction and leads 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 their core competencies. The IonBond venture
is proving to offer synergistic benefits to our customers and partners. Our
geographic and market spread reduces the risk associated with any one account or
country. Our top ten customers accounted for approximately 12% of total
revenue, compared to 11% in 2004.
During 2005 £31.8m was spent on 14 bolt-on acquisitions. The Health Sciences
division of the Testing SBU acquired three laboratories in the food testing
sector to spearhead a global expansion in this market. Seven further
laboratories were added during the year to enhance our existing footprint in
each of the Materials Testing, Engineering & Technology and Environmental
divisions. Of particular note was the establishment of a European Engineering &
Technical Centre in Sweden through the purchase of CSM Materialteknik AB from
SAAB AB.
The Heat Treatment division of our Thermal Processing SBU expanded its
geographical presence with four bolt-on acquisitions. In Eastern Europe we
acquired four plants in Poland and a 75% interest in the heat treatment
activities of Uttis Industries SA in Romania. We also strengthened our position
in the aerospace and nuclear market sectors by the purchase of Nadcap-approved
Expert Heat Treatments Limited in the UK and ABMT SA in France.
The divestiture of our non-core electroplating activities was completed midyear
and generated cash receipts of £5.8m. Other asset sales, including the
divestiture of one heat treatment plant in North America, generated a total of
£8.6m.
THERMAL PROCESSING
Thermal Processing revenue was £384.4m (7% growth) and operating profit was
£54.3m (18% improvement) with an operating margin of 14% compared to 13% in
2004. The Thermal Processing SBU operates as two divisions, Heat Treatment and
Hot Isostatic Pressing (HIP) with our remaining Surface Engineering activities
now incorporated into the Heat Treatment division. Their performance was as
follows:
HEAT TREATMENT
Revenue was £349.2m (6% growth) and operating profit was £44.8m (15%
improvement) with operating margin of 13% compared to 12% in 2004. Strong
growth in aerospace, oil and gas, continued strength in IGT and overall stable
automotive demand provided a reasonable background for our performance.
Americas
Revenue of £112.8m (an increase of 9%) and operating profit of £11.2m (up 38%)
were generated. Our aerospace, IGT, and oil and gas sectors all saw improved
demand from a combination of market pickup and new outsourcing contracts.
Several automotive related facilities saw a decline in the second half which,
based on industry forecasts, will remain at subdued levels in 2006. The
combination of price pressure and increases in energy and employee costs
continue to hold back the margin improvement expected from higher volumes. We
are now able to offer several high value added services (Low Pressure
Carburising, Electron Beam Welding and Kolsterising of stainless steel) to
complement existing heat treatment and brazing services thus helping to improve
margins in the oversupplied North American market.
Europe
Revenue of £236.4m (an increase of 5%) and operating profit of £33.7m (up 11%)
were generated. Although the manufacturing sector faced a difficult
environment, our strategy of pursuing outsourced work, transferring technology
and optimising operational efficiencies paid off. Almost all automotive focused
facilities are now certified to the stringent TS 16949 automotive quality
standard, whilst most facilities will achieve ISO 14001 environmental
certification by the end of 2006. This positions us in line with the quality
and responsibility expectations of world class manufacturers. Our network of
Eastern European facilities was expanded in 2005 by the commissioning of a
start-up facility in Poland which was immediately followed by the acquisition of
the market leader with four facilities. Our Romanian facility was merged with a
competitor to create a market leading position, with Bodycote owning 75% of the
new entity. Continued growth in our Eastern European operations during 2006 is
anticipated.
Asia
Our previously announced development in Wuxi, China has been boosted by the
award of an outsourcing contract from Faurecia SA (affiliated to PSA Peugeot
Citroen) for the heat treatment of automotive components. Construction of this
10,000 m2 plant is expected to be completed in the second half of this year.
The size of the plant has been doubled from that originally envisaged due to
strong interest from other western companies setting up manufacturing bases in
the area. As part of the expansion a Testing laboratory has also been added to
the project. The total cost of the new facility is expected to be approximately
£5m. Bodycote intends to complete similar new factories in other carefully
selected areas of China over the next 5 years to service predominantly western
companies establishing new manufacturing operations in the region. We are
actively evaluating opportunities in other Asian markets
HIP
Divisional revenue was £35.2m (10% growth) and operating profit was £9.5m (34%
improvement), with an operating margin of 27% compared with 22% in 2004. The
revenue growth was driven by the continuing strong demand from the IGT market
for new and replacement parts. Aerospace demand continued to pick up throughout
the year and is expected to maintain this growth trend beyond 2006. Although
margins improved, we still have work to do because the high investment in HIP
facilities requires 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 multi-national nuclear fusion project, ITER,
which will be sited in France, opens up the prospect of generating additional
revenue as we have successfully demonstrated our ability to HIP manufacture
critical components. Demand for Densal(R) treatment of aluminium castings
showed excellent progress in the high performance European automotive sector
with adoption in three significant applications. In Europe two large HIP units,
out of service for a large part of 2004, returned to service in 2005. In North
America a used HIP unit, previously acquired at low cost, will be brought into
service in 2006 followed by the addition of new mega-HIP capacity in 2007.
TESTING
Revenue was £86.5m (32% growth), operating profit was £16.3m (31% improvement)
and the operating margin was maintained at 19%. This growth in revenue was
achieved in generally good trading environments with outsourcing demand driving
organic revenue ahead by 9%. Our strategy to grow this division continues, with
ten small to medium acquisitions completing in the year.
Business development strategies aligned to customer-facing service provision
resulted in a reorganisation of management in 2005 along business streams as
opposed to country based organisation. The Testing SBU now operates four
divisions: Materials Testing, Engineering & Technology, Health Sciences and
Environmental Testing.
Materials Testing
Materials Testing advanced strongly as a result of continued demand from the
buoyant oil and gas sector and improving aerospace markets. Automotive
outsourcing of testing continues to assist our growth. Our European business
saw substantial revenue gains as a number of global projects from the Caspian
region and Sakhalin Island produced significant demand for our specialist
corrosion services. In aerospace and defence markets, the acquisition of CSM in
Sweden strengthened our position in advanced NDT systems, polymer/composite
testing, and materials consultancy offerings, enabling deployment of these
services across our network. The Middle East benefited from the acquisition of
a start-up in Qatar and the purchase of GHD Cladding in Dubai. Continuing high
demand for our services in the Gulf of Mexico region led to investment in a new
state of the art facility in Houston, US with relocation completed in February
2006.
