Final Results

14th Mar 2006 07:04

Cookson Group PLC14 March 2006 14 March 2006 ANNOUNCEMENT OF 2005 PRELIMINARY RESULTS Highlights • Trading profit from continuing operations up 14% - strong increase in trading profit for the Ceramics and Electronics divisions • Return on sales on continuing operations increased over one percentage point - Substantial progress towards achieving 2007 margin targets - Ceramics achieves full year margin of 9.9% and Electronics 10.5% • Headline profit before tax up 20% • Headline EPS up 24% • Dividends resumed - 2005 final of 5 pence per share • Disposal proceeds target of £100 million reached ahead of schedule • Accelerated 'top-up' payment schedule agreed with UK pension plan trustee ------------------------ ---------- -------- -------------------------------- 2005 2004 Increase/(decrease) vs. 2004Continuing Operations* Reported rates Constant ratesRevenue £1,481m £1,501m -1% -3%Trading profit** £123.5m £108.3m +14% +11%Return on sales** 8.3% 7.2% +1.1 pts +1.0 pts Total OperationsRevenue £1,635m £1,653m -1% -2%Trading profit** £130.2m £114.9m +13% +11%Return on sales** 8.0% 7.0% +1.0 pts +1.0 ptsProfit before tax - headline** £101.9m £85.0m +20% - basic £81.4m £50.1m +62%Earnings per share - headline** 37.2p 30.1p +24% - basic (5.8)p (11.2)pDividend per share 5.0p -Free cash flow** £48.4m £58.1m £(9.7)mNet debt £292.3m £321.8m £29.5m lower------------------------ ---------- -------- --------------------------------*Continuing operations excludes the results of the Laminates and SCS businesses **Refer to the attached Income Statement and Statement of Cash Flows fordefinitions Commenting on the Group's results and outlook, Nick Salmon, Chief Executive,said: "In 2005 we have made good progress in implementing the Strategic Plan announcedin January 2005. This is borne out by the Group's improved profitability,reduced debt and the achievement of our £100 million disposals target ahead ofschedule. Over the past two years we have delivered sustained free cash flow and stronglyimproved profitability. As a result of this and our improved confidence in theprospects for the Group, we are recommending a final dividend for 2005 of 5pence, the first time a dividend will have been paid since October 2001. With our continued cost reduction and restructuring programmes in all divisionstogether with a particular focus on the turnaround of the Precious Metalsdivision, we expect an improvement in the overall performance of our continuingoperations in 2006. The disposal of Laminates should also improve the qualityof our earnings." OVERVIEW Note: the results for the Group for 2005 and the comparative year have beenstated in accordance with International Financial Reporting Standards (IFRS).The impact on the Group's 2004 financial statements of its transition to IFRSwas communicated to shareholders on 22 July 2005 by way of a press and RNSannouncement and is available on the Company's website atwww.cooksongroup.co.uk. Summary of Group results End market growth for our products and services in 2005 was positive overall.Global steel production, the most important end market for our Ceramicsdivision, increased 6%, with falls in Europe and NAFTA more than offset bygrowth in Asia Pacific, most notably China. The Electronics division's endmarkets grew more modestly in 2005 following a year of strong growth in 2004,with strong growth in Asia-Pacific again offsetting slight declines in Europeand NAFTA. Retail jewellery, the end market for the Precious Metals division,was weak throughout 2005, particularly in the UK. This reflected severalfactors, including the sharp rise in the cost of gold and generally weakerretail spending trends. Against this background, trading profit from continuing operations increased by14% to £123.5 million. This reflected revenue from continuing operations at£1,481 million, marginally down on 2004, but with an improved product mix withlower revenue from commodity type activities and growth in several of our newer,higher technology segments. The return on sales was 8.3%, over one percentagepoint higher than last year. Restructuring costs were £18.5 million. Strongertrading profits and a lower interest charge resulted in headline profit beforetax increasing by 20% to £101.9 million. Headline earnings per share increasedby 24% to 37.2 pence. The Board is recommending the resumption of dividendpayments with a recommended final dividend for 2005 of 5.0 pence payable on 12June 2006 to shareholders on the register at 26 May 2006. Net debt at year endof £292.3 million was £29.5 million lower than prior year, having been adverselyaffected by £26.4 million of foreign exchange movements in the year, butbenefiting from the gross disposal proceeds of £29 million for SpecialityCoating Systems (SCS) received at year end. Restructuring As part of our Strategic Plan to improve the operational performance ofunderperforming businesses, a number of actions were initiated in 2005.Restructuring charges in 2005 totalled £18.5 million, of which £5.1 millionrelated to the discontinued Laminates business and £13.4 million to continuingoperations. For the past few years a significant proportion of ourrestructuring charges (£45 million in the last four years) related to theturnaround of Laminates which was thereby returned to profitability before itssale. The main restructuring actions completed in 2005 covered: Ceramics division: • The relocation of production capacity from the US to Mexico • The merger of two South African factories onto a single site • The closure of a linings factory in Italy • The downsizing of a linings factory in Germany • Overhead reduction programmes in the US, the UK and Continental Europe Electronics division: • The closure of the Laminates operation in Germany and downsizing in Sweden • Overhead reduction in Europe • The relocation of production capacity from the US to Mexico • Workforce reduction in Singapore Precious Metals division: • An 8% reduction in the US workforce and consolidation into one factory • The completion of restructuring in France Strategic Plan Good progress has been made in implementing the Strategic Plan announced inJanuary 2005. The margin improvements in the Ceramics and Electronics divisionshave come from a combination of improved profitability in the revenue mix andinternal cost reduction actions, which have more than offset raw material andenergy cost increases. The disposals proceeds target of £100 million will be reached when we receivethe proceeds from the Laminates disposal. The Laminates deal was signed on 15December 2005 but is subject to approval by the European competitionauthorities, which we expect to receive shortly. Following the sale of ourCeramic Fibres business for US$23 million (£13 million) announced on 22 February2006, the total value of disposal transactions signed since December 2004 standsat £114 million. The sale of Laminates has a particular significance for the Group. Over thepast four years, following the severe downturn in the telecommunications marketin 2001 and the transition of the electronics manufacturing industry toAsia-Pacific, Laminates has made cumulative operating losses of £46 million andhas absorbed significant cash in restructuring costs and capital investments toexpand new and existing facilities - some £73 million in total. Additionally,Laminates was the Group's only sector which sold purely into the electronicsmarket, hence our cyclical market exposure is much reduced. In fact,electronics end markets now represent only around 20% of Group revenue. There are one or two further, albeit smaller, potential business disposals inthe pipeline and some further land and property transactions that we expect tocomplete in 2006. The Strategic Plan involves further restructuring actions in our continuingoperations, beyond those actions listed above, to reduce costs and adjustproduction capacities in mature markets. It is anticipated that there will betwo further years of restructuring charges at levels similar to 2005. Given the good progress achieved in implementing the Strategic Plan and the muchimproved underlying performance of the Group in terms of earnings and cash flow,the board is satisfied that the criteria set out in the Strategic Plan for theresumption of dividend payments has been met. Accordingly the board isrecommending a final dividend for 2005 of 5 pence per share. RESULTS OF OPERATIONS Note: the data provided in the tables below are at reported exchange rates. Inaddition, 'continuing operations' exclude the results of 'discontinuedoperations' in 2005, which comprises SCS (previously included within theAssembly Materials sector) and Laminates (previously a separate sector withinthe Electronics division). Group - Continuing operations Revenue (£m) Trading Profit (£m) Return on Sales (%) ---------------- ------------------- ------------------- 2005 2004 2005 2004 2005 2004 ----- ---- ----- ----- ----- ---- First half 720 741 53.9 48.2 7.5 6.5 Second half 761 760 69.6 60.1 9.1 7.9 ----- ---- ----- ----- ----- ---- Year 1,481 1,501 123.5 108.3 8.3 7.2 ----- ---- ----- ----- ----- ---- ----- ---- ----- ----- ----- ---- Revenue from continuing operations was marginally lower than in 2004, being 1%lower at reported exchange rates and 3% lower at constant exchange rates.Revenue trends were similar between the first and second halves of the year on aconstant currency basis with a 3% decline for both periods. The substantial progress made towards achieving the margin targets set out inour Strategic Plan announced on 18 January 2005, meant that trading profit fromcontinuing operations increased by 14% at reported exchange rates and 11% atconstant exchange rates compared to prior year. Our two largest divisions -Ceramics and Electronics - which together make up 83% of Group revenue fromcontinuing operations, both reported significantly higher levels ofprofitability than in the prior year. Trading profit from continuing operationsin the Ceramics division increased by 24% to £73.9 million, and by 9% to £51.1million in the Electronics division. The Precious Metals division, whichconstitutes 17% of Group revenue from continuing operations, reported tradingprofit 35% lower at £7.0 million. Return on sales from continuing operations of 8.3% has improved by over onepercentage point compared to 2004. Both our largest divisions - Ceramics andElectronics - reported good growth in return on sales from continuing operationswith margins very close to, or already achieving, double-digit levels. The fastest-growing and most profitable region for the Group continued to beAsia-Pacific which accounted for 20% of the Group's revenue from continuingoperations in 2005 and 43% of trading profit. Whilst NAFTA (which comprises theUS, Canada and Mexico) and Europe remain the Group's largest regions in terms ofrevenue, higher levels of growth outside these regions has seen their combinedshare of Group revenue from continuing operations fall from 79% in 2004 to 75%in 2005. Ceramics division Revenue (£m) Trading Profit (£m) Return on Sales (%) ---------------- ------------------- ------------------- 2005 2004 2005 2004 2005 2004 ----- ---- ----- ----- ----- ---- First half 368 358 34.1 27.4 9.3 7.7 Second half 378 381 39.8 32.0 10.5 8.4 ----- ---- ----- ----- ----- ---- Year 746 739 73.9 59.4 9.9 8.0 ----- ---- ----- ----- ----- ---- ----- ---- ----- ----- ----- ---- Market