Final Results

Cookson Group PLC 13 March 2007 13 March 2007 ANNOUNCEMENT OF 2006 PRELIMINARY RESULTS STRONG RESULTS DEMONSTRATE PROGRESS IN IMPLEMENTING STRATEGIC PLAN Highlights â€¢ Strong results demonstrate progress in implementing Strategic Plan â€¢ Continued transformation of Group's profile, with more profitable and less cyclical mix of continuing operations â€¢ Continuing operations (now excludes Monofrax: 2006 revenue Â£27 million; trading profit Â£4.0 million): - Revenue of Â£1,590 million, up 9% - Trading profit of Â£150 million, up 20% - Return on sales up 0.9 percentage points to 9.5% â€¢ Headline PBT and EPS up 30% and 27% respectively â€¢ Net debt of Â£181 million, down Â£112 million â€¢ Pension deficit of Â£155 million, down Â£70 million â€¢ Final dividend of 7 pence, up 40% 2006 2005(3) Improvement vs. 2005(4) Continuing Operations(1) Revenue Â£1,590m Â£1,457m +9% Trading profit(2) Â£150.3m Â£124.9m +20% Return on sales 9.5% 8.6% +0.9 pts Total Operations Revenue Â£1,661m Â£1,635m +2% Trading profit2 Â£158.2m Â£134.7m +17% Return on sales 9.5% 8.2% +1.3 pts Profit before tax - headline(2) Â£131.2m Â£101.1m +30% - basic Â£113.5m Â£78.5m +45% Earnings per share - headline(2) 46.6p 36.8p +27% - basic 32.8p (5.8)p Dividends per share - interim 3.0p - - final 7.0p 5.0p +40% Free cash flow(2) Â£64.5m Â£42.9m up Â£21.6m Net debt Â£180.5m Â£292.3m down Â£111.8m (1) Continuing operations exclude the trading results of the Laminates, Monofrax and SCS businesses. (2) Refer to the attached Income Statement and Statement of Cash Flows for definitions. (3) Note 2 to the accounts attached details the restatements made to the 2005 comparative information, none of which impacts net cash flows, financial position or total recognised income and expense. (4) For revenue and trading profit the impact of changes in exchange rates between 2005 and 2006 has not been material and, as a result, the percentage improvement between 2005 and 2006 is the same at both reported and constant exchange rates. Commenting on the Group's results and outlook, Nick Salmon, Chief Executive, said: 'The results for 2006 demonstrate the progress achieved so far in the implementation of the Strategic Plan, through which we continue to transform the profile of the Group. 'Our programme of exiting commodity activities, either by disposal or closure, while improving our competitiveness in mature markets and growing strongly in emerging markets, is resulting in an intrinsically more profitable and less cyclical mix of continuing operations. End-market growth for our principal activities has been sound, resulting in good organic revenue growth. Both our net debt and the pension deficit have also reduced significantly during the year. 'Our main end-markets, global steel production and electronics, are forecast to continue to grow ahead of GDP over the medium-term. Trading over the first two months of 2007 has continued the positive trends from 2006. All three divisions have detailed plans to deliver strong organic earnings growth through 2007, 2008 and beyond. However, the recent weakening of the US dollar, through its translation impact on our sterling results, would partially reduce this growth if it were to continue. Based on these factors we expect to continue to deliver further improvement in our underlying performance.' OVERVIEW Summary of Group results Revenue from continuing operations of Â£1,590 million was up 9% on 2005 and trading profit rose 20% to Â£150.3 million. Headline profit before tax increased by 30% and headline earnings per share rose 27% to 46.6 pence. Net debt at 31 December 2006 was Â£181 million, down Â£112 million from a year earlier due to good cash generation, receipt of disposal proceeds and favourable foreign exchange movements. The worldwide pension deficit also reduced by Â£70 million to Â£155 million, which reflects the accelerated contribution programme in the UK and the freezing of the main US defined benefit plans. Ceramics division The Ceramics division had another outstanding year, with trading profit up 22% over 2005 driven by revenue growth in our high-margin flow control and fused silica product lines and good progress in our strategy to improve margins in the linings business. Global steel production, our main end-market, grew 9% in 2006. During the year projects were launched to build additional production facilities in China, Poland and Mexico and to close two factories in the UK and two in the US, while making further cost reductions in the global management structure. Two non-core businesses were disposed of in 2006, Ceramic Fibres and Carbon Blocks, and a further two businesses in early 2007, Monofrax fused-cast refractories and a small US refractory brick business. Electronics division Worldwide demand for electronics remained buoyant, which supported the Electronics division in delivering an 11% increase in trading profit, with good contributions from several of our new product lines. In mid-year, the closure of the low-margin Industrial Metals activity in Europe was completed and, later in the year, two substantial restructuring projects were launched for completion by the end of 2007. In the US, two Assembly Materials factories will be closed with some production relocating to Mexico. In the Chemistry sector in Europe, facilities are being consolidated by closing factories in Spain and Italy, while expanding production in Germany and the Netherlands. The buyout of the former 49% JV partners in the Chemistry sector's China business was completed, now giving the potential for strong growth in this important market. The non-core Florida-based PVC Cements business was sold in December. Precious Metals division The Precious Metals division delivered a 41% improvement in trading profit, with the full year benefit of the restructuring programmes completed in mid-2005 in the US and France. Retail jewellery markets showed modest growth in the US but remained weak in Europe, particularly in the UK. In response to this we restructured the UK selling and distribution network in 2006 and, in January 2007, plans for a fundamental restructuring of UK manufacturing operations were announced, involving closing the Wrexham facility and downsizing the Birmingham operations, while transferring some production to a new facility in Thailand. The US operations continue to perform well and profitability should be further improved with the closure of the New Jersey facility and the relocation of its production to the main Attleboro plant, which is due to be completed by mid-2007. Changing Group profile The programme of disposals, closures, restructuring and new investments is changing the profile of our activities and markets. Geographically our markets are well balanced with one-third of revenue in NAFTA (which comprises the US, Canada and Mexico), one-third in Europe and one-third in emerging markets, mainly Asia-Pacific. Over the past three years, the total number of employees in our continuing operations has remained level but with significant changes across the regions. In Asia-Pacific employee numbers have grown 66%. In NAFTA they have reduced 10% overall, but with an increase in Mexico as production is relocated from the US. European employee numbers have reduced 21% overall, but with growth in Poland and the Czech Republic. We have exited many commoditised activities and also the most highly cyclical, specifically with the sale of the capital goods business Speedline, in 2003 and the Laminates business in 2006. As a result, the intrinsic cyclicality of the Group has been greatly reduced and the profitability and stability of the mix of our activities much improved. Strategic Plan update While most of the original targets from the January 2005 Strategic Plan have already been achieved or exceeded ahead of schedule, the transformation of the Group is not complete. In November 2006, an update on the Strategic Plan with revised targets was announced with the key points as follows. Ceramics division â€¢ 2/3rds of revenue is now in higher-margin speciality products with further profit growth achievable by expanding in emerging markets while improving efficiency in NAFTA and Europe (including expansion in Mexico and Poland) â€¢ 1/3rd of revenue is in linings (primarily monolithics and the construction & installation business) where our profitability is significantly below our competitors. This can be turned around > New targets: 2008 return on sales (RoS) margin of 13%; revenue growth 5% to 6% CAGR Electronics division â€¢ The highly cyclical businesses, Speedline and Laminates, have now been sold â€¢ Profitable growth will be driven by: â€¢ New products and technical developments â€¢ Strong growth in Chemistry in China following recent successful buyout of former 49% JV partners â€¢ Further restructuring of Chemistry in Europe and Assembly Materials in NAFTA > Sustained growth in profits Precious Metals division â€¢ US operations were substantially restructured in 2005 and further consolidation of manufacturing is currently underway. 15% return on net sales value (RoNSV) target maintained â€¢ Further restructuring in UK announced in January 2007, including the transfer of some production to Thailand. Mid single-digit RoNSV target for 2007 > US operations are in good shape. Turnaround of UK will continue in 2007 Many of the investment and restructuring plans mentioned above will only produce full benefits from 2008 onwards and further initiatives are still to be announced. However, 2007 should be the last year of high restructuring charges and capital expenditure as the major transformation projects are completed. The new targets do not assume any acquisitions but the Group now has the financial strength to make acquisitions should suitable opportunities arise. OUTLOOK Our main end-markets, global steel production and electronics, are forecast to continue to grow ahead of GDP over the medium-term. Trading over the first two months of 2007 has continued the positive trends from 2006. All three divisions have detailed plans to deliver strong organic earnings growth through 2007, 2008 and beyond. However, the recent weakening of the US dollar, through its translation impact on our sterling results, would partially reduce this growth if it were to continue. Based on these factors we expect to continue to deliver further improvement in our underlying performance. RESULTS OF OPERATIONS Note: â€¢ the data provided in the tables below are at reported exchange rates and reflect the restatements as described more fully in the Group Financial Review below. Comparatives have been restated accordingly. â€¢ unless otherwise stated, for revenue and trading profit the impact of changes in exchange rates between 2005 and 2006 has not been material and, as a result, the percentage improvement between 2005 and 2006 is the same at both reported and constant exchange rates. Group - Continuing operations Revenue (Â£m) Trading Profit (Â£m) Return on Sales (%) 2006 2005 2006 2005 2006 2005 First half 803 708 69.7 54.5 8.7 7.7 Second half 787 749 80.6 70.4 10.2 9.4 Year 1,590 1,457 150.3 124.9 9.5 8.6 Revenue from continuing operations, which excludes the results of the Laminates, Monofrax and SCS businesses, was 9% higher. The increase in revenue from continuing operations reflected both strong organic growth plus the impact of higher metal prices being passed through to customers in the Precious Metals division and the Assembly Materials and Chemistry sectors of the Electronics division. Revenue trends were broadly similar between the first and second half of the year on a constant currency basis with 10% and 9% increases respectively. On a constant currency basis, revenue in the second half of 2006 was 2% higher than the first half. In addition to the adverse currency impact, revenue in the second half of 2006 has also been reduced by business disposals and closures made during the course of the year. These two factors have more than offset the positive impact on revenue of higher metal prices in the second half of the year. Trading profit from continuing operations was 20% higher. Each division reported significantly higher levels of profitability than in the prior year, reflecting both the strong organic revenue growth and the benefit of the cost reduction initiatives implemented over the last two years. Trading profit increased by 22% to Â£89.5 million in the