13th Mar 2007 07:03
Cookson Group PLC13 March 2007 13 March 2007 ANNOUNCEMENT OF 2006 PRELIMINARY RESULTS STRONG RESULTS DEMONSTRATE PROGRESS IN IMPLEMENTING STRATEGIC PLAN Highlights • Strong results demonstrate progress in implementing Strategic Plan • Continued transformation of Group's profile, with more profitable and less cyclical mix of continuing operations • Continuing operations (now excludes Monofrax: 2006 revenue £27 million; trading profit £4.0 million): - Revenue of £1,590 million, up 9% - Trading profit of £150 million, up 20% - Return on sales up 0.9 percentage points to 9.5% • Headline PBT and EPS up 30% and 27% respectively • Net debt of £181 million, down £112 million • Pension deficit of £155 million, down £70 million • Final dividend of 7 pence, up 40% 2006 2005(3) Improvement vs. 2005(4) Continuing Operations(1) Revenue £1,590m £1,457m +9%Trading profit(2) £150.3m £124.9m +20%Return on sales 9.5% 8.6% +0.9 pts Total Operations Revenue £1,661m £1,635m +2%Trading profit2 £158.2m £134.7m +17%Return on sales 9.5% 8.2% +1.3 ptsProfit before tax - headline(2) £131.2m £101.1m +30% - basic £113.5m £78.5m +45%Earnings per share - headline(2) 46.6p 36.8p +27% - basic 32.8p (5.8)p Dividends per share - interim 3.0p - - final 7.0p 5.0p +40% Free cash flow(2) £64.5m £42.9m up £21.6mNet debt £180.5m £292.3m down £111.8m (1) Continuing operations exclude the trading results of the Laminates, Monofrax and SCS businesses. (2) Refer to the attached Income Statement and Statement of Cash Flows for definitions. (3) Note 2 to the accounts attached details the restatements made to the 2005 comparative information, none of which impacts net cash flows, financial position or total recognised income and expense. (4) For revenue and trading profit the impact of changes in exchange rates between 2005 and 2006 has not been material and, as a result, the percentage improvement between 2005 and 2006 is the same at both reported and constant exchange rates. Commenting on the Group's results and outlook, Nick Salmon, Chief Executive,said: "The results for 2006 demonstrate the progress achieved so far in theimplementation of the Strategic Plan, through which we continue to transform theprofile of the Group. "Our programme of exiting commodity activities, either by disposal or closure,while improving our competitiveness in mature markets and growing strongly inemerging markets, is resulting in an intrinsically more profitable and lesscyclical mix of continuing operations. End-market growth for our principalactivities has been sound, resulting in good organic revenue growth. Both ournet debt and the pension deficit have also reduced significantly during theyear. "Our main end-markets, global steel production and electronics, are forecast tocontinue to grow ahead of GDP over the medium-term. Trading over the first twomonths of 2007 has continued the positive trends from 2006. All three divisionshave detailed plans to deliver strong organic earnings growth through 2007, 2008and beyond. However, the recent weakening of the US dollar, through itstranslation impact on our sterling results, would partially reduce this growthif it were to continue. Based on these factors we expect to continue to deliver further improvement inour underlying performance." OVERVIEW Summary of Group results Revenue from continuing operations of £1,590 million was up 9% on 2005 andtrading profit rose 20% to £150.3 million. Headline profit before tax increasedby 30% and headline earnings per share rose 27% to 46.6 pence. Net debt at 31December 2006 was £181 million, down £112 million from a year earlier due togood cash generation, receipt of disposal proceeds and favourable foreignexchange movements. The worldwide pension deficit also reduced by £70 million to £155 million, whichreflects the accelerated contribution programme in the UK and the freezing ofthe main US defined benefit plans. Ceramics division The Ceramics division had another outstanding year, with trading profit up 22%over 2005 driven by revenue growth in our high-margin flow control and fusedsilica product lines and good progress in our strategy to improve margins in thelinings business. Global steel production, our main end-market, grew 9% in 2006. During the yearprojects were launched to build additional production facilities in China,Poland and Mexico and to close two factories in the UK and two in the US, whilemaking further cost reductions in the global management structure. Two non-corebusinesses were disposed of in 2006, Ceramic Fibres and Carbon Blocks, and afurther two businesses in early 2007, Monofrax fused-cast refractories and asmall US refractory brick business. Electronics division Worldwide demand for electronics remained buoyant, which supported theElectronics division in delivering an 11% increase in trading profit, with goodcontributions from several of our new product lines. In mid-year, the closureof the low-margin Industrial Metals activity in Europe was completed and, laterin the year, two substantial restructuring projects were launched for completionby the end of 2007. In the US, two Assembly Materials factories will be closedwith some production relocating to Mexico. In the Chemistry sector in Europe,facilities are being consolidated by closing factories in Spain and Italy, whileexpanding production in Germany and the Netherlands. The buyout of the former49% JV partners in the Chemistry sector's China business was completed, nowgiving the potential for strong growth in this important market. The non-coreFlorida-based PVC Cements business was sold in December. Precious Metals division The Precious Metals division delivered a 41% improvement in trading profit, withthe full year benefit of the restructuring programmes completed in mid-2005 inthe US and France. Retail jewellery markets showed modest growth in the US butremained weak in Europe, particularly in the UK. In response to this werestructured the UK selling and distribution network in 2006 and, in January2007, plans for a fundamental restructuring of UK manufacturing operations wereannounced, involving closing the Wrexham facility and downsizing the Birminghamoperations, while transferring some production to a new facility in Thailand.The US operations continue to perform well and profitability should be furtherimproved with the closure of the New Jersey facility and the relocation of itsproduction to the main Attleboro plant, which is due to be completed bymid-2007. Changing Group profile The programme of disposals, closures, restructuring and new investments ischanging the profile of our activities and markets. Geographically our markets are well balanced with one-third of revenue in NAFTA(which comprises the US, Canada and Mexico), one-third in Europe and one-thirdin emerging markets, mainly Asia-Pacific. Over the past three years, the total number of employees in our continuingoperations has remained level but with significant changes across the regions.In Asia-Pacific employee numbers have grown 66%. In NAFTA they have reduced 10%overall, but with an increase in Mexico as production is relocated from the US.European employee numbers have reduced 21% overall, but with growth in Polandand the Czech Republic. We have exited many commoditised activities and also the most highly cyclical,specifically with the sale of the capital goods business Speedline, in 2003 andthe Laminates business in 2006. As a result, the intrinsic cyclicality of theGroup has been greatly reduced and the profitability and stability of the mix ofour activities much improved. Strategic Plan update While most of the original targets from the January 2005 Strategic Plan havealready been achieved or exceeded ahead of schedule, the transformation of theGroup is not complete. In November 2006, an update on the Strategic Plan withrevised targets was announced with the key points as follows. Ceramics division • 2/3rds of revenue is now in higher-margin speciality products with further profit growth achievable by expanding in emerging markets while improving efficiency in NAFTA and Europe (including expansion in Mexico and Poland) • 1/3rd of revenue is in linings (primarily monolithics and the construction & installation business) where our profitability is significantly below our competitors. This can be turned around > New targets: 2008 return on sales (RoS) margin of 13%; revenue growth 5% to 6% CAGR Electronics division • The highly cyclical businesses, Speedline and Laminates, have now been sold • Profitable growth will be driven by: • New products and technical developments • Strong growth in Chemistry in China following recent successful buyout of former 49% JV partners • Further restructuring of Chemistry in Europe and Assembly Materials in NAFTA > Sustained growth in profits Precious Metals division • US operations were substantially restructured in 2005 and further consolidation of manufacturing is currently underway. 