21st Feb 2007 07:00
Croda International PLC20 February 2007 Wednesday, 21 February 2007 Croda International Plc Preliminary Results Announcement Year to 31 December 2006 Highlights Croda reports record results for 2006 2006 2005 % change Sales - continuing operations £518.9m £305.6m 69.8 Profit before tax - continuing operations before exceptional items £54.3m £50.6m 7.3 Profit before tax £19.0m £50.6m (62.5) Earnings per share - continuing operations before exceptional items 28.8p 25.8p 11.6 Earnings per share - basic 6.3p 25.6p (75.4) Dividend per share 14.30p 13.35p 7.1 • Successful integration of Uniqema • Record number of new product launches • Further increase in underlying Croda operating margins to 18.2% • New Group structure in place as planned for 1 January 2007 • Exceptional charge of £35.3m relating to integration of Uniqema • Proposed final dividend of 9.65p, making the total for the year 14.3p, up 7.1% Commenting on the results, Chairman, Martin Flower, said: "The acquisition of Uniqema is a transforming move for Croda. It gives us arobust platform for future profitable growth and further enhancement ofshareholder value. I am pleased to report that Croda's existing business hadanother record year of earnings and margin growth despite high levels of costinflation and adverse currency movements. Trading in January has beenencouraging and whilst we have seen only one month's trading so far we areconfident of meeting our targets for the year." For further information, please contact: Mike Humphrey, Group Chief Executive Tel: 01405 860551 Sean Christie, Group Finance Director Tel: 01405 860551 Charlie Watenphul or Andrew Dowler, Financial Dynamics Tel: 0207 831 3113 Or visit our web site at: www.croda.com where the presentation to analysts willbe available by midday today. Chairman's Statement Whilst the acquisition of Uniqema from ICI has been the major event in 2006, Iam pleased to report that Croda's existing business had another record year ofearnings and margin growth despite high levels of energy and feedstock inflationand adverse currency movements. Overall Group continuing pre-tax pre-exceptional profits for 2006 were up 7.3%at £54.3m (2005 £50.6m) driven by growth in Consumer Care. Sales for the yearwere £518.9m (2005 £305.6m) with a 2.7% uplift in the existing Croda businessaugmented by £205.0m from Uniqema in the four months since acquisition. Basicearnings per share for continuing operations before exceptional items increased11.6% to 28.8p compared to 25.8p last year. The Board is recommending a finaldividend of 9.65p making a total of 14.3p, up 7.1% on last year. The dividendwill be paid on 1 June 2007 to those shareholders on the register on 4 May 2007.At this level the dividend cover is two times. Uniqema The acquisition of Uniqema is a transforming move for Croda. It provides anexcellent geographic fit, strengthens our global position in Consumer Care andit gives us a robust platform for future profitable growth and furtherenhancement of shareholder value. Uniqema was purchased from ICI for an initial consideration of £370m on 1September 2006, funded partly by a £61m share placement. Good progress has beenmade in restructuring the business. The specialities part of Uniqema has beenintegrated with the Croda regional specialities structure; the remainingacquired business will retain the name Uniqema and will operate as a globalOleochemical company. We have announced staffing reductions of 290 across thecombined business as a result of these moves. This has been a period of intense activity for both businesses and I would liketo say thank you on behalf of the Board to all our employees for their effortsthroughout the year. Outlook Trading in January has been encouraging with underlying sales and profits forthe combined group ahead of the corresponding period last year and in line withour plans. Whilst we have only seen one month's trading so far, we areconfident of meeting our targets for the year. Chief Executive's review In 1999, I wrote a strategy paper for the Board outlining how we should changeCroda by increasing focus on our core oleochemical speciality business. Oncethat was achieved we would then make a transforming transaction by buying one ofa very short list of companies. The refocusing continues to be an outstanding success, as evidenced by theexcellent Croda results for 2006. On our short list of targets was Uniqema,part of ICI. We