Interim Results
Bodycote International PLC
28 August 2002
EMBARGOED UNTIL 0700 HRS : 28 AUGUST 2002
BODYCOTE INTERNATIONAL PLC
INTERIM RESULTS ANNOUNCEMENT
FOR THE HALF YEAR TO 30 JUNE 2002
H I G H L I G H T S
• Sales £225.3m, stable versus H2 2001
• Operating cash inflow of £16m
• Capital expenditure reduced to 1.3x depreciation
• Merged 9 plants, 9 more to follow
SUMMARY OF RESULTS Half year to Half year to
30 June 2002 30 June 2001
As restated
Turnover £225.3m £251.7m
EBITDA* £47.4m £69.8m
Operating Profit * £26.8m £48.7m
Profit before taxation and exceptional items * £21.3m £41.5m
Headline earnings per share 5.8p 11.9p
Dividend per share 2.25p 2.25p
* Expressed before amortisation of goodwill and exceptional items
Commenting on the results, John Hubbard, Chief Executive said:
'The general downturn in demand has affected customers in every sector of our
business. We have responded by reducing costs and reigning back capital
expenditure to improve capacity utilisation.
Sales have now stabilised, and I am confident that the measures we are
continuing to implement will ensure that Bodycote emerges far stronger and more
responsive as markets improve. Our medium term strategy is to focus operations
on our higher value added segments and further capitalise on outsourcing
opportunities. All our actions are designed to improve return on capital
employed.
Bodycote is the leading science based, metallurgical service company, leveraging
our technical capabilities into all relevant market sectors by enhancing the
engineering performance of materials'.
INTERIM STATEMENT
Introduction
As anticipated in our AGM statement, the six months to 30 June 2002 was a period
of significantly lower demand than the first half of 2001. There was excess
capacity in the market causing pricing pressures and a shift in our sales mix
toward lower value added market segments. Against this backdrop a number of
measures were taken to reduce costs and improve capacity utilisation. Moreover,
several important initiatives were launched to ensure that the Group will be
more responsive to changing market patterns in future years. The full benefit
of these measures and initiatives will not be felt until next year.
Results
Sales in the first half, as previously indicated, were down 10% (to £225.3m)
compared to the same period last year. However there has been no material
deterioration between the second half of 2001 and the first half 2002 as monthly
sales have been stable. Discussions with customers indicate that our overall
market share is at least being maintained. EBITDA was £47.4m (before
exceptional items) compared to £69.8m in 2001. Operating profit (before
goodwill and exceptional items) was £26.8m versus £48.7m in the same period in
2001. At the AGM we indicated that we expected to incur exceptional charges of
approximately £18m; we have taken £10.2m of this in the first half (with the
balance to come in the second half) to deliver annualised cost savings in excess
of £10m, which will begin to be realised in the second half of this year.
Headline earnings per share are 5.8p, down 51%.
Strategy
Since being appointed Chief Executive at the beginning of the year, I have been
undertaking a detailed review of the Group's strategic direction, and this
process continues. Our immediate focus is to improve the performance of
existing operations. I am convinced that Bodycote has a unique market position
providing high value-added technical services for highly engineered products
particularly to the Automotive, Aerospace, Industrial Gas Turbine (IGT), Oil and
Gas, Tooling and Defence sectors. The Group will continue to develop this
model.
Bodycote is the largest independent commercial provider of Heat Treating,
HIPping and Materials Testing in Europe and North America. These market leading
positions provide a platform from which the Group can leverage its technical
know-how to deliver further value added services to its broad customer base,
thereby providing the basis for delivering to shareholders sustainable and
improved returns.
The Board foresees that there will be considerable structural change in the
markets that we serve as manufacturers reassess the real cost of maintaining
in-house capacity for services that Bodycote can perform more efficiently. This
will result in significant revenue growth opportunities in the years to come.
We continue to evaluate appropriate bolt on acquisitions in areas which will
strengthen our performance and position in the market place.
Initiatives undertaken
The Strategic Business Units (SBUs) are being more closely aligned through a new
reporting structure with one person responsible for all commercial aspects of
operations in each geographic area. Key objectives are to share technical
knowledge, customer opportunities, administrative functions and gain purchasing
economies. In March we created a Senior Operating Board whose principal
responsibility is to provide more direct leadership and effective accountability
for the performance of each SBU and plant within the Group. This Board has also
been tasked with assessing competing capital expenditure proposals for
submission to the Main Board, which is responsible for ensuring an adequate
return on the capital that we deploy.