Ceramics division; by 11% to Â£58.5 million in the Electronics division; and by 41% to Â£11.0 million in the Precious Metals division. Return on sales from continuing operations for the Group of 9.5% has improved by 0.9 percentage points compared to 2005, with the margin of the two largest divisions - Ceramics and Electronics - well into double-digit levels at 11.8% and 10.5%, respectively. If metals prices in 2006 had remained at similar levels to those in 2005, the return on sales from continuing operations in 2006 would have been 1.3 percentage points higher than for 2005. The fastest growing and most profitable region for the Group continued to be Asia-Pacific which accounted for 23% of Group revenue from continuing operations in 2006 and 42% of trading profit. NAFTA and Europe remain the Group's largest regions in terms of revenue, however despite revenue growth in both these regions, higher levels of growth particularly in Asia-Pacific has seen their combined share of Group revenue fall from 75% in 2005 to 72% in 2006. Ceramics division Revenue (Â£m) Trading Profit (Â£m) Return on Sales (%) 2006 2005 2006 2005 2006 2005 First half 384 356 42.7 33.7 11.1 9.5 Second half 373 366 46.8 39.4 12.5 10.8 Year 757 722 89.5 73.1 11.8 10.1 The Ceramics division experienced a very strong year as a result of good growth in global steel production combined with the beneficial impact of the various restructuring initiatives carried out during the last two years. Revenue from continuing operations for the year at Â£757 million was 5% higher than 2005. These results exclude the results of Monofrax, the US fused-cast refractory business, which was sold in February 2007 and whose results are included in discontinued operations. The division's results do, however, include the results of a number of smaller non-core businesses which were either sold or closed during the year, but which did not qualify to be treated as discontinued operations for financial reporting purposes. These include the principally US-based Ceramic Fibres business and the UK-based Carbon Blocks and Magnesia Carbon Bricks businesses. Excluding the revenue from these businesses, organic revenue for the division was up 8% at constant exchange rates, broadly in line with the growth in world steel production. Trading profit from continuing operations grew strongly by 22% at reported exchange rates (up 21% at constant exchange rates) to Â£89.5 million - the highest level ever achieved by the division. Return on sales was 11.8%, up 1.7 percentage points from the 10.1% reported in 2005. Return on net assets (being trading profit divided by the total of average property, plant and equipment, investments, trade working capital and other operating receivables and payables) increased strongly from 28.2% in 2005 to 34.6% in 2006. At the end of 2005 a new, more streamlined and responsive organisational model was introduced which focuses operational responsibilities on the principal product lines of flow control, foundry and linings on a regional basis. Further downsizing of the central management function was initiated at the end of 2006. In each region the key end-market is global steel production. In 2006, global steel production rose by 9% to over 1.2 billion tonnes. Following the 6% growth in 2005, the rate of growth increased during 2006, being 8% in the first half and 9% in the second half of the year. China reinforced its position as the world's leading steel producer with year-on-year growth of 19% and accounted for just over one-third of the world's total production in 2006. Notwithstanding the strong growth from this region, global production outside of China still showed growth of 5% with strong growth in the major regions of India (up 8%), the US (up by 6%) and the enlarged European Union (up by 6%). Europe and NAFTA are the division's two largest regions making up 39% and 34%, respectively, of total divisional revenue from continuing operations. However, the two fastest-growing regions are Asia-Pacific and Rest of the World, which include the fast-developing markets of China, India and Brazil, together comprising 21% of total divisional revenue. Fused Silica, the one product line that is managed on a global rather than a regional basis, makes up the remaining 6%. NAFTA (comprising the US, Canada and Mexico) Revenue from continuing operations in NAFTA grew by 2% to Â£254 million (at constant exchange rates and adjusted for the disposal of the Ceramic Fibres business) with growth in all principal product lines - flow control, linings and foundry. Flow control, which constitutes 40% of NAFTA revenue, grew by 4% in line with the growth in steel production in the region. Linings, which constitutes just over 50% of NAFTA revenue, increased by 1%. This business, which supplies and installs monolithic refractory linings into a variety of industries, has adopted a strategy of focussing its resources only on higher-margin, more value-added projects and this has been reflected in the significantly improved profitability of this business in 2006. Trading profit from continuing operations increased significantly by over 40% (at constant exchange rates and adjusted for the disposal of the Ceramic Fibres business) compared to 2005. This reflected the underlying volume growth, the impact of the elimination of around 60 non-production personnel at the end of 2005, the cost benefit of the ongoing relocation of production capacity from the US to Mexico and significantly improved profitability in the linings product line. Linings, which broke-even in 2005, returned to profitability with a low single-digit return on sales in 2006. Whilst this improvement is encouraging, this level of profitability is still well below that of its main competitors and we believe that further significant improvements can be made going forward. During 2006, the division continued its restructuring programme with the announcement that the Crown Point (Indiana) facility will close in early 2007. Production of taphole clay, an important product used in the production of molten iron, will be transferred to an existing facility at Chicago Heights (Illinois) where a new production line using updated technology is being constructed. The slide-gate and linings production capacity has also been expanded at the Monterrey facility in Mexico. In February 2007, as part of the programme of disposing of non-core businesses, the sale of Monofrax, a fused-cast refractory business based in Falconer (New York), was completed and a small US refractory brick business was sold. Europe Improved market conditions resulted in revenue in Europe growing by 9% to Â£297 million (at constant exchange rates and adjusting for the closed linings operations in the UK discussed below). Flow control, which constitutes 53% of European revenue grew by 7%, ahead of the 6% growth in steel production in the region. Linings, which constitute one-third of European revenue, also saw good growth with a 13% increase in revenue on an organic basis. Trading profit increased by 14% (at constant exchange rates and adjusted for the closed linings businesses in the UK). The profit improvement was particularly marked in the linings operation, which saw its underlying return on sales more than double. Following a strategic review of the UK operations in early 2006, the Carbon Blocks business, located in Bawtry (South Yorkshire) was sold in June 2006. The Magnesia Carbon Bricks business, located in Worksop (Nottinghamshire), which was experiencing very weak market conditions, was closed in December 2006. The slide-gate operation in Goole (East Yorkshire) will also close in mid-2007, in light of the expansion of slide-gate capacity at our facility in Skawina, Poland based on new slide-gate plate technology. As a result of these initiatives, the Ceramics division's UK headquarters, based in Barlborough (Derbyshire), is being downsized. Asia-Pacific and Rest of the World Revenue in these regions grew in total by 16% to Â£162 million at constant exchange rates reflecting strong steel production growth in the two key markets of China and India (19% and 8% respectively) combined with good growth in the construction & installation business, which primarily operates in Australia. China continues to experience consolidation in the steel industry and the government is encouraging the industry to shift to more modern, energy and pollution efficient methods of steel production which should expand the market for the Ceramics division's leading flow control products. This trend should enable the division to continue its strong progress in China, even if the rate of growth of total steel production starts to slow. The strong revenue growth has resulted in trading profit increasing strongly by over 20% with improved profitability from both the flow control and, more markedly, the linings product lines. As part of the division's expansion in the region, in May we announced the construction of a new Â£5 million foundry crucible facility in Suzhou, Jiangsu Province, near two of the division's existing Chinese facilities. The new facility, which is expected to be operational in the first quarter of 2008, will produce long-life, high-performance alumina graphite crucibles for the fast-growing non-ferrous foundry market. The Chinese foundry industry is the largest in the world and has experienced annual growth of around 10% over the last few years. Fused Silica The one product line that is managed on a global rather than a regional basis is Fused Silica. The principal products in the global Fused Silica product line are tempering rollers used in the glass industry and Solar CruciblesTM used in the manufacture of photovoltaic (or solar) cells. Revenue has grown by 11% to Â£44 million compared to 2005 at constant exchange rates with 8% growth in tempering rollers being enhanced by strong growth of 16% for Solar CruciblesTM. Market conditions in the worldwide glass industry were generally good in 2006, with growth of around 5% driven by strong growth in the construction industry in China and increasing demand for flat screen television panels. The fast-growing solar energy industry has benefited in 2006 from the impact of high oil and gas prices, which has placed increased emphasis on the development of renewable energy sources, such as solar. As anticipated, limited supplies of the polysilicon material used in the majority of solar panels has restricted growth in the short-term, but additional capacity is now coming on stream such that growth should accelerate further. Profitability remains strong for this product line with trading profit up 15% on 2005. To meet the increasing demand for fused silica products, a number of new investments were made during the year. In China, we made a Â£5 million investment at our existing glass roller facility in Kua Tang. This investment, which was completed at the beginning of 2007, significantly increases capacity for producing the rollers used in the glass industry and transforms this facility into the Ceramics division's leading centre worldwide for glass roller production. Alongside this facility, we also completed a new facility to manufacture solar crucibles for the fast-growing photovoltaic market in Asia-Pacific. This facility is currently in its ramp-up phase with full commercial production expected by the second quarter of 2007. Following this additional investment in China, a Â£7 million investment for the manufacture of solar crucibles at our existing facility in Skawina, Poland to support European customers has been commenced which is expected to be operational in the second half of 2007. With the announcement of the closure of the Beaver Falls (Pennsylvania) facility, glass roller production in the US will now be consolidated into one facility at Dillon (South Carolina) with effect from the first quarter of 2007. Electronics division Revenue (Â£m) Trading Profit (Â£m) Return on Sales (%) 2006 2005 2006 2005 2006 2005 First half 281 234 27.1 21.5 9.6 9.2 Second half 274 255 31.4 31.0 11.5 12.2 Year 555 489 58.5 52.5 10.5 10.7 Following the completion of the Laminates disposal in April 2006, the Electronics division now comprises two sectors, Assembly Materials and Chemistry, the results of which are reviewed below. Return on net assets for the division increased strongly from 37.6% in 2005 to 42.2% in 2006. Assembly Materials Revenue (Â£m) Trading