finally managed to acquire Uniqema in 2006. We have bought agood company that, as part of Croda, will become a great company. Thetransition phase is almost complete and the new organisation was in place on 1January 2007. All people who are leaving the new Company have either alreadyleft or know the timing of their departure. We thank them all for their pastcontributions. We are now beginning the process of repositioning the acquired business usingthe same tools we adopted in 1999. Croda is a brand new company, combining themarket facing approach of Croda with the site based operational skills ofUniqema. The new structure is already a reality, with the specialities part of Uniqemaintegrated into Croda's existing structure. The more commodity oleochemicalsbusiness based around fatty acids, glycerine and polymerised fatty acids hasbeen separated into a new organisation operating globally under the Uniqemaname. We will improve the quality of both businesses by emphasising innovation,customer service and rigorous cost control. The specialities business of Uniqema consists of the seven factories in Wilton -UK, Mevisa - Spain, Chocques - France, Atlas Point - USA, Thane - India,Cikarang - Indonesia and Woobang - South Korea, and the sales offices around theworld. These factories have been integrated into our regional specialitiesstructure and the offices have been rationalised into the Croda marketingnetwork, resulting in a number of office closures. The more commodityoleochemicals business is now a separate unit encompassing the factories inGouda - Holland, Bromborough - UK, Emmerich - Germany, Cremona - Italy, Chicago- USA and Klang - Malaysia. This retains the Uniqema name and will operate as acohesive global business. Uniqema's leadership in fatty acid productiontechnology is complemented by its growing business in derivative polymerisedfatty acids. Croda now has excellent manufacturing facilities in 14 countries across Europe,the Americas and Asia compared to six countries prior to the acquisition. Ourglobal marketing network has increased from operations in twenty-six countriesto thirty-five. This is a welcome increase in our powerful global marketingnetwork, especially in fast growing, developing markets. So far we are delighted with the acquisition, which gives us some great peopleand assets, some very good technologies and a much more balanced geography. Weare ready and fit for the challenge of delivering a leaner, more profitablecompany with solid growth prospects in our chosen business sectors. The relative performances of Croda and the acquired business in 2006 graphicallyemphasise the success of the market facing Croda model, in contrast to the moreinternalised, process driven structure of Uniqema in the past. Old Crodaproduced excellent results for the year, in spite of rising raw material costs,enormous energy price rises and unfavourable currency movements. Operatingprofits rose 9% to another record level of £57.2 million. Sales were up 2.7% to£313.9 million (in constant currency they were up 3.8%). We again reduced ourvolumes, especially in the low margin traded oils business. Excluding this,volumes of our core products rose 3%. The real strength of Croda's product andtechnology franchise was demonstrated in the sales increase of nearly 7%attributable to price and product mix effects. We continued to launch newproducts and increased sales in Consumer Care by almost 4%, whilst increasingoperating profits by over 9%. Personal Care was again the driving force behindthis excellent performance. Enterprise Technologies successfully launched twonew product ranges - inorganic sunscreens and the nascent range of polymers,both for the growing global market in Personal Care. Strong cash generation underpinned the strong trading, helped by a well directedlevel of capital expenditure, which has again improved the quality of our globalassets. UK sales were flat, as our customer base continues to shrink, but sales inmainland Europe were well ahead of 2005, with good growth in France, Germany andHolland. In North America, sales were generally flat, mainly due to customerdestocking in the second half, which now seems to have run its course. In LatinAmerica, sales growth was again excellent, with particularly good performancesin Brazil, Argentina and Mexico. Asian sales were ahead, with further stronggrowth in China. We had mixed success with our ongoing disposals programme for non