Engineering & Technology
In Engineering & Technology we continued to capitalise on our strategy of
providing high end technical solutions to a number of industrial sectors. In
the UK the acquisition of J W Worsley brings advanced environmental simulation
testing into the Group to service our clients in the European transportation
market. We invested in several large scale vehicle dynamics test stands at our
Technology Centre in Mississauga, Canada to meet demand from North American
heavy duty truck manufacturers, with several large outsourcing projects secured.
Health Sciences
The European Health Sciences unit performed extremely well with the addition of
a food testing/advisory services business complementing strong revenue growth in
our pharmaceutical and occupational hygiene segments. The acquisition of Law
Laboratories and Allied Laboratories mid-year positioned Bodycote as the
laboratory of choice for a number of large UK food retailers. The network
continues to expand, with the acquired expertise and technologies being rolled
out to other geographical regions through our technology transfer teams.
Environmental Testing
Our Environmental Testing business posted significant revenue growth,
particularly in Canada, where the acquisition of Arthur Gordon, continued
operational improvements and investments in fully automated analytical systems
allowed greater customer satisfaction on deliveries whilst improving
productivity.
SAFETY, HEALTH AND ENVIRONMENTAL (SHE)
SHE has always been of major importance in our business and since initiating an
enhanced Group wide measurement and benchmarking system in 2004 we have seen our
performance improve but we remain some way from our ultimate goal of zero
accidents. Our two safety KPIs for lost time accidents showed improvement:
Frequency Rate fell by 2.1% and Severity Rate fell by 12.3%. Our initiative
helps us to understand better the reasons and root cause of accidents occurring
within the Group, improve awareness among the employees and change behaviour.
As in every other area of our business, we work on continuously improving our
understanding and application of safety procedures in a consistent manner
throughout the Group. We continue to roll out our Zero Tolerance Policy into
the various countries. The research project we are funding at a University in
California to advance safety in confined space entry procedures is expected to
be finalised in 2006, with recommendations which will benefit the whole
industry.
CURRENT TRADING AND PROSPECTS
Trading since the start of the New Year has been in line with the Board's
expectations. Notably we entered 2006 with annualised revenue for the Testing
SBU in excess of £100m.
IGT markets were strong in 2005 and we anticipate this sector will show
continued modest growth in 2006. Aerospace showed improvement in 2005 and we
anticipate the pace of growth will increase throughout 2006. Automotive is
forecast to remain flat in terms of overall build rate for North America and
Europe in 2006. The restructuring being undertaken by some manufacturers will
offer challenges that we are confident we will manage successfully. The low end
tooling market has continued to decline in western markets due to the movement
of manufacturing to areas of lower cost, where Bodycote does not currently have
a significant presence.
Since the year end we have acquired four laboratories, NorWest Soil Research
(seven Canadian locations and three European joint ventures), West Coast
Analytical in the USA, Tetra in the UK and ACT Laboratories, Testing and
Engineering with two locations in Detroit, as well as one Heat Treatment
facility, SGB Solingen, in Germany. The pipeline of potential acquisitions
which fit our strategic plan and investment criteria remains well stocked. The
rate of acquisitions will continue to be controlled by our commitment to
integrate successfully each acquisition into our operations.
People are our number one resource. We will continue to focus our management
efforts on training, improving the working environment, increasing the
productivity, safety and effectiveness of our human resources. Energy, our
number two cost, is anticipated to remain expensive and we will continue our
endeavours to pass these costs on to our customers.
Overall we expect to maintain our performance improvement during 2006 through
our continuous self-help programmes, improving market demand, disciplined
capital investment and value enhancing acquisitions, all with a focus on
continuing to improve our return on capital employed.
J D Hubbard
28 February 2006
1 expressed pre impairment of goodwill (£5.8m: 2004 £nil), amortisation of
acquired intangibles (£0.2m: 2004: £nil) and restructuring costs (£nil: 2004
£2.4m)
GROUP FINANCE DIRECTOR'S REPORT
Revenue and Operating Profit
Group revenue for the continuing business in 2005 was £470.9m compared with
£426.4m in 2004. Demand improved in most of the Group's markets, although
conditions in automotive were challenging, particularly in the second half, for
both North America and continental Europe. Whilst total sales increased by 3%,
the improvement excluding the now divested electroplating and PVD businesses was
10%, of which 5% was organic, 4% was from acquisitions and 1% was due to
favourable exchange rate movements.
Revenue Headline Operating Margin
Profit 1
£m £m £m £m % %
2005 2004 2005 2004 2005 2004
Heat Treatment 349.2 328.7 44.8 38.8 12.8 11.8
HIP 35.2 32.1 9.5 7.1 27.0 22.1
Thermal Processing 384.4 360.8 54.3 45.9 14.1 12.7
Testing 86.5 65.6 16.3 12.4 18.8 18.9
Head Office - - (2.8) (2.8) - -
Continuing Business 470.9 426.4 67.8 55.5 14.4 13.0
Electroplating/PVD 1.5 30.8 - (2.4) - -
(discontinued)
472.4 457.2 67.8 53.1 14.4 11.6
1 before impairment of goodwill of £5.8m (2004: nil), amortisation of acquired
intangible assets of £0.2m (2004: nil), tax and interest on the share of results
of associates of £0.8m (2004: nil) and restructuring costs of £nil (2004:
£11.2m). A reconciliation of headline operating profit to operating profit can
be found on page 21.
Following on from the improved market conditions seen in 2004, the year began
well and first half sales showed organic growth of 5.8%. Aerospace, IGT, oil
and gas and health science markets all continued to improve. The second half of
the year saw a softening in automotive demand and consequently organic growth
was somewhat less at 4.7%, resulting in a 5.3% improvement for the year as a
whole. The second half was also impacted by a significant escalation in energy
prices. Gross energy cost was higher in the first half by approximately £1m
compared to a year earlier and in the second half the year on year increase was
circa £2m. Of the total annual increase of £3m, approximately £2m was recovered
in selling prices during 2005 and we expect to recover the balance in 2006.