Profit (Â£m) Return on Sales (%) 2006 2005 2006 2005 2006 2005 First half 162 129 12.8 9.5 7.9 7.4 Second half 157 145 15.4 16.1 9.8 11.1 Year 319 274 28.2 25.6 8.8 9.4 Revenue for the year at Â£319 million was 17% higher than prior year. However, in 2006 the average price of tin and silver - the sector's major raw materials - were 21% and 58% higher, respectively, than for 2005. The cost of tin and silver was, in the main, passed through to customers during the year, such that revenue was increased by approximately Â£30 million compared to 2005 as a result of the higher metal prices. Revenue also reflected the impact of disposals and closures, namely the US-based PVC Cements business in December 2006 and the closure of the low-margin industrial metals activities in Naarden, the Netherlands in June 2006. Excluding the impact of higher metal prices and disposals, underlying revenue was 8% higher than last year (on a constant currency basis). The revenue growth reflected the good growth in PCB production, the increasing penetration of lead-free solder - with its relatively more expensive mix of metals - but more difficult markets for solder products used in industrial applications. Trading profit of Â£28.2 million was 10% higher than last year reflecting the growth in underlying volumes, the higher profitability of lead-free products and the impact of cost-saving initiatives. Return on sales decreased from 9.4% to 8.8% due to the impact of higher metal prices. If metals prices in 2006 had remained at similar levels to those in 2005, the return on sales in 2006 would have been 0.4 percentage points higher than for 2005. Asia-Pacific, the sector's largest region accounted for 54% of revenue, an increase of 6 percentage points over 2005. This reflected the continued migration of consumer electronics production to this region. Europe accounted for 22% of revenue, NAFTA 20%, and the Rest of the World 4%. The world-wide transition to lead-free solder products, driven by European Union legislation which became effective on 1 July 2006, continues to enhance both revenue and profits. For 2006, 47% of solder sales were lead-free compared with 24% in 2005, with the conversion of lead-free reaching 51% in the fourth quarter of 2006. Capacity for the production of lead-free solder has been increased during the year, notably in Asia-Pacific. Sales of lead-free solder in 2006 are particularly high in Asia-Pacific, with a conversion rate for the year of 67% compared to 31% in Europe and 19% in the US. Going forward the conversion rate is expected to increase significantly in the US, grow steadily in Europe and start to level off in Asia-Pacific. Sales of the sector's proprietary low-silver content, lead-free solder (Alpha SACXTM) have also grown strongly in the year following its introduction in the second half of 2005. With only one-tenth of the silver content of normal lead-free solder this product offers significant cost advantages to our customers. In the fourth quarter of 2006, 17% of lead-free solder sales were Alpha SACXTM compared to 5% in the equivalent quarter in 2005. The Semi-conductor Packaging Materials business, which provides epoxy-mould compounds, underfills and solder spheres to the electronics industry, faced continuing difficult market conditions in 2006 with revenue down on last year. In response, headcount reductions were implemented during the year and there was a change in senior management in the fourth quarter. During 2006, the strategy of exiting non-core, commoditised businesses and restructuring in the more mature markets continued. In June 2006, the closure of the low-margin industrial metals activities in Naarden, the Netherlands was completed with a reduction in headcount of 65, and in December 2006 the US-based PVC Cements business was sold. In November 2006, the restructuring of the sector's manufacturing operations in NAFTA was announced for implementation during 2007. Production of high labour-intensive solder wire is to be moved from the Altoona (Pennsylvania) facility to a new site in Monterrey, Mexico. The Jersey City (New Jersey) facility is to close with production moved to Monterrey, Mexico and to Altoona. The wave solder flux manufacturing facility in Alpharetta (Georgia) is to close with production moved to an existing Chemistry sector facility in Mexico City, Mexico. When completed, headcount in the US will be reduced by 120 with 90 new jobs created in Mexico. Annual cost savings from this restructuring of Â£2.2 million are anticipated from the beginning of 2008. R&D and new product development remains a key focus, reflected by a further expansion of R&D capabilities in Bangalore, India. Chemistry Revenue (Â£m) Trading Profit (Â£m) Return on Sales (%) 2006 2005 2006 2005 2006 2005 First half 119 105 14.3 12.0 12.0 11.4 Second half 117 110 16.0 14.9 13.8 13.5 Year 236 215 30.3 26.9 12.9 12.5 Revenue for the year at Â£236 million was 9% higher than 2005 at reported exchange rates (10% at constant exchange rates). This growth was to a large extent driven by the pass through of higher precious metal prices (notably for gold and palladium) to customers. Prior to this impact, the organic growth in revenue of 2% (at constant exchange rates) reflected underlying growth for the sector's higher-margin products serving the electronics markets, being offset by weaker sales of lower-margin products for industrial and automotive markets (particularly in the US). Within the electronics markets, the sector's copper damascene, lead-free immersion silver (AlphaStarTM) and wafer bumping products reported strong revenue growth, whilst in industrial markets, our range of plating-on-plastics and corrosion and wear-resistant coatings products also grew strongly. Trading profit for 2006 at Â£30.3 million was 13% higher than 2005. This reflected the better mix of higher-margin products serving electronics markets combined with the effect of the rationalisation of the sector's European sales and distribution network, a cost-reduction initiative commenced in 2005. Return on sales increased from 12.5% to 12.9%. If metals prices in 2006 had remained at similar levels to those in 2005, return on sales in 2006 would have been 1.3 percentage points higher than for 2005. Europe and NAFTA remain the sector's largest regions with 40% and 35% of total sector revenue. European revenue was down 3% on last year (before the metal price impact) reflecting a deliberate strategy of reducing sales of low-margin electroplating equipment. Excluding equipment sales, underlying revenue was 3% higher, reflecting generally solid industrial markets and modest growth in vehicle production volumes, particularly in Germany which is our largest market for automotive-related product in Europe. Revenue in NAFTA was up 2% on last year (before the metal price impact) primarily due to the strong sales to electronics markets (including copper damascene and lead-free immersion silver products) more than offsetting weak automotive market in the second half of the year. Revenue in Asia-Pacific, which accounts for 24% of the sector's revenue, grew strongly by 13% reflecting the strong growth in this region. In October 2006, the joint venture partners in our Chinese operation who owned 49% of the business were bought out (with economic effect from April 2006) for a cash consideration of Â£2.4 million. As well as enhancing the ability to service the fast-growing industrial sector in China, this transaction enhances net earnings by over Â£1 million per annum. Following this acquisition, the construction of a new Â£6 million manufacturing facility in Nansha, Guangdong Province was announced for completion in 2008. These initiatives now give the sector unencumbered freedom to conduct and grow its business in China. In Europe, the consolidation of the sector's manufacturing footprint continued with the closure of the Swedish and Austrian facilities. In addition, the closure of the production facility in Spain and the consolidation of our facilities in Italy were announced with completion expected by the end of 2007. With the rationalisation of these smaller facilities, production will now be focussed on our existing facilities in Germany and the Netherlands, where the production and warehousing facilities have recently been enhanced. Annual cost savings from this European restructuring of Â£2 million are anticipated from the beginning of 2008. Precious Metals division Revenue (Â£m) Net Sales Value Trading Profit Return on Net (Â£m) (Â£m) Sales Value (%) 2006 2005 2006 2005 2006 2005 2006 2005 First half 139 118 57 52 4.4 2.9 7.7 5.6 Second half 139 128 54 56 6.6 4.9 12.3 8.8 Year 278 246 111 108 11.0 7.8 9.9 7.2 The Precious Metals division operates in two distinct geographic regions: the US, which constitutes 58% of the total net sales value (being revenue excluding the precious metals content) for the division, and Europe (which comprises the UK, France and Spain). Return on net assets (being trading profit divided by the total of average property, plant and equipment, investments, trade working capital and other operating receivables and payables) increased from 11.0% in 2005 to 14.5% in 2006. Precious Metals - US Revenue (Â£m) Net Sales Value Trading Profit Return on Net (Â£m) (Â£m) Sales Value (%) 2006 2005 2006 2005 2006 2005 2006 2005 First half 77 62 33 29 4.1 3.0 12.4 10.3 Second half 78 71 31 32 4.9 4.3 15.8 13.3 Year 155 133 64 61 9.0 7.3 14.1 11.9 Net sales value of Â£64 million grew by 5% at reported exchange rates (6% at constant exchange rates) compared to 2005. This increase reflected some firming of retail markets with evidence of a return to fashion of the 'yellow gold look', strong sales of chain and findings products particularly to non-US markets such as India and Hong Kong, and increased business from Tiffany and the US Mint (in particular, the supply of 24 carat gold blanks for the production of the 'Buffalo' coin for investors and collectors). Trading profit for 2006 at Â£9.0 million was 23% higher than last year reflecting the good organic growth in net sales value growth and the full year impact of the headcount reductions implemented in the second quarter of 2005. Return on net sales value was 14.1% (2005: 11.9%). The initiative to consolidate all of the US manufacturing operations into the principal facility in Attleboro (Massachusetts) has continued in 2006, with the announcement in August 2006 of the relocation to Attleboro of Inverness, our ear-stud business currently located in New Jersey. This relocation, which will be completed in mid-2007 and involves a net headcount reduction of 20, will generate annual cost savings of Â£1.5 million. Precious Metals - Europe Revenue (Â£m) Net Sales Value Trading Profit Return on Net (Â£m) (Â£m) Sales Value (%) 2006 2005 2006 2005 2006 2005 2006 2005 First half 62 56 24 23 0.3 (0.1) 1.3 (0.4) Second half 61 57 23 24 1.7 0.6 7.5 2.5 Year 123 113 47 47 2.0 0.5 4.3 1.1 Net sales value of Â£47 million was broadly unchanged compared with 2005. This reflected continuing weak retail demand (particularly in the UK) being offset by stronger scrap refining business, stimulated by the high precious metal prices during the year. Net sales value was 5% lower in the UK, but this was offset by small increases in France and Spain. The UK business outperformed the overall jewellery market with hallmark statistics for 2006 from the Assay Office showing a 14% and 12% decline from 2005 in the number of gold and silver jewellery items requiring to be hallmarked. Trading profit for 2006 was Â£2.0 million, well ahead of the Â£0.5 million profit reported in 2005. All three countries were profitable and reported improved levels of profitability, with particularly strong performances coming from France and Spain. At the beginning of 2006, the first phase of the restructuring of the UK operations was announced, with the implementation of new call centre and internet selling systems. Whilst this has reinforced our position as a leader in the UK marketplace, the business continued to suffer from weakening demand in the industry overall and increased competition from low-cost imports. Against this background, a proposed fundamental restructuring of the manufacturing operations was announced in January 2007, to be implemented on a phased basis during 2007. The facility in Wrexham, which produces chain and findings, will close with