In speciality areas such as HIP and Physical Vapour Deposition (PVD) we now have
product managers focusing on delivering efficient and consistent technological
solutions across all geographies. Individual plants can now share the Group's
collective knowledge as well as offering to our customers the Group's wide
expertise by using our web based enquiry system.
Our Coatings strategy is focusing on those operations providing value added
service in the Group's key market sectors rather than commodity offerings. The
scope of this SBU will evolve as we further evaluate opportunities to develop
this business.
We are continuing to merge administrative functions into Shared Service Centres
by geography. Despite having many legacy software systems we are now gathering
and analysing information from all plants on a more timely and consistent basis
thereby allowing us to use Key Performance Indicators (KPIs) to benchmark and
drive improvements across the business.
We are implementing, where possible, a more flexible staffing scheme in
continental Europe in order to react quickly to fluctuating customer demands.
Our remuneration and incentive programme is currently being reviewed to
reinforce our drive for a consistency of standards and performance across all
our plants.
Rationalisation measures
Our plant network has been reviewed to ensure excellent local service without
unnecessary overlap. During the first six months of the year, we merged nine
plants. We anticipate merging a further nine plants in the next twelve months
the charge for which will be borne in the second half of 2002. This
reorganisation impacts all geographic areas. Capital expenditure will be lower
in 2002 than 2001 and our current intention is that it will be lower again in
2003. Under-utilised equipment is being redeployed around the Group and we are
also looking to sell surplus property. Our priority is to improve our return on
capital before investing in significant new capacity.
Operational review
Heat Treatment sales and operating profits were £160.4m and £20.0m respectively
in the first half of 2002 versus £163.2m and £24.6m in the second half of 2001.
North America exhibited good cost control although sales and operating profit
fell £4.2 m and £1.7m respectively. Central Europe disappointed with flat sales
and operating profit down £1.3m; Switzerland, Austria and Liechtenstein suffered
from a sharp decline in sales and operating profit. The French and Belgian
operations, with sales up £1.1m but operating profit down £0.2m, have more to
achieve in reducing costs, especially people related. The UK was particularly
affected by soft demand in the Aerospace and IGT markets with both sales and
operating profit off £1.2m. The Nordic group experienced weak demand and
changes in mix towards lower margin markets but overall succeeded in controlling
costs, with sales up £1.2m but operating profit off £0.2m.
HIP sales and operating profits were £15.0m and £2.5m respectively in the first
half of 2002 compared to £15.4m and £3.0m in the second half of 2001. Sales are
suffering from downturns of approximately 15% in the two main markets of
Aerospace and IGT. This is exacerbated by low levels of utilisation at the
rebuilt Andover plant and additional Group capacity coming on line in Europe.
However, there is consolidation planned to improve efficiency.
Materials Testing sales and operating profits were £26.2m and £4.6m respectively
in the first half of 2002; in the second half of 2001 they were £25.9m and
£4.3m. We successfully secured several outsourcing agreements, which included
additional engine testing programmes for a leading North American automotive
manufacturer. Strong performance in Oil and Gas was offset by weakness in
Aerospace and IGT. General Electric aerospace and NADCAP Radiography approvals
have strengthened our position in Europe. We are well positioned for future
growth and profitability.
Coatings in Europe continues to be our most challenging business, where there
has been a significant drop in demand notably in our telecommunications related
customer base. Sales and operating profits of £23.7m and £0.4m respectively in
the first half of 2002 in comparison with £23.2m and £0.6m in the second half of
2001. The new facility in Gothenburg Sweden, which was approved in the second
half of 2000 to address the opportunity in the telecommunications market, will
be in production in the second half. We anticipate it may take a further two
years before we see an acceptable level of profitability.
In the operational review all references to operating profit are stated before
goodwill amortisation and exceptional items.