Our exit from the electroplating business was completed in March, except for one
facility which was sold in August. The business broke even in 2005 and this
compares to a loss, before restructuring costs, of £3.2m in 2004.
As part of our continuous improvement programme, we have reduced the activity at
one of our North American heat treatment plants and have decided to write off
the associated goodwill in the second half (£4.0m). This is in addition to the
charge taken in the first half (£1.8m) associated with the sale of the facility
at Grand Rapids, Michigan.
The first full year since the establishment of the Group's associate venture,
IonBond, has met our expectations of higher attributable operating profit from
an investment reduced by three quarters, when compared to the business which was
wholly owned. The results are now reported within the heat treatment division
of the Thermal Processing Strategic Business Unit, along with those of the
continuing surface engineering business.
THERMAL PROCESSING
Heat Treatment
Overall sales at constant currency increased by 5.5% of which 74% was organic.
Operational gearing, the ratio of change in organic operating profit to change
in organic sales, at 33% was disappointing. This is accounted for by a
combination of energy cost increases, soft automotive demand, which kept price
increases down and labour costs, due to average people cost increases of c. 2%.
Energy prices in North America were a major issue, with the gross cost
increasing by an average of 12% compared to the prior year. More than half of
the increase was recovered in selling prices and this accounts for about a
quarter of the year on year increase in sales value. Further recovery is
expected in 2006. In Europe the largest increases were in the UK followed by
Germany but were less of an issue in France and Scandinavia. Cost increases in
Europe are being well recovered.
North American sales increased by 8.1%, essentially all organic, driven by
growth in aerospace, IGT and oil & gas and despite some softness in automotive
demand. Notwithstanding the impact of energy costs, operating margins improved
by two percentage points but over-capacity in the Great Lakes region continues
to see margins, on average, lower than most other parts of the Group.
In Europe the best performances were in the north. The UK saw organic sales
growth of 7.5%, as a result of aerospace demand and the Nordic area was ahead by
3%, due to growth in heavy truck, marine, bearings and general engineering. The
UK also benefited from the acquisition of Expert Heat Treatment with sales of
£1.7m in 5 months. France and Germany saw modest sales growth in the face of
softening automotive demand, particularly in France and Italy in the second
half. The best performing areas of continental Europe were the Czech Republic
and Poland, with the latter assisted by the acquisition of four facilities early
in the year. However, these countries currently offer a small fraction of the
volumes available in the developed economies.
In Asia, the Group's first wholly-owned facility in China is under construction
and the first equipment to be installed is being transferred from France.
Several of our speciality businesses had excellent performances in 2005: K Tech
(R) ceramics, which has much of its sales in oil & gas; plasma spray for
aerospace applications and Kolsterising(R) for hardening stainless steel, whilst
our new metallic diffusion product, CoatAlloy(R) was approved by several
prospective customers.
HIP
HIP followed a solid performance in 2004 with further progress in 2005. At
constant currencies sales were ahead 10%, driven by aerospace and IGT demand in
the UK and USA and by Densal(R) for automotive in Germany. Operational gearing,
at 80%, was good and above our expectations and resulted in a margin improvement
to 27% (2004: 22%). We need to improve margins further still to meet our target
of mid teens pre tax return on capital.
TESTING
The Testing Strategic Business Unit (SBU) has continued its outstanding record
of growth and profit performance. At constant currencies, sales were up 29% of
which 9% came from organic growth and the balance from ten bolt-on acquisitions
completed during the year at a cost of £21.9m.
All parts of the SBU performed well and margins were maintained at 19% and
consequently our return on capital expectations are being met. The Testing
division, as with Thermal Processing, is being helped by strength in the
aerospace, IGT and oil and gas sectors. Engineering and Technology is similarly
benefiting but in addition, and in contrast to other parts of the Group, is
seeing increases from automotive in North America as customers seek both to
improve their product offerings and hence increase development programmes and
lower costs via outsourcing. Our strengthened Health Science and Environmental
businesses have seen good growth, particularly in the UK, the former in the food
testing arena and the latter due to asbestos characterisation and management in
commercial premises. Our laboratories in the Middle East produced solid
results, particularly in civil engineering markets.
Profit Before Tax
Headline profit before tax 1 was £58.8m compared to £46.7m last year. Headline
operating profit 1, 2 increased from 2004 to 2005 by £14.7 m. Foreign exchange
movements during the year resulted in a net increase in operating profit of
£0.7m. The Group's net interest charge (excluding net pension financing) was
reduced from £8.1m to £7.3m reflecting lower average net borrowings. The net
financing charge related to the Group's defined benefit pension schemes was
£1.0m compared to £0.7m in 2004.
Taxation
The effective tax rate in 2005, before impairment of goodwill and amortisation
of acquired intangible assets (which are not generally allowable for tax) was
20.2% (2004: 21.4%) reflecting the mix of taxable profits and losses and the
jurisdictions in which the Group operates.
Earnings Per Share, Dividends and Interest
Headline earnings per share 3 were 14.6p (2004: 11.7p), with basic diluted
earnings per share being 12.7p (2004: 12.2p). The Board is recommending a final
dividend of 4.05p (2004: 3.85p). The dividend is covered 2.3 (2004: 1.9) times
by headline earnings. Interest, excluding net pension financing, was covered
9.1 (2004: 6.0) times by headline operating profit 1, 2.
Capital Expenditure
Net capital expenditure for the year was £44.0m compared to £34.0m in 2004. The
multiple of net capital expenditure to depreciation was 1.1 times, following two
years when the ratio was 0.8 times. With buoyant demand in a number of the
Group's markets and strong growth expected in Testing, the Group anticipates a
similar ratio in the coming year.
Major projects undertaken during the year included new sealed quench furnace
lines in Kitchener, Ontario, Indianapolis, Cleveland, Ejby, Denmark and Zabzre,
Poland; the establishment of a new heat treatment facility in Brno, Czech
Republic and a new laboratory in Houston; additional
Heavy Duty emissions and vehicle cooling system test cells at two locations in
Canada; additional Low Pressure Carburizing equipment in Detroit and Kapfenberg,
Austria; the start of installation of a new large HIP unit in Camas, Washington
and a Densal(R) unit in Munich.