manufacturing transferring to a new site in Thailand. The stampings operation at the main facility in Birmingham will also relocate to Thailand and certain other products will increasingly be sourced from the division's US-based operations. The sales office in Dublin will also close. These initiatives, which will result in the loss of some 80 jobs, will result in annualised cost savings of Â£2.0 million. Group corporate The Group's corporate costs, being the costs directly related to managing the Group holding company, were Â£8.7 million, broadly in line with last year. The costs in 2006 reflect a number of non-recurring charges, in particular costs relating to the successful SEC deregistration. Group - Discontinued operations (Laminates, Monofrax and SCS) Revenue (Â£m) Trading Profit (Â£m) Return on Sales (%) 2006 2005 2006 2005 2006 2005 First half 62 87 6.3 2.1 10.1 2.4 Second half 10 91 1.6 7.7 16.7 8.5 Year 72 178 7.9 9.8 11.0 5.5 Discontinued operations include the results of the Laminates business, which was sold in April 2006, Monofrax, the sale of which was completed in February 2007 and, in 2005, the Speciality Coating Systems business, which was sold at the end of December 2005. The Laminates business traded profitably in 2006 up to its disposal, reflecting both the restructuring of this business in 2005 and the discontinuance of any depreciation charge as required by its accounting treatment as a business 'held for sale'. Monofrax traded satisfactorily in 2006 with trading results broadly in line with 2005. GROUP FINANCIAL REVIEW Improvement 2006 2005 vs. 2005 Profit before tax (Â£m) - headline 131.2 101.1 +30% - basic 113.5 78.5 +45% Earnings per share (pence) - headline 46.6 36.8 +27% - basic 32.8 (5.8) Dividends per share - interim 3.0p - - final 7.0p 5.0p +40% Free cash flow (Â£m) 64.5 42.9 up Â£21.6m Net debt (Â£m) 180.5 292.3 down Â£111.8m Restatement of comparative information This is the second year that the Group accounts have been prepared in accordance with International Financial Reporting Standards ('IFRS'). During 2006, as a result of the continued assessment of the detailed impact of IFRS on the presentation of the Group accounts, a number of changes to the accounting treatment and presentation of certain items in the Group accounts for 2006 have been made, together with appropriate changes to the respective comparative information for 2005. These changes are explained in Note 2 to the attached accounts, but none of them have had an impact on the Group's net cash flows, financial position or total recognised income and expense as previously reported for 2005. The comparative information in this review is stated after these changes. Group Income Statement Headline profit before tax 2006 2005 Improvement Â£m Â£m vs. 2005 Trading profit: Continuing operations - at 2006 exchange rates 150.3 125.7 +20% Discontinued operations (Laminates, Monofrax and SCS) 7.9 9.6 Currency exchange rate impact - (0.6) Trading profit - at reported exchange rates 158.2 134.7 +17% Net finance charges (interest) (28.4) (35.0) Post-tax income from joint ventures 1.4 1.4 Headline profit before tax 131.2 101.1 +30% Headline profit before tax for total operations was Â£131.2 million for 2006, which was Â£30.1 million higher than 2005. The increase in headline profit before tax arose as follows: â€¢ Â£24.6 million increase in trading profit from continuing operations at constant exchange rates as discussed in the Review of Operations above; â€¢ Â£0.6 million positive trading profit exchange rate translation variance; â€¢ Â£6.6 million lower charge for net finance costs (interest) for ongoing activities primarily due to a decrease in the average level of borrowings throughout the year; partially offset by: â€¢ Â£1.7 million decrease in trading profit from discontinued operations at constant exchange rates. Items excluded from headline profit before tax A net charge of Â£17.7 million was incurred in the year (2005: Â£22.6 million) for items excluded from headline profit before tax. This charge consisted of the following items: Rationalisation costs: a charge of Â£34.7 million (2005: Â£18.5 million) was incurred in the year. Of the total charge, Â£10.3 million related to non-cash write-down of assets and Â£24.4 million to cash-related costs. The principal items included in the total charge for 2006 were as follows: â€¢ Â£22.9 million arose in the Ceramics division for the rationalisation of facilities mainly in the UK, of which Â£9.0 million related to the non-cash write-down of assets, and for administrative headcount reductions both in Europe and the US; â€¢ Â£7.1 million arose in the Assembly Materials sector for the rationalisation of production facilities in Europe and the relocation of manufacturing operations from the US to Mexico; â€¢ Â£1.6 million arose in the Chemistry sector for the rationalisation of the sales, manufacturing and distribution network in Europe; â€¢ Â£2.4 million arose in the Precious Metals division for the relocation to its principal facility in Attleboro (Massachusetts) of Inverness, the ear-stud business currently located in New Jersey, and the restructuring of the sales function of the UK operations; and â€¢ Â£0.7 million arose in respect of redundancy initiatives in Group central operations. A further cash-related rationalisation charge of between Â£10-15 million in 2007 and between Â£5-8 million annually for 2008 and beyond is expected, in respect of both the completion of the above projects, plus additional cost-reduction projects expected to be initiated in these years. Employee benefits curtailment gains: a credit of Â£8.6 million (2005: Â£Nil) was realised in the year relating to amendments to defined benefit pension plans and post-retirement healthcare plans in the US. Profit/(loss) relating to non-current assets: a net credit of Â£13.1 million (2005: Â£Nil) was realised in the year relating mainly to the disposal of surplus properties. Non-recurring finance costs: in 2005 a non-cash charge of Â£1.2 million was incurred when the existing bank facility was put in place in March 2005, relating to the write-off of the un-amortised portion of the fees incurred in respect of the previous facility. Loss on disposal of continuing operations: a net charge of Â£4.7 million (2005: Â£2.9 million) was incurred in the year relating to costs associated with the disposal, either in the current or prior years, of a number of businesses which did not qualify to be treated as discontinued operations for financial reporting purposes. The principal operations which were disposed of during the year, for which the results up to the date of disposal have been included within continuing operations, were the Ceramic Fibres and the UK Carbon Blocks businesses, both formerly part of the Ceramics division, and the PVC Cements business, formerly part of the Assembly Materials sector. The net charge included a write-off of goodwill of Â£4.2 million. The loss on disposal of continuing operations in 2005 related principally to the disposal of the Group's Technical Ceramics business (McDanel), formerly part of the Ceramics division. Group profit before tax after the items noted above was Â£113.5 million for the year compared to Â£78.5 million in 2005. Taxation The tax charge on ongoing activities was Â£38.2 million (2005: Â£28.1 million). The effective tax rate on headline profit before tax from continuing operations (before share of post-tax profit of joint ventures) was 31.3% (2005: 31.3%). Tax reform processes underway in certain of the countries in which the Group operates, in particular Germany and China, create some uncertainty as to the Group's longer-term effective tax rate. Subject to these uncertainties, the Group is expecting the effective tax rate for 2007 to be broadly in line with that achieved in 2006. The Group tax charge relating to exceptional items of Â£5.3 million (2005: Â£16.0 million) resulted from a tax credit of Â£2.1 million in respect of rationalisation costs, a tax charge of Â£3.7 million in respect of the profit relating to non-current assets, a tax charge of Â£0.6 million in respect of the disposal of operations and a Â£3.1 million tax charge in respect of the different treatment of goodwill in the US for book and tax purposes. Net post-tax loss on disposal of discontinued operations A charge of Â£3.3 million (2005: Â£41.7 million) was incurred in the year, principally consisting of a post-tax loss of Â£5.8 million relating to the disposal of the Group's Laminates business ('Laminates') to Isola Group S.A.R.L. on 21 April 2006, net of a post-tax profit of Â£2.7 million relating to additional proceeds received in respect of operations discontinued in prior years. The loss on disposal after tax relating to Laminates comprised adjustments to the 31 December 2005 estimated fair value less costs to sell, including movements in working capital. The assets and liabilities of the Laminates business, formerly part of the Electronics division, were classified as 'held for sale' in the Group balance sheet as at 31 December 2005, with the consequential recording of a loss at that date of Â£52.5 million in the 2005 results. The post-tax loss on disposal in 2005 included the loss in respect of the Laminates business noted above plus a post-tax profit of Â£10.8 million arising on the sale of Specialty Coating Systems ('SCS'), formerly part of the Assembly Materials sector, in December 2005. Headline profit attributable to equity holders Headline profit attributable to parent company equity holders for 2006 was Â£89.2 million (2005: Â£69.3 million), with the Â£19.9 million increase over 2005 principally arising from the significant increase in headline profit before tax. After taking account of all items excluded from headline profit before tax noted above (net of the related tax impact) and the net post-tax loss on disposal of discontinued operations, the Group recorded a profit of Â£66.4 million for 2006, Â£74.0 million higher than the Â£7.6 million loss recorded in 2005. Return on investment The Group's post-tax return on investment ('ROI') in 2006 was 8.4%. Whilst the ROI is still not exceeding the Group's post-tax weighted average cost of capital ('WACC'), which is estimated to be around 8.5%, it has improved significantly in the last two years (2005: 6.8%; 2004: 6.0%) due to the Group's improved trading performance. Capital expenditure and rationalisation projects are assessed against the Group's WACC as part of a pre-authorisation process. Earnings per share ('EPS') Headline EPS, based on the headline profit attributable to parent company equity holders, amounted to 46.6 pence per share in 2006, an increase of 27% on the 36.8 pence reported in 2005. The Directors believe this basis of calculating EPS is an important measure of the underlying earnings per share of the Group. Basic EPS, based on the total earnings attributable to parent company equity holders, was 32.8 pence (2005: loss of 5.8 pence per share). The average number of shares in issue during 2006 was 191.5 million (2005: 188.5 million). Dividends In June 2006, a 5.0 pence final dividend in respect of 2005 was paid to shareholders, the first dividend payment since October 2001. This followed a two-year period over which the Group delivered sustained free cash flow and strongly improving underlying profitability. 