15% return on net sales value (RoNSV) target maintained • Further restructuring in UK announced in January 2007, including the transfer of some production to Thailand. Mid single-digit RoNSV target for 2007 > US operations are in good shape. Turnaround of UK will continue in 2007 Many of the investment and restructuring plans mentioned above will only producefull benefits from 2008 onwards and further initiatives are still to beannounced. However, 2007 should be the last year of high restructuring chargesand capital expenditure as the major transformation projects are completed. The new targets do not assume any acquisitions but the Group now has thefinancial strength to make acquisitions should suitable opportunities arise. OUTLOOK Our main end-markets, global steel production and electronics, are forecast tocontinue to grow ahead of GDP over the medium-term. Trading over the first twomonths of 2007 has continued the positive trends from 2006. All three divisionshave detailed plans to deliver strong organic earnings growth through 2007, 2008and beyond. However, the recent weakening of the US dollar, through itstranslation impact on our sterling results, would partially reduce this growthif it were to continue. Based on these factors we expect to continue to deliver further improvement inour underlying performance. RESULTS OF OPERATIONS Note: • the data provided in the tables below are at reported exchange ratesand reflect the restatements as described more fully in the Group FinancialReview below. Comparatives have been restated accordingly. • unless otherwise stated, for revenue and trading profit the impact ofchanges in exchange rates between 2005 and 2006 has not been material and, as aresult, the percentage improvement between 2005 and 2006 is the same at bothreported and constant exchange rates. Group - Continuing operations Revenue (£m) Trading Profit (£m) Return on Sales (%) 2006 2005 2006 2005 2006 2005 First half 803 708 69.7 54.5 8.7 7.7 Second half 787 749 80.6 70.4 10.2 9.4 Year 1,590 1,457 150.3 124.9 9.5 8.6 Revenue from continuing operations, which excludes the results of the Laminates,Monofrax and SCS businesses, was 9% higher. The increase in revenue fromcontinuing operations reflected both strong organic growth plus the impact ofhigher metal prices being passed through to customers in the Precious Metalsdivision and the Assembly Materials and Chemistry sectors of the Electronicsdivision. Revenue trends were broadly similar between the first and second halfof the year on a constant currency basis with 10% and 9% increases respectively. On a constant currency basis, revenue in the second half of 2006 was 2% higherthan the first half. In addition to the adverse currency impact, revenue in thesecond half of 2006 has also been reduced by business disposals and closuresmade during the course of the year. These two factors have more than offset thepositive impact on revenue of higher metal prices in the second half of theyear. Trading profit from continuing operations was 20% higher. Each divisionreported significantly higher levels of profitability than in the prior year,reflecting both the strong organic revenue growth and the benefit of the costreduction initiatives implemented over the last two years. Trading profitincreased by 22% to £89.5 million in the Ceramics division; by 11% to £58.5million in the Electronics division; and by 41% to £11.0 million in the PreciousMetals division. Return on sales from continuing operations for the Group of 9.5% has improved by0.9 percentage points compared to 2005, with the margin of the two largestdivisions - Ceramics and Electronics - well into double-digit levels at 11.8%and 10.5%, respectively. If metals prices in 2006 had remained at similarlevels to those in 2005, the return on sales from continuing operations in 2006would have been 1.3 percentage points higher than for 2005. The fastest growing and most profitable region for the Group continued to beAsia-Pacific which accounted for 23% of Group revenue from continuing operationsin 2006 and 42% of trading profit. NAFTA and Europe remain the Group's largestregions in terms of revenue, however despite revenue growth in both theseregions, higher levels of growth particularly in Asia-Pacific has seen theircombined share of Group revenue fall from 75% in 2005 to 72% in 2006. Ceramics division Revenue (£m) Trading Profit (£m) Return on Sales (%) 2006 2005 2006 2005 2006 2005 First half 384 356 42.7 33.7 11.1 9.5 Second half 373 366 46.8 39.4 12.5 10.8 Year 757 722 89.5 73.1 11.8 10.1 The Ceramics division experienced a very strong year as a result of good growthin global steel production combined with the beneficial impact of the variousrestructuring initiatives carried out during the last two years. Revenue fromcontinuing operations for the year at £757 million was 5% higher than 2005.These results exclude the results of Monofrax, the US fused-cast refractorybusiness, which was sold in February 2007 and whose results are included indiscontinued operations. The division's results do, however, include theresults of a number of smaller non-core businesses which were either sold orclosed during the year, but which did not qualify to be treated as discontinuedoperations for financial reporting purposes. These include the principallyUS-based Ceramic Fibres business and the UK-based Carbon Blocks and MagnesiaCarbon Bricks businesses. Excluding the revenue from these businesses, organicrevenue for the division was up 8% at constant exchange rates, broadly in linewith the growth in world steel production. Trading profit from continuingoperations grew strongly by 22% at reported exchange rates (up 21% at constantexchange rates) to £89.5 million - the highest level ever achieved by thedivision. Return on sales was 11.8%, up 1.7 percentage points from the 10.1%reported in 2005. Return on net assets (being trading profit divided by thetotal of average property, plant and equipment, investments, trade workingcapital and other operating receivables and payables) increased strongly from28.2% in 2005 to 34.6% in 2006. At the end of 2005 a new, more streamlined and responsive organisational modelwas introduced which focuses operational responsibilities on the principalproduct lines of flow control, foundry and linings on a regional basis. Furtherdownsizing of the central management function was initiated at the end of 2006.In each region the key end-market is global steel production. In 2006, globalsteel production rose by 9% to over 1.2 billion tonnes. Following the 6% growthin 2005, the rate of growth increased during 2006, being 8% in the first halfand 9% in the second half of the year. China reinforced its position as theworld's leading steel producer with year-on-year growth of 19% and accounted forjust over one-third of the world's total production in 2006. Notwithstandingthe strong growth from this region, global production outside of China stillshowed growth of 5% with strong growth in the major regions of India (up 8%),the US (up by 6%) and the enlarged European Union (up by 6%). Europe and NAFTA are the division's two largest regions making up 39% and 34%,respectively, of total