Cash Flow and Borrowings
After allowing for capital expenditure, interest and tax the Group generated
free cash flow of £42.1m compared to £57.3m in 2004 and cash flow from
operations was £95.7m compared to £100.5m in 2004. The reduction in free cash
flow was primarily due to increased capital expenditure. There has been
continued focus on cash collection, however, debtor days increased from 65 to 68
following a change in the treatment of bills of exchange in France, which
increased debtors by £4.7m. Acquisitions, along with the additional 5%
investment in IonBond, resulted in net cash outgoings of £33.9m. Net borrowings
ended the year at £108.5m, an increase of £18.2m; and gearing was 25% compared
to 21% in 2004.
Defined Benefit Pension Arrangements
The Group has defined pension benefit obligations in the UK, France, Germany and
USA, which are all reflected in the Group balance sheet. In the UK the Group
has a final salary scheme, which was closed to new members in April 2001 but
continues to accrue benefits for current employee members, a total of just over
300 people. The deficit as calculated by the scheme actuary at 31 December 2005
using the principles of IAS 19 is £21.8m. In France we operate a plan which
pays a cash lump sum on retirement and also for long service. The plan is open
to new employees but by its nature is not mortality dependant. It is unfunded
and the IAS 19 liability at 31 December 2005 was €5.9m. The Group's heat
treatment business in Germany has inherited several defined benefit
arrangements. They are all unfunded, have no future benefit accrual and are
closed to new members. The IAS 19 liability at 31 December 2005 was €4.4m. The
company sponsors five defined benefit pension arrangements in the USA, which
were inherited with the acquisition of Lindberg and had a total IAS 19 deficit
at 31 December 2005 of $1.6m.
Treasury
Treasury activities have the objective of minimising risk and are centralised in
the Group's head office in Macclesfield. Group Treasury is responsible for
management of liquidity and interest and foreign exchange risks, operating
within policies and authority limits approved by the Board. The use of
financial instruments including derivatives is permitted when approved by the
Board, where the effect is to minimise risk to the Group. Speculative trading
of derivatives or other financial instruments is not permitted.
Bodycote has operations in 30 countries. Assets are hedged where appropriate,
by matching the currency of borrowings to the net assets. The Group principally
borrows in US Dollars, Euro and Swedish Krona, consistent with the location of
the Groups non-sterling assets. These borrowings are at both fixed and floating
interest rates and the Group will use derivatives where appropriate, to generate
the desired effective currency and interest rate exposure.
Exposure to interest rate fluctuations on indebtedness is managed by using a
combination of fixed and floating rates for borrowings. Consideration is given
to entering into interest rate swaps and forward rate agreements. The policy
objective is to have a target proportion, currently 25 to 75 per cent of net
borrowings, hedged at all times.
At the end of December 2005, 24% of borrowings were at fixed rates for an
average period of 4.0 years.
It is Group policy to hedge exposure to cash transactions in foreign currencies
when a commitment arises, usually through the use of foreign exchange forward
contracts but not to hedge exposure for the translation of reported profits.
Bodycote is financed by a mix of cash flows from operations, short-term
borrowings and longer-term loans from banks, capital markets and finance leases.
Bodycote's funding policy is to ensure continuity of finance at reasonable
cost, based on committed funding from several sources, arranged for a range of
maturities. At 31 December 2005 Bodycote had £72.1m of unutilised committed
facilities. The Group's principal committed facility of £225m (£55m of which
was unutilised at 31 December 2005) has a maturity of over 4.5 years. The Group
has an $80m US privately placed bond which has just less than 4 years to
maturity.
Bodycote also has access to uncommitted and short-term facilities, used
principally to manage day-to-day liquidity and working capital requirements. In
addition pooling, netting and concentration techniques are used to minimise
borrowings.
D F Landless
28 February 2006
1 expressed pre impairment of goodwill (£5.8m: 2004 £nil), amortisation of
acquired intangibles (£0.2m: 2004: £nil) and restructuring costs (£nil: 2004
£2.4m)
2 expressed before interest and tax on associates (£0.8m: 2004 £nil)
3 a detailed breakdown of EPS can be found in note 4 on page 26
Consolidated income statement
For the year ended 31 December 2005
2005 2004
£m £m
Revenue
Existing operations 453.7 424.6
Acquisitions 17.2 1.8
Revenue - continuing operations 470.9 426.4
Operating profit
Existing operations 57.0 54.2
Acquisitions 3.3 1.3
Share of results of associates 0.7 -
Operating profit - continuing operations 61.0 55.5
Operating profit prior to amortisation and impairment charges 67.0 55.5
Amortisation of acquired intangible fixed assets (0.2) -
Impairment of goodwill (5.8) -
Operating profit - continuing operations 61.0 55.5
Investment income 5.2 4.7
Finance costs (13.5) (13.5)
Profit before taxation 52.7 46.7
Taxation (11.8) (9.3)
Profit for the period from continuing operations 40.9 37.4
Discontinued operations
Loss for the period from discontinued operations - (9.0)
Profit for the year 40.9 28.4
Attributable to:
Equity holders of the parent 40.7 28.2
Minority interest 0.2 0.2
40.9 28.4
pence pence
Earnings per share
From continuing operations:
Basic 12.7 12.2