corebusinesses. We sold the Application Chemicals business in mid year and willdispose of the site in Doncaster separately in early 2007. In the year,Chemtura, the majority shareholder of Baxenden Chemicals, attempted to sell thecompany. As such we reported Baxenden last year as discontinued. However, thisbusiness has now been withdrawn from sale and together we are reviewing ouroptions. The full roll out of SAP to our major units is now complete, with the USA fullyon-stream and Japan implemented in January 2007. We have expanded capacity at anumber of sites, most notably with a new ester plant in Brazil and newfacilities at Sederma in France, to satisfy demand for our speciality products. In spite of the continuing consolidation of our customer base, I am pleased toreport that no one customer represents more than 3.4% of our global turnover.The top ten customers still represent only 19% of our global business. Theacquisition of Uniqema will not change these ratios to any significant degree. Consumer Care This sector again performed strongly in 2006, with sales growth of 4% and anincrease in operating profit of over 9% with a pleasing increase in margins. In2006, this sector represented 69% of Group turnover pre Uniqema and 84% ofoperating profit. This is a true speciality business with excellent marginsdriven by innovation and growing markets. These gains were achieved in spite ofa very unfavourable raw material cost environment and unwelcome currency shifts. There were a record number of new product launches in all units in this sector.All units look well set to continue to progress in the future, with particularlygood prospects for the Sederma actives business and the Crodarom range of plantextracts. Good progress was made in most regions, with the exception of the USA where flatsales, but increased profits, reflected the difficulties of the overall marketin the second half of 2006. There are strong signs that this period ofdestocking is coming to an end. Industrial Specialities Sales in this sector were flat, with all units performing as well as could beexpected in tough market conditions. Profits were up 7% as we improved thequality of the business by exiting lower margin products. Application Chemicals has been sold from this sector, whereas Baxenden Chemicalsprofits reappear, as it has ceased to be classified as discontinued. Uniqema As anticipated, the performance of the Uniqema businesses in the last quarter of2006 was lower than the previous year. In stark contrast to Croda's existingbusiness, there were almost no real price increases in 2006. With strong costpressures from energy and raw materials and unhelpful currency shifts, it is notsurprising profits were falling. Sales were robust in quarter four, but profitsfell. We have a strong belief that Uniqema's high quality products have beenunderpriced and steps have already been taken to increase selling prices to morefully reflect the cost increases suffered. We start 2007 with a clear picture of the business and a very committed team.The disruptions of restructuring are effectively behind us and the increasedfocus on direct customer contact should yield the expected results. Thereorganisation has resulted in a large number of people leaving the company andby 2008 we expect a reduction of approximately 7% in the original combinedheadcount. We are well on the way to finalising all the other major synergyprojects as part of our objective to achieve £20m of annualised synergy benefitby the end of 2008. Summary 2006 was a year of terrific progress in the core business in spite of thepotential distractions of the largest transaction in the history of Croda.Forty years ago, Croda bought two companies that were bigger than itself andcreated the platform for what Croda is today. I am proud of the teams from bothCroda and Uniqema who have worked amazingly hard to implement the transition andintegration phases with speed and efficiency. We are confident we can achievethe business and profit improvement we outlined at the time of the transaction.I have visited all of the major sites we acquired and am encouraged by thequality and enthusiasm of the people and the strength of the asset andtechnology base. 2007 will be an even more exciting year. Financial review In a year dominated by the acquisition of Uniqema it is pleasing to report suchstrong progress in the existing business. Operating profits were up 9.0% withimproved