divisional revenue from continuing operations. However,the two fastest-growing regions are Asia-Pacific and Rest of the World, whichinclude the fast-developing markets of China, India and Brazil, togethercomprising 21% of total divisional revenue. Fused Silica, the one product linethat is managed on a global rather than a regional basis, makes up the remaining6%. NAFTA (comprising the US, Canada and Mexico) Revenue from continuing operations in NAFTA grew by 2% to £254 million (atconstant exchange rates and adjusted for the disposal of the Ceramic Fibresbusiness) with growth in all principal product lines - flow control, linings andfoundry. Flow control, which constitutes 40% of NAFTA revenue, grew by 4% inline with the growth in steel production in the region. Linings, whichconstitutes just over 50% of NAFTA revenue, increased by 1%. This business,which supplies and installs monolithic refractory linings into a variety ofindustries, has adopted a strategy of focussing its resources only onhigher-margin, more value-added projects and this has been reflected in thesignificantly improved profitability of this business in 2006. Trading profit from continuing operations increased significantly by over 40%(at constant exchange rates and adjusted for the disposal of the Ceramic Fibresbusiness) compared to 2005. This reflected the underlying volume growth, theimpact of the elimination of around 60 non-production personnel at the end of2005, the cost benefit of the ongoing relocation of production capacity from theUS to Mexico and significantly improved profitability in the linings productline. Linings, which broke-even in 2005, returned to profitability with a lowsingle-digit return on sales in 2006. Whilst this improvement is encouraging,this level of profitability is still well below that of its main competitors andwe believe that further significant improvements can be made going forward. During 2006, the division continued its restructuring programme with theannouncement that the Crown Point (Indiana) facility will close in early 2007.Production of taphole clay, an important product used in the production ofmolten iron, will be transferred to an existing facility at Chicago Heights(Illinois) where a new production line using updated technology is beingconstructed. The slide-gate and linings production capacity has also beenexpanded at the Monterrey facility in Mexico. In February 2007, as part of theprogramme of disposing of non-core businesses, the sale of Monofrax, afused-cast refractory business based in Falconer (New York), was completed and asmall US refractory brick business was sold. Europe Improved market conditions resulted in revenue in Europe growing by 9% to £297million (at constant exchange rates and adjusting for the closed liningsoperations in the UK discussed below). Flow control, which constitutes 53% ofEuropean revenue grew by 7%, ahead of the 6% growth in steel production in theregion. Linings, which constitute one-third of European revenue, also saw goodgrowth with a 13% increase in revenue on an organic basis. Trading profit increased by 14% (at constant exchange rates and adjusted for theclosed linings businesses in the UK). The profit improvement was particularlymarked in the linings operation, which saw its underlying return on sales morethan double. Following a strategic review of the UK operations in early 2006, the CarbonBlocks business, located in Bawtry (South Yorkshire) was sold in June 2006. TheMagnesia Carbon Bricks business, located in Worksop (Nottinghamshire), which wasexperiencing very weak market conditions, was closed in December 2006. Theslide-gate operation in Goole (East Yorkshire) will also close in mid-2007, inlight of the expansion of slide-gate capacity at our facility in Skawina, Polandbased on new slide-gate plate technology. As a result of these initiatives, theCeramics division's UK headquarters, based in Barlborough (Derbyshire), is beingdownsized. Asia-Pacific and Rest of the World Revenue in these regions grew in total by 16% to £162 million at constantexchange rates reflecting strong steel production growth in the two key marketsof China and India (19% and 8% respectively) combined with good growth in theconstruction & installation business, which primarily operates in Australia.China continues to experience consolidation in the steel industry and thegovernment is encouraging the industry to shift to more modern, energy andpollution efficient methods of steel production which should expand the marketfor the Ceramics division's leading flow control products. This trend shouldenable the division to continue its strong progress in China, even if the rateof growth of total steel production starts to slow. The strong revenue growth has resulted in trading profit increasing strongly byover 20% with improved profitability from both the flow control and, moremarkedly, the linings product lines. As part of the division's expansion in the region, in May we announced theconstruction of a new £5 million foundry crucible facility in Suzhou, JiangsuProvince, near two of the division's existing Chinese facilities. The newfacility, which is expected to be operational in the first quarter of 2008, willproduce long-life, high-performance alumina graphite crucibles for thefast-growing non-ferrous foundry market. The Chinese foundry industry is thelargest in the world and has experienced annual growth of around 10% over thelast few years. Fused Silica The one product line that is managed on a global rather than a regional basis isFused Silica. The principal products in the global Fused Silica product lineare tempering rollers used in the glass industry and Solar CruciblesTM used inthe manufacture of photovoltaic (or solar) cells. Revenue has grown by 11% to£44 million compared to 2005 at constant exchange rates with 8% growth intempering rollers being enhanced by strong growth of 16% for Solar CruciblesTM.Market conditions in the worldwide glass industry were generally good in 2006,with growth of around 5% driven by strong growth in the construction industry inChina and increasing demand for flat screen television panels. The fast-growingsolar energy industry has benefited in 2006 from the impact of high oil and gasprices, which has placed increased emphasis on the development of renewableenergy sources, such as solar. As anticipated, limited supplies of thepolysilicon material used in the majority of solar panels has restricted growthin the short-term, but additional capacity is now coming on stream such thatgrowth should accelerate further. Profitability remains strong for this product line with trading profit up 15% on2005. To meet the increasing demand for fused silica products, a number of newinvestments were made during the year. In China, we made a £5 millioninvestment at our existing glass roller facility in Kua Tang. This investment,which was completed at the beginning of 2007, significantly increases capacityfor producing the rollers used in the glass industry and transforms thisfacility into the Ceramics division's leading centre worldwide for glass rollerproduction. Alongside this facility, we also completed a new facility tomanufacture solar crucibles for the fast-growing photovoltaic market inAsia-Pacific. This facility is currently in its ramp-up phase with fullcommercial production expected by the second quarter of 2007. Following thisadditional investment in China, a £7 million investment for the manufacture ofsolar crucibles at our existing facility in Skawina, Poland to support Europeancustomers has been commenced which is expected to be operational in the secondhalf of 2007. With the announcement of the closure of the Beaver Falls (Pennsylvania)facility, glass roller production in the US will now be consolidated into onefacility at Dillon (South Carolina) with effect from the first quarter of 2007. Electronics division Revenue (£m) Trading Profit (£m) Return on Sales (%) 2006 2005 2006 2005 2006 2005 First half 281 234 27.1 21.5 9.6 9.2 Second half 274 255 31.4 31.0 11.5 12.2 Year 555 