Balance Sheet and Cash Flow
Group net borrowings at 30 June 2002 stood at £238.5m (2001: £234.5m) which
represents gearing of 60% (2001: 62%). Whilst the Board would not wish to see
gearing materially increase it is comfortable with the current level. Interest
payments are 4.1 times covered by pre-exceptional operating profits (2001:
6.2x). Operating cash flow, a particular target for the Group, was a positive
£15.5m (2001: £22.2m). Capital expenditure was £27.4m (2001: £28.6m) and the
ratio of capital expenditure to depreciation was 1.3x (2001: 1.4x). In addition
to our equipment renewal programme, some major projects being completed this
year are the Gothenburg, Sweden coatings facility, an anodising plant at
Aljarvi, Finland, large HIP and Densal II units at Hereford, UK and
additional PVD equipment for the emerging tribological market. The Group
continues to focus on the control of working capital. At 30 June debtor days
stood at 67 compared to more than 70 days in 2000 and 2001 with further
reductions anticipated. All businesses are expected to minimise inventories and
negotiate improved payment terms with suppliers. The effective tax rate for the
Group was 27% (2001: 27%) and this is not expected to rise further. As the
Group has minimal cross border trading, the transaction effects of currency
changes have been immaterial. The movement in exchange rates came late in the
half and because the Group's business is well matched between US dollars and
Euros and with these currencies moving in opposite directions, the translation
impact was negligible.
Dividend
The directors have declared an unchanged interim dividend of 2.25 pence per
share. This will be paid on 2 January 2003 to all shareholders on the register
at the close of business on 29 November 2002.
Outlook
Bodycote's geographic spread of operations and diversity of markets has
historically helped to deliver a robust and predictable performance. The global
drop in demand has affected all sectors of our business but we are continuing to
restructure the company to operate effectively and efficiently in this
environment. The downturn has also prompted an increase in the level of
enquiries for outsourcing in Heat Treatment, Coatings and Materials Testing,
although consummation of these agreements can take a significant length of time.
July and August are traditionally soft months for the Group due to the impact of
customers' holidays. 2002 has been no exception to this pattern. In contrast,
the September to November period is typically the strongest part of the year for
Bodycote. Indications from our customers are mixed but overall it is unlikely
that there will be a significant upward movement in demand for their products
and hence our services.
Bodycote is the leading business to business, science based, service company
leveraging our metallurgical capabilities into essentially every sector by
enhancing the engineering performance of materials. The medium term strategy is
to execute the key initiatives outlined above and to focus operations on our
higher value added segments, and further capitalise on outsourcing
opportunities, all of which will improve the return on capital employed. The
management is instituting the important changes necessary, and is committed to
delivering results. We are confident that the Group will emerge far stronger
and more flexible as markets improve.
The confidence and dedication exhibited by our employees in these challenging
times is much appreciated.
John D Hubbard
CEO
28 August 2002
Unaudited consolidated profit and loss account
Year to Half year to Half year to
31 December 2001 30 June 2002 30 June 2001
As restated
£m £m £m
479.4 Turnover - continuing operations 225.3 251.7
Operating profit
80.2 - Trading 26.8 48.7
- - Operating exceptional items arising from (10.2) -
restructuring and asset write downs
(8.1) - Goodwill amortisation (4.3) (3.8)
72.1 Operating profit - continuing operations 12.3 44.9
Exceptional items
(1.9) Loss on disposal of discontinued operations - -
(0.8) Loss on disposal of tangible fixed assets of - -
continuing operations
69.4 Profit on ordinary activities before interest and 12.3 44.9
taxation
(13.9) Net interest payable (5.5) (7.2)
55.5 Profit on ordinary activities before taxation 6.8 37.7
(18.0) Tax on profit on ordinary activities (3.0) (11.1)
37.5 Profit on ordinary activities after taxation 3.8 26.6
(0.1) Minority interests - equity - -
37.4 Profit for the financial period 3.8 26.6
(15.6) Dividends - paid and proposed (5.8) (5.8)
21.8 Retained (loss)/profit for the period (2.0) 20.8
Earnings per share