margins, despite start up costs of Enterprise Technologies and our newoffice in Shenzhen, adverse currency translation and higher raw material prices. Operating profit growth was driven by Consumer Care up 9.3% to £48.0m.Industrial Specialities saw 7.0% growth despite the modest decline in thereclassified Baxenden business. Uniqema contributed £4.3m operating profit in the four months since acquisitionwith sales growth ahead of our expectations but lower margins, due in the mainto un-recovered input cost rises. The £33.0m operating exceptional item, of which the cash cost is £28.8m, arisesas a result of the post acquisition restructuring we have already announced andbegun to implement in Uniqema. The main elements are redundancy, charges foronerous lease and supply agreements and costs in relation to the termination ofdistribution arrangements. The bulk of the cash cost of the restructuring willoccur in 2007. Restructuring All commercial, customer facing, restructuring of Uniqema was completed for 1January 2007 in line with our pre acquisition timetable. Distribution, backoffice and system changes will take place throughout 2007. 290 redundancieshave been announced across the Group as part of this programme. Interest Interest costs rose significantly as a result of the acquisition of Uniqemawhich masked the benefit of the strong underlying cash generation in the year,though IAS19 pension financing income partially reduced the charge. Taxation In 2006 the effective tax rate before exceptional items has fallen to 33% from34.8%. The mix of overseas earnings in countries with higher tax rates than theUK has not changed materially as a result of the Uniqema acquisition. Acquisition Croda acquired Uniqema from ICI on 1 September 2006 for an initial considerationof £370m. We raised £61m through a share placement on 5 September 2006, thebalance financed by debt. The provisional total consideration of £381.8mreferred to in note 12 includes fees and payments for inherited cash and higherworking capital less a deduction for pensions based on the September 2006valuation. Discontinued operations We sold our metal treatments business, Croda Application Chemicals, to Shell inMarch 2006 for an initial consideration of £3.9m. The sale of our associate,Baxenden Chemicals Limited, did not complete and Baxenden has therefore beenre-classified as a continuing business within Industrial Specialities. Theprior year comparatives have been adjusted accordingly. Dividends We are again able to increase the dividend ahead of the rate of inflation andimprove our dividend cover. We propose to raise the final dividend 7.2% to9.65p making a total of 14.30p (2005: 13.35p). Pre exceptional continuingdividend cover increases to 2 times compared to 1.9 times in 2005. Cash We generated over £70m of cash from our operations in 2006. This was aftermaking a £6m additional payment into the Croda pension fund in December. Thestrong EBITDA was boosted by a small working capital inflow. Capitalexpenditure across the enlarged group was £22.6m, close to the level ofdepreciation. Overall there was an increase in net debt of £305.7m due largelyto the acquisition of Uniqema. Treasury The Group's treasury policies are approved by the Board and subject to regularreporting and review. The main financial risks faced by the Group relate tocurrency, interest rates and availability of capital. Major changes in our funding structures have taken place as a result of theUniqema acquisition. We arranged a £450m syndicated term loan and revolvingcredit line and this together with our US$55m fixed loan note forms the core ofour borrowing facilities. We hedge up to three months on known currency transaction exposure using forwardcontracts and foreign currency bank accounts. We do not hedge translationexposure but reduce the risk by matching currency assets with borrowings whereit is possible and tax efficient to do so. To this end we borrowed US$130m and€145m within the new facility. We also fixed interest rates on £100m of our debt in line with our policy to fixinterest rates on up to half our borrowings. Following our £61m share placement in September 2006, we cancelled 8.7m treasuryshares, leaving a balance of 3.8m. Pensions Croda has a number of pension funds across its global operations as doesUniqema. During 2007 all Uniqema's ongoing pension arrangements will transfer toCroda. We made a one off payment to the Croda UK