489 58.5 52.5 10.5 10.7 Following the completion of the Laminates disposal in April 2006, theElectronics division now comprises two sectors, Assembly Materials andChemistry, the results of which are reviewed below. Return on net assets forthe division increased strongly from 37.6% in 2005 to 42.2% in 2006. Assembly Materials Revenue (£m) Trading Profit (£m) Return on Sales (%) 2006 2005 2006 2005 2006 2005 First half 162 129 12.8 9.5 7.9 7.4 Second half 157 145 15.4 16.1 9.8 11.1 Year 319 274 28.2 25.6 8.8 9.4 Revenue for the year at £319 million was 17% higher than prior year. However,in 2006 the average price of tin and silver - the sector's major raw materials -were 21% and 58% higher, respectively, than for 2005. The cost of tin andsilver was, in the main, passed through to customers during the year, such thatrevenue was increased by approximately £30 million compared to 2005 as a resultof the higher metal prices. Revenue also reflected the impact of disposals andclosures, namely the US-based PVC Cements business in December 2006 and theclosure of the low-margin industrial metals activities in Naarden, theNetherlands in June 2006. Excluding the impact of higher metal prices anddisposals, underlying revenue was 8% higher than last year (on a constantcurrency basis). The revenue growth reflected the good growth in PCBproduction, the increasing penetration of lead-free solder - with its relativelymore expensive mix of metals - but more difficult markets for solder productsused in industrial applications. Trading profit of £28.2 million was 10% higher than last year reflecting thegrowth in underlying volumes, the higher profitability of lead-free products andthe impact of cost-saving initiatives. Return on sales decreased from 9.4% to8.8% due to the impact of higher metal prices. If metals prices in 2006 hadremained at similar levels to those in 2005, the return on sales in 2006 wouldhave been 0.4 percentage points higher than for 2005. Asia-Pacific, the sector's largest region accounted for 54% of revenue, anincrease of 6 percentage points over 2005. This reflected the continuedmigration of consumer electronics production to this region. Europe accountedfor 22% of revenue, NAFTA 20%, and the Rest of the World 4%. The world-wide transition to lead-free solder products, driven by European Unionlegislation which became effective on 1 July 2006, continues to enhance bothrevenue and profits. For 2006, 47% of solder sales were lead-free compared with24% in 2005, with the conversion of lead-free reaching 51% in the fourth quarterof 2006. Capacity for the production of lead-free solder has been increasedduring the year, notably in Asia-Pacific. Sales of lead-free solder in 2006 areparticularly high in Asia-Pacific, with a conversion rate for the year of 67%compared to 31% in Europe and 19% in the US. Going forward the conversion rateis expected to increase significantly in the US, grow steadily in Europe andstart to level off in Asia-Pacific. Sales of the sector's proprietarylow-silver content, lead-free solder (Alpha SACXTM) have also grown strongly inthe year following its introduction in the second half of 2005. With onlyone-tenth of the silver content of normal lead-free solder this product offerssignificant cost advantages to our customers. In the fourth quarter of 2006,17% of lead-free solder sales were Alpha SACXTM compared to 5% in the equivalentquarter in 2005. The Semi-conductor Packaging Materials business, which provides epoxy-mouldcompounds, underfills and solder spheres to the electronics industry, facedcontinuing difficult market conditions in 2006 with revenue down on last year.In response, headcount reductions were implemented during the year and there wasa change in senior management in the fourth quarter. During 2006, the strategy of exiting non-core, commoditised businesses andrestructuring in the more mature markets continued. In June 2006, the closureof the low-margin industrial metals activities in Naarden, the Netherlands wascompleted with a reduction in headcount of 65, and in December 2006 the US-basedPVC Cements business was sold. In November 2006, the restructuring of thesector's manufacturing operations in NAFTA was announced for implementationduring 2007. Production of high labour-intensive solder wire is to be movedfrom the Altoona (Pennsylvania) facility to a new site in Monterrey, Mexico.The Jersey City (New Jersey) facility is to close with production moved toMonterrey, Mexico and to Altoona. The wave solder flux manufacturing facilityin Alpharetta (Georgia) is to close with production moved to an existingChemistry sector facility in Mexico City, Mexico. When completed, headcount inthe US will be reduced by 120 with 90 new jobs created in Mexico. Annual costsavings from this restructuring of £2.2 million are anticipated from thebeginning of 2008. R&D and new product development remains a key focus, reflected by a furtherexpansion of R&D capabilities in Bangalore, India. Chemistry Revenue (£m) Trading Profit (£m) Return on Sales (%) 2006 2005 2006 2005 2006 2005 First half 119 105 14.3 12.0 12.0 11.4 Second half 117 110 16.0 14.9 13.8 13.5 Year 236 215 30.3 26.9 12.9 12.5 Revenue for the year at £236 million was 9% higher than 2005 at reportedexchange rates (10% at constant exchange rates). This growth was to a largeextent driven by the pass through of higher precious metal prices (notably forgold and palladium) to customers. Prior to this impact, the organic growth inrevenue of 2% (at constant exchange rates) reflected underlying growth for thesector's higher-margin products serving the electronics markets, being offset byweaker sales of lower-margin products for industrial and automotive markets(particularly in the US). Within the electronics markets, the sector's copperdamascene, lead-free immersion silver (AlphaStarTM) and wafer bumping productsreported strong revenue growth, whilst in industrial markets, our range ofplating-on-plastics and corrosion and wear-resistant coatings products also grewstrongly. Trading profit for 2006 at £30.3 million was 13% higher than 2005. Thisreflected the better mix of higher-margin products serving electronics marketscombined with the effect of the rationalisation of the sector's European salesand distribution network, a cost-reduction initiative commenced in 2005. Returnon sales increased from 12.5% to 12.9%. If metals prices in 2006 had remainedat similar levels to those in 2005, return on sales in 2006 would have been 1.3percentage points higher than for 2005. Europe and NAFTA remain the sector's largest regions with 40% and 35% of totalsector revenue. European revenue was down 3% on last year (before the metalprice impact) reflecting a deliberate strategy of reducing sales of low-marginelectroplating equipment. Excluding equipment sales, underlying revenue was 3%higher, reflecting generally solid industrial markets and modest growth invehicle production volumes, particularly in Germany which is our largest marketfor automotive-related product in Europe. Revenue in NAFTA was up 2% on lastyear (before the metal price impact) primarily due to the strong sales toelectronics markets (including copper damascene and lead-free immersion silverproducts) more than offsetting weak automotive market in the second half of theyear. Revenue in Asia-Pacific, which accounts for 24% of the sector's revenue,grew strongly by 13% reflecting the strong growth in this region. In October2006, the joint venture partners in our Chinese operation who owned 49% of thebusiness were bought out (with economic effect from April 2006) for a cashconsideration of £2.4 million. As well as enhancing the ability to service thefast-growing industrial sector in China, this transaction enhances net earningsby over £1 million per annum. Following this acquisition, the construction of anew £6 million manufacturing facility in Nansha, Guangdong Province wasannounced for completion in 2008. These initiatives now give the sectorunencumbered freedom to conduct and grow its business in China. In Europe, the