Diluted 12.7 12.2
From continuing and discontinued operations:
Basic 12.7 9.3
Diluted 12.7 9.3
Consolidated statement of recognised income and expense
For the year ended 31 December 2005
2005 2004
£m £m
Exchange differences on translation of foreign operations (5.1) 2.0
Actuarial losses on defined benefit pension schemes (3.7) (8.2)
Tax on items taken directly to equity 0.2 2.1
Net income recognised directly in equity (8.6) (4.1)
Profit for the year 40.9 28.4
Recognised income for the year 32.3 24.3
Attributable to:
Equity holders of the parent 32.1 24.1
Minority interests 0.2 0.2
32.3 24.3
Consolidated balance sheet
As at 31 December 2005
2005 2004
restated*
£m £m
Non-current assets
Goodwill 154.2 139.7
Other intangible assets 3.7 1.4
Property, plant and equipment 442.9 425.9
Interests in associates 9.2 5.8
Other investments - 0.4
Finance lease receivables 1.9 -
Deferred tax asset 22.7 18.9
Trade and other receivables 6.1 6.1
640.7 598.2
Current assets
Inventories 11.9 8.9
Finance lease receivables 0.3 -
Trade and other receivables 114.5 102.3
Cash and cash equivalents 124.8 142.1
251.5 253.3
Non-current assets classified as held for sale 1.2 6.9
Total assets 893.4 858.4
Current liabilities
Trade and other payables 97.2 86.9
Dividends payable 7.5 7.2
Current tax liabilities 3.3 2.5
Obligations under finance leases 1.4 1.5
Bank overdrafts and loans 6.4 7.0
Short-term provisions 2.3 1.5
118.1 106.6
Net current assets 133.4 146.7
Non-current liabilities
Bank loans 221.6 219.5
Retirement benefit obligation 29.9 24.2
Deferred tax liabilities 79.9 72.1
Obligations under finance leases 3.9 4.4
Long-term provisions 4.7 6.7
Other payables 1.8 2.9
341.8 329.8
Total liabilities 459.9 436.4
Net assets 433.5 422.0
* see note 5
Consolidated balance sheet
As at 31 December 2005
2005 2004
£m £m
Equity
Share capital
32.1 32.1
Share premium account 300.3 300.0
Own shares (2.5) (0.8)
Other reserves
1.7 1.5
Hedging and translation reserves 11.1 16.2
Retained earnings 89.4 72.0
Equity attributable to equity holders of the parent 432.1 421.0
Minority interest 1.4 1.0
Total equity 433.5 422.0
Consolidated cash flow statement
For the year ended 31 December 2005
2005 2004
£m £m
Net cash from operating activities 95.7 100.5
Investing activities
Purchases of property, plant and equipment (51.8) (37.5)
Proceeds on disposal of property, plant and equipment and intangible 8.6 3.6
assets
Purchases of intangible fixed assets (0.9) (0.5)
Acquisition of investment in an associate (2.3) (5.2)
Acquisition of subsidiary (31.8) (4.7)
Disposal of subsidiary 5.8 20.4
Net cash used in investing activities (72.4) (23.9)
Financing activities
Interest received 5.4 4.2
Interest paid (14.9) (12.9)
Dividends paid (19.5) (15.7)
Dividends paid to a minority shareholder (0.1) -
Repayments of bank loans (10.1) (9.2)
Payments of obligations under finance leases (1.6) (2.2)
New bank loans raised 0.1 5.1
New obligations under finance leases 0.1 0.4
Proceeds on issue of ordinary share capital 0.3 62.0
Own shares purchased (1.7) -
Net cash (used in)/from financing activities (42.0) 31.7
Net (decrease)/increase in cash and cash equivalents (18.7) 108.3
Cash and cash equivalents at beginning of year 138.7 29.8
Effect of foreign exchange rate changes 0.7 0.6
Cash and cash equivalents at end of year 120.7 138.7
Reconciliation of operating profit to net cash inflow from operating activities
2005 2004
£m £m
Operating profit from continuing operations 61.0 55.5
Operating loss from discontinued operations - (2.4)
Operating profit 61.0 53.1
Share of associates' interest and tax 0.8 -
Depreciation of property, plant and equipment 40.5 43.4
Amortisation of intangible assets 0.9 0.6
Impairment of goodwill 5.8 -
EBITDA 1 109.0 97.1
(Gain)/loss on disposal of property, plant and equipment (0.6) 0.5
Income from associates (1.6) -
Share-based payments 0.2 0.2
Operating cash flows before movements in working capital 107.0 97.8
(Increase)/decrease in inventories (2.1) 3.6
Increase in receivables (8.4) (2.1)
Increase in payables
2.8 7.1
Increase/(decrease) in provisions 4.7 (0.5)
Cash generated by operations 104.0 105.9
Income taxes paid (8.3) (5.4)
Net cash from operating activities 95.7 100.5
1 Earnings before interest, tax, depreciation and amortisation
1. Operating Profit
2005 2004
Existing Acquisitions Continuing Existing Acquisitions Continuing
operations operations operations operations
£m £m £m £m £m £m
Revenue 453.7 17.2 470.9 424.6 1.8 426.4
Cost of sales (301.4) (10.7) (312.1) (283.5) (1.1) (284.6)
Gross profit 152.3 6.5 158.8 141.1 0.7 141.8
Other operating income 2.5 0.1 2.6 - 0.3
0.3
Distribution (14.3) (0.4) (14.7) (13.6) (0.1) (13.7)
Impairment of goodwill (5.8) - (5.8) - - -
Other administration (77.7) (2.9) (80.6) (72.2) 0.7 (71.5)
expenses
Total administration (83.5) (2.9) (86.4) (72.2) 0.7 (71.5)
expenses
Other operating expenses - - - (1.4) - (1.4)
Operating profit before 57.0 3.3 60.3 54.2 1.3 55.5
income from associates
Income from associates 0.7 -
after interest and tax
Operating profit 61.0 55.5
2. Business and geographical
segments
Discontinued Operations
Heat Hot Testing Electro-plating PVD Dis-continued Head Office Continuing
Treatment Isostatic operations and operations
Pressing eliminations
2005 2005 2005 2005 2005 2005 2005 2005
£m £m £m £m £m £m £m £m
Revenue
External sales 349.2 35.2 86.5 1.5 - (1.5) - 470.9
Inter-segment - - 0.6 - - - (0.6) -
sales
Total revenue 349.2 35.2 87.1 1.5 - (1.5) (0.6) 470.9
Inter-segment sales are charged at prevailing market prices
Result
Segment result 43.3 9.5 16.3 - - - - 69.1
prior to amortisation
of acquired intangible
assets and impairment
of goodwill
Share of associate's 1.5 - - - - - - 1.5
operating profit