pension fund of £6m in December2006 and a further £14m was paid into the fund in January 2007. The pension deficit under IAS19 increased to £140.5m at 31 December 2006 (2005:£107.1m). The £40m unfunded Uniqema liabilities taken on as part of theacquisition less the £6m additional contribution from Croda were the mainfactors behind this movement. Information Technology Croda and Uniqema both use SAP as their core software application. We haveseparated all Uniqema systems from ICI and will make the necessary changes tocombine systems across the enlarged group during 2007. Croda International Plc Preliminary announcement of trading results for the year ended 31 December 2006 Condensed Group income statement 2006 2006 2006 2005 £m £m £m £m Note Before exceptional Exceptional items items Total Total Continuing operationsRevenue 2 518.9 - 518.9 305.6 Cost of sales (386.5) (7.3) (393.8) (214.5) ______ ______ ______ ______ Gross profit 132.4 (7.3) 125.1 91.1 Operating expenses (72.2) (25.7) (97.9) (40.0) Share of associate's post-tax profits 1.3 - 1.3 1.4 ______ ______ ______ ______ Operating profit 2 61.5 (33.0) 28.5 52.5 Net financial expenses 3 (7.2) (2.3) (9.5) (1.9) ______ ______ ______ ______ Profit before tax 54.3 (35.3) 19.0 50.6 Tax 4 (17.9) 6.8 (11.1) (17.6) ______ ______ ______ ______ Profit after tax from continuing operations 36.4 (28.5) 7.9 33.0 Profit after tax from discontinued operations 7 0.1 - 0.1 (0.2) ______ ______ ______ ______ Profit for the year 36.5 (28.5) 8.0 32.8 ______ ______ ______ ______ Attributable to: Minority interest - 0.1 Equity shareholders 8.0 32.7 ______ ______ 8.0 32.8 ______ ______ pence per pence per share shareEarnings per share of 10p (note 5)BasicTotal 6.3 25.6Continuing operations 6.2 25.8Continuing operations before exceptional items 28.8 25.8 DilutedTotal 6.2 25.2Continuing operations 6.1 25.4 Ordinary dividends (note 6)Interim 4.65 4.35Final 9.65 9.00 Condensed Group statement of recognised income and expense 2006 2005 £m £m Profit attributable to equity shareholders 8.0 32.7 Exchange differences (3.6) 4.7 Actuarial movement on retirement benefit obligations (net of deferred tax) 13.5 (3.8) ______ ______ Total recognised income and expense 17.9 33.6 ______ ______ Condensed Group balance sheet at 31 December 2006 2005 Note £m £m AssetsNon-current assetsIntangible assets 190.4 6.5Property, plant and equipment 333.5 122.4Investments: Associated undertaking 11.0 - Other 0.9 1.4 Deferred tax assets 46.8 36.0 ______ ______ 582.6 166.3 ______ ______Current assetsInventories 133.5 53.4Trade and other receivables 180.8 55.7Cash and cash equivalents 48.6 39.3 Other financial assets 8 0.8 0.1Current tax assets 2.6 -Assets classified as held for sale 7 1.2 15.4 ______ ______ 367.5 163.9 ______ ______LiabilitiesCurrent liabilitiesTrade and other payables (200.1) (43.6)Borrowings and other financial liabilities 8 (55.0) (24.2) Provisions 10 (17.4) -Current tax liabilities - (5.5) ______ ______ (272.5) (73.3) ______ ______ Net current assets 95.0 90.6 ______ ______ Non-current liabilitiesBorrowings and other financial liabilities 8 (324.3) (39.4) Other payables (1.1) (1.0)Retirement benefit liabilities (140.5) (107.1)Provisions 10 (33.0) (12.6)Deferred tax liabilities (53.1) (16.2) ______ ______ (552.0) (176.3) ______ ______ Net assets 125.6 80.6 ______ ______ Equity shareholders' funds 11 123.7 79.7Minority interests 1.9 0.9 ______ ______ Total equity 125.6 80.6 ______ ______ Condensed Group cash flow statement Note 2006 2005 £m £mCash flows from operating activitiesContinuing operationsOperating profit 28.5 52.5Adjustments for: Depreciation and loss on disposal of fixed assets 20.3 14.0 Share of associate's post-tax profits (1.3) (1.4) Exceptional provision 33.0 - Other provisions 0.2 - Cash paid against operating provisions (3.5) - Changes in working capital 4.4 3.4 Pension fund contributions in excess of service costs (11.3) (2.8) Share based payments 1.0 0.7 Dividend from associate - 1.4 ______ ______ Cash generated from continuing operations 71.3 67.8Discontinued operations (1.0) (0.2)Exceptional financial expenses (2.3) -Interest paid (11.6) (3.7)Tax paid (19.1) (15.9) ______ ______ Net cash generated from operating activities 37.3 48.0 ______ ______Cash flows from investing activitiesAcquisition of subsidiaries (net of cash acquired) 12 (356.2) -Purchases of property, plant and equipment (22.6) (9.1)Proceeds from sale of property, plant, equipment