consolidation of the sector's manufacturing footprint continuedwith the closure of the Swedish and Austrian facilities. In addition, theclosure of the production facility in Spain and the consolidation of ourfacilities in Italy were announced with completion expected by the end of 2007.With the rationalisation of these smaller facilities, production will now befocussed on our existing facilities in Germany and the Netherlands, where theproduction and warehousing facilities have recently been enhanced. Annual costsavings from this European restructuring of £2 million are anticipated from thebeginning of 2008. Precious Metals division Revenue (£m) Net Sales Value Trading Profit Return on Net (£m) (£m) Sales Value (%) 2006 2005 2006 2005 2006 2005 2006 2005 First half 139 118 57 52 4.4 2.9 7.7 5.6Second half 139 128 54 56 6.6 4.9 12.3 8.8 Year 278 246 111 108 11.0 7.8 9.9 7.2 The Precious Metals division operates in two distinct geographic regions: theUS, which constitutes 58% of the total net sales value (being revenue excludingthe precious metals content) for the division, and Europe (which comprises theUK, France and Spain). Return on net assets (being trading profit divided bythe total of average property, plant and equipment, investments, trade workingcapital and other operating receivables and payables) increased from 11.0% in2005 to 14.5% in 2006. Precious Metals - US Revenue (£m) Net Sales Value Trading Profit Return on Net (£m) (£m) Sales Value (%) 2006 2005 2006 2005 2006 2005 2006 2005 First half 77 62 33 29 4.1 3.0 12.4 10.3Second half 78 71 31 32 4.9 4.3 15.8 13.3 Year 155 133 64 61 9.0 7.3 14.1 11.9 Net sales value of £64 million grew by 5% at reported exchange rates (6% atconstant exchange rates) compared to 2005. This increase reflected some firmingof retail markets with evidence of a return to fashion of the 'yellow goldlook', strong sales of chain and findings products particularly to non-USmarkets such as India and Hong Kong, and increased business from Tiffany and theUS Mint (in particular, the supply of 24 carat gold blanks for the production ofthe 'Buffalo' coin for investors and collectors). Trading profit for 2006 at £9.0 million was 23% higher than last year reflectingthe good organic growth in net sales value growth and the full year impact ofthe headcount reductions implemented in the second quarter of 2005. Return onnet sales value was 14.1% (2005: 11.9%). The initiative to consolidate all of the US manufacturing operations into theprincipal facility in Attleboro (Massachusetts) has continued in 2006, with theannouncement in August 2006 of the relocation to Attleboro of Inverness, ourear-stud business currently located in New Jersey. This relocation, which willbe completed in mid-2007 and involves a net headcount reduction of 20, willgenerate annual cost savings of £1.5 million. Precious Metals - Europe Revenue (£m) Net Sales Value Trading Profit Return on Net (£m) (£m) Sales Value (%) 2006 2005 2006 2005 2006 2005 2006 2005 First half 62 56 24 23 0.3 (0.1) 1.3 (0.4)Second half 61 57 23 24 1.7 0.6 7.5 2.5 Year 123 113 47 47 2.0 0.5 4.3 1.1 Net sales value of £47 million was broadly unchanged compared with 2005. Thisreflected continuing weak retail demand (particularly in the UK) being offset bystronger scrap refining business, stimulated by the high precious metal pricesduring the year. Net sales value was 5% lower in the UK, but this was offset bysmall increases in France and Spain. The UK business outperformed the overalljewellery market with hallmark statistics for 2006 from the Assay Office showinga 14% and 12% decline from 2005 in the number of gold and silver jewellery itemsrequiring to be hallmarked. Trading profit for 2006 was £2.0 million, well ahead of the £0.5 million profitreported in 2005. All three countries were profitable and reported improvedlevels of profitability, with particularly strong performances coming fromFrance and Spain. At the beginning of 2006, the first phase of the restructuring of the UKoperations was announced, with the implementation of new call centre andinternet selling systems. Whilst this has reinforced our position as a leaderin the UK marketplace, the business continued to suffer from weakening demand inthe industry overall and increased competition from low-cost imports. Againstthis background, a proposed fundamental restructuring of the manufacturingoperations was announced in January 2007, to be implemented on a phased basisduring 2007. The facility in Wrexham, which produces chain and findings, willclose with manufacturing transferring to a new site in Thailand. The stampings operation at the main facility in Birmingham will also relocate toThailand and certain other products will increasingly be sourced from thedivision's US-based operations. The sales office in Dublin will also close.These initiatives, which will result in the loss of some 80 jobs, will result inannualised cost savings of £2.0 million. Group corporate The Group's corporate costs, being the costs directly related to managing theGroup holding company, were £8.7 million, broadly in line with last year. Thecosts in 2006 reflect a number of non-recurring charges, in particular costsrelating to the successful SEC deregistration. Group - Discontinued operations (Laminates, Monofrax and SCS) Revenue (£m) Trading Profit (£m) Return on Sales (%) 2006 2005 2006 2005 2006 2005 First half 62 87 6.3 2.1 10.1 2.4 Second half 10 91 1.6 7.7 16.7 8.5 Year 72 178 7.9 9.8 11.0 5.5 Discontinued operations include the results of the Laminates business, which wassold in April 2006, Monofrax, the sale of which was completed in February 2007and, in 2005, the Speciality Coating Systems business, which was sold at the endof December 2005. The Laminates business traded profitably in 2006 up to itsdisposal, reflecting both the restructuring of this business in 2005 and thediscontinuance of any depreciation charge as required by its accountingtreatment as a business "held for sale". Monofrax traded satisfactorily in 2006with trading results broadly in line with 2005. GROUP FINANCIAL REVIEW Improvement 2006 2005 vs. 2005Profit before tax (£m)- headline 131.2 101.1 +30%- basic 113.5 78.5 +45% Earnings per share (pence)- headline 46.6 36.8 +27%- basic 32.8 (5.8) Dividends per share - interim 3.0p - - final 7.0p 5.0p +40% Free cash flow (£m) 64.5 42.9 up £21.6mNet debt (£m) 180.5 292.3 down £111.8m Restatement of comparative information This is the second year that the Group accounts have been prepared in accordancewith International Financial Reporting Standards ('IFRS'). During 2006, as aresult of the continued assessment of the detailed impact of IFRS on thepresentation of the Group accounts, a number of changes to the accountingtreatment and presentation of certain items in the Group accounts for 2006 havebeen made, together with appropriate changes to the respective comparativeinformation for 2005. These changes are explained in Note 2 to the attachedaccounts, but none of them have had an impact on the Group's net cash flows,financial position or total recognised income and expense as previously reportedfor 2005. The comparative information in this review is stated after thesechanges. Group Income Statement Headline profit before tax 2006 2005 Improvement £m £m vs. 2005 Trading profit: Continuing operations - at 2006 exchange rates 150.3 125.7 +20%Discontinued operations(Laminates, Monofrax and SCS) 7.9 9.6Currency exchange rate impact - (0.6) Trading profit - at reported exchange rates 158.2 134.7 +17% Net finance charges (interest) (28.4) (35.0) Post-tax income from joint ventures 1.4 1.4 Headline profit before tax 131.2 101.1 +30% Headline profit before tax for total operations was £131.2 million for 2006,which was £30.1 million higher than 2005. The increase in headline profitbefore tax arose as follows: • £24.6 million increase in trading profit from continuing operations at constant exchange rates as discussed in the Review of Operations above; • £0.6 million positive trading profit exchange rate translation variance; • £6.6 