Unallocated corporate - - - - - - (2.8) (2.8)
expenses
44.8 9.5 16.3 - - - (2.8) 67.8
Amortisation of (5.8) - (0.2) - - - - (6.0)
acquired intangible
assets and impairment
of goodwill
Segment result 39.0 9.5 16.1 - - - (2.8) 61.8
Share of associates' (0.8) (0.8)
interest and tax
Operating profit - 61.0
continuing operations
Investment revenues 5.2
Finance costs (13.5)
Profit before tax 52.7
Tax (11.8)
Profit for year 40.9
2. Business and geographical segments
(continued)
Discontinued Operations
Heat Hot Testing Electro-plating PVD Discon-tinued Head office Continuing
Treatment Isostatic operations and operations
Pressing eliminations
2004 2004 2004 2004 2004 2004 2004 2004
£m £m £m £m £m £m £m £m
Revenue
External sales 328.7 32.1 65.6 19.1 11.7 (30.8) - 426.4
Inter-segment sales - - 0.5 - - - (0.5) -
Total revenue 328.7 32.1 66.1 19.1 11.7 (30.8) (0.5) 426.4
Inter-segment sales are charged at prevailing market prices
Result
Segment result prior to 38.8 7.1 12.4 (14.5) 0.9 13.6 - 58.3
amortisation of
acquired intangible
assets and impairment
of goodwill
Unallocated corporate - - - - - - (2.8) (2.8)
expenses
Operating profit - 38.8 7.1 12.4 (14.5) 0.9 13.6 (2.8) 55.5
continuing operations
Investment revenues 4.7
Finance costs (13.5)
Profit before tax 46.7
Tax (9.3)
Loss for the year from (9.0)
discontinued operations
Profit for year 28.4
2. Business and geographical segments
(continued)
Other information
Discontinued Operations
Heat Hot Testing Electroplating PVD Head office and Consolidated
Treatment Isostatic eliminations
Pressing
2005 2005 2005 2005 2005 2005 2005
£m £m £m £m £m £m £m
Capital additions 37.6 5.2 9.9 - - - 52.7
Depreciation and 32.2 4.3 4.9 - - - 41.4
amortisation
Impairment losses 5.8 - - - - - 5.8
Balance sheet
Assets:
Segment assets 726.8 86.5 117.6 - - (46.7) 884.2
Interests in associates 9.2 - - - - - 9.2
Consolidated total 736.0 86.5 117.6 - - (46.7) 893.4
assets
Liabilities:
Segment liabilities 399.1 28.0 69.3 - - (36.5) 459.9
Segment net assets 336.9 58.5 48.3 - - (10.2) 433.5
Discontinued Operations
Heat Hot Testing Electroplating PVD Head office and Consolidated
Treatment Isostatic eliminations
Pressing
2004 2004 2004 2004 2004 2004 2004
£m £m £m £m £m £m £m
Capital additions 30.6 1.2 5.6 - 0.6 (0.6) 37.4
Depreciation and 32.6 5.1 4.0 0.6 1.7 (2.3) 41.7
amortisation
Balance sheet
Assets:
Segment assets 700.4 77.1 77.3 - - 3.6 858.4
Interests in associates - - - - - - -
Consolidated total 700.4 77.1 77.3 - - 3.6 858.4
assets
Liabilities:
Segment liabilities 344.1 19.5 41.0 - - 31.8 436.4
Segment net assets 356.3 57.6 36.3 - - (28.2) 422.0
2. Business and geographical segments
(continued)
By geographical market
Sales revenue
2005 2004
£m £m
Europe 297.6 269.2
North America 166.7 152.1
Rest of world 6.6 5.1
470.9 426.4
Revenue from the Group's discontinued operations was derived principally from Europe (2005: £1.5 million, 2004: £30.8
million).
Carrying amount of
segment
Additions to property,
assets plant and equipment and
intangible assets
2005 2004 2005 2004
£m £m £m £m
Europe 293.0 275.8 31.1 26.2
North America 126.9 136.9 21.0 10.9
Rest of world 13.6 9.3 0.6 0.3
433.5 422.0 52.7 37.4
3. Taxation
Continuing Discontinued Operations Total
Operations
2005 2004 2005 2004 2005 2004
£m £m £m £m £m £m
Current taxation 9.4 8.8 - (4.6) 9.4 4.2
Deferred taxation 2.4 0.5 - - 2.4 0.5
11.8 9.3 - (4.6) 11.8 4.7
UK corporation tax is calculated at 30% (2004: 30%) of the estimated assessable profit for the year. Taxation
for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
There was no charge to current tax in 2005 relating to the Electroplating and PVD divisions, the facilities of
which were disposed of during 2004 and 2005. No material tax charge or credit arose on the disposal of the
relevant assets.
4. Earnings per share
From continuing and discontinued operations
The calculation of the basic and diluted earnings per share is based on the
following data:
2005 2004
£m £m
Earnings
Earnings for the purposes of basic earnings per share 40.7 28.2
being net profit attributable to equity holders of the
parent
Number of shares
Number Number
Weighted average number of ordinary shares for the 319,719,955 304,605,680
purposes of basic earnings per share
Effect of dilutive potential ordinary shares:
Share options 546,590 124,007
Weighted average number of ordinary shares for the 320,266,545 304,729,687
purposes of diluted earnings per share
From continuing operations
2005 2004
£m £m
Earnings
Net profit attributable to equity holders of the parent 40.7 28.2
Adjustments to exclude loss for the year from - 9.0
discontinued operations
Earnings from continuing operations for the purpose of 40.7 37.2
basic earnings per share excluding discontinued
operations
The denominators are the same as those detailed above for both basic and diluted earnings per
share from continuing and discontinued operations.
Earnings per share from continuing and discontinued
operations:
pence pence
Basic 12.7 9.3
Diluted 12.7 9.3
Loss per share from discontinued operations: pence pence
Basic - (2.9)
Diluted - (2.9)
4. Earnings per share (continued)
Earning per share from continuing operations:
pence pence
Basic 12.7 12.2
Diluted 12.7 12.2
Headline earnings
2005 2004
£m £m
Net profit attributable to equity holders of the parent 40.7 28.2
Add back:
Impairment of goodwill 5.8 -
Amortisation of acquired intangible fixed assets 0.2 -
Restructuring costs after tax - 7.3
Headline earnings 46.7 35.5
Earnings per share from headline earnings:
pence pence
Basic 14.6 11.7
Diluted 14.6 11.7
5. Accounting Policies
Basis of accounting
The financial statements of the Group have been prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted for use in the EU.