and other investments 2.0 1.4Proceeds from sale of businesses (net of costs) 3.2 -Cash paid against non-operating provisions (0.2) (5.2)Interest received 1.5 1.3 ______ ______ Net cash used in investing activities (372.3) (11.6) ______ ______ Cash flows from financing activitiesAdditional borrowings 341.9 15.0Repayment of borrowings (27.9) (0.6)Capital element of finance lease repayments (0.2) (0.1)Net purchases of own shares (18.2) (21.8)Proceeds from share placement 60.6 -Dividends paid 6 (17.9) (21.7) Net cash used in financing activities 338.3 (29.2) ______ ______ Net increase in cash and cash equivalents 3.3 7.2Cash and cash equivalents brought forward 26.4 17.5Exchange differences (1.7) 1.7 ______ ______ Cash and cash equivalents carried forward 28.0 26.4 ______ ______ Cash and cash equivalents carried forward compriseCash at bank and in hand 48.6 39.3Bank overdrafts (20.6) (12.9) ______ ______ 28.0 26.4 ______ ______ Reconciliation to net debtNet increase in cash and cash equivalents 3.3 7.2Increase in debt and lease financing (313.8) (14.3) ______ ______ Change in net debt from cash flows (310.5) (7.1)Loans in acquired businesses (0.8) -New finance lease contracts (0.1) (0.2)Exchange differences 5.7 (1.7) ______ ______ (305.7) (9.0)Net debt brought forward (24.2) (15.2) ______ ______ Net debt carried forward (329.9) (24.2) ______ ______ Notes to the preliminary announcement 1. Basis of preparation The financial information above is derived from the Group's full statutory accounts on which the auditors have reported; their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. Statutory accounts for 2005 have been filed with the Registrar of Companies and those for 2006 will be delivered following the Annual General Meeting. As explained in the Financial Review, Baxenden has been reclassified as a continuing operation as the business is no longer for sale. 2. Segmental information Primary reporting format - business segments At 31 December 2006 the Group is organised on a worldwide basis into two main business segments, relating to the manufacture and sale of the Group'sproducts which are destined for either the Consumer Care market or the marketfor Industrial Specialities. There is no material trade between segments.Segment results, assets and liabilities include items directly attributable to asegment as well as those that can be allocated on a reasonable basis. Theresults of Uniqema post-acquisition have been kept separate from the two mainsegments as the acquired business was managed and reported as a stand aloneentity. With effect from 1 January 2007 the results of the acquired businesswill be analysed across the Consumer Care and Industrial Specialities segmentsas its operations become aligned with the pre-acquisition structure of theGroup. 2006 2005 £m £mRevenue - continuing operationsConsumer Care 215.9 207.8Industrial Specialities 98.0 97.8Uniqema 205.0 - ______ ______ 518.9 305.6 ______ ______Operating profit - continuing operations before exceptional itemsConsumer Care 48.0 43.9Industrial Specialities 9.2 8.6Uniqema 4.3 - ______ ______ 61.5 52.5 ______ ______ Secondary reporting format - geographical segments The sales analysis in the table below is based on the location of thecustomer. 2006 2005 £m £mRevenue by destination - continuing operationsoperationsEurope 241.7 131.7Americas 175.4 111.5Asia 73.1 42.3Rest of World 28.7 20.1 ______ ______ 518.9 305.6 ______ ______ 3. Net financial expenses 2006 2005 £m £m Bank interest payable 13.3 3.8Bank interest receivable (3.1) (1.5)Expected return on pension scheme assets less interest on scheme liabilities (3.0) (0.4) ______ ______ 7.2 1.9 ______ ______ 4. Tax 2006 2005 £m £mAnalysis of tax charge for the yearUnited Kingdom current tax (0.9) 1.4Overseas current tax 12.6 15.4Deferred tax (0.6) 0.8 ______ ______ 11.1 17.6 ______ ______ 5. Earnings per share 2006 2005 p p Earnings per share - continuing operations before 28.8 25.8exceptional itemsImpact of exceptional items and discontinued (22.5) (0.2)operations ______ ______ Earnings per share - basic 6.3 25.6 ______ ______ 6. Dividends paid Pence 2006 2005 per £m £m shareOrdinary2004 Interim - paid January 2005 4.10 - 5.42004 Final - paid July 2005 8.40 - 10.72005 Interim - paid October 2005 4.35 - 5.52005 Final - paid June 2006 9.00 10.9 -2006 Interim - paid October 2006 4.65 6.2 - ______ ______ 17.1 21.6 Preference (paid June and December) 0.1 0.1Dividends paid to minority shareholders 0.7 - ______ ______ 17.9 21.7 ______ ______ The directors are proposing a final dividend of 9.65p per share (£13.5m) in respect of the financial year ending 31 December 2006. It will be paid on 1 June 2007 to shareholders registered on 4 May 2007. The total dividend for the year ending 31 December 2006 is 14.3p per share (£19.7m). 