million lower charge for net finance costs (interest) for ongoing activities primarily due to a decrease in the average level of borrowings throughout the year; partially offset by: • £1.7 million decrease in trading profit from discontinued operations at constant exchange rates. Items excluded from headline profit before tax A net charge of £17.7 million was incurred in the year (2005: £22.6 million) foritems excluded from headline profit before tax. This charge consisted of thefollowing items: Rationalisation costs: a charge of £34.7 million (2005: £18.5 million) wasincurred in the year. Of the total charge, £10.3 million related to non-cashwrite-down of assets and £24.4 million to cash-related costs. The principalitems included in the total charge for 2006 were as follows: • £22.9 million arose in the Ceramics division for the rationalisation of facilities mainly in the UK, of which £9.0 million related to the non-cash write-down of assets, and for administrative headcount reductions both in Europe and the US; • £7.1 million arose in the Assembly Materials sector for the rationalisation of production facilities in Europe and the relocation of manufacturing operations from the US to Mexico; • £1.6 million arose in the Chemistry sector for the rationalisation of the sales, manufacturing and distribution network in Europe; • £2.4 million arose in the Precious Metals division for the relocation to its principal facility in Attleboro (Massachusetts) of Inverness, the ear-stud business currently located in New Jersey, and the restructuring of the sales function of the UK operations; and • £0.7 million arose in respect of redundancy initiatives in Group central operations. A further cash-related rationalisation charge of between £10-15 million in 2007and between £5-8 million annually for 2008 and beyond is expected, in respect ofboth the completion of the above projects, plus additional cost-reductionprojects expected to be initiated in these years. Employee benefits curtailment gains: a credit of £8.6 million (2005: £Nil) wasrealised in the year relating to amendments to defined benefit pension plans andpost-retirement healthcare plans in the US. Profit/(loss) relating to non-current assets: a net credit of £13.1 million(2005: £Nil) was realised in the year relating mainly to the disposal of surplusproperties. Non-recurring finance costs: in 2005 a non-cash charge of £1.2 million wasincurred when the existing bank facility was put in place in March 2005,relating to the write-off of the un-amortised portion of the fees incurred inrespect of the previous facility. Loss on disposal of continuing operations: a net charge of £4.7 million (2005:£2.9 million) was incurred in the year relating to costs associated with thedisposal, either in the current or prior years, of a number of businesses whichdid not qualify to be treated as discontinued operations for financial reportingpurposes. The principal operations which were disposed of during the year, forwhich the results up to the date of disposal have been included withincontinuing operations, were the Ceramic Fibres and the UK Carbon Blocksbusinesses, both formerly part of the Ceramics division, and the PVC Cementsbusiness, formerly part of the Assembly Materials sector. The net chargeincluded a write-off of goodwill of £4.2 million. The loss on disposal of continuing operations in 2005 related principally to thedisposal of the Group's Technical Ceramics business (McDanel), formerly part ofthe Ceramics division. Group profit before tax after the items noted above was £113.5 million for theyear compared to £78.5 million in 2005. Taxation The tax charge on ongoing activities was £38.2 million (2005: £28.1 million).The effective tax rate on headline profit before tax from continuing operations(before share of post-tax profit of joint ventures) was 31.3% (2005: 31.3%).Tax reform processes underway in certain of the countries in which the Groupoperates, in particular Germany and China, create some uncertainty as to theGroup's longer-term effective tax rate. Subject to these uncertainties, theGroup is expecting the effective tax rate for 2007 to be broadly in line withthat achieved in 2006. The Group tax charge relating to exceptional items of£5.3 million (2005: £16.0 million) resulted from a tax credit of £2.1 million inrespect of rationalisation costs, a tax charge of £3.7 million in respect of theprofit relating to non-current assets, a tax charge of £0.6 million in respectof the disposal of operations and a £3.1 million tax charge in respect of thedifferent treatment of goodwill in the US for book and tax purposes. Net post-tax loss on disposal of discontinued operations A charge of £3.3 million (2005: £41.7 million) was incurred in the year,principally consisting of a post-tax loss of £5.8 million relating to thedisposal of the Group's Laminates business ("Laminates") to Isola Group S.A.R.L.on 21 April 2006, net of a post-tax profit of £2.7 million relating toadditional proceeds received in respect of operations discontinued in prioryears. The loss on disposal after tax relating to Laminates comprisedadjustments to the 31 December 2005 estimated fair value less costs to sell,including movements in working capital. The assets and liabilities of theLaminates business, formerly part of the Electronics division, were classifiedas "held for sale" in the Group balance sheet as at 31 December 2005, with theconsequential recording of a loss at that date of £52.5 million in the 2005results. The post-tax loss on disposal in 2005 included the loss in respect of theLaminates business noted above plus a post-tax profit of £10.8 million arisingon the sale of Specialty Coating Systems ("SCS"), formerly part of the AssemblyMaterials sector, in December 2005. Headline profit attributable to equity holders Headline profit attributable to parent company equity holders for 2006 was £89.2million (2005: £69.3 million), with the £19.9 million increase over 2005principally arising from the significant increase in headline profit before tax. After taking account of all items excluded from headline profit before tax notedabove (net of the related tax impact) and the net post-tax loss on disposal ofdiscontinued operations, the Group recorded a profit of £66.4 million for 2006,£74.0 million higher than the £7.6 million loss recorded in 2005. Return on investment The Group's post-tax return on investment ("ROI") in 2006 was 8.4%. Whilst theROI is still not exceeding the Group's post-tax weighted average cost of capital("WACC"), which is estimated to be around 8.5%, it has improved significantly inthe last two years (2005: 6.8%; 2004: 6.0%) due to the Group's improved tradingperformance. Capital expenditure and rationalisation projects are assessedagainst the Group's WACC as part of a pre-authorisation process. Earnings per share ("EPS") Headline EPS, based on the headline profit attributable to parent company equityholders, amounted to 46.6 pence per share in 2006, an increase of 27% on the36.8 pence reported in 2005. The Directors believe this basis of calculatingEPS is an important measure of the underlying earnings per share of the Group.Basic EPS, based on the total earnings attributable to parent company equityholders, was 32.8 pence (2005: loss of 5.8 pence per share). The average numberof shares in issue during 2006 was 191.5 million (2005: 188.5 million). Dividends In June 2006, a 5.0 pence final dividend in respect of 2005 was paid toshareholders, the first dividend payment since October 2001. This followed atwo-year period over which the Group delivered sustained free cash flow andstrongly improving underlying profitability. 