Bodycote International plc's consolidated financial statements were prepared in
accordance with United Kingdom Generally Accepted Accounting Principles (UK
GAAP) until 1 January 2005. UK GAAP differs in some areas from IFRS.
Whilst the financial information contained in this preliminary announcement has
been computed in accordance with International Financial Reporting Standards,
this announcement does not itself contain sufficient information to comply with
IFRS. The Company expects to publish full financial statements that comply with
IFRS in March 2006.
The Group has made use of the exemption available under IFRS 1 to only apply IAS
32, 'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial
Instruments: Recognition and Measurement' from 1 January 2005.
The financial statements have been prepared on the historic cost basis. The
principal accounting policies adopted are set out below.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and entities controlled by the Company (its subsidiaries) made up to
31 December each year. Control is achieved where the Company has the power to
govern the financial and operating policies of an investee entity so as to
obtain benefits from its activities.
On acquisition, the assets and liabilities and contingent liabilities of a
subsidiary are measured at their fair values at the date of acquisition. Any
excess of the cost of acquisition over the fair values of the identifiable net
assets acquired is recognised as goodwill. Any deficiency of the cost of
acquisition below the fair values of the identifiable net assets acquired (i.e.
discount on acquisition) is credited to profit and loss in the period of
acquisition. The interest of minority shareholders is stated at the minority's
proportion of the fair values of the assets and liabilities recognised.
Subsequently, any losses applicable to the minority interest in excess of the
minority interest are allocated against the interests of the parent.
The results of subsidiaries acquired or disposed of during the year are included
in the consolidated income statement from the effective date of acquisition or
up to the effective date of disposal, as appropriate.
Where necessary, adjustments are made to the financial statements of
subsidiaries to bring the accounting policies used into line with those used by
the Group.
All intra-group transactions, balances, income and expenses are eliminated on
consolidation.
Investments in associates
An associate is an entity over which the Group is in a position to exercise
significant influence, but not control or joint control, through participation
in the financial and operating policy decisions of the investee.
The results and assets and liabilities of associates are incorporated in these
financial statements using the equity method of accounting. Investments in
associates are carried in the balance sheet at cost as adjusted by
post-acquisition changes in the Group's share of the net assets of the
associate, less any impairment in the value of individual investments. Losses
of the associates in excess of the Group's interest in those associates are not
recognised.
Any excess of the cost of acquisition over the Group's share of the fair values
of the identifiable net assets of the associate at the date of acquisition is
recognised as goodwill. Any deficiency of the cost of acquisition below the
Group's share of the fair values of the identifiable net assets of the associate
at the date of acquisition (i.e. discount on acquisition) is credited in profit
and loss in the period of acquisition.
Where a group company transacts with an associate of the Group, profits and
losses are eliminated to the extent of the Group's interest in the relevant
associate. Losses may provide evidence of an impairment of the asset
transferred, in which case appropriate provision is made for impairment.
Non-current assets held for sale
Non-current assets (and disposal groups) classified as held for sale are
measured at the lower of carrying amount and fair value less costs to sell.
Non-current assets and disposal groups are classified as held for sale if their
carrying amount will be recovered through a sale transaction rather than through
continuing use. This condition is regarded as met only when the sale is highly
probable and the asset (or disposal group) is available for immediate sale in
its present condition. Management must be committed to the sale which should be
expected to qualify for recognition as a completed sale within one year from the
date of classification.
Goodwill
Goodwill arising on consolidation represents the excess of the cost of
acquisition over the Group's interest in the fair value of the identifiable
assets and liabilities of a subsidiary, associate or jointly controlled entity
at the date of acquisition.
Goodwill is recognised as an asset and reviewed for impairment at least
annually. Any impairment is recognised immediately in profit or loss and is not
subsequently reversed.
On disposal of a subsidiary, associate or jointly controlled entity, the
attributable amount of goodwill is included in the determination of the profit
or loss on disposal.
Goodwill arising on acquisitions before the date of transition to IFRSs has been
retained at the previous UK GAAP amounts, subject to being tested for impairment
at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has
not been reinstated and is not included in determining any subsequent profit or
loss on disposal.
Revenue recognition
Revenue is measured at the fair value of the consideration received or
receivable and represents amounts receivable for goods and services provided in
the normal course of business, net of discounts, VAT and other sales-related
taxes.
Interest income is accrued on a time basis, by reference to the principal
outstanding and at the effective interest rate applicable, which is the rate
that exactly discounts estimated future cash receipts through the expected life
of the financial asset to that asset's net carrying amount.
Dividend income from investments is recognised when the shareholder's rights to
receive payment have been established.
The Group as a Lessee
Leases are classified as finance leases whenever the terms of the lease transfer
substantially all the risks and rewards of ownership to the lessee. All other
leases are classified as operating leases.
Assets held under finance leases are recognised as assets of the Group at their
fair value or, if lower, at the present value of the minimum lease payments,
each determined at the inception of the lease. The corresponding liability to
the lessor is included in the balance sheet as a finance lease obligation.
Lease payments are apportioned between finance charges and reduction of the
lease obligation so as to achieve a constant rate of interest on the remaining
balance of the liability. Finance charges are charged directly against income.
Rentals payable under operating leases are charged to income on a straight-line
basis over the term of the relevant lease.
Benefits received and receivable as an incentive to enter into an operating
lease are also spread on a straight-line basis over the lease term.
The Group as a Lessor
Amounts due from lessees under finance leases are recorded as receivables at the
amount of the group's net investment in the leases. Finance lease income is
allocated to accounting periods so as to reflect a constant periodic rate of
return on the group's net investment outstanding in respect of the leases.
Foreign currencies
Transactions in currencies other than pounds sterling are recorded at the rates
of exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities that are denominated in foreign currencies
are retranslated at the rates prevailing on the balance sheet date. Gains and
losses arising on retranslation are included in net profit or loss for the
period.
On consolidation, the assets and liabilities of the Group's overseas operations
are translated at exchange rates prevailing on the balance sheet date. Income
and expense items are translated at the average exchange rates for the period
unless exchange rates fluctuate significantly. Exchange differences arising, if
any, are classified as equity and transferred to the Group's translation
reserve. Such translation differences are recognised as income or as expenses
in the period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate. The Group has elected to treat goodwill and
fair value adjustments arising on acquisitions before the date of transition to
IFRSs as sterling-denominated assets and liabilities.