7. Discontinued operations On 24 March 2006, in continuance of the Group's stated objective to dispose of non-core activities, the Group's metal treatments division was sold to Shell UK Limited. The sale did not include the non-current assets of thebusiness, primarily land and buildings. These have been valued significantly inexcess of their carrying value and, accordingly, there has been nore-measurement to fair value less costs to sell. During 2005, the Group, in conjunction with the company's majorityshareholder, commenced the process of selling its holding in the Group's soleassociate, Baxenden Chemicals Limited. The sale process did not result in anyprospective purchaser being able to match the shareholders' valuation of thecompany and accordingly the process was discontinued. Baxenden has thus beenreclassified back into continuing operations. The impact of the operations discontinued in 2006, which resided withinthe Industrial Specialities segment, is as follows: 2006 2005 £m £m Pre tax operating results from discontinued operations 0.2 (0.2)Tax (0.1) - ______ ______ Post tax operating results from discontinued operations 0.1 (0.2) ______ ______ 8. Financial assets and liabilities The Group manages its interest rate profile using a combination of interest rate swaps. Since 2002 an interest rate swap has been used to convert a proportion of the Group's fixed rate debt to a floating rate. During the yearthe Group took out additional interest rate swaps to fix a proportion of thefloating rate acquisition funding. Under IFRS, the fair value of such derivative instruments must berecognised in the financial statements with a corresponding fair valueadjustment to the underlying loan instrument. Accordingly, a financial asset of£0.8m has been recognised within current assets, being the fair value of theinterest rate swaps, and current financial liabilities include £0.8m inrecognition of the corresponding adjustment to the fair value of the Group'sfixed rate debt at 31 December 2006. 9. Treasury shares During the year the Company purchased a further 4,335,000 shares on the open market with a nominal value of £0.4m to be held as treasury shares, takingthe Company's total holding to 12,457,589 shares. At its meeting on 29 June2006, the Board took the decision to cancel 8,700,000 of the shares held by theCompany as treasury shares, leaving a balance of 3,757,589 shares so held. The total consideration paid for treasury shares has been deducted fromshareholders' funds and as a consequence of the subsequent cancellation of theshares, an amount equal to the nominal value of the cancelled shares has beentransferred to the newly created capital redemption reserve. 10. Accounting estimates and judgements The Group's critical accounting policies under IFRS have beenestablished by management with the approval of the Audit Committee. Theapplication of these policies requires estimates and assumptions to be madeconcerning the future and judgements to be made on the applicability of policiesto particular situations. Estimates and judgements are continually evaluatedand are based on historical experience and other factors, including expectationsof future events that are believed to be reasonable under the circumstances. Under IFRS an estimate or judgement may be considered critical if itinvolves matters that are highly uncertain, or where different estimationmethods could reasonably have been used, or if changes in the estimate thatwould have a material impact on the Group's results are likely to occur fromperiod to period. Critical judgement has been required when preparing theGroup's accounts as follows: Provisions At 31 December 2006, the Group has an environmental provision of £10.7min respect of soil and potential ground water contamination on a number ofsites. Restructuring provisions, totalling £34.7m as at 31 December 2006,largely relate to the ongoing plans to integrate the acquired Uniqema businesswith the existing Croda business. The environmental provision was established in line with UK GAAP and hasbeen reviewed