2006 has marked a further year ofexcellent progress with good cash generation along with further improvements inprofitability. This, together with the Board's confidence in the prospects forthe Group, has resulted in the Board recommending a final dividend for 2006 of7.0 pence per share to be paid on 11 June 2007 to shareholders on the registerat 25 May 2007. This final dividend, together with the interim dividend paid on16 October 2006, makes a total dividend of 10.0 pence per ordinary share for theyear, which is covered 4.6 times by headline earnings and 3.3 times by free cashflow. Group cash flows Net cash flows from operating activities In 2006, the Group generated £67.7 million of net cash inflow from operatingactivities, £5.1 million higher than 2005. This net increase principally arosefrom: • A £12.6 million increase in EBITDA (being trading profit before depreciation and amortisation) to £195.2 million; • A cash outflow of £27.2 million for trade working capital, £3.5 million higher than 2005; • A cash outflow of £7.2 million in respect of the Laminates business in the period prior to its disposal; • A £0.9 million decrease in cash spend for rationalisation costs to £16.1 million; • A £15.5 million increase in pension "top-up" payments; • A net decrease in cash outflow for operating provisions and other items of £17.6 million, including £4 million of additional incentive payments to employees throughout the Group in 2005, with the remainder arising from movements on other receivables and payables; • A £7.5 million decrease in net interest paid; and • A £7.3 million increase in tax payments. The cash outflow in respect of trade working capital, prior to the impact ofdiscontinued operations, results from both the increase in underlying revenuebut also the impact of higher metal prices (notably gold, silver and tin) on thelevels of inventories and trade receivables at year end in the Precious Metalsdivision and the Assembly Materials and Chemistry sectors. There continues tobe a strong focus on working capital management, as evidenced by the ratio ofaverage trade working capital to revenue from continuing operations reducingfrom 22.3% in 2005 to 21.8% in 2006. Cash outflow for rationalisation was £16.1 million of which £10.0 millionrelated to programmes that were initiated in 2006 in respect of continuingoperations and the balance from prior year initiatives. Net cash flows from investing activities Capital expenditure Payments to acquire property, plant and equipment were £43.2 million in 2006,broadly in line with 2005 and representing 117% of depreciation (2005: 90%). Proceeds from sale of property, plant and equipment Proceeds from the sale of surplus properties in the US, Europe and Asia were£16.6 million (2005: £10.3 million). Dividends from joint ventures Dividends of £0.9 million were received in the year (2005: £4.7 million) fromthe Chemistry division's Japanese joint venture. Disposals and acquisitions Net cash inflow from disposals and acquisitions in the year was £52.2 millionwhich included the following: • Proceeds from the disposal of businesses, net of disposal costs, of £59.4 million, principally comprising £11.1 million for the disposal in March 2006 of the Ceramic Fibres business, £42.2 million for the disposal in April 2006 of the Laminates business, £1.4 million for the disposal in June 2006 of the UK Carbon Blocks business, £1.7 million for the disposal in December 2006 of the PVC Cements business and £3.8 million of additional proceeds in respect of the disposal, in 2003, of the Speedline business; • Trailing costs and purchase price adjustments for prior year disposals, net of any associated property disposals, of £3.1 million; and • Acquisitions of subsidiaries of £4.1 million principally comprises £2.4 million in respect of the buy-out of the Chemistry sectors 49% Chinese joint venture partners. Free cash flow Free cash flow is defined as net cash flow from operating activities after 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 £64.5 million, £21.6 million higher than 2005. As in prioryears, free cash flow in the second half increased strongly compared with thefirst half of the year due to higher profitability and significantly higher cashinflows from trade working capital. Net cash flow before repayment of borrowings Net cash inflow before financing for the year was £94.2 million, £45.3 millionhigher than 2005. This improvement primarily reflects proceeds from thedisposal of businesses more than offsetting additional funding contributions toGroup pension plans. After an outflow for financing activities (beforerepayment of borrowings) of £14.9 million (2005: inflow of £4.8 million),arising primarily from the payments of the 2005 final and the 2006 interimdividends, the net cash inflow for the year (before repayment of borrowings) was£79.3 million, £25.6 million higher than for 2005. The strong cash inflow, together with a positive translation effect of £32.9million, mainly due to the increase in the value of sterling from US$1.72 toUS$1.96 during the year, resulted in an overall decrease in net debt of £111.8million to £180.5 million. Net debt As at 31 December 2006, the Group had net debt of £180.5 million which was drawnon available medium to long-term committed facilities of around £480 million.The Group's net debt comprised the following At 31 December 2006 (£m) At 31 December 2005 (£m) US Private Placement loan notes 278.5 317.5Committed bank facilities - 23.3Lease financing 1.9 4.6Other loans, overdrafts, other 12.0 12.8Gross borrowings 292.4 358.2Cash and short-term deposits (111.9) (65.9)Net debt 180.5 292.3 The US Private Placement loan notes, currently US$545 million, are repayable atvarious dates between 2007 and 2012, with US$50 million repayable in May 2007and US$130 million repayable in November 2007. A new committed, unsecured bankfacility for £200 million was arranged in March 2005. The facility, which hadan original maturity date of March 2008 with options to extend by two furthertwelve month periods, was extended in January 2007 by twelve months such thatthe current maturity date is March 2010. This facility was un-drawn as 31December 2006. Sufficient headroom exists within this committed facility to meetthe repayments of the US Private Placement loan notes due in 2007. The Group is currently operating well within the borrowing ratios contained bothin the US Private Placement loan notes and in the £200 million bank facility.For 2006, the Group's EBITDA to net interest ratio was 7.7 times (against acovenant requirement of greater than four times), the net borrowings to EBITDAratio was 1.1 times (covenant requirement of less than three times) and the USGAAP leverage covenant (gross borrowings to shareholders' funds ratio on a USGAAP basis) was 30% (against a covenant requirement of less than 50%). Currency The US dollar weakened significantly against sterling during the fourth quarterof the year and the year-end exchange rate was some 14% lower than for 2005.However, the average US dollar exchange rate for 2006 was only 1% lower than for2005. Other US dollar "tracking" currencies, such as the Singapore and HongKong dollar and the Chinese renminbi, also showed a similar trend. The value ofthe euro was relatively stable against sterling, both in respect of the year-endrates and the average for the year compared to last year. For 2006, the nettranslation impact of currency changes on revenue and profits was not material. Pension fund and other post-retirement obligations The Group operates defined contribution and defined benefit pension plans,principally in the UK and US. In addition, the Group has various other definedbenefit post-retirement arrangements, being principally healthcare plans in theUS. As at 31 December 2006, a liability of £155.1 million was recognised inrespect of employee benefits, a decrease of £69.7 million over the £224.8million as at 31 December 2005. This decrease arises, in respect of the UKplan, from an increase in the interest rate used to discount the present valueof future liabilities and the additional "top-up" payments agreed with theTrustee in February 2006. For the US plans, the decrease arises from theincrease in the discount rate and the freezing of ongoing accruals for currentemployees in the two largest plans. Both of these factors have more than offsetthe assumption of increased life expectancy of retirees. Of the totalliability, £78.3 