18.2p Headline 5.8p 11.9p
14.6p Basic 1.5p 10.4p
14.6p Basic - diluted 1.5p 10.4p
Unaudited consolidated balance sheet
As at As at As at
31 December 2001 30 June 2002 30 June
2001
£m £m As restated
£m
Fixed assets
154.4 Intangible assets 151.7 156.7
496.6 Tangible assets 498.7 475.5
2.3 Investments 1.9 2.1
653.3 652.3 634.3
Current assets
17.7 Stocks 19.3 16.1
118.2 Debtors 120.0 138.2
52.3 Cash at bank and in hand 60.7 66.6
188.2 200.0 220.9
Creditors
(197.2) Amounts falling due within one year (208.9) (208.6)
(9.0) Net current (liabilities)/ assets (8.9) 12.3
644.3 Total assets less current liabilities 643.4 646.6
Creditors
(212.4) Amounts falling due after more than one year (203.3) (225.6)
(41.0) Provisions for liabilities and charges (42.7) (39.7)
390.9 Net assets 397.4 381.3
Capital and reserves
25.6 Called-up share capital 25.6 25.6
244.2 Share premium account 244.2 244.2
2.7 Revaluation reserve 2.1 2.7
(10.1) Currency and other reserve (0.5) (17.3)
127.8 Profit and loss account 125.8 125.9
390.2 Shareholders' funds - equity 397.2 381.1
0.7 Minority interests - equity 0.2 0.2
390.9 397.4 381.3
Unaudited consolidated cash flow statement
Year to Half year to Half year to
31 December 2001 30 June 30 June 2001
2002
£m £m £m
110.5 Net cash inflow from operating activities (Note A) 42.9 50.8
(13.9) Return on investments and servicing of finance (5.5) (5.5)
(24.1) Taxation (5.3) (10.7)
(62.7) Capital expenditure and financial investment (27.4) (28.6)
(105.5) Acquisitions and disposals (Note B) (0.6) (96.4)
(9.9) Equity dividends paid (5.8) (5.5)
(105.6) Cash outflow before management of liquid resources (1.7) (95.9)
and financing
37.6 Management of liquid resources (0.1) (22.6)
58.8 Financing 3.7 70.2
(9.2) Increase/(decrease) in cash in the period 1.9 (48.3)
Reconciliation of net cash flow to movement in net debt
(9.2) Increase/(decrease) in cash in the period 1.9 (48.3)
(58.6) Cash inflow from increase in debt and lease (3.6) (70.0)
financing
(37.6) Cash outflow/(inflow) from movement in liquid 0.1 22.6
resources
(105.4) Change in net debt resulting from cash flows (1.6) (95.7)
(38.9) Debt acquired with subsidiaries - (38.7)
(4.2) Currency adjustments 5.1 (6.6)
(148.5) Movement in net debt position 3.5 (141.0)
(93.5) Net debt position at 1 January (242.0) (93.5)
(242.0) Net debt position at end of period (238.5) (234.5)
Year to Half year to Half year to
31 December 2001 30 June 30 June 2001
2002
£m £m £m
Note A: Reconciliation of operating profit to net cash inflow from operating activities
72.1 Operating profit 12.3 44.9
39.5 Depreciation charges 20.6 21.1
8.1 Amortisation of goodwill 4.3 3.8
(1.4) Profit on sale of tangible fixed assets (0.4) (0.6)
- Write off of tangible fixed assets 6.2 -
(4.3) Increase in stocks (1.4) (2.9)
10.3 (Increase)/decrease in debtors (0.9) (5.5)
(13.8) Increase/(decrease) in creditors 2.2 (10.0)
110.5 Net cash inflow from operating activities 42.9 50.8
Note B: Acquisitions and disposals
2.1 Net cash acquired with subsidiaries - 0.8
(105.7) Purchase of subsidiary undertakings (0.1) (97.2)
- Purchase of minority shareholders' interest (0.5) -
(1.9) Sale of discontinued operations - -
(105.5) Net cash outflow from acquisitions and disposals (0.6) (96.4)
Analysis of net debt position
As at As at As at
31 December 2001 30 June 2002 30 June 2001
£m £m £m
37.1 Cash at bank and in hand 45.6 36.4
15.2 Short term deposits 15.1 30.2
(14.5) Bank overdrafts (20.8) (8.3)
(74.0) Bank loans due within one year (81.7) (76.6)
(200.3) Bank loans due after one year (191.3) (210.4)
(1.0) Finance leases due within one year (1.0) (0.9)
(4.5) Finance leases due after one year (4.4) (4.9)
(242.0) (238.5) (234.5)
Unaudited consolidated statement of total recognised gains and losses
Year to Half year to Half year to
31 December 2001 30 June 2002 30 June 2001
As restated
£m £m £m
37.4 Profit for the financial period 3.8 26.6
0.4 Currency adjustments 9.6 (7.7)
- Unrealised deficit on revaluation of tangible fixed (0.6) -
assets
Total recognised gains and losses relating to the
period
37.8 12.8 18.9
(11.6) Prior year adjustment - (11.6)
26.2 Total gains and losses recognised since last report and 12.8 7.3
financial statements
Reconciliation of movements in shareholders' funds
37.4 Profit for the financial period 3.8 26.6
(15.6) Dividends paid and proposed (5.8) (5.8)
21.8 Retained (loss)/ profit for the financial period (2.0) 20.8
0.4 Currency adjustments 9.6 (7.7)
0.3 New shares issued - 0.3
- Unrealised deficit on revaluation of tangible fixed (0.6) -
assets
22.5 Net movement in shareholders' funds 7.0 13.4