2006 has marked a further year of excellent progress with good cash generation along with further improvements in profitability. This, together with the Board's confidence in the prospects for the Group, has resulted in the Board recommending a final dividend for 2006 of 7.0 pence per share to be paid on 11 June 2007 to shareholders on the register at 25 May 2007. This final dividend, together with the interim dividend paid on 16 October 2006, makes a total dividend of 10.0 pence per ordinary share for the year, which is covered 4.6 times by headline earnings and 3.3 times by free cash flow. Group cash flows Net cash flows from operating activities In 2006, the Group generated Â£67.7 million of net cash inflow from operating activities, Â£5.1 million higher than 2005. This net increase principally arose from: â€¢ A Â£12.6 million increase in EBITDA (being trading profit before depreciation and amortisation) to Â£195.2 million; â€¢ A cash outflow of Â£27.2 million for trade working capital, Â£3.5 million higher than 2005; â€¢ A cash outflow of Â£7.2 million in respect of the Laminates business in the period prior to its disposal; â€¢ A Â£0.9 million decrease in cash spend for rationalisation costs to Â£16.1 million; â€¢ A Â£15.5 million increase in pension 'top-up' payments; â€¢ A net decrease in cash outflow for operating provisions and other items of Â£17.6 million, including Â£4 million of additional incentive payments to employees throughout the Group in 2005, with the remainder arising from movements on other receivables and payables; â€¢ A Â£7.5 million decrease in net interest paid; and â€¢ A Â£7.3 million increase in tax payments. The cash outflow in respect of trade working capital, prior to the impact of discontinued operations, results from both the increase in underlying revenue but also the impact of higher metal prices (notably gold, silver and tin) on the levels of inventories and trade receivables at year end in the Precious Metals division and the Assembly Materials and Chemistry sectors. There continues to be a strong focus on working capital management, as evidenced by the ratio of average trade working capital to revenue from continuing operations reducing from 22.3% in 2005 to 21.8% in 2006. Cash outflow for rationalisation was Â£16.1 million of which Â£10.0 million related to programmes that were initiated in 2006 in respect of continuing operations and the balance from prior year initiatives. Net cash flows from investing activities Capital expenditure Payments to acquire property, plant and equipment were Â£43.2 million in 2006, broadly in line with 2005 and representing 117% of depreciation (2005: 90%). Proceeds from sale of property, plant and equipment Proceeds from the sale of surplus properties in the US, Europe and Asia were Â£16.6 million (2005: Â£10.3 million). Dividends from joint ventures Dividends of Â£0.9 million were received in the year (2005: Â£4.7 million) from the Chemistry division's Japanese joint venture. Disposals and acquisitions Net cash inflow from disposals and acquisitions in the year was Â£52.2 million which included the following: â€¢ Proceeds from the disposal of businesses, net of disposal costs, of Â£59.4 million, principally comprising Â£11.1 million for the disposal in March 2006 of the Ceramic Fibres business, Â£42.2 million for the disposal in April 2006 of the Laminates business, Â£1.4 million for the disposal in June 2006 of the UK Carbon Blocks business, Â£1.7 million for the disposal in December 2006 of the PVC Cements business and Â£3.8 million of additional proceeds in respect of the disposal, in 2003, of the Speedline business; â€¢ Trailing costs and purchase price adjustments for prior year disposals, net of any associated property disposals, of Â£3.1 million; and â€¢ Acquisitions of subsidiaries of Â£4.1 million principally comprises Â£2.4 million in respect of the buy-out of the Chemistry sectors 49% Chinese joint venture partners. Free cash flow Free cash flow is defined as net cash flow from operating activities after net outlays for the acquisition and disposal of fixed assets, dividends from joint ventures and dividends paid to minority shareholders, but before additional funding contributions to Group pension plans. Free cash flow was Â£64.5 million, Â£21.6 million higher than 2005. As in prior years, free cash flow in the second half increased strongly compared with the first half of the year due to higher profitability and significantly higher cash inflows from trade working capital. Net cash flow before repayment of borrowings Net cash inflow before financing for the year was Â£94.2 million, Â£45.3 million higher than 2005. This improvement primarily reflects proceeds from the disposal of businesses more than offsetting additional funding contributions to Group pension plans. After an outflow for financing activities (before repayment of borrowings) of Â£14.9 million (2005: inflow of Â£4.8 million), arising primarily from the payments of the 2005 final and the 2006 interim dividends, the net cash inflow for the year (before repayment of borrowings) was Â£79.3 million, Â£25.6 million higher than for 2005. The strong cash inflow, together with a positive translation effect of Â£32.9 million, mainly due to the increase in the value of sterling from US$1.72 to US$1.96 during the year, resulted in an overall decrease in net debt of Â£111.8 million to Â£180.5 million. Net debt As at 31 December 2006, the Group had net debt of Â£180.5 million which was drawn on available medium to long-term committed facilities of around Â£480 million. The Group's net debt comprised the following At 31 December 2006 (Â£m) At 31 December 2005 (Â£m) US Private Placement loan notes 278.5 317.5 Committed bank facilities - 23.3 Lease financing 1.9 4.6 Other loans, overdrafts, other 12.0 12.8 Gross borrowings 292.4 358.2 Cash and short-term deposits (111.9) (65.9) Net debt 180.5 292.3 The US Private Placement loan notes, currently US$545 million, are repayable at various dates between 2007 and 2012, with US$50 million repayable in May 2007 and US$130 million repayable in November 2007. A new committed, unsecured bank facility for Â£200 million was arranged in March 2005. The facility, which had an original maturity date of March 2008 with options to extend by two further twelve month periods, was extended in January 2007 by twelve months such that the current maturity date is March 2010. This facility was un-drawn as 31 December 2006. Sufficient headroom exists within this committed facility to meet the repayments of the US Private Placement loan notes due in 2007. The Group is currently operating well within the borrowing ratios contained both in the US Private Placement loan notes and in the Â£200 million bank facility. For 2006, the Group's EBITDA to net interest ratio was 7.7 times (against a covenant requirement of greater than four times), the net borrowings to EBITDA ratio was 1.1 times (covenant requirement of less than three times) and the US GAAP leverage covenant (gross borrowings to shareholders' funds ratio on a US GAAP basis) was 30% (against a covenant requirement of less than 50%). Currency The US dollar weakened significantly against sterling during the fourth quarter of the year and the year-end exchange rate was some 14% lower than for 2005. However, the average US dollar exchange rate for 2006 was only 1% lower than for 2005. Other US dollar 'tracking' currencies, such as the Singapore and Hong Kong dollar and the Chinese renminbi, also showed a similar trend. The value of the euro was relatively stable against sterling, both in respect of the year-end rates and the average for the year compared to last year. For 2006, the net translation impact of currency changes on revenue and profits was not material. Pension fund and other post-retirement obligations The Group operates defined contribution and defined benefit pension plans, principally in the UK and US. In addition, the Group has various other defined benefit post-retirement arrangements, being principally healthcare plans in the US. As at 31 December 2006, a liability of Â£155.1 million was recognised in respect of employee benefits, a decrease of Â£69.7 million over the Â£224.8 million as at 31 December 2005. This decrease arises, in respect of the UK plan, from an increase in the interest rate used to discount the present value of future liabilities and the additional 'top-up' payments agreed with the Trustee in February 2006. For the US plans, the decrease arises from the increase in the discount rate and the freezing of ongoing accruals for current employees in the two largest plans. Both of these factors have more than offset the assumption of increased life expectancy of retirees. Of the total liability, Â£78.3 million relates to the deficit on the Group's defined benefit pension plan in the UK, Â£39.8 million to the Group's defined benefit pension plans in the US, Â£13.6 million to defined benefit pension arrangements in the Rest of the World and Â£23.4 million to unfunded post-retirement benefit arrangements, being mainly healthcare benefit arrangements in the US. Following the disposal of SCS and the announcements of the disposals of the Laminates business in December 2005 and the Ceramic Fibres business in February 2006, and in view of the increase in the net pension deficit for the UK plan during 2005, it was agreed with the Trustee of the Group's UK plan in February 2006 to make revised 'top-up' payments (in addition to the normal cash contributions) of Â£25.5 million in 2006 and Â£26.5 million in 2007. The level of these additional 'top-up' payments will be reviewed in consultation with the Trustee of the Group's UK plan when the next triennial valuation is available in mid-2007. In order to reduce significantly the future volatility of the Group's UK plan, in November 2006 the plan Trustee implemented risk mitigation elements within its investment strategy by which it entered into a portfolio of inflation and interest rate swaps, executed an equity hedge and planned an increase in its asset diversification. The effect of these arrangements is to significantly narrow the range of likely outcomes for the employee benefit deficit arising from variability in the investment performance of the plan's assets due to the impact of future changes in economic circumstances and other aspects of financial market pricing which are largely outside of the Group's control. These risk mitigation enhancements have not impacted on the expected return assumptions in the Group's financial reporting under the relevant accounting standard. The US pension plans undergo full actuarial valuations every year and the net deficit as at 31 December 2006 was Â£39.8 million (2005: Â£61.1 million). Funding of the US plans is made in accordance with US government regulations. The two principal defined benefit pension plans in the US are closed to new members and ongoing accruals for both schemes are being frozen for the majority of active members with effect from the first quarter of 2007. Benefits payable under certain post-retirement healthcare benefit arrangements in the US have also been amended which has resulted in a significant reduction in the net deficit as at 31 December 2006 to Â£16.8 million (2005: Â£25.3 million). The charge against trading profit in 2006 for all pension plans (including defined contribution plans) and other post-retirement plans was Â£22.3 million, a reduction of Â£0.4 million compared to 2005. Total pension cash contributions amounted to Â£42.4 million in 2006 (2005: Â£25.9 million). For further information please contact: Shareholder/analyst enquiries: Nick Salmon, Chief Executive Cookson Group plc Mike Butterworth, Group Finance Director Tel: +44 (0)20 7822 0000 Isabel Luetgendorf, Investor Relations Manager Media enquiries: John Olsen Hogarth Partnership Tel: +44 (0)20 7357 9477 Copies of Cookson's 2006 Annual Report are due to be posted to the shareholders of the Company on 19 April 2007 and will be available on the Company's website and at the Registered Office of the Company after that date. Cookson management will make a presentation to analysts on 13 March 2007 at 9: 30am (UK time). This will be broadcast live on Cookson's website. An archive version of the presentation will be available on the website from mid-afternoon on 13 March. Forward-Looking Statements This announcement contains certain forward-looking statements which may include reference to one or more of the following: the Group's financial condition, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, competitive positions, growth opportunities for existing products, plans and objectives of management and other matters. Statements in this document that are not historical facts are hereby identified as 'forward-looking statements'. Such forward-looking statements, including, without limitation, those relating to the future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income, in each case relating to Cookson, wherever they occur in this document, are necessarily based on assumptions reflecting the views of Cookson and involve a number of known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various important factors. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include without limitation: economic and business cycles; the terms and conditions of Cookson's financing arrangements; foreign currency rate fluctuations; competition in Cookson's principal markets; acquisitions or disposals of businesses or assets; and trends in Cookson's principal industries. The foregoing list of important factors is not exhaustive. When relying on forward-looking statements, careful consideration should be given to the foregoing factors and other uncertainties and events, as well as factors described in documents the Company files with the UK regulator from time to time including its annual reports and accounts. Such forward-looking statements speak only as of the date on which they are made. Except as required by the Rules of the UK Listing Authority and the London Stock Exchange and applicable law, Cookson undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this announcement might not occur. Cookson Group plc, 165 Fleet Street, London EC4A 2AE Registered in England and Wales No. 251977 www.cooksongroup.co.uk 2006 2005 Continuing Discontinued Continuing Discontinued operations operations Total operations operations Total restated restated restated (note 2) Notes Â£m Â£m Â£m Â£m Â£m Â£m Revenue 3 1,589.6 71.8 1,661.4 1,457.1 177.5 1,634.6 Manufacturing costs - raw (766.6) (30.8) (797.4) (663.4) (79.8) (743.2) materials - (376.9) (23.9) (400.8) (375.5) (61.5) (437.0) other Administration, selling and (295.8) (9.2) (305.0) (293.3) (26.4) (319.7) distribution costs Trading profit 1,3 150.3 7.9 158.2 124.9 9.8 134.7 Rationalisation of operating 1,4 (34.6) (0.1) (34.7) (13.4) (5.1) (18.5) activities Profit/(loss) relating to 1,5 13.1 - 13.1 (1.9) 1.9 - non-current assets Curtailment gains relating to 1,6 8.5 0.1 8.6 - - - employee benefits Profit from operations 137.3 7.9 145.2 109.6 6.6 116.2 Finance costs 7 (53.8) - (53.8) (57.2) - (57.2) Finance income 7 25.4 - 25.4 21.0 - 21.0 Share of post-tax profit of joint 1.4 - 1.4 1.4 - 1.4 ventures Loss on disposal of continuing 8 (4.7) - (4.7) (2.9) - (2.9) operations Profit before tax 105.6 7.9 113.5 71.9 6.6 78.5 Income tax costs - ongoing 9 (38.2) (0.3) (38.5) (28.1) (0.3) (28.4) activities - 1,9 (5.3) - (5.3) (15.8) (0.2) (16.0) exceptional items Net post-tax loss on disposal of 10 - (3.3) (3.3) - (41.7) (41.7) discontinued operations Profit/(loss) for the year 62.1 4.3 66.4 28.0 (35.6) (7.6) Profit/(loss) for the year attributable to: Equity holders of the parent 58.6 4.3 62.9 24.6 (35.6) (11.0) company Minority interests 3.5 - 3.5 3.4 - 3.4 Profit/(loss) for the year 62.1 4.3 66.4 28.0 (35.6) (7.6) Headline profit before tax: 1 Trading profit 158.2 134.7 Share of post-tax profit of joint 1.4 1.4 ventures Net finance costs (28.4) (36.2) Add back: write-off of capitalised - 1.2 borrowing costs Headline profit before tax 131.2 101.1 Income tax costs on ongoing (38.5) (28.4) activities Profit attributable to minority (3.5) (3.4) interests Headline profit attributable to parent company 89.2 69.3 equity holders Earnings per share (pence): 11 Basic 32.8 (5.8) Diluted 32.6 (5.8) Headline earnings per share 1,11 (pence): Basic 46.6 36.8 Diluted 46.3 36.6 2006 2005 restated (note 2) Notes Â£m Â£m Cash flows from operating activities Profit from operations 145.2 116.2 Adjustments for: - Rationalisation of operating activities 34.7 18.5 - Curtailment gains relating to employee benefits (8.6) - - Profit relating to non-current assets (13.1) - - Depreciation and amortisation 37.0 47.9 EBITDA 1 195.2 182.6 Net increase in trade working capital (27.2) (23.7) Net outflows related to assets and liabilities classified as held for sale (7.2) - Outflows related to rationalisation of operating activities (16.1) (17.0) Additional funding contributions into Group pension plans (25.5) (10.0) Other operating outflows (2.0) (19.6) Cash generated from operations 117.2 112.3 Interest paid (28.3) (31.3) Interest received 6.3 1.8 Income taxes paid (27.5) (20.2) Net cash inflow from operating activities 67.7 62.6 Cash flows from investing activities Purchase of property, plant and equipment (43.2) (42.5) Proceeds from sale of property, plant and equipment 16.6 10.3 Acquisition of subsidiaries and joint ventures, net of cash acquired (4.1) (10.6) Disposal of subsidiaries, net of cash disposed of 59.4 30.4 Dividends received from joint ventures 0.9 4.7 Other investing outflows, including additional costs for prior years' disposals (3.1) (6.0) Net cash inflow/(outflow) from investing activities 26.5 (13.7) Net cash inflow before financing activities 94.2 48.9 Cash flows from financing activities Repayment of borrowings (29.9) (45.2) Settlement of forward foreign exchange contracts 2 (5.4) 5.5 Proceeds from the issue of share capital 8.0 2.1 Proceeds from sale of treasury shares 0.9 - Payment of transaction costs - (0.6) Dividends paid to equity shareholders (15.4) - Dividends paid to minority shareholders (3.0) (2.2) Net cash outflow from financing activities (44.8) (40.4) Net increase in cash and cash equivalents 49.4 8.5 Cash and cash equivalents at 1 January 63.5 44.0 Effect of exchange rate fluctuations on cash and cash equivalents (7.9) 11.0 Cash and cash equivalents at 31 December 105.0 63.5 Free cash flow: Net cash inflow from operating activities 67.7 62.6 Additional funding contributions into Group pension plans 25.5 10.0 Purchase of property, plant and equipment (43.2) (42.5) Proceeds from sale of property, plant and equipment 16.6 10.3 Dividends received from joint ventures 0.9 4.7 Dividends paid to minority shareholders (3.0) (2.2) Free cash flow 1 64.5 42.9 2006 2005 restated (note 2) Notes Â£m Â£m Assets Property, plant and equipment 222.4 264.9 Intangible assets 429.0 481.6 Interests in joint ventures 11.6 13.1 Investments 15.8 19.7 Income tax recoverable 2.3 2.3 Deferred tax assets 11.3 15.0 Other receivables 9.8 8.7 Total non-current assets 702.2 805.3 Cash and short-term deposits 111.9 65.9 Inventories 171.2 179.6 Trade and other receivables 303.0 294.0 Income tax recoverable 1.1 - Derivative financial instruments 1.7 3.7 588.9 543.2 Assets classified as held for sale 18.6 87.2 Total current assets 607.5 630.4 Total assets 1,309.7 1,435.7 Equity Issued share capital 13 19.3 375.5 Share premium account 14 6.3 645.5 Other reserves (17.0) 37.8 Retained earnings 15 466.2 (609.8) Total parent company shareholders' equity 474.8 449.0 Minority interests 9.4 12.7 Total equity 484.2 461.7 Liabilities Interest-bearing loans and borrowings 188.1 341.9 Employee benefits 17 155.1 224.8 Other payables 19.5 35.5 Provisions 22.5 11.1 Deferred tax liabilities 21.8 21.6 Total non-current liabilities 407.0 634.9 Interest-bearing loans and borrowings 104.3 16.3 Trade and other payables 241.9 249.2 Income tax payable 27.7 16.4 Provisions 32.7 20.6 Derivative financial instruments 6.1 - 412.7 302.5 Liabilities directly associated with assets classified as held for sale 5.8 36.6 Total current liabilities 418.5 339.1 Total liabilities 825.5 974.0 Total equity and liabilities 1,309.7 1,435.7 Net debt: Interest-bearing loans and borrowings - non-current 188.1 341.9 - current 104.3 16.3 Cash and short-term deposits (111.9) (65.9) Total net debt 1,16 180.5 292.3 2006 2005 Â£m Â£m Exchange differences on translation of the net assets of foreign operations (81.1) 73.7 Net investment hedges 25.3 (29.9) Actuarial gains/(losses) on employee defined benefit schemes 21.8 (41.1) Changes in fair value of equity securities available-for-sale 0.2 2.2 Net (expense)/income recognised directly in equity (33.8) 4.9 Profit/(loss) for the year 66.4 (7.6) Total recognised income and expense for the year 32.6 (2.7) Attributable to: Equity holders of the parent company 29.9 (6.0) Minority interests in - profit for the year 3.5 3.4 - foreign exchange translation differences (0.8) (0.1) Total recognised income and expense for the year 32.6 (2.7) Group Reconciliation of Movements in Equity For the year ended 31 December 2006 Total equity attributable to parent company Minority Total equity interests equity holders Â£m Â£m Â£m As at 1 January 2005 450.6 11.7 462.3 Total recognised income and expense for the year (6.0) 3.3 (2.7) New share capital issued 2.1 - 2.1 Recognition of share-based payments 2.3 - 2.3 Dividends paid - (2.3) (2.3) (1.6) 1.0 (0.6) As at 31 December 2005 449.0 12.7 461.7 As at 1 January 2006 449.0 12.7 461.7 Total recognised income and expense for the year 29.9 2.7 32.6 New share capital issued 8.0 - 8.0 Disposal of treasury shares 0.9 - 0.9 Recognition of share-based payments 2.4 - 2.4 Dividends paid (15.4) (3.1) (18.5) Acquisition of minority interest - (2.9) (2.9) 25.8 (3.3) 22.5 As at 31 December 2006 474.8 9.4 484.2 1 Basis of preparation The audited consolidated financial statements of Cookson Group plc (the 'Company ') in respect of the year ended 31 December 2006 have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted in the EU and were approved by the Board of Directors on 13 March 2007. The financial information set out in this preliminary results announcement does not constitute the Company's statutory accounts, within the meaning of section 240 of the Companies Act 1985, for the years ended 31 December 2006 or 2005 but is derived from those accounts. An unqualified audit report was issued on the statutory accounts for 2006, which will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The comparative figures for the financial year ended 31 December 2005 are not the Company's statutory accounts for that financial year. Those accounts, which were prepared under IFRS, have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. These sections address whether proper accounting records have been kept, whether the Company's accounts are in agreement with these records and whether the auditor has obtained all the information and explanations necessary for the purposes of its audit. Disclosure of exceptional items International Accounting Standard ('IAS') 1, Presentation of Financial Statements, provides no definitive guidance as to the format of the income statement, but states key lines which should be disclosed. It also encourages additional line items and the re-ordering of items presented on the face of the income statement when appropriate for a proper understanding of the entity's financial performance. In keeping with the spirit of this aspect of IAS 1, the Company has adopted a policy of disclosing separately on the face of its income statement the effect of any components of financial performance considered by the Directors to be exceptional, or for which separate disclosure would assist both in a better understanding of the financial performance achieved and in making projections of future results. Both materiality and the nature and function of the components of income and expense are considered in deciding upon such presentation. Such items may include, inter alia, the financial effect of any profit or loss arising on business disposals, major rationalisation or restructuring activity, curtailment gains or losses relating to employee benefits, profits and losses on sale or impairment of non-current assets and other items, including the taxation impact of the aforementioned items, which have a significant impact on the Group's results of operations either due to their size or nature. Non-GAAP financial measures The Company uses a number of non-Generally Accepted Accounting Practice ('non-GAAP') financial measures in addition to those reported in accordance with IFRS. Because IFRS measures reflect all items which affect reported performance, the Directors believe that certain non-GAAP measures, which reflect what they view as the underlying performance of the Group, are important and should be considered alongside the IFRS measures. The following non-GAAP measures are referred to in this document. On the face of the Group income statement, 'trading profit' is separately disclosed, being defined as profit from operations before: the costs of rationalisation of operating activities; the profit or loss relating to non-current assets and curtailment gains or losses relating to employee benefits. The Directors believe that trading profit is an important measure of the underlying trading performance of the Group. On the face of the Group income statement, 'headline profit before tax' and ' headline profit attributable to parent company equity holders' are reported, together with their calculation. The Directors believe that headline profit before tax and headline profit attributable to parent company equity holders provide important measures of the underlying earning capacity of the Group. On the face of the Group income statement, 'headline earnings per share' is reported. The Directors believe that headline earnings per share gives an important measure of the underlying earning capacity of the Group. On the face of the Group statement of cash flows, 'EBITDA' is reported as a sub-total, representing Group earnings before interest, tax, depreciation and amortisation charges. EBITDA is a financial measure that is commonly used and the Directors believe it to be an important measure of the underlying trading performance of the Group. On the face of the Group statement of cash flows, 'free cash flow' is reported, together with its calculation. The Directors believe that free cash flow, which reflects the Group's operational cash flow before repayment of borrowings and defined benefit post-retirement deficits or expenditure on business acquisitions or disposals, gives an important measure of the underlying cash-generation capacity of the Group. On the face of the Group balance sheet, 'net debt' is reported, together with its calculation. The Directors believe that this is an important measure as it shows the Group's aggregate net indebtedness to banks and other external finance institutions. 