million relates to the deficit on the Group's defined benefitpension plan in the UK, £39.8 million to the Group's defined benefit pensionplans in the US, £13.6 million to defined benefit pension arrangements in theRest of the World and £23.4 million to unfunded post-retirement benefitarrangements, being mainly healthcare benefit arrangements in the US. Following the disposal of SCS and the announcements of the disposals of theLaminates business in December 2005 and the Ceramic Fibres business in February2006, and in view of the increase in the net pension deficit for the UK planduring 2005, it was agreed with the Trustee of the Group's UK plan in February2006 to make revised "top-up" payments (in addition to the normal cashcontributions) of £25.5 million in 2006 and £26.5 million in 2007. The level ofthese additional "top-up" payments will be reviewed in consultation with theTrustee of the Group's UK plan when the next triennial valuation is available inmid-2007. In order to reduce significantly the future volatility of the Group's UK plan,in November 2006 the plan Trustee implemented risk mitigation elements withinits investment strategy by which it entered into a portfolio of inflation andinterest rate swaps, executed an equity hedge and planned an increase in itsasset diversification. The effect of these arrangements is to significantlynarrow the range of likely outcomes for the employee benefit deficit arisingfrom variability in the investment performance of the plan's assets due to theimpact of future changes in economic circumstances and other aspects offinancial market pricing which are largely outside of the Group's control.These risk mitigation enhancements have not impacted on the expected returnassumptions in the Group's financial reporting under the relevant accountingstandard. The US pension plans undergo full actuarial valuations every year and the netdeficit as at 31 December 2006 was £39.8 million (2005: £61.1 million). Fundingof the US plans is made in accordance with US government regulations. The twoprincipal defined benefit pension plans in the US are closed to new members andongoing accruals for both schemes are being frozen for the majority of activemembers with effect from the first quarter of 2007. Benefits payable undercertain post-retirement healthcare benefit arrangements in the US have also beenamended which has resulted in a significant reduction in the net deficit as at31 December 2006 to £16.8 million (2005: £25.3 million). The charge against trading profit in 2006 for all pension plans (includingdefined contribution plans) and other post-retirement plans was £22.3 million, areduction of £0.4 million compared to 2005. Total pension cash contributionsamounted to £42.4 million in 2006 (2005: £25.9 million). For further information please contact:Shareholder/analyst enquiries:Nick Salmon, Chief Executive Cookson Group plcMike Butterworth, Group Finance Director Tel: +44 (0)20 7822 0000Isabel Luetgendorf, Investor Relations ManagerMedia enquiries:John Olsen Hogarth Partnership Tel: +44 (0)20 7357 9477 Copies of Cookson's 2006 Annual Report are due to be posted to the shareholdersof the Company on 19 April 2007 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 13 March 2007 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 13 March. Forward-Looking Statements This announcement contains certain forward-looking statements which may includereference to one or more of the following: the Group's financial condition,results of operations, cash flows, dividends, financing plans, businessstrategies, operating efficiencies or synergies, budgets, capital and otherexpenditures, competitive positions, growth opportunities for existing products,plans and objectives of management and other matters. Statements in this document that are not historical facts are hereby identifiedas "forward-looking statements". Such forward-looking statements, including,without limitation, those relating to the future business prospects, revenues,working capital, liquidity, capital needs, interest costs and income, in eachcase relating to Cookson, wherever they occur in this document, are necessarilybased on assumptions reflecting the views of Cookson and involve a number ofknown and unknown risks, uncertainties and other factors that could cause actualresults, performance or achievements to differ materially from those expressedor implied by the forward-looking statements. Such forward-looking statementsshould, therefore, be considered in light of various important factors.Important factors that could cause actual results to differ materially fromestimates or projections contained in the forward-looking statements includewithout limitation: economic and business cycles; the terms and conditions ofCookson's financing arrangements; foreign currency rate fluctuations;competition in Cookson's principal markets; acquisitions or disposals ofbusinesses 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, 165 Fleet Street, London EC4A 2AE Registered in England and Wales No. 251977 www.cooksongroup.co.uk 2006 2005 Continuing Discontinued Continuing Discontinued operations operations Total operations operations Total restated restated restated (note 2) Notes £m £m £m £m £m £mRevenue 3 1,589.6 71.8 1,661.4 1,457.1 177.5 1,634.6Manufacturing costs - raw (766.6) (30.8) (797.4) (663.4) (79.8) (743.2)materials - (376.9) (23.9) (400.8) (375.5) (61.5) (437.0)otherAdministration, selling and (295.8) (9.2) (305.0) (293.3) (26.4) (319.7)distribution costsTrading profit 1,3 150.3 7.9 158.2 124.9 9.8 134.7Rationalisation of operating 1,4 (34.6) (0.1) (34.7) (13.4) (5.1) (18.5)activitiesProfit/(loss) relating to 1,5 13.1 - 13.1 (1.9) 1.9 -non-current assetsCurtailment gains relating to 1,6 8.5 0.1 8.6 - - -employee benefitsProfit from operations 137.3 7.9 145.2 109.6 6.6 116.2Finance costs 7 (53.8) - (53.8) (57.2) - (57.2)Finance income 7 25.4 - 25.4 21.0 - 21.0Share of post-tax profit of joint 1.4 - 1.4 1.4 - 1.4venturesLoss on disposal of continuing 8 (4.7) - (4.7) (2.9) - (2.9)operationsProfit before tax 105.6 7.9 113.5 71.9 6.6 78.5Income tax costs - ongoing 9 (38.2) (0.3) (38.5) (28.1) (0.3) (28.4)activities - 1,9 (5.3) - (5.3) (15.8) (0.2) (16.0)exceptional itemsNet post-tax loss on disposal of 10 - (3.3) (3.3) - (41.7) (41.7)discontinued operationsProfit/(loss) for the year 62.1 4.3 66.4 28.0 (35.6) (7.6) Profit/(loss) for the yearattributable to:Equity holders of the parent 58.6 4.3 62.9 24.6 (35.6) (11.0)companyMinority interests 3.5 - 3.5 3.4 - 3.4Profit/(loss) for the year 62.1 4.3 66.4 28.0 (35.6) (7.6) Headline profit before tax: 1Trading profit 158.2 134.7Share of post-tax profit of joint 1.4 1.4venturesNet finance costs (28.4) (36.2)Add back: write-off of capitalised - 1.2borrowing costsHeadline profit before tax 131.2 101.1Income tax costs on ongoing (38.5) (28.4)activitiesProfit attributable to minority (3.5) (3.4)interestsHeadline profit attributable to parent company 89.2 69.3equity holders Earnings per share (pence): 11Basic 32.8 (5.8)Diluted 32.6 (5.8) Headline earnings per share 1,11(pence):Basic 46.6 36.8Diluted 46.3 36.6 2006 2005 restated (note 2) Notes £m £mCash flows from operating activitiesProfit from operations 145.2 116.2Adjustments for:- Rationalisation of operating activities 34.7 18.5- Curtailment gains relating to employee benefits (8.6) -- Profit relating to non-current assets (13.1) -- Depreciation and amortisation 37.0 47.9EBITDA 1 195.2 182.6Net increase in trade working capital (27.2) (23.7)Net outflows related to assets and liabilities classified as held for sale (7.2) -Outflows related to rationalisation of operating activities (16.1) (17.0)Additional funding contributions into Group pension plans (25.5) (10.0)Other operating outflows (2.0) (19.6)Cash generated from operations 117.2 112.3Interest paid (28.3) (31.3)Interest received 6.3 1.8Income taxes paid (27.5) (20.2)Net cash inflow from operating activities 67.7 62.6 Cash flows from investing activitiesPurchase of property, plant and equipment (43.2) (42.5)