Conditions Approximately 60% of the Ceramics division's revenue is linked to the level ofsteel produced in the markets in which it operates. In 2005, global steelproduction rose by 6% to over 1.1 billion tonnes, only the second year in whichsteel production has exceeded 1 billion tonnes. Following the 9% growth in2004, the rate of growth slowed during 2005, being 7% in the first half and 6%in the second half of the year. China reinforced its position as the world'sleading steel producer with year-on-year growth of 25% and accounted for over30% of the world's total production in 2005. China's steel industry continuesto migrate towards higher grade steels, the production of which typicallyutilises more of the Ceramics division's products. Outside of China, globalproduction was down by 1% with strong growth in India of 17% - albeit from asmall base - being more than offset by lower production in the enlarged EuropeanUnion (down by 4%) and the US (down by 6%). The end markets of the Foundry, Glass and Industrial Products sectors aregenerally linked to GDP growth. Whilst 2005 was a year of overall globaleconomic growth, the most important markets for these sectors - construction andautomotive - experienced mixed fortunes. Whilst the construction industryperformed well, notably in China, vehicle production in the automotive industrywas broadly flat in both the established markets of the US and Europe. Demandfor solar energy - and thus for the Glass sector's crucibles used in themanufacture of photovoltaic cells - was strong. Divisional Performance The Ceramics division experienced a very strong year as a result of growth inglobal steel production combined with the beneficial impact of the variousrestructuring initiatives carried out during the last two years. Revenue forthe year at £746 million was 1% higher than 2004 at reported exchange rates, but1% lower at constant exchange rates. In December 2004, two plants based inBelgium and Germany which made bricks used in glass-making furnaces weredivested. Excluding the revenue from these businesses, revenue for the divisionwas up 5% at reported exchange rates and 3% at constant exchange rates. All ofthe division's market sectors - Iron and Steel, Glass, Foundry, and IndustrialProducts - reported underlying revenue growth. Trading profit grew strongly by24% at reported exchange rates to £73.9 million - the highest level everachieved by the division - and was up 21% at constant exchange rates. Allmarket sectors reported trading profit growth with particularly strongperformances from the Foundry and Glass sectors. Return on sales was close todouble-digit at 9.9%, up nearly two percentage points from the 8.0% reported in2004. Europe and NAFTA are the division's two largest regions with each making up 39%of the total division's revenue. However, the two fastest-growing regions areAsia-Pacific and Rest of the World which together make up 22% of the totaldivision's revenue, an increase of two percentage points on 2004. Electronics division Revenue (£m) Trading Profit (£m) Return on Sales (%) ---------------- ------------------- ------------------- 2005 2004 2005 2004 2005 2004 ----- ---- ----- ----- ----- ---- First half 234 232 20.8 21.0 8.9 9.0 Second half 255 242 30.3 26.0 11.9 10.7 ----- ---- ----- ----- ----- ---- Year 489 474 51.1 47.0 10.5 9.9 ----- ---- ----- ----- ----- ---- ----- ---- ----- ----- ----- ---- Market Conditions Following the disposals of the Laminates business and SCS (completed at the endof 2005), only two-thirds of the division's continuing revenue now comes fromelectronics markets with the remainder deriving from automotive and otherindustrial markets. The improved market conditions in the global electronics industry that wereevident in 2004 have continued throughout 2005. In 2005, the semiconductorindustry grew 6% by value whilst printed circuit board (PCB) production grew 2%by value and 6% by volume. Electronic equipment production grew by 8% by valuein 2005, driven by strong consumer-led demand for PCs, mobile telephones, gamesconsoles, plasma and LCD televisions and MP3 players. Consumers continue todrive the electronics industry to an ever increasing degree and consumerpurchases now account for 45% of worldwide electronic equipment sales. GlobalPC sales grew by 15% by volume in 2005, whilst the total annual production ofmobile phones reached 810 million units, a 14% increase over 2004. Regionally, Asia-Pacific experienced the strongest growth as a result of bothproduction capacity migrating to this region and also strong local end-marketdemand. PCB production, for example, whilst growing 2% worldwide saw declinesin both the US and Europe (8% and 10% respectively) being more than offset bygrowth of 20% in China. The transition to lead-free products accelerated strongly in 2005 inanticipation of new EU regulations coming into force in mid-2006 and similardevelopments in other regions. The use of lead-free products is a significantchange, not just for the Assembly Materials sector whose solder products havetraditionally contained lead. Non-lead solders melt at higher temperatures andso all other PCB components, including fabrication chemistries, must also beable to withstand these temperatures. The increasing move to lead-free productsis expected to continue over the next few years. For the non-electronics markets it was a mixed picture. Whilst 2005 was a yearof overall global economic growth, the most important non-electronics market forthe division, the automotive industry, was subdued with vehicle productionbroadly flat in both the established markets of the US and Europe. Divisional Performance Revenue for the year from continuing operations at £489 million was 3% higherthan last year at reported exchange rates (1% at constant exchange rates).Excluding the impact of lower tin prices in the Assembly Materials sector,revenue would have been 5% higher at reported exchange rates (3% at constantexchange rates). Trading profit increased by 9% to £51.1 million giving areturn on sale for the division of 10.5% (2004: 9.9%), in line with the targetfor the end of 2007 set in January 2005 (as adjusted for IFRS). Asia-Pacific the division's fast-growing region, was responsible for 37% ofrevenue from continuing operations, an increase of three percentage points over2004. Europe accounted for 32%, NAFTA 28%, and the Rest of the World 3%. Assembly Materials Revenue for the year from continuing operations at £273 million was 6% higherthan prior year at reported exchange rates (4% at constant exchange rates).However in 2005, the average price of tin - the sector's major raw material -was 9% lower than for 2004. The lower cost of tin was, in the main, passed onto customers during the year, such that underlying revenue was 6% higher thanlast year (on a constant currency basis). The revenue growth reflected the goodgrowth in PCB production noted above but more difficult markets for solderproducts used in non-electronics applications. Trading profit of £24.5 million was 24% higher than last year at reportedexchange rates (20% at constant exchange rates) reflecting the growth inunderlying volumes, the higher profitability of lead-free products and theimpact of cost-saving initiatives. Return on sales increased strongly from 7.6%to 9.0%. Asia-Pacific, the sector's largest region accounted for nearly half (48%) oftotal revenue, an increase of 4 percentage points over 2004. This reflected thecontinued migration of PCB assembly to this region and the increased size andinfluence of Asian contract manufacturers. Europe and NAFTA each accounted for24% of revenue and the Rest of the World 4%. Chemistry Revenue for the year of £216 million was flat at reported exchange rates anddown 2% at constant exchange rates. This reflected underlying growth inPCB-related products - driven by the worldwide growth in semiconductor and PCBvolumes - being negated by an over-stocking issue for semiconductor products inthe prior year, modest growth in industrial markets and the deliberate exit fromseveral low margin, commoditised industrial products. Within the semiconductormarket, the sector's copper damascene and lead-free immersion silver productsreported strong revenue growth, whilst in industrial markets our range ofplating on plastics and corrosion and wear-resistant coatings products also grewstrongly. Trading profit declined 3% to £26.6 million at reported exchange rates and 4% atconstant exchange rates largely driven by the impact of the overstocking in 2004of high margin semiconductor copper damascene products. Return on salesremained strong at 12.3% (2004: 12.7%). Europe and NAFTA remain the sector's largest regions with 43% and 33% of totalsector revenue respectively. European revenue was relatively unchanged despiteweak industrial markets, flat vehicle production volumes and continued migrationof the electronics industry to Asia-Pacific. Revenue in NAFTA was down 2% onlast year primarily due to weak demand for PCB-related products, flat vehicle production volumes and temporary de-stockingin the first quarter of the year by the sole distributor of high margin copperdamascene products for the high performance semi-conductor market. Thisde-stocking followed a build-up in inventory of this product by the distributorin the fourth quarter of 2004. The underlying demand for copper damascene,however, remains healthy with growth of around 30% per annum and theover-stocking in the first quarter was cleared by the end of the second quarter.In the Asia-Pacific region, which accounts for 23% of the sector's revenue,revenue increased marginally (1% at reported exchange rates), mainly due to thegrowth in products directed at the PCB market being offset by a decrease insales of lower margin industrial products. Precious Metals division Revenue (£m) Trading Profit (£m) Return on Sales (%) ---------------- ------------------- ------------------- 2005 2004 2005 2004 2005 2004 ----- ---- ----- ----- ----- ---- First half 118 151 2.6 3.9 2.2 2.6 Second half 128 137 4.4 6.9 3.4 5.0 ----- ---- ----- ----- ----- ---- Year 246 288 7.0 10.8 2.8 3.8 ----- ---- ----- ----- ----- ---- ----- ---- ----- ----- ----- ---- Market Conditions 2005 saw the continuation of difficult market conditions in both of our keymarkets, the US and Europe. Demand for finished jewellery products isinfluenced to a large extent by both consumer confidence and consumerpreferences. Consumer confidence was depressed in the US and in Europe and thistrend was exacerbated by the shift in customers' discretionary spend away fromjewellery products and more towards consumer electronic products such as mobilephones and MP3 players. The preference of buyers and wearers of jewellery for white metals andgemstones, which was evident in 2004, continued in 2005. The price of preciousmetals - particularly gold - also has an impact on demand. As prices increasethe weight of gold in the finished product is typically reduced to meet retailerprice points. In addition, retailers are reluctant to hold inventory whenprices are high. Gold traded at around $420/ounce in the first half of the yearbut then rose steeply throughout the second half to finish the year at around$520/ounce. Divisional Performance The division's revenue of £246 million was 15% lower than last year at bothreported and constant exchange rates reflecting the very difficult marketconditions. Net sales