2 Restatement of comparative information in the 2006 Group accounts Except as referred to below, this preliminary results announcement has been prepared on the basis of the accounting policies adopted in the Company's audited consolidated financial statements for the year ended 31 December 2005. The audited consolidated financial statements for the year ended 31 December 2006 have been prepared in accordance with the Companies Act 1985 and IFRS, having been prepared in accordance with IFRS for the first time in 2005. During 2006, the Directors continued to assess the detailed impact of IFRS on the presentation of the Group accounts within the Company's audited consolidated financial statements. As a consequence of this continued assessment, the Directors have made a number of changes to the accounting treatment and presentation of certain items in the Group accounts for 2006, together with appropriate changes to the respective comparative information in the prior year. These changes are explained below, none of which have had an impact on the Group's net cash flows, financial position or total recognised income and expense as previously reported for 2005. (a) Interest cost and expected returns associated with the Group's defined benefit pension and other post-retirement benefit plans In the Group's annual financial statements for the year ended 31 December 2005, the interest cost and expected return on assets associated with the Group's defined benefit pension and other post-retirement benefit plans were recognised in the income statement within trading profit. For 2006, the interest cost has been included in the income statement within finance costs and the expected return on assets within finance income. Comparative figures for 2005 have been restated accordingly, such that raw material manufacturing costs have increased by Â£0.4m; other manufacturing costs have decreased by Â£1.6m; administration, selling and distribution costs have decreased by Â£4.1m; trading profit and profit from operations have increased by Â£5.3m; finance costs have increased by Â£24.2m and finance income has increased by Â£18.9m. This change in accounting treatment, which the Directors believe provides the user of the financial statements with more relevant information in relation to the Group's trading performance, finance costs and finance income, has no impact upon the Group's previously reported net cash flows, financial position or total recognised income and expense. (b) Amortisation and impairment of intangibles In the Group's annual financial statements for the year ended 31 December 2005, charges in respect of the amortisation and impairment of intangibles were separately disclosed in the Group income statement as a component of profit from operations, outside of trading profit. No such costs were incurred for the year ended 31 December 2006 and the Directors believe that these charges do not currently warrant separate disclosure. Comparative figures for 2005 have been restated, increasing administration, selling and distribution costs by Â£0.8m and reducing trading profit by Â£0.8m. This change in presentation has no impact upon the Group's previously reported net cash flows, financial position or total recognised income and expense. (c) Disposal of businesses from continuing operations In the Group's annual financial statements for the year ended 31 December 2005, the loss on disposal of operations which were not classified as discontinued operations due to their size and importance, were calculated post-tax and presented on the face of the income statement below income tax costs. In these financial statements, losses on disposal of continuing operations have been reported pre-tax as a separate line item below operating profit and before profit before tax. Comparative figures for 2005 have been restated accordingly, such that a loss on disposal of continuing operations of Â£2.9m has been reported before profit before tax; profit before tax has reduced by Â£2.9m and income tax costs on exceptional items have increased by Â£1.6m. This change in accounting treatment, which the Directors believe provides the user of the financial statements with more relevant information in relation to the results from continuing operations, has no impact upon the Group's previously reported net cash flows, financial position or total recognised income and expense. (d) Cash flows from financing activities In the Group's annual financial statements for the year ended 31 December 2005, cash flows resulting from the settlement of forward foreign exchange contracts were disclosed within the statement of cash flows as a component of cash flows from operating activities. The Directors believe that such items should more appropriately be presented as a component of cash flows from investing activities and comparative figures for 2005 have been restated accordingly. This change in presentation has no impact upon the Group's previously reported net cash flows, financial position or total recognised income and expense. (e) Bank overdrafts In the Group's annual financial statements for the year ended 31 December 2005, overdrafts were disclosed within the balance sheet as a component of cash and cash equivalents. The Directors believe that such items should more appropriately be presented as a component of interest-bearing loans and borrowings and comparative figures for 2005 have been restated accordingly. This change in presentation has no impact upon the Group's previously reported net cash flows, financial position or total recognised income and expense. (f) Investments In the Group's annual financial statements for the year ended 31 December 2005, certain assets held in Rabbi Trusts were disclosed in the balance sheet as a component of other financial assets. The Directors believe that such items should more appropriately be presented within non-current investments and comparative figures for 2005 have been restated accordingly. This change in presentation has no impact upon the Group's previously reported net cash flows, financial position or total recognised income and expense. 3 Segment reporting As required by IAS 14, Segment Reporting, the analysis of the Group's results by business segments separately includes those central corporate costs, representing the central costs of operating as a public company in the UK, which are neither directly attributable to nor capable of being allocated on a reasonable basis to, individual segments. Inter-segment revenue is not material in relation to total Group revenue, whether analysed by business or geographical segments. The contribution from acquisitions to revenue and profit from operations in 2006 and 2005 was not material. By business segments 2006 2005 Profit Profit from from Operations Revenue operations Revenue restated Â£m Â£m Â£m Â£m Ceramics 756.6 89.5 722.1 73.1 Electronics 554.7 58.5 489.2 52.5 - Assembly Materials 319.3 28.2 273.7 25.6 - Chemistry 235.4 30.3 215.5 26.9 Precious Metals 278.3 11.0 245.8 7.8 Group corporate costs - (8.7) - (8.5) Trading profit - continuing operations 1,589.6 150.3 1,457.1 124.9 - discontinued 71.8 7.9 177.5 9.8 operations Rationalisation of operating activities - (34.7) - (18.5) Profit relating to non-current assets - 13.1 - - Curtailment gains relating to employee benefits - 8.6 - - Total Group 1,661.4 145.2 1,634.6 116.2 Of the total cost of rationalisation of operating activities of Â£34.7m (2005: Â£18.5m), Â£22.9m related to Ceramics (2005: Â£8.1m); Â£7.0m to Assembly Materials (2005: Â£0.8m); Â£1.7m to Chemistry (2005: Â£2.2m); Â£2.4m to Precious Metals (2005: Â£1.4m); Â£0.6m to Group corporate operations (2005: Â£0.9m) and Â£0.1m to discontinued operations (2005: Â£5.1m). Of the total net profit relating to non-current assets of Â£13.1m in 2006 (2005: net nil), Â£0.1m loss related to Ceramics (2005: Â£0.1m loss); Â£1.5m profit to Assembly Materials (2005: Â£0.3m profit); Â£12.8m profit to Chemistry (2005: Â£1.5m loss); Â£1.1m loss to Group corporate operations (2005: Â£0.6m loss) and, in 2005, Â£1.9m profit to discontinued operations. 2006 2005 By By By location of customer By location of customer Group operations location Group operations location Profit Profit from from Operations Revenue operations Revenue Revenue restated Revenue By geographical segments Â£m Â£m Â£m Â£m Â£m Â£m Europe 590.3 46.2 525.7 566.4 42.4 506.2 NAFTA 552.8 30.8 525.9 526.6 22.3 514.4 Asia-Pacific 359.8 63.7 420.9 289.7 53.9 328.9 Rest of the World 86.7 9.6 117.1 74.4 6.3 107.6 Trading profit - continuing operations 1,589.6 150.3 1,589.6 1,457.1 124.9 1,457.1 - discontinued operations 71.8 7.9 71.8 177.5 9.8 177.5 Rationalisation of operating activities - (34.7) - - (18.5) - Profit relating to non-current assets - 13.1 - - - - Curtailment gains relating to employee benefits - 8.6 - - - - Total Group 1,661.4 145.2 1,661.4 1,634.6 116.2 1,634.6 Of the total cost of rationalisation of operating activities of Â£34.7m (2005: Â£18.5m), Â£24.2m was incurred in Europe (2005: Â£8.3m); Â£9.1m in NAFTA (2005: Â£3.3m); Â£1.2m in Asia-Pacific (2005: Â£0.8m); Â£0.1m in the Rest of the World (2005: Â£1.0m) and Â£0.1m related to discontinued operations (2005: Â£5.1m). Of the total net profit relating to non-current assets of Â£13.1m in 2006 (2005: net nil), Â£8.9m profit related to Europe (2005: Â£0.6m loss); Â£3.1m profit to NAFTA (2005: Â£1.3m loss); Â£1.2m profit to Asia-Pacific (2005: Â£nil); Â£0.1m loss to the Rest of the World (2005: Â£nil) and Â£1.9m profit in 2005 to discontinued operations. 4 Rationalisation of operating activities The charge of Â£34.7m (2005: Â£18.5m) was the result of the implementation of a number of initiatives aimed at reducing the Group's cost base and realigning its manufacturing capacity with its customer markets. The initiatives implemented included redundancy programmes, the consolidation of facilities, plant closures, the streamlining of manufacturing processes and the rationalisation of product lines. Of these rationalisation charges, Â£10.3m (2005: Â£3.0m) represented asset write-downs, the majority of which were in Europe and NAFTA. Total cash spend in respect of rationalisation initiatives was Â£16.1m (2005: Â£17.0m). The net taxation credit attributable to these rationalisation costs was Â£2.1m (2005: Â£5.7m). 5 Profit/(loss) relating to non-current assets The net profit on non-current assets of Â£13.1m in 2006 mainly comprised profits arising on the sale of surplus property. There was no net (loss)/profit for the Group during 2005 in relation to non-current assets, as a net loss of Â£1.9m in the Group's continuing operations was offset by a profit of Â£1.9m in discontinued operations. The net taxation charge attributable to the sale of non-current assets was Â£3.7m (2005: Â£nil). 6 Curtailment gains relating to employee benefits Curtailment gains of Â£8.6m (2005: Â£nil) result from reductions in liabilities arising from the closure of the Group's two largest US defined benefit pension plans to new members and the freezing of the benefits of existing members therein, together with reductions in the level of benefits provided through certain of the Group's US post-retirement healthcare plans. 