379.3 Shareholders' funds at beginning of period (as previously 390.2 379.3
stated)
(11.6) Prior year adjustment - (11.6)
367.7 Shareholders' funds at beginning of period (as restated) 390.2 367.7
390.2 Shareholders' funds at end of period 397.2 381.1
Notes to the financial statements
1. Segmental analysis by activity
Year to Half year to Half year to
31 December 2001 30 June 2002 30 June 2001
£m £m £m
Turnover
344.9 Heat treatment 160.4 181.7
32.0 Hot isostatic pressing 15.0 16.6
52.3 Materials testing 26.2 26.4
50.2 Metallurgical coatings 23.7 27.0
479.4 225.3 251.7
Profit and loss
60.8 Heat treatment 20.0 36.2
7.3 Hot isostatic pressing 2.5 4.3
9.9 Materials testing 4.6 5.6
3.8 Metallurgical coatings 0.4 3.2
81.8 27.5 49.3
(1.6) Head Office expenses (0.7) (0.6)
Operating profit before amortisation of goodwill and
80.2 operating exceptional items 26.8 48.7
(13.9) Net interest payable (5.5) (7.2)
66.3 Profit on ordinary activities before amortisation of 21.3 41.5
goodwill and exceptional items
(8.1) Amortisation of goodwill (4.3) (3.8)
58.2 Profit on ordinary activities before exceptional items 17.0 37.7
- Operating exceptional items (10.2) -
(2.7) Exceptional items - -
55.5 Profit on ordinary activities before taxation 6.8 37.7
Notes to the financial statements
2. The interim financial information has been prepared on the
basis of the accounting policies set out in the group's statutory accounts for
the year ended 31 December 2001. The comparative figures for 30 June 2001 have
been restated to reflect the implementation of FRS19 Deferred Tax in the period
ended 30 June 2001. The effects of the change in policy on net assets at 30
June 2001 is a decrease of £11.6m
3. The calculation of basic earnings per share is based on
earnings of £3.8 million (2001: £26.6 million) and on the average number of
shares in issue during the half year, amounting to 256,283,201 (2001:
256,153,632). Headline earnings per share have been calculated on profits of
£14.8 million (2001: £30.4 million), which are stated before amortisation of
goodwill and the post tax impact of exceptional items. Diluted earnings per
share calculated in accordance with FRS14 were 1.5p (2001: 10.4p) based on a
diluted weighted average share capital of 256,513,023 shares (2001:
256,429,601).
4. The charge for taxation on the profit for the period is
based on the estimated effective rate for the full year. The amount includes
£0.7 million (2001: £9.4 million) relating to tax on overseas activities.
5. This interim report does not comprise the group's
statutory accounts. The results for the year ended 31 December 2001 are
extracts from the published accounts as filed with the Registrar of Companies.
These were audited and reported upon without qualification by Arthur Andersen
and did not contain a statement under section 237 (2) or (3) of the Companies
Act 1985.
6. Copies of this report and the last Annual Report and
Accounts are available from the Secretary, Bodycote International plc, Hulley
Road, Hurdsfield, Macclesfield, Cheshire SK10 2SG, and can each be downloaded or
viewed via the group's website at www.bodycote.com
Independent Review Report to Bodycote International plc by Deloitte & Touche
Chartered Accountants
• Introduction
We have been instructed by the company to review the financial information for
the six months ended 30 June 2002, which comprises the consolidated profit and
loss account, the consolidated balance sheet, the consolidated cash flow
statement, the analysis and reconciliation of net debt, notes A and B, the
consolidated statement of total recognized gains and losses, the reconciliation
of movement in shareholders' funds and related notes 1 to 6. We have read the
other information contained in the interim report and considered whether it
contains any apparent misstatements or material inconsistencies with the
financial information.
• Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
• Review work performed
We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A
review consists principally of making enquiries of group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with United Kingdom Auditing Standards and therefore
provides a lower level of assurance than an audit. Accordingly we do not
express an audit opinion on the financial information.
• Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2002.
Enquiries: Wednesday 28 August 2002 : 0900 hrs - 1130 hrs Telephone: 0207 831 3113
John Hubbard, Chief Executive
David Landless, Group Finance Director
Website: http://www.bodycote.com
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