value, which excludes the precious metal content, of £95million was 18% lower than 2004 both at reported and constant exchange rates.Trading profit decreased by 35% to £7.0 million giving a return on net salesvalue of 7.4% (2004: 9.3%). Net sales value for the division's US operations, which constitute 57% of thetotal division's net sales value, fell by 20% to £54 million at reportedexchange rates reflecting both the weak market conditions and Tiffany, one ofthe region's largest customers, increasing its level of in-house manufacturing.In the second quarter, headcount was reduced by 8% and most activities in theregion were consolidated onto a single site. As a result of these cost-savinginitiatives, the return on net sales value increased marginally to 13.2% (2004:13.0%). Trading profit reduced by £1.6 million to £7.1 million. In Europe, net sales value fell by 16% to £41 million reflecting unprecedentedfalls in the demand for jewellery products in the three key markets of the UK,France and Spain. Hallmarking of gold jewellery items in the UK fell by 18% in2005 compared to last year. This resulted in a small trading loss of £0.1million for the year (2004: £2.1 million profit). The restructuring of theFrench operations, which included exiting from manufacturing and the relocationof the sales force, was completed in the year. Given the unsatisfactory trading performance in the UK, we will re-focus the UKoperations starting in 2006. An increased emphasis on selling via the internetand the existing call-centre will help drive sales whilst, at the same time,reducing selling costs. Group - Discontinued operations (Laminates and SCS) Revenue (£m) Trading Profit (£m) Return on Sales (%) ---------------- ------------------- ------------------- 2005 2004 2005 2004 2005 2004 ----- ---- ----- ----- ----- ---- First half 75 76 0.4 3.7 0.5 4.9 Second half 79 76 6.3 2.9 8.0 3.8 ----- ---- ----- ----- ----- ---- Year 154 152 6.7 6.6 4.4 4.3 ----- ---- ----- ----- ----- ---- ----- ---- ----- ----- ----- ---- Laminates: on 15 December 2005, the disposal of the Laminates business wasannounced. Completion of the disposal is conditional upon clearance from thecompetition authorities in Europe which is expected shortly. Laminates, the only one of the Electronics division's three sectors whoseproducts are sold exclusively into the electronics industry, had anotherdifficult year. Trading losses in the first half of the year were made up inthe second half leaving the sector with a small trading profit for the year. General market conditions were unchanged compared to last year with the marketremaining highly competitive and marked by significant over-capacity. The trendof PCB fabricator customers, such as Matsushita and Viasystems, to migrate theiroperations from NAFTA and Europe to Asia-Pacific (and China in particular)accelerated during the year. Demand for products related to high reliabilityserver applications and lead-free assembly (which requires higher assemblytemperatures) helped drive the higher end of the market, whilst the market formore standard product was very weak. Revenue for the year at £134 million was 1% higher than prior year at reportedexchange rates although unchanged at constant exchange rates. Volumes of highermargin products, such as GETEK(TM) and other high temperature/reliabilitylaminates, was strong. However, this growth was more than offset by bothreduced volumes and prices for lower end products and the exit in the US fromthe rigid laminates business. Trading profit was £1.9 million, down from the £2.5 million result in 2004.Return on sales was 1.4% (2004: 1.9%). SCS: on 31 December 2005, SCS was sold as it was not regarded as part of ourcore electronics business. This business had revenue of £20 million in 2005 andcontributed some £4.8 million of trading profit for the year. GROUP INCOME STATEMENT Headline profit before tax £m* 2005 2004 ---- ---- First half 39.9 37.2 Second half 62.0 47.8 ---- ---- Year 101.9 85.0 ---- ---- ---- ---- * at reported exchange rates Headline profit before tax for total operations was £101.9 million for 2005,which was £16.9 million higher than 2004. The increase in headline profitbefore tax arose as follows: - £12.5 million increase in trading profit from continuing operations at constant exchange rates; - £0.1 million decrease in trading profit from discontinued operations at constant exchange rates; - £2.9 million positive trading profit exchange rate translation variance; - £2.5 million lower charge for net interest payable for ongoing activities due to both a decrease of some £27 million in the average level of borrowings (average rates on gross borrowings were 6.9% for the year, similar to last year), lower margins on the new bank facility arranged in March 2005 compared to the previous facility, and interest savings from the repayment of £80 million of convertible bonds in November 2004; - £0.9 million decrease in income from joint ventures (net of tax) from £2.3 million to £1.4 million, primarily in the Chemistry sector's Japanese joint venture; this shortfall was anticipated following an exceptionally high level of profitability in the first half of 2004. Items excluded from headline profit before tax A net charge of £20.5 million was incurred in the year (2004: £34.9 million) foritems excluded from headline profit before tax, of which £5.0 million wasnon-cash related. This charge consisted of the following items: Rationalisation costs Rationalisation costs of £18.5 million (2004: £22.7 million) were incurred inthe year, of which £5.1 million (2004: £8.9 million) related to the discontinuedLaminates operation. Of the total charge, £3.0 million related to non-cashwrite down of assets and £15.5 million of cash-related costs. The principalitems included in the total charge for 2005 were as follows: - £8.1 million arose in the Ceramics division for the rationalisation of facilities in the US, Italy, South Africa and Germany; and for sales and administrative headcount reductions in both the US and Europe - £2.2 million arose in the Chemistry sector for the rationalisation of production facilities, primarily in Europe - £1.4 million arose in the Precious Metals division for the completion of the restructuring of operations in France (including exiting manufacturing and relocating the sales force); and for the reduction in workforce and consolidation of most activities onto one main site in the US - £5.1 million arose in the Laminates sector (included in discontinued operations) for the closure of the facility in Germany and the streamlining of production in Sweden. A further rationalisation charge of around £20 million is expected in each of2006 and 2007 in respect of both the completion of the above projects plusadditional cost reduction projects expected to be initiated in these years. Amortisation of intangibles A non-cash charge of £0.8 million (2004: £0.8 million) was incurred in the yearrelating to the amortisation of a product license fee relating to a discontinuedoperation. (Loss)/profit relating to fixed assets A net charge of £nil (2004: £16.8 million) was incurred in the year principallyrelating to the disposal of surplus properties and the write-down ofinvestments. Non-recurring finance costs In 2005, a non-cash charge of £1.2 million (2004: £nil) was incurred at the timethe existing bank facility was put in place in March 2005 relating to thewrite-off of the un-amortised portion of the fees incurred in respect of theprevious facility. In 2004, a profit of £5.4 million was recognised in respectof deferred income relating to interest rate swaps closed-out in prior years. Group profit before tax after the items noted above was £81.4 million for theyear compared to £50.1 million in 2004. Taxation The tax charge on headline profit before tax (but before the share of post-taxprofit of joint ventures) was £28.4 million. The effective tax rate on thisheadline profit before tax from continuing operations was 30.3%. Theprogressive migration of the Group's operations away from jurisdictions where ithas accumulated unutilised tax losses is expected to result in an increase inthe Group's effective tax rate going forward. The Group tax charge from otheractivities of £14.4 million resulted from a £16.6 million non-cash write-off ofits US deferred tax asset in light of a prudent reassessment of expected futuregeographical profit contributions, a tax credit of £5.7 million in respect ofrationalisation costs, and a £3.5 million tax charge in respect of the differenttreatment of goodwill in the US for book and tax purposes. Net post-tax loss on disposal of operations A charge of £46.2 million (2004: £34.9 million) was incurred in the year,consisting of a net post-tax loss before goodwill of £12.1 million and awrite-off of goodwill of £34.1 million, primarily from the following: - sale of the Laminates business (loss of £52.5 million) - sale of SCS from the Assembly Materials sector (profit of £10.8 million) - sale of the Technical Ceramics business (McDanel) from the Ceramics division (loss of £1.6 million) - adjustments to the loss on sale in December 2004 of two brick-making facilities in Europe from the Ceramics division (loss of £0.8 million) - sale of the Fraternity Rings business from the Precious Metals division (loss of £0.4 million) Headline profit attributable to parent company equity holders Headline profit attributable to parent company equity holders for the year was£70.1 million (2004: £56.6 million), with the £13.5 million increase over 2004arising from the significant increase in headline profit before tax, a smallincrease in the effective tax rate and a reduction of £0.7 million in profitattributable to minority interests. After taking account of all items excluded from headline profit before tax notedabove (net of the related tax impact), the write-off of the deferred tax asset,and the net post-tax loss on disposal of operations, the Group recorded a lossof £7.6 million, a £9.4 million improvement on the £17.0 million loss incurredin 2004. Earnings per share (EPS) Headline EPS, based on the headline profit attributable to parent company equityholders, amounted to 37.2 pence per share in 2005, an increase of 24% on the30.1 pence recorded in 2004. The Directors believed this basis of calculatingEPS is an important measure of the underlying earnings per share of the Group. Basic EPS, based on the total net loss attributable to parent company equityholders, was a loss per share of 5.8 pence (2004: 11.2 pence). The average number of shares in issue during 2005 was 188.5 million (2004: 188.3million) and takes into account the 1 for 10 share capital consolidation thatwas approved by shareholders and effected in May 2005. Dividend Over the last two years the Group has delivered sustained free cash flow andstrongly improved underlying profitability. This, together with the Board'simproved confidence in the prospects for the Group, has resulted in the Boardrecommending a final dividend of 5 pence per share in respect of 2005. Ifapproved, the dividend will be paid on 12 June 2006 to shareholders on theregister at 26 May 2006. No dividend was paid or proposed in respect of 2004.The last time a dividend was paid was in October 2001. GROUP CASH FLOWS Net cash from operating activities In 2005, the Group generated £68.1 million of net cash inflow from operatingactivities, £25.2 million lower