7 Finance costs and finance income In the Group's annual financial statements for the year ended 31 December 2005, the interest cost and expected return on assets associated with the Group's defined benefit pension and other post-retirement benefit plans was recognised in the income statement within trading profit. As permitted under IFRS, these components of the Group's total pension and other post-retirement benefits charge are now recognised as components of finance costs and finance income respectively, which the Directors believe is a more appropriate accounting treatment. Comparative figures have been restated, such that net pension expense of Â£5.3m for the year ended 31 December 2005 has been reclassified in the income statement from trading profit, Â£24.2m of which has been charged within finance costs and Â£18.9m of which has been credited within finance income. 8 Loss on disposal of continuing operations During the year, the Group disposed of a number of businesses from its Ceramics and Electronics divisions, none of which represented a separate major line of business or geographical area of operations. Accordingly, these disposals are presented within pre-tax results from continuing operations in the Group's income statement. The aggregate proceeds received in respect of these disposals, net of selling costs, amounted to Â£22.4m and, together with additional costs in relation to prior year disposals, resulted in a net loss before tax of Â£4.7m. In 2005, the Group disposed of its Technical Ceramics business, formerly a part of the Ceramics division, and also incurred additional costs in relation to prior year disposals, resulting in a net loss before tax of Â£2.9m. The tax charge associated with these disposals was Â£0.6m (2005: Â£1.6m). 9 Income tax The total charge for income tax of Â£43.8m for 2006 (2005: Â£44.4m) comprises a tax charge on ongoing activities of Â£38.5m (2005: Â£28.4m), representing an effective rate of 31.3% (2005: 31.3%) on profit from continuing operations excluding the Group's share of post-tax joint venture income, together with a tax charge on exceptional items of Â£5.3m (2005: Â£16.0m). The tax charge on exceptional items comprises a Â£2.1m credit (2005: credit Â£5.7m) in relation to rationalisation costs, a charge of Â£3.7m (2005: Â£nil) in relation to the sale of non-current assets, a charge of Â£3.1m (2005: Â£3.5m) in relation to the different treatment of goodwill amortisation for tax and reporting purposes and a charge of Â£0.6m (2005: Â£1.6m) on the loss on disposal of continuing operations. The 2005 charge additionally included a write-down of deferred tax assets of Â£16.6m following a reassessment of expected future geographical profit contributions. 10 Net post-tax loss on disposal of discontinued operations On 15 December 2005, the Group announced that it had entered into an agreement to sell its Laminates business, which previously formed part of its Electronics division, to ISOLA Group S.A.R.L, with completion of the transaction expected in the first half of 2006. Accordingly, with effect from 31 December 2005, the assets and liabilities of the Laminates business were reclassified in the Group balance sheet to 'held for sale' and measured at fair value less costs to sell, resulting in a loss in 2005 of Â£52.5m, after a related tax credit of Â£0.6m. In 2006, a further loss of Â£5.8m was incurred on the completion of the disposal on 21 April 2006. On 31 December 2005, the Group sold its Specialty Coating Systems (SCS) business, which previously formed part of the Assembly Materials sector of the Electronics division, to Bunker Hill Capital for Â£29.4m, resulting in a profit on disposal in 2005 of Â£10.8m, after a related tax charge of Â£5.7m. During 2006, a further Â£0.2m of disposal costs were incurred. As part of the sale of the Group's former Speedline business in 2003 to KPS, an equity fund, the sale agreement provided for Cookson to receive further consideration from KPS contingent upon Speedline being sold in the future for more than a specified sum. In December 2006, Speedline was sold by KPS for an amount in excess of the specified sum, resulting in a profit of Â£2.7m being recognised in 2006. There was no tax charge or credit associated with the net post-tax loss on disposal of discontinued operations in 2006 (2005: net tax charge of Â£5.1m). 11 Earnings per share Basic earnings per share are calculated using a weighted average number of ordinary shares of 191.5m (2005: 188.5m). Diluted earnings per share are calculated assuming conversion of all outstanding dilutive share options. Outstanding share options are only treated as dilutive when their conversion to ordinary shares would decrease earnings per share or increase loss per share. These adjustments give rise to an increase in the weighted average number of ordinary shares of 1.3m (2005: 1.1m). 12 Dividends During the year, the Company paid a final dividend of 5.0p per share for the year ended 31 December 2005 and an interim dividend of 3.0p per share for the year ended 31 December 2006. The total cost of dividends paid in 2006 was Â£15.4m (2005: Â£nil). The proposed final dividend for the year of 7.0p per share (2005: 5.0p) is subject to approval by shareholders at the Company's Annual General Meeting and has not been included as a liability in these financial statements. If approved by shareholders, the dividend will be paid on 11 June 2007 to ordinary shareholders on the register at 25 May 2007 and, based upon the number of ordinary shares in issue at 31 December 2006, will cost Â£13.4m. 13 Issued share capital At an Extraordinary General Meeting of the Company held on 12 January 2006, shareholders approved special resolutions to reduce the issued share capital of the Company by cancelling and extinguishing all of the existing deferred shares of 49p each. The cancellation of the deferred shares became effective on 15 February 2006 upon registration of the order of the High Court with the Registrar of Companies, at which date the balance of Â£356.5m on the account became a non-distributable reserve of the Company reported within retained earnings. This reserve becomes distributable only at such time when all external creditors of the Company as at 15 February 2006 have either been fully settled, or have agreed that this reserve may be deemed distributable. The holders of ordinary shares are entitled to receive dividends as declared from time to time, are entitled to one vote per share at meetings of the Company and rank equally with regard to entitlement to the Company's residual assets. The deferred shares carried no right to dividends or voting and were effectively worthless. Also at the Extraordinary General Meeting of the Company held on 12 January 2006, shareholders approved a special resolution to amend the Company's Articles of Association to facilitate termination of the Company's registration with the Securities Exchange Commission ('SEC') of the US. The amendment included a provision conferring upon the Board the power to require ordinary shares which are held directly or indirectly by US resident shareholders to be sold in order to reduce the number of such shareholders below 300, as presently required by the SEC for termination of registration. The Board commenced exercising these compulsory transfer provisions soon after the amendment was approved by shareholders and, having reduced the number of US resident shareholders below 300, the Company announced on 21 February 2006 that it had filed a Form 15 with the SEC to terminate the SEC registration of its ordinary shares, with SEC de-registration occurring on 22 May 2006. On filing of the Form, the Company's obligations to file certain forms and reports with the SEC, including Forms 20-F and 6-K, were suspended. Under currently applicable SEC regulations, after the de-registration, the number of the Company's US resident shareholders must remain below 300 at each financial year-end to avoid re-commencement of SEC reporting and other applicable US obligations. The Company's Articles of Association give the Company's Directors the ability to limit the number of US resident shareholders for this purpose. 14 Share premium account At an Extraordinary General Meeting of the Company held on 12 January 2006, shareholders approved a special resolution to cancel the share premium account of the Company. The cancellation became effective on 15 February 2006 upon registration of the order of the High Court with the Registrar of Companies, at which date the balance of Â£646.9m on the account became a non-distributable reserve of the Company reported within retained earnings. This reserve becomes distributable only at such time when all external creditors of the Company as at 15 February 2006 have either been fully settled, or have agreed that this reserve may be deemed distributable. 15 Retained earnings The balance on the Group's retained earnings increased by Â£1,076.0m during the year, of which Â£356.5m resulted from a non-distributable reserve that arose on the cancellation of the Company's deferred shares (note 13) and Â£646.9m resulted from a non-distributable reserve that arose on the cancellation of the share premium account of the Company (note 14). 16 Reconciliation of movement in net debt Balance at Foreign Non-cash Cash flow Balance at 1 January exchange movements 31 December 2006 adjustment 2006 Â£m Â£m Â£m Â£m Â£m Short-term deposits - - - 68.0 68.0 Cash at bank and in hand 65.9 (7.8) - (14.2) 43.9 Bank overdrafts (2.4) (0.1) - (4.4) (6.9) Cash and cash equivalents 63.5 (7.9) - 49.4 105.0 Current (13.9) 2.0 (92.0) 6.5 (97.4) Non-current (343.0) 38.8 92.0 23.4 (188.8) Refinancing costs and issue costs 1.1 - (0.4) - 0.7 Borrowings, excluding overdrafts (355.8) 40.8 (0.4) 29.9 (285.5) Net debt (292.3) 32.9 (0.4) 79.3 (180.5) 17 Employee benefits The balance as at 31 December 2006 of Â£155.1m (2005: Â£224.8m) in respect of the Group's defined benefit pension and other post-retirement benefit obligations, classified in the balance sheet as 'Employee benefits', results from an interim actuarial valuation of the Group's defined benefit pension and other post-retirement obligations as at that date. Of the total balance, Â£118.1m (2005: Â£178.5m) relates to the combined deficits of the Group's principal defined benefit pension schemes in the UK and the US. Of the remainder of the total, Â£13.6m (2005: Â£14.3m) relates to defined benefit pension arrangements in the Rest of the World and Â£23.4m (2005: Â£32.0m) relates to unfunded post-retirement benefit arrangements, being mainly healthcare benefit arrangements in the US. The total charge in the income statement for 2006 in respect of the Group's defined benefit pension and other post-retirement benefit obligations, before curtailment gains, was Â£15.3m (2005: Â£14.8m). Curtailment gains in 2006 of Â£8.6m (2005: Â£nil) have been credited in arriving at operating profit (note 6) and settlement losses of Â£0.3m (2005: Â£0.9m curtailment gains) have been charged in arriving at the net post-tax loss on disposal of operations. Cash contributions into the Group's defined benefit pension plans, including additional funding contributions aimed at accelerating the reduction in the UK plan deficit agreed with the plan Trustee of Â£25.5m (2005: Â£10.0m), amounted to Â£40.1m (2005: Â£23.0m). Actuarial gains and favourable exchange rate movements together contributed Â£30.9m to the reduction in the employee benefits balance in the year (2005: Â£46.9m increase). 18 Exchange rates The Group reports its results in pounds sterling. A substantial portion of the Group's revenue and profits are denominated in currencies other than pounds sterling. It is the Group's policy to translate the income statements and cash flow statements of overseas operations into pounds sterling using average annual exchange rates and to translate the balance sheet using year end rates. The principal exchange rates used were as follows: Year end rate Average rate 2006 2005 2006 2005 US dollar ($ per Â£) 1.96 1.72 1.84 1.82 Euro (â‚¬ per Â£) 1.48 1.46 1.47 1.46 Singapore dollar (S$ per Â£) 3.00 2.85 2.92 3.03 Hong Kong dollar (HK$ per Â£) 15.22 13.31 14.30 14.17 Chinese Renminbi (RMB per Â£) 15.28 13.85 14.68 14.81 This information is provided by RNS The company news service from the London Stock Exchange

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