Borrowing costs
Borrowing costs are recognised in profit or loss in the period in which they are
incurred.
Government grants
Government grants relating to property, plant and equipment are treated as
deferred income and released to profit and loss over the expected useful lives
of the assets concerned.
Operating profit
Operating profit is stated after charging restructuring costs, goodwill
impairment, amortisation of acquired intangible assets and after the post-tax
share of results of associates but before investment income and finance costs.
Retirement benefit costs
Payments to defined contribution retirement benefit schemes are charged as an
expense as they fall due. Payments made to state-managed retirement benefit
schemes are dealt with as payments to defined contribution schemes where the
Group's obligations under the schemes are equivalent to those arising in a
defined contribution retirement benefit scheme.
For defined benefit retirement benefit schemes, the cost of providing benefits
is determined using the Projected Unit Credit Method, with actuarial valuations
being carried out at each balance sheet date. Actuarial gains and losses are
recognised in full in the period in which they occur. They are recognised
outside profit or loss and presented in the statement of recognised income and
expense.
Past service cost is recognised immediately to the extent that the benefits are
already vested, and otherwise is amortised on a straight-line basis over the
average period until the benefits become vested.
The retirement benefit obligation recognised in the balance sheet represents the
present value of the defined benefit obligation, as reduced by the fair value of
scheme assets.
Taxation
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the income statement because it
excludes items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or deductible. The
Group's liability for current tax is calculated using tax rates that have been
enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are generally recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if the
temporary difference arises from goodwill or from the initial recognition (other
than in a business combination) of other assets and liabilities in a transaction
that affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates, and interests in joint
ventures, except where the Group is able to control the reversal of the
temporary difference and it is probable that the temporary difference will not
reverse in the foreseeable future.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised. Deferred tax is
charged or credited in the income statement, except when it relates to items
charged or credited directly to equity, in which case the deferred tax is also
dealt with in equity.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation
and any recognised impairment loss.
Depreciation is charged so as to write off the cost of assets, other than land,
over their estimated useful lives, using the straight-line method, on the
following bases:
Freehold buildings 2%
Leasehold property over the period of the lease
Fixtures and fittings 10% - 20%
Plant and machinery 5% - 20%
Motor vehicles 20% - 33%
Assets held under finance leases are depreciated over their expected useful
lives on the same basis as owned assets or, where shorter, over the term of the
relevant lease.
The gain or loss arising on the disposal or retirement of an asset is determined
as the difference between the sales proceeds and the carrying amount of the
asset and is recognised in income.
Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any indication that
those assets have suffered an impairment loss. If any such indication exists,
the recoverable amount of the asset is estimated in order to determine the
extent of the impairment loss (if any). Where the asset does not generate cash
flows that are independent from other assets, the Group estimates the
recoverable amount of the cash-generating unit to which the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in
use. In assessing value in use, the estimated future cash flows are discounted
to their present value using a discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset for
which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to
be less than its carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable amount. An impairment loss
is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the asset
(cash-generating unit) is increased to the revised estimate of its recoverable
amount, but so that the increased carrying amount does not exceed the carrying
amount that would have been determined had no impairment loss been recognised
for the asset (cash-generating unit) in prior years. A reversal of an
impairment loss is recognised as income immediately.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost
comprises direct materials and, where applicable, direct labour costs and those
overheads that have been incurred in bringing the inventories to their present
location and condition. Net realisable value represents the estimated selling
price less all estimated costs of completion and costs to be incurred in
marketing, selling and distribution.
Financial instruments
Financial assets and financial liabilities are recognised on the Group's balance
sheet when the Group becomes a party to the contractual provisions of the
instrument.
Trade receivables
Trade receivables do not carry any interest and are stated at their nominal
value as reduced by appropriate allowances for estimated irrecoverable amounts.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangements entered into. An equity instrument is
any contract that evidences a residual interest in the assets of the Group after
deducting all of its liabilities.
Bank borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds
received, net of direct issue costs. Finance charges, including premiums
payable on settlement or redemption and direct issue costs, are accounted for on
an accrual basis to the profit and loss account using effective interest method
and are added to the carrying amount of the instrument to the extent that they
are not settled in the period in which they arise.
Trade payables
Trade payables are not interest-bearing and are stated at their nominal value.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received,
net of direct issue costs.
Hedge accounting
The Group's activities expose it primarily to the financial risks of changes in
foreign currency exchange rates. The Group uses foreign currency debt to hedge
its exposure to changes in the underlying net assets of overseas operations
arising from exchange rate movements.
Gains and losses arising from the retranslation of foreign currency debt that is
designated and effective as a hedge of the group's investment in overseas
operations are recognised directly in equity and the ineffective portion is
recognised immediately in the income statement.
Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated, or exercised, or no longer qualifies for hedge accounting.
Provisions
Provisions for restructuring costs are recognised when the group has a detailed
formal plan for the restructuring that has been communicated to affected
parties.
During the year, the Group changed the classification of certain restructuring
and environmental liabilities from long-term payables to provisions and
accordingly the comparative information at 31 December 2004 has been restated.
This has reduced long-term payables at that date by £6.7 million and increased
provisions by the same amount. In the opinion of the directors, this a more
appropriate presentation of these liabilities.
Share-based payments
The Group has applied the requirements of IFRS 2 Share-based Payments. In
accordance with the transitional provisions, IFRS 2 has been applied to all
grants of equity instruments after 7 November 2002 that were unvested as of 1
January 2005.
The Group issues equity-settled share-based payments to certain employees.
Equity-settled share-based payments are measured at fair value at the date of
grant. The fair value determined at the grant date of the equity-settled
share-based payments is expensed on a straight-line basis over the vesting
period, based on the group's estimate of shares that will eventually vest.
Fair value is measured by use of a Black-Scholes model.
6. 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 2005 or 2004 but
is derived from those financial statements. Statutory financial statements for
2004 were prepared under UK GAAP and have been delivered to the Register of
Companies. Those for 2005 will be delivered following the company's annual
general meeting, which will be convened at 3 pm on 23 May 2006. 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.
This report was approved by the Board of Directors on 28 February 2006.
This information is provided by RNS
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