to ensure compliance with IFRS. The restructuring provisions havebeen established in line with IFRS. Based on environmental information currentlyavailable and the detailed plans established for the restructuring of the Group,this level of provision is considered appropriate by the directors. Goodwill and fair value of assets acquired The Group's goodwill carrying value has increased significantly in the year following the acquisition of Uniqema. The Group tests annually whethergoodwill has suffered any impairment and the Group's goodwill value has beensupported by detailed value-in-use calculations relating to the recoverableamounts of the underlying cash generating units. These calculations require theuse of estimates, however as recoverable amounts far exceed carrying values,including goodwill, there is no sensitivity with regard to impairment. 11. Condensed statement of changes in equity 2006 2005 £m £m Opening shareholders' equity 79.7 88.8Shares issued 60.6 -Total recognised income 17.8 33.5Ordinary dividends on equity shares (note 4) (17.1) (21.6)Transactions in own shares (18.2) (21.8)Share based payments 0.9 0.8 ______ ______ Closing shareholders' equity 123.7 79.7 ______ ______ 12. Acquisition of Uniqema On 1 September 2006, the Group completed the purchase of the Uniqemabusiness from ICI plc for a total consideration of £381.8m. The purchaseincluded a number of wholly-owned statutory entities, where 100% of votingshares were acquired, two majority-owned companies, where ICI's stake waspurchased in full, and assets and liabilities in territories where Uniqemapreviously had no separate statutory presence. The purchase has been accounted for as an acquisition. Due to thenature of the acquired business, and after a rigorous review, there were foundto be no separately identifiable and quantifiable intangible assets, other thancomputer software, due in the main to the lack of any valuable trademarks,licences or other product related intangibles. Consequently, the whole excess ofconsideration over net assets acquired is recognised as goodwill in thefinancial statements. The goodwill is justified by (i) the acquisition of a skilled workforce; (ii)the fact that Uniqema's product portfolio complements and enhances Croda'sexisting product offering; (iii) further expected growth as a result ofrationalising and improving Uniqema's existing distribution network; and (iv)cost saving synergies as a result of bringing the business within Croda'sexisting structure. The assets and liabilities acquired, along with the cost of the acquisition aresummarised below: Provisional fair values £m Intangible assets 6.9Property, plant and equipment 217.1Inventories 82.9Receivables 111.6Cash and cash equivalents 18.1Loans acquired (0.8)Payables (131.3)Deferred taxation (22.2)Provisions (8.5)Retirement benefit liabilities (68.1)Minority interest (1.6) ______ Net assets acquired 204.1Goodwill 177.7 ______ Provisional total consideration 381.8 ______ The consideration was satisfied wholly in cash. The fair values are provisionalat this stage and will be finalised in the 2007 financial statements. The net outflow of cash and cash equivalents on the acquisition ofUniqema was as follows: £m Provisional total consideration 381.8Consideration adjustments re working capital, net debt and pensions unpaid at year end (6.0)Accrued acquisition costs (1.5)Cash and cash equivalents acquired (18.1) ______ 356.2 ______ From the date of acquisition to 31 December 2006, Uniqema's contribution toGroup results was as follows: £mIncome statementRevenue 205.0Profit before tax 4.2 Proforma results for the Group for 2006, on the basis that Uniqema hadbeen acquired at the beginning of the year, are as follows: £m Revenue 958.6Profit for the year before exceptional items 36.0 The proforma results include the following adjustments: (a) Fair value adjustments - proforma depreciation charges are based on the provisional fair values as outlined above. (b) Borrowings incurred to finance the acquisition - the proforma results include the estimated full year borrowing cost had the acquisition funding been in place at the start of the year. (c) Alignment of accounting policies - the proforma results assume Croda's accounting policies applied from the start of the year. Adjustments to Uniqema's results for the year are thus required where policies differ. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Croda International