than 2004. This net decrease principally arosefrom: - a £15.5 million increase in EBITDA (being trading profit before interest, tax and depreciation) to £177.3 million; - a cash outflow of £23.7 million for trade working capital, £6.8 million higher than 2004 - a £2.8 million increase in cash spend for rationalisation costs to £17.0 million; - a £3.5 million increase in pension 'top-up' payments; and - a net increase in cash outflow in respect of operating provisions and other items of £30.1 million, including £8.9 million of additional incentive payments to employees throughout the Group, with the remainder arising from movements on other non-trading debtors and creditors. The cash outflow in respect of trade working capital results in the ratio ofaverage working capital to sales for continuing operations increasing from 21.7%in 2004 to 22.4%. This primarily reflects the increasing percentage of Grouprevenue arising in Asia-Pacific where levels of trade working capital(particularly trade debtors) are traditionally higher than in the US and Europe. Cash outflow for rationalisation was £17.0 million of which £3.6 million relatedto programmes that were initiated in 2005 in respect of continuing operations,£5.3 million in respect of the discontinued Laminates business, and the balancefrom prior year initiatives (including £3.3 million in respect of therestructuring of the Precious Metals division's French operation). Some £10million is expected to be outlaid in 2006 for rationalisation programmes whichcommenced in 2005. Net cash from investing activities Capital expenditure Payments to acquire property, plant and equipment were £42.5 million in 2005, inline with 2004 and representing 90% of depreciation (2004: 90%). Proceeds fromthe sale of surplus properties, in the US, Europe and Asia, were £10.3 million(2004: £1.4 million). Dividends from joint ventures Dividends of £4.7 million were received in the year (2004: £2.3 million) fromthe Chemistry sector's Japanese joint venture. Acquisitions and disposals Net cash inflow for disposals in the year, net of acquisition-related costs, was£13.8 million which included the following: - Proceeds from the disposal of businesses, net of disposal costs, of £30.4 million, primarily comprises £4.4 million for the disposal in June 2005 of the Technical Ceramics business (McDanel) and £28.7 million for the disposal in December 2005 of SCS; Net of: - An increase in the Ceramic's division's joint venture interest with Wuhan Steel Corp in China from 25% to 50% for £1.7 million; - Deferred consideration for prior year acquisitions of £8.9 million, comprising £6.1 million for the acquisition in 2000 of Achem and £1.7 million for the acquisition in 2001 of Advent. The balance owing for deferred consideration for prior year acquisitions is £3.2 million, of which £1.1 million falls due in 2006; and - Trailing costs and purchase price adjustments for prior year disposals of £6.0 million. Free cash flow £m 2005 2004 ---- ----- First half (17.8) (18.0) Second half 66.2 76.1 ---- ----- Year 48.4 58.1 ---- ----- ---- ----- Free cash flow is defined as net cash flow from operating activities after netoutlays for the acquisition and disposal of fixed assets, dividends from jointventures and dividends paid to minority shareholders, but before additionalfunding contributions to Group pension plans. Free cash flow was £48.4 million, £9.7 million lower than 2004 due to thedecrease in cash flow from operating activities for the reasons described above.As in prior years, free cash flow in the second half increased stronglycompared with the first half of the year due to higher profitability andsignificantly higher cash inflows from trade working capital. Net cash flow before financing Net cash inflow before financing for the year was £54.4 million, £20.3 millionhigher than 2004. After an outflow for financing activities (before repaymentsof borrowings) of £0.7 million (2004: £3.3 million), net cash inflow for theyear (before repayment of borrowings) was £53.7 million, £22.9 million higherthan 2004. The strong cash inflow was partially offset by a negative translation effect of£26.4 million, mainly due to the decrease in the value of sterling from $1.92 to$1.72 during the year, resulting in a decrease in net debt of £29.5 million to£292.3 million. Group borrowings As at 31 December 2005, the Group had gross borrowings of £355.8 million whichwere drawn on available medium to long-term committed facilities of c.£520million. The Group's net debt comprised the following: At 31 December 2005 (£m) At 31 December 2004 (£m) ----------------------- ----------------------- US Private Placement loan notes 317.5 296.7 Committed bank facility 23.3 40.0 Lease financing and asset securitisation 4.6 16.0 Other loans, overdrafts, other 10.4 13.1 ----------------------- ----------------------- Gross borrowings 355.8 365.8 Cash and short-term deposits (63.5) (44.0) ----------------------- ----------------------- Net debt 292.3 321.8 ----------------------- ----------------------- ----------------------- ----------------------- The US Private Placement loan notes ($545 million) are repayable at variousdates between 2007 and 2012. A new committed bank facility for £200 million was arranged in March 2005 onimproved pricing and terms. The facility, which had an original maturity dateof March 2008 with options to extend by two further twelve month periods, wasextended in January 2006 by a further twelve months such that the currentmaturity date is now March 2009. It is unsecured, with all security andguarantees under the previous facility fully released. Only £23.3 million wasdrawn on this facility at 31 December 2005. 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 definedpost-retirement benefit arrangements, being principally healthcare plans in theUS. As at 31 December 2005, a liability of £224.8 million is recognised in respectof employee benefits; an increase of £34.9 million over the £189.9 million as at31 December 2004. This increase results primarily in respect of the UK planfrom changes in the actuarial assumption used to discount the present value offuture liabilities and increased expectations as to the life expectancy ofretirees. Both of these factors have more than offset the increase in themarket value of the assets of the plan since the end of 2004. Of the totalliability, £117.4 million relates to the deficit on the Group's defined benefitplan in the UK, £61.1 million to the Group's defined benefit pension plans inthe US, £14.3 million to pension arrangements in the Rest of the World, and£32.0 million to unfunded post-retirement benefit arrangements, being mainlyhealthcare benefit arrangements in the US. Following the triennial actuarial valuation of the UK plan completed in 2004 andafter consultation with the trustees of the Group's UK plan, normal cashcontributions in respect of active members of the plan were supplemented with anadditional 'top-up' payment of £10 million in 2005 (2004: £6.5 million).Further 'top-up' payments of £10.5 million and £12 million were anticipated tobe made in 2006 and 2007. Following the disposal of SCS and the announcement ofthe disposals of the Laminates business in December 2005 and the Ceramic Fibresbusiness in February 2006, and in view of the increase in the net pensiondeficit for the UK plan during 2005, it was agreed with the trustees of theGroup's UK plan in February 2006 to make revised 'top-up' payments (in additionto the normal cash contributions) of £25.5 million in 2006 and £26.5 million in2007. The level of these additional 'top-up' payments will be reviewed inconsultation with the trustees of the Group's UK plan when the next triennialvaluation is available in mid-2007. The US plans undergo actuarial valuations every year and the net deficit as at31 December 2005 was £61.1 million (2004: £47.4 million). Funding of the USplans is made in accordance with US government regulations. The two principaldefined benefit pension plans in the US are closed to new members and ongoingaccruals are in the process of being frozen for the majority of active members. The charge against trading profit in 2005 for all pension plans (includingdefined contribution plans) was £22.7 million, a reduction of £0.4 million over2004. Total pension cash contributions amounted to £25.9 million in 2005 (2004:£18.9 million). OUTLOOK As a 'just in time' supplier, our businesses do not have an order book giving aclear long-term market view. However, we are close to our customers in all ourmarkets and our view on the Group's outlook reflects their views: Ceramics: the talk of 'de-stocking' in the global steel industry has nowsubsided and we see the positive momentum at the end of 2005 continuing into2006. Steel output in 2006 is expected to be ahead in Asia-Pacific, growing atthe global level and broadly in line with 2005 in Europe and NAFTA. Electronics: market growth in electronics is expected to be slightly ahead ofGDP, but our automotive markets in Europe and the US may show some softness. Precious Metals: some firming of the US market is apparent, but Europe remainsweak. Our well-established positions in the fastest-growing, and most profitable,Asia-Pacific region represent a substantial asset and will be an importantfactor in our performance in 2006. Against a background of these market expectations, and with continued costreduction and restructuring programmes in all divisions together with aparticular focus on the turnaround of the Precious Metals division, we expect animprovement in the overall performance of our continuing operations in 2006.The disposal of Laminates should also improve the quality of our earnings. Shareholder/analyst enquiries:Nick Salmon, Chief Executive Cookson Group plcMike Butterworth, Group Finance Director Tel: + 44 (0)20 7061 6500Isabel Vilela, Investor Relations Manager Media enquiries:John Olsen Hogarth Partnership Tel: +44 (0)20 7357 9477 Copies of Cookson's 2005 Annual Report are due to be posted to the shareholdersof the Company on 19 April 2006 and will be available on the Company's websiteand at the Registered Office of the Company after that date. Cookson management will make a presentation to analysts on 14 March 2006 at 9:30am (UK time). This will be broadcast live on Cookson's website. An archiveversion of the presentation will be available on the website from mid-afternoonon 14 March. Forward Looking Statements This announcement contains certain forward looking statements regarding theGroup's financial condition, results of operations, cash flows, dividends,financing plans, business strategies, operating efficiencies or synergies,budgets, capital and other expenditures, competitive positions, growthopportunities for existing products, plans and objectives of management andother matters. Statements in this document that are not historical facts arehereby identified as "forward looking statements". Such forward lookingstatements, including, without limitation, those relating to the future businessprospects, revenues, working capital, liquidity, capital needs, interest costsand income, in each case relating to Cookson, wherever they occur in thisdocument, are necessarily based on assumptions reflecting the views of Cooksonand involve a number of known and unknown risks, uncertainties and other factorsthat could cause actual results, performance or achievements to differmaterially from those expressed or implied by the forward looking statements.Such forward looking statements should, therefore, be considered in light ofvarious important factors. Important factors that could cause actual results todiffer materially from estimates or projections contained in the forward lookingstatements include without limitation: economic and business cycles; the termsand conditions of Cookson's financing arrangements; foreign currency ratefluctuations; competition in Cookson's principal markets; acquisitions ordisposals of businesses or assets; and trends in Cookson's principal industries. The foregoing list of important factors is not exhaustive. When relying onforward looking statements, careful consideration should be given to theforegoing factors and other uncertainties and events, as well as factorsdescribed in documents the Company files with the UK regulator from time to timeincluding its annual reports and accounts. Such forward looking statements speak only as of the date on which they aremade. Except as required by the Rules of the UK Listing Authority and the LondonStock Exchange and applicable law, Cookson undertakes no obligation to updatepublicly or revise any forward looking statements, whether as a result of newinformation, future events or otherwise. In light of these risks, uncertaintiesand assumptions, the forward looking events discussed in this announcement mightnot occur. Cookson Group plc, 265 Strand, London WC2R 1DBRegistered in England and Wales No. 251977www.cooksongroup.co.uk Group Income Statementfor the year ended 31 December 2005 2005 2004 ------------------------------------- ------------------------------------ Continuing Discontinued Continuing Discontinued operations operations Total operations operations Total note £m £m £m £m £m £m--------------------------------------------------------------------------------- ------------------------------------ Revenue 2 1,480.8 153.8 1,634.6 1,500.5 152.0 1,652.5 Manufacturing - raw materials (667.7) (75.1) (742.8) (682.6) (73.2) (755.8)costs - other (390.1) (48.5) (438.6) (395.7) (51.4) (447.1)Administration, selling and distribution (299.5) (23.5) (323.0) (313.9) (20.8) (334.7)costs--------------------------------------------------------------------------------- ------------------------------------ Trading profit 1,2 123.5 6.7 130.2 108.3 6.6 114.9 Rationalisation of operating activities 2,3 (13.4) (5.1) (18.5) (13.8) (8.9) (22.7)Amortisation and impairment of 2,9 - (0.8) (0.8) - (0.8) (0.8)intangibles(Loss)/profit relating to fixed assets 2,4 (1.9) 1.9 - (16.8) - (16.8)--------------------------------------------------------------------------------- ------------------------------------ Profit from operations 108.2 2.7 110.9 77.7 (3.1) 74.6 Net finance - ongoing activities (29.7) - (29.7) (32.2) - (32.2)costs - other activities 5 (1.2) - (1.2) 5.4 - 5.4 Share of post-tax profit of joint 1.4 - 1.4 2.3 - 2.3ventures--------------------------------------------------------------------------------- ------------------------------------ Profit before tax 78.7 2.7 81.4 53.2 (3.1) 50.1 Income tax - ongoing activities 6 (28.4) - (28.4) (22.9) (1.4) (24.3)costs - other activities 6 (14.2) (0.2) (14.4) (7.7) (0.2) (7.9) Net post-tax loss on disposal of 7 (4.5) (41.7) (46.2) (34.9) - (34.9)operations--------------------------------------------------------------------------------- ------------------------------------ Profit/(loss) for the year 31.6 (39.2) (7.6) (12.3) (4.7) (17.0)--------------------------------------------------------------------------------- ------------------------------------ Profit/(loss) for the year attributableto:Equity holders of the parent company 28.2 (39.2) (11.0) (16.4) (4.7) (21.1)Minority interests 3.4 - 3.4 4.1 - 4.1--------------------------------------------------------------------------------- ------------------------------------ Profit/(loss) for the year 31.6 (39.2) (7.6) (12.3) (4.7) (17.0)--------------------------------------------------------------------------------- ------------------------------------ ------------------------------------------------------------------------------------------------------------------------ Earnings per share (pence) 8 Basic and diluted (5.8)p (11.2)p--------------------------------------------------------------------------------- ------ Headline profit before tax 1 Trading profit 130.2 114.9 Share of post-tax profit of joint 1.4 2.3 ventures Net finance costs of ongoing (29.7) (32.2) activities--------------------------------------------------------------------------------- ------ Headline profit before tax 101.9 85.0 Income tax costs on ongoing activities (28.4) (24.3) Profit attributable to minority (3.4) (4.1) interests--------------------------------------------------------------------------------- ------ Headline profit attributable to parent company equity 70.1 56.6holders--------------------------------------------------------------------------------- ------ Headline earnings per share 8 37.2p 30.1p --------------------------------------------------------------------------------- ------ Group Statement of Cash FlowsFor the year ended 31 December 2005 note 2005 2004 ---- £m £m ------- ---------- Cash flows from operating activities ------- ----------Profit from operations 110.9 74.6 Add: Rationalisation of operating activities 3 18.5 22.7 Loss relating to fixed assets 4 - 16.8 Amortisation of intangibles 9 0.8 0.8 Depreciation 47.1 46.9 ------- ---------- EBITDA 1 177.3 161.8Net increase in trade working capital (23.7) (16.9)Outflows related to rationalisation of operating 3 (17.0) (14.2)activitiesAdditional funding contributions to Group 15 (10.0) (6.5)pension plansOther items (8.8) 21.3 ------- ----------Cash generated from operations 117.8 145.5 Interest paid (31.3) (35.9)Interest received 1.8 4.4Income taxes paid (20.2) (20.7) ------- ---------- Net cash inflow from operating activities 68.1 93.3 Cash flows from investing activities ------- ----------Acquisition of property, plant and equipment (42.5) (42.3)Proceeds from sale of property, plant and 4 10.3 1.4equipmentAcquisition of subsidiaries, net of cash 10 (10.6) (12.0)acquiredDisposal of subsidiaries, net of cash disposed 30.4 1.4ofDividends received from joint ventures 4.7 2.3Other, including additional costs for prior (6.0) (10.0)years' disposals ------- ---------- Net cash outflow from investing activities (13.7) (59.2) ------- ---------- Net cash inflow before financing activities 54.4 34.1 Cash flows from financing activities ------- ----------Repayment of borrowings 17 (45.2) (39.7)Proceeds from the issue of share capital 2.1 0.9Payment of transaction costs (0.6) (1.1)Dividends paid to minority shareholders (2.2) (3.1) ------- ---------- Net cash outflow from financing activities (45.9) (43.0) ------- ---------- Net increase/(decrease) in cash and cash 17 8.5 (8.9)equivalentsCash and cash equivalents at 1 January 44.0 52.8Effect of exchange rate fluctuations on cash 11.0 0.1held ------- ---------- Cash and cash equivalents at end of period 63.5 44.0 ------- ---------------------------------------------------------- ---- ------ --- ------- --- ---------- Free cash flow 1Net cash inflow from operating activities 68.1 93.3Additional funding contributions to Group 10.0 6.5pension plansAcquisition of property, plant and equipment (42.5) (42.3)Proceeds from sale of property, plant and 10.3 1.4equipmentDividends received from joint ventures 4.7 2.3Dividends paid to minority shareholders (2.2) (3.1) ------- ------ Free cash flow 48.4 58.1 ------- ------------------------------------------------------ ---- ------ --- ------- --- ---------- Group Balance SheetAs at 31 December 2005 note 2005 2004 ------ £m £m ------- -------Assets ------- ------- Property, plant and equipment 264.9 322.9 Intangible assets 9 481.6 485.2 Investments in joint ventures 13.1 14.7 Other investments 11 11.2 16.7 Income tax recoverable 2.3 2.2 Deferred tax assets 15.0 31.2 Other receivables 8.7 10.6 ------- -------Total non-current assets 796.8 883.5 ------- ------- Cash and cash equivalents 63.5 44.0 Inventories 179.6 174.1 Trade and other receivables 294.0 303.4 Income tax recoverable - 0.9 Other financial assets 12 12.2 - ------- ------- 549.3 522.4 Assets classified as held for sale 7 87.2 - ------- -------Total current assets 636.5 522.4 ------- ------- Total assets 1,433.3 1,405.9 ------- ------- Equity ------- ------- Issued share capital 13 375.5 375.5 Share premium account 14 645.5 643.4 Other reserves 37.8 (10.9) Retained earnings (609.8) (576.6) ------- -------Total parent company shareholders' equity 449.0 431.4 Minority interests 12.7 11.7 ------- ------- Total equity 461.7 443.1 ------- ------- Liabilities ------- ------- Interest-bearing loans and borrowings 341.9 326.1 Employee benefits 15 224.8 189.9 Other payables 35.5 58.3 Provisions 11.1 10.3 Deferred tax liabilities 21.6 8.6 ------- -------Total non-current liabilities 634.9 593.2 ------- ------- Interest-bearing loans and borrowings 13.9 39.7 Trade and other payables 249.2 303.2 Income tax payable 16.4 11.6 Provisions 20.6 15.1 ------- ------- 300.1 369.6Liabilities directly associated with assets 7 36.6 -classified as held for sale ------- -------Total current liabilities 336.7 369.6 ------- ------- Total liabilities 971.6 962.8 ------- ------- Total equity and liabilities 1,433.3 1,405.9 ------- --------------------------------------------------------- ----- --- ------ --- ------- --- ------- Net debtInterest-bearing loans - non-current 341.9 326.1and borrowings - current 13.9 39.7Cash and cash equivalents (63.5) (44.0) ------- ------ Net debt 17 292.3 321.8 ------- -------------------------------------------------------- ----- --- ------ --- ------- --- ------- Group Statement of Recognised Income and Expense 2005 2004 For the year ended 31 December 2005 £m £m-------------------------------------------------- ----- --- ------ --- ------- --- -------Opening Group reserves adjustment (note 1) 19.2 -Exchange differences on translation of the net assets of 73.7 (35.8)foreign operationsNet investment hedges (29.9) 23.8Actuarial loss on employee benefit schemes (41.1) (26.8)Changes in fair value of equity securities 2.2 -available-for-sale-------------------------------------------------- ----- --- ------ --- ------- --- -------Net income/(expense) recognised directly in equity 24.1 (38.8) Loss for the year (7.6) (17.0)-------------------------------------------------- ----- --- ------ --- ------- --- ------- 16.5 (55.8) ------- -------Profit attributable to minority interests (3.4) (4.1)Foreign exchange translation differences attributable to 0.1 1.1minority interests ------- ------- (3.3) (3.0)-------------------------------------------------- ----- --- ------ --- ------- --- -------Total recognised income and expense attributable to parent 13.2 (58.8)company equity shareholders-------------------------------------------------- ----- --- ------ --- ------- --- ------- Group Reconciliation of Movements in EquityFor the year ended 31 December 2005 Total equity Minority Total attributable interests equity to parent company equity holders £m £m £m--------------------------- --- ------- --- ------ --- ------ -------- ------- ------- Total equity as at 1 487.1 11.8 498.9January 2004 Movements for the year: -------- ------- ------- Total net recognised (losses)/gains (58.8) 3.0 (55.8) relating to the year New share capital issued 0.9 - 0.9 Share-based payments 2.2 - 2.2 Dividends paid to - (3.1) (3.1) minority interests -------- ------- ------- (55.7) (0.1) (55.8)--------------------------- --- ------- --- ------ --- ------ -------- ------- ------- Total equity as at 31 431.4 11.7 443.1December 2004 --------------------------- --- ------- --- ------ --- ------ -------- ------- ------- Total equity as at 1 431.4 11.7 443.1January 2005 Movements for the year: -------- ------- ------- Total net recognised 13.2 3.3 16.5 gains relating to the year New share capital issued 2.1 - 2.1 Share-based payments 2.3 - 2.3 Dividends paid to - (2.3) (2.3) minority interests -------- ------- ------- 17.6 1.0 18.6--------------------------- --- ------- --- ------ --- ------ -------- ------- ------- Total equity as at 31 449.0 12.7 461.7December 2005 --------------------------- --- ------- --- ------ --- ------ -------- ------- ------- Notes to the Accounts 1 Basis of preparation The audited consolidated financial statements of Cookson Group plc (the "Company") in respect of the year ended 31 December 2005 have been prepared inaccordance with International Financial Reporting Standards ("IFRS") as adoptedin the EU and were approved by the Board of Directors on 14 March 2006. Thefinancial information set out in this preliminary results announcement does notconstitute the Company's statutory accounts for the years ended 31 December 2005or 2004 but is derived from those accounts. An unqualified audit report wasissued on the statutory accounts for 2005, which will be delivered to theRegistrar of Companies following the Company's Annual General Meeting. The comparative figures for the financial year ended 31 December 2004 are notthe Company's statutory accounts for that financial year. Those accounts, whichwere prepared under UK Generally Accepted Accounting Practice ("UK GAAP"), havebeen reported on by the Company's auditor and delivered to the Registrar ofCompanies. The report of the auditor was unqualified and did not contain astatement under section 237(2) or (3) of the Companies Act 1985. These sectionsaddress whether proper accounting records have been kept, whether the Company'saccounts are in agreement with these records and whether the auditor hasobtained all the information and explanations necessary for the purposes of itsaudit. A comprehensive analysis and explanation of the adjustments made by the Companyto its comparative consolidated financial statements on transition of itsaccounting policies to IFRS from UK GAAP, as disclosed in the Company'sstatutory annual consolidated accounts for 2004, was announced to the LondonStock Exchange on 22 July 2005. A copy of this announcement can be found on theCompany's website and is obtainable from the Group Secretary at the Company'sregistered address. This preliminary results announcement has been prepared on the basis of theaccounting policies adopted in the Company's audited statutory annualconsolidated accounts for 2004, except as referred to below or as stated in theLondon Stock Exchange announcement referred to above. Opening Group reserves adjustment A net adjustment to opening Group reserves of £19.2m has been made in theperiod, the major components being explained below. As part of its transition to IFRS, the Company has adopted for the purpose ofits consolidated Group accounts, with effect from 1 January 2005: InternationalAccounting Standard No. 32 ("IAS 32"), "Financial Instruments: Disclosure andPresentation"; and IAS 39, "Financial Instruments: Recognition and Measurement".Comparative figures have not been amended in connection with these changes ofaccounting policy, as permitted by International Financial Reporting StandardNo. 1 ("IFRS 1"). As a consequence of the adoption of IAS 32 and IAS 39, theGroup accounts must recognise, at fair value, certain financial instruments usedin its operations. The use of financial instruments to any significant extentis restricted mainly to the Group's central treasury function, which usesforward foreign exchange contracts to convert the currency denomination of debtinstruments and interest rate swaps to switch debt instruments between fixed andfloating rates of interest. In addition, certain of the Group's manufacturingoperations use commodity forward purchase and sale contracts and forward foreignexchange contracts to hedge the impact on their trading results of underlyingmovements in commodity prices and foreign currency rates. In accordance with the requirements of IAS 39, the fair value of certainfinancial investments at the end of the reporting period is reflected on theGroup balance sheet as either a "financial asset" or "financial liability", withthe corresponding charge or credit being recognised either in the incomestatement or through Group reserves. As the adoption of these standardsrepresents a change in accounting policy, the impact of the adoption of IAS 39as at 1 January 2005 has been accounted for as an adjustment to the openingGroup balance sheet. There was no impact to opening Group reserves as a resultof the adoption of these standards, with interest-bearing loans and borrowingsbeing decreased by £1.1m, inventory reduced by £1.2m and trade and otherreceivables reduced by £0.2m. As a further consequence resulting from the adoption of IAS 32 and IAS 39,deferred income of £22.3m as at 1 January 2005, which was being carried on theGroup balance sheet in respect of the close-out of interest rate swaps in priorperiods, has been credited to opening Group reserves, net of an associated taxcharge. Under UK GAAP this deferred income was being credited to the incomestatement over the term of the underlying loan arrangements to which the swapshad related. As a consequence of adopting IAS 39, the Group has included within "otherinvestments" as at 1 January 2005 two equity trade investments at market valueand, accordingly, an opening credit to Group reserves was recognised at 1January 2005 of £2.5m to reflect this change. Disclosure of significant items IAS 1 provides no definitive guidance as to the format of the income statement,but states key lines which should be disclosed. It also encourages additionalline items and the re-ordering of items presented on the face of the incomestatement when appropriate for a proper understanding of the entity's financialperformance. In keeping with the spirit of this aspect of IAS 1, the Companyhas adopted a policy of disclosing separately on the face of its incomestatement the effect of any components of financial performance considered bythe Directors to be significant and/or for which separate disclosure wouldassist both in a better understanding of the financial performance achieved andin making projections of future results. Materiality and/or the nature andfunction of the components of income and expense are considered in deciding uponsuch presentation. Such items may include, inter alia, the financial effect ofany profit or loss arising on business disposals, major rationalisation and/orrestructuring activity, profits and losses on sale or impairment of fixedassets, amortisation and impairment of intangible and other non-current assetsand other items, including the taxation impact of the aforementioned items,which have a significant impact on the Group's results of operations either dueto 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 withIFRS. Because IFRS measures reflect all items which affect reportedperformance, the Directors believe that certain non-GAAP measures, which reflectwhat they view as the underlying performance of the Group, are important andshould be considered alongside the IFRS measures. The following non-GAAPmeasures are referred to in this document. On the face of the Group income statement, "trading profit" is separatelydisclosed, being defined as profit from operations before the costs ofrationalisation of operations, the profit or loss relating to fixed assets andthe amortisation and impairment of intangibles. The Directors believe thattrading profit is an important measure of the underlying trading performance ofthe Group. On the face of the Group income statement, "headline earnings per share" isreported, together with its calculation. The Directors believe that headlineearnings per share gives an important measure of the underlying earning capacityof the Group. On the face of the Group statement of cash flows, "EBITDA" is reported as asub-total, representing Group earnings before interest, tax, depreciation andamortisation charges. EBITDA is a financial measure that is commonly used andthe Directors believe it to be an important measure of the underlying tradingperformance 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, whichreflects the Group's operational cash flow before repayment of borrowings anddefined benefit post-retirement deficits or expenditure on business acquisitionsor disposals, gives an important measure of the underlying cash-generationcapacity of the Group. On the face of the Group balance sheet, "net debt" is reported, together withits calculation. The Directors believe that this is an important measure as itshows the Group's aggregate net indebtedness to banks and other external financeinstitutions. 2 Segment reporting As required by IAS 14, the segment analysis of the Group's results by division/sector separately includes central corporate costs, representing the centralcosts of operating as a "plc" which are not directly attributable to individualsegments. Where the Group's central costs are directly attributable to segmentoperations, they have been allocated primarily according to the relative revenuecontribution of each continuing operating segment to the total. Inter-segmentrevenue is not material in relation to total Group revenue, whether analysed bydivision/sector or by geographic location of operations. The contribution fromacquisitions to revenue and profit from operations in 2005 and 2004 was notmaterial. 2005 2004--------------------------- --- ------ --- ------ --- ------- -------- --- ------- --------By Division/Sector Revenue Profit Revenue Profit £m from £m from operations operations £m £m--------------------------- --- ------ --- ------ --- ------- -------- --- ------- --------Ceramics 746.1 73.9 739.3 59.4Electronics 488.9 51.1 473.5 47.0 ------- -------- ------- -------- Assembly Materials 273.4 24.5 257.7 19.7 Chemistry 215.5 26.6 215.8 27.3 ------- -------- ------- -------- Precious Metals 245.8 7.0 287.7 10.8Group corporate costs - (8.5) - (8.9)--------------------------- --- ------ --- ------ --- ------- -------- ------- -------- Trading - Continuing operations 1,480.8 123.5 1,500.5 108.3profit - Discontinued operations 153.8 6.7 152.0 6.6 Rationalisation of operating activities - (18.5) - (22.7)Amortisation and impairment of - (0.8) - (0.8)intangibles(Loss)/profit relating to fixed assets - - - (16.8)--------------------------- --- ------ --- ------ --- ------- -------- ------- -------- Total Group 1,634.6 110.9 1,652.5 74.6--------------------------- --- ------ --- ------ --- ------- -------- ------- -------- Of the total cost of the rationalisation of operating activities of £18.5m(2004: £22.7m), £8.1m related to Ceramics (2004: £2.9m), £0.8m to AssemblyMaterials (2004: £0.2m), £2.2m to Chemistry (2004: £0.8m), £1.4m to PreciousMetals (2004: £9.9m), £0.9m to Group corporate operations (2004: nil) and £5.1mto discontinued operations (2004: £8.9m). The total amortisation and impairment of intangibles costs of £0.8m (2004:£0.8m) related to discontinued operations. Of the total (loss)/profit relating to fixed assets of nil in 2005 (2004: £16.8mloss), £0.1m loss relates to Ceramics (2004: nil), £0.3m profit relates toAssembly Materials (2004: nil), £1.5m loss to Chemistry (2004: £1.1m profit),£0.6m loss to Group corporate operations (2004: £17.9m loss) and £1.9m profit todiscontinued operations (2004: nil). 2005 2004-------------------------------------------------------------------------------------- -------------------------------- By location of By By location of By customer customer Group operations location Group operations location -------------------- -------- --------------------- ---------Geographical Revenue Profit Revenue Revenue Profit Revenue £m from £m £m from £m operations operations £m £m-------------------------------------------------------------- ------------- ------- --------- ---------- --------Europe 566.3 41.2 512.3 608.6 39.1 558.8NAFTA 550.7 23.0 528.7 570.1 20.6 547.2Asia-Pacific 289.4 53.2 331.8 254.4 42.6 303.5Rest of the World 74.4 6.1 108.0 67.4 6.0 91.0-------------------------------------------------------------- ------------- ------- --------- ---------- --------Trading - Continuing 1,480.8 123.5 1,480.8 1,500.5 108.3 1,500.5profit - Discontinued 153.8 6.7 153.8 152.0 6.6 152.0 Rationalisation of operating activities - (18.5) - - (22.7) -Amortisation and impairment of intangibles - (0.8) - - (0.8) -(Loss)/profit relating to fixed assets - - - - (16.8) --------------------------------------------------------------- ------------- ------- --------- ---------- --------Total Group 1,634.6 110.9 1,634.6 1,652.5 74.6 1,652.5-------------------------------------------------------------- ------------- ------- --------- ---------- -------- Of the total cost of the rationalisation of operating activities of £18.5m(2004: £22.7m), £13.6m was incurred in Europe (2004: £16.7m), £2.6m in NAFTA(2004: £5.7m), £0.9m in Asia-Pacific (2004: £0.3m); £1.4m in the Rest of theWorld (2004: nil). The total amortisation and impairment of intangibles costs of £0.8m (2004:£0.8m) was within NAFTA. Of the total (loss)/profit relating to fixed assets of nil in 2005 (2004: £16.8mloss), £0.3m loss was in Europe (2004: nil), £1.1m loss in NAFTA (2004: £17.9mloss), £0.5m loss in Asia-Pacific (2004: £1.1m profit) and £1.9m profit indiscontinued operations (2004: nil), of which £0.6m was in NAFTA and £1.3m inEurope. 3 Rationalisation of operating activities The rationalisation of operating activities charge of £18.5m in 2005 representsthe cost of a number of initiatives throughout the Group aimed at reducing theGroup's cost base and re-aligning its manufacturing capacity. Of the totalcharge, £5.1m relates to the Laminates business, primarily the closure of itsGerman manufacturing operation. Cash costs of £17.0m were incurred in 2005 inrespect of the rationalisation and redundancy initiatives commenced both in 2005and in prior periods. Of the £22.7m charge incurred in 2004, £8.6m related to a programme torationalise the Precious Metals division's French activities. Under a SocialPlan, the programme encompassed the closure of 5 manufacturing and distributionsites, a headcount reduction of 150 and the realignment of the division'smanufacturing capacity in Europe. 4 (Loss)/profit relating to fixed assets The disposal of surplus Group properties during 2005 generated cash proceeds of£10.3m (2004: £1.4m) and resulted in (loss)/profit of nil. The loss of £16.8mreported in 2004 comprised an impairment charge of £17.9m in respect of theGroup's revenue-sharing arrangement related to a fibre optic cable network inthe USA, net of a profit of £1.1m on the sale of surplus property. 5 Net finance costs Disclosed separately on the face of the income statement as net finance costsfrom other activities is a charge of £1.2m (2004: £5.4m credit). The 2005charge related to the write-off of unamortised fees associated with theCompany's £148m multicurrency revolving credit facility, which was replaced by anew £200m facility as announced on 1 March 2005. The 2004 credit representsdeferred income relating to interest rate swaps that were closed-out in prioryears. As stated in note 1, on adoption of IAS 39 with effect from 1 January2005, the remaining such deferred income on the Group balance sheet was creditedto opening Group reserves. 6 Income tax The total charge for income tax of £42.8m for 2005 (2004: £32.2m) comprises atax charge on ongoing activities of £28.4m, representing an effective rate of30.3% (2004: 30.0%) on profit from continuing operations excluding the Group'sshare of post-tax joint venture income, together with a £14.4m charge from otheractivities. The progressive migration of business operations away fromjurisdictions where the Group has accumulated unutilised tax losses is expectedto result in an increase in the Group's effective tax rate going forward. The total charge from other activities includes a charge of £16.6m relating tothe write-off of deferred tax assets in the US, based on the Directors' currentforecast of the near-term capacity of the Group's US businesses to generatetaxable profits at a level which would allow for the recovery of prior periodtax losses previously capitalised as deferred tax assets. Also included is acharge of £3.5m relating to deferred tax on goodwill, due to the fact thatgoodwill for Group accounts purposes is no longer amortised, althoughamortisation charges are still allowed as a deduction for tax purposes incertain jurisdictions in which the Group operates. The 2005 charge is net of atax credit of £5.7m in respect of rationalisation costs incurred in the year.The comparative charge for 2004 includes £4.8m in respect of the net write-offof tax assets and provisions, £4.1m in respect of deferred tax on goodwill and acredit related to rationalisation costs of £1.0m. 7 Net post-tax loss on disposal of operations Of the net post-tax loss on disposal of operations of £46.2m in 2005, £41.7mrelated to discontinued operations, comprising a loss of £52.5m related to thesale of the Group's Laminates businesses and a profit of £10.8m related to thesale of Specialty Coating Systems, Inc. ("SCS"), both formerly part of theElectronics division. The £4.5m net loss from continuing operations, after atax cost of £1.6m, includes the disposal of the Group's Technical Ceramicsbusiness, formerly a part of the Ceramics division, plus a number of additionaltrailing costs related to previous years' disposals. The Company announced on 15 December 2005 that it had entered into an agreementto sell its Laminates business to Isola Group S.A.R.L, for US$91m (£51m). IsolaGroup S.A.R.L. is ultimately owned by Texas Pacific Group. Completion of thetransaction is conditional on satisfactory clearance from the Europeancompetition authorities and is expected during the first half of 2006. Thepurchase price will be satisfied on completion by a combination of cash proceedsand an assumption of net debt. SCS was sold on 31 December 2005 to Bunker HillCapital for US$55.5m (£30m). The consideration was satisfied by way of animmediate cash payment of US$54.0m (£29.4m), with an additional US$1.5m (£0.8m)to be paid upon closing of the sale of the SCS China business in 2006. Theconsideration on both the Laminates and SCS deals will be subject to completionbalance sheet adjustments in respect of working capital and capital expenditure,which are not expected to be material. The net loss on disposal of discontinued operations includes a write-off ofassociated deferred tax assets of £5.1m and a write-off of goodwill and otherintangible assets of £35.1m. In accordance with IFRS 5, the assets andliabilities of the Laminates business have been disclosed in the Group balancesheet, respectively, as assets and liabilities "held for sale" at fair valueless costs to sell, but prior year comparatives are not restated. The net loss for 2004 of £34.9m included the sale of the Ceramics division'sloss-making European silica-zinc brick business at a loss of £30.6m and £5.1mrelated to the winding-up of the Laminates sector's joint venture with Fukuda.The total loss included a tax credit of £2.6m. 8 Earnings per share Earnings per share are calculated using a weighted average of 188.5m ordinaryshares in issue during the period (2004: 188.3m). The ordinary shares held bythe Group's Employee Share Ownership Plan ("ESOP") have been excluded from theweighted average number of shares, as these shares are held within retainedearnings. The ESOP held 1.2m ordinary shares as at 31 December 2005 (2004:1.2m). Diluted earnings per share are calculated assuming conversion of alloutstanding dilutive share options. Outstanding share options are only treatedas dilutive when their conversion to ordinary shares would decrease earnings pershare or increase loss per share. These adjustments give rise to an increase inaverage ordinary shares of 1.1m (2004: nil). The number of ordinary shares inissue as at 31 December 2005 was 190.4m (2004: 189.6m). The number of ordinaryshares used in the calculation of earnings per share takes into account theshare consolidation approved at the Company's Annual General Meeting held on 26May 2005 whereby shareholders received one new ordinary share of 10p each forevery 10 existing ordinary shares of 1p each held at the close of business on 26May 2005. On the face of the Group income statement, both earnings per share and headlineearnings per share are shown, together with the calculation of the lattermeasure. The Directors believe that the non-GAAP measure of headline earningsper share gives an important measure of the underlying earning capacity of theGroup. 9 Intangible assets As at 31 December 2005, total intangible assets are comprised solely of goodwillof £481.6m (2004: £478.3m). Goodwill is carried unamortised, but is subject toannual review for impairment. The goodwill of £26.6m that was being carried inthe Group balance sheet which related to the Group's Laminates business has,together with the other assets relating to that business, been reported withinassets held for sale as at 31 December 2005 and written-down to its recoverableamount based on the agreement to sell the business, which was announced inDecember 2005. No other impairment charge was made in either the current orcomparative periods. The other intangible assets balance of £6.9m reported in2004 related to a perpetual licensing agreement of the Laminates business in theUS which was being amortised over its estimated 10 year useful life and which,along with the other Laminates assets, was reported within assets held for saleat 31 December 2005. The amortisation charge in 2005 in respect of thelicensing agreement was £0.8m (2004: £0.8m). 10 Acquisition of subsidiaries The cash consideration paid of £10.6m (2004: £12.0m) in respect of theacquisition of subsidiary companies mainly comprised £8.9m of deferredconsideration for prior year acquisitions. 11 Other investments Other investments of £11.2m as at 31 December 2005 comprise mainly equitysecurities available for sale of £6.2m (2004: nil) and £3.0m (2004: £3.1m) inrespect of a 20-year revenue-sharing arrangement with Electric Lightwave, Inc.related to a fibre optic cable network in the US. Other investments at 31December 2004 included £6.4m in respect of monies held in Rabbi Trusts in the USwhich are held to fund certain of the Group's US pension liabilities. Theseassets are not recognised by IAS 19 as being pension assets. On 1 January 2005,the Group adopted IAS 32 and IAS 39, and as such £8.5m in respect of monies heldin Rabbi Trusts have been disclosed within other financial assets as at 31December 2005 and held at fair value. 12 Other financial assets As described in note 11 above, with the adoption of IAS 32 and IAS 39 in thecurrent period, £8.5m in respect of monies held in Rabbi Trusts have beendisclosed within other financial assets as at 31 December 2005. In addition,£3.7m of derivative financial instruments yet to mature as at the end of thereporting period are reflected on the Group balance sheet as financial assets inaccordance with the requirements of IAS 39. 13 Issued capital At the Company's Annual General Meeting held on 26 May 2005, shareholdersapproved a share consolidation. The share consolidation took effect followingthe close of business on 26 May 2005, with shareholders receiving one newordinary share of 10p each for every 10 existing ordinary shares of 1p each heldat the close of business on 26 May 2005. Trading in the new ordinary shares of10p commenced on 27 May 2005. At an Extraordinary General Meeting of the Company held on 12 January 2006,shareholders approved special resolutions to reduce the issued share capital ofthe Company by cancelling and extinguishing the deferred shares of 49p each. On15 February 2006, the High Court of Justice confirmed the reduction of capitalof the Company from £550.0m (divided into 1,934,963,124 ordinary shares of 10pence each and 727,558,546 deferred shares of 49 pence each) to £193.5m (dividedinto 1,934,963,124 ordinary shares of 10 pence each). The Order of the Courtwas registered on 15 February 2006 and the reduction of capital, includingtherefore the cancellation of the deferred shares, was effective on that date.Upon their cancellation, the balance of £356.5m in respect of the deferredshares became a non-distributable reserve of the Company. This reserve becomesdistributable only at such time when all external creditors of the Company as at15 February 2006 have either been fully settled, or have agreed that thisreserve may be deemed distributable. Also at the Extraordinary General Meeting of the Company held on 12 January2006, Shareholders approved a special resolution to amend the Company's Articlesof Association to facilitate termination of the Company's registration with theSecurities Exchange Commission ("SEC") of the US. The amendment included aprovision conferring upon the Board the power to require ordinary shares whichare held directly or indirectly by US resident shareholders to be sold in orderto reduce the number of such shareholders below 300, as presently required bythe SEC for termination of registration. In order to avoid the costs ofcomplying with SEC registration requirements in respect of the financial yearended 31 December 2005, the Board commenced exercising these compulsory transferprovisions soon after the amendment was approved by shareholders and, havingreduced the number of US resident shareholders below 300, the Company announcedon 21 February 2006 that it had filed a Form 15 with the SEC to terminate theSEC registration of its ordinary shares. SEC de-registration will occur 90 daysafter 21 February 2006 or such shorter period as the SEC may determine. Onfiling of the form, the Company's obligations to file certain forms and reportswith the SEC, including Forms 20-F and 6-K, were suspended. Under currently applicable SEC regulations, after the de-registration takeseffect, the number of the Company's US resident shareholders must remain below300 at each financial year end to avoid re-commencement of SEC reporting andother applicable US obligations. The Company's Articles of Association give theCompany's Directors the ability to limit the number of the Company's US residentshareholders for this purpose. 14 Share premium account At 31 December 2005 the share premium account amounted to £645.5m (2004:£643.4m), the movements during 2005 representing the effect of share optionexercises. At an Extraordinary General Meeting of the Company held on 12 January 2006,shareholders approved a special resolution to cancel the share premium accountof the Company. The cancellation became effective on 15 February 2006 uponregistration of the order of the High Court of Justice with the Registrar ofCompanies, at which date the balance of £646.9m on the account became anon-distributable reserve of the Company. This reserve becomes distributableonly at such time when all external creditors of the Company as at 15 February2006 have either been fully settled, or have agreed that this reserve may bedeemed distributable. 15 Employee benefits The balance of £224.8m in respect of "Employee benefits" as at 31 December 2005results from an interim actuarial valuation of the Group's defined benefitpension and other post-retirement obligations as at that date (2004: £189.9m).Of the total balance, £178.5m relates to the combined deficits of the Group'sprincipal defined benefit pension schemes in the UK and the US (2004: £146.2m).Of the remainder of the total, £14.3m (2004: £12.5m) relates to defined benefitpension arrangements in the rest of the world and £32.0m (2004: £31.2m) relatesto unfunded post-retirement benefit arrangements, being mainly healthcarebenefit arrangements in the US. The valuation of the Group's pension arrangements at 31 December 2005 representsa "roll-forward" from the date of the last full individual scheme valuations,which was 31 December 2003 in the case of the UK pension scheme and 31 December2004 for the US pension schemes. For the UK and US pension schemes, changes inactuarial assumptions, namely a reduction in discount rates and an increasedallowance for mortality rate improvements, together resulted in a £54.2maddition to the combined scheme liabilities. Together with a net increase inasset performance of £23.6m, these movements represent the main components ofthe increase in the combined valuation deficit from 2004 to 2005 of £32.3m. Forvaluation purposes, the discount rates used were 4.75% for the UK (2004: 5.25%)and 5.50% for the USA (2004: 5.75%). The mortality assumptions used in the Group's actuarial valuations sincetransition to IFRS have been amended to assume that pensioners have a longerlife expectancy. The mortality assumptions used in the valuation of the definedbenefit pension liabilities of the Group's UK and US plans are summarised in thetable below and have been selected to reflect the characteristics and experienceof the membership of those plans. This has been done by adjusting standardmortality tables which reflect recent research into mortality experience in theUK (PA 92 tables combined with the 2002 short cohort improvement factors) andthe USA (UP-94 tables using projection scale AA). In addition, the UKassumptions have been further adjusted to reflect the latest available trendinformation, which indicates that mortality relating, in particular, to bluecollar workers may not be improving as quickly as indicated by the standardtables. Accordingly, based on an analysis of the mix of blue and white collarworkers in the Group's plan, the UK assumptions have been adjusted (using ascaling factor of 118.75%) to reflect a lower level of longevity amongst theblue collar membership. UK US------------------------------------------------------------------------------------------ ----------------------- 2005 2004 2005 2004 years years years years ------------------------------------------------------------------------------------------ ----------------------- Longevity at age 65 for current pensioners: - Men 19.7 18.4 17.7 17.7 - Women 22.4 21.3 20.6 20.6 Longevity at age 65 for future pensioners: - Men 20.4 19.3 18.5 17.7 - Women 23.1 22.3 21.0 20.6------------------------------------------------------------------------------------------ ----------------------- The total charge against trading profit in the income statement for 2005 inrespect of the Group's defined benefit pension and other post-retirementobligations was £14.8m (2004: £15.6m). In addition to the regular funding contributions into the Group's UK definedbenefit pension plan, the Company has, in agreement with the plan Trustee, beenmaking additional funding contributions aimed at accelerating the reduction inthe plan deficit. Additional contributions of £6.5m were made in 2004 and£10.0m in 2005. 16 Exchange rates The Group reports its results in pounds sterling. A substantial portion of theGroup's revenue and profits are denominated in US dollars and in currenciesother than pounds sterling. It is the Group's policy to translate the incomestatements and cash flow statements of overseas operations into pounds sterlingusing average annual exchange rates and to translate the balance sheet usingyear end rates. The principal exchange rates used were as follows: Year end rate Average rate------------------------------------------------------------------------------------------ -------------------- 2005 2004 2005 2004------------------------------------------------------------------------------------------ --------------------US dollar ($ per £) 1.72 1.92 1.82 1.83Euro (• per £) 1.46 1.41 1.46 1.48Singapore dollar (S$ per £) 2.85 3.15 3.03 3.09Hong Kong dollar (HK$ per £) 13.31 14.94 14.17 14.25Japanese yen (Y per £) 203 198 200 198Chinese Renminbi (RMB per £) 13.85 15.90 14.81 15.08------------------------------------------------------------------------------------------ -------------------- 17 Reconciliation of movement in net debt Balance Opening Foreign Transferred Refinancing Cash Balance at debt exchange to held and issue flow at 1 January adjustment adjustment for sale costs 31 December 2005 2005 £m £m £m £m £m £m £m------------------- ------- -------- -------- -------- -------- ------- --------Short-term deposits 4.3 - 0.2 - - (4.5) -Cash at bank and in 43.1 - 10.9 - - 11.9 65.9handBank overdrafts (3.4) - (0.1) - - 1.1 (2.4)------------------- ------- -------- -------- -------- -------- ------- --------Cash and cash 44.0 - 11.0 - - 8.5 63.5equivalents ------- Other loans andfinance leases: ------- - Current (39.7) - (2.9) 0.9 - 27.8 (13.9) - Non-current (328.2) 1.1 (34.5) 1.2 - 17.4 (343.0)Refinancing costs 2.1 - - - (1.0) - 1.1and issue costs------------------- --- ------- -------- -------- -------- -------- ------- --------Other loans and (365.8) 1.1 (37.4) 2.1 (1.0) 45.2 (355.8)finance leases ------- ------------------- --- ------- -------- -------- -------- -------- ------- -------- Net debt (321.8) 1.1 (26.4) 2.1 (1.0) 53.7 (292.3)------------------- --- ------- -------- -------- -------- -------- ------- -------- 18 Dividend The Directors have recommended a dividend of 5.0p per ordinary share (2004: nil)as a final dividend in respect of the year ended 31 December 2005. If approvedby shareholders at the Company's Annual General Meeting the dividend will bepaid on 12 June 2006 to ordinary shareholders on the register at 26 May 2006.Based upon the number of ordinary shares in issue at 31 December 2005, the totalcost of the dividend would be £9.5m (2004: nil). This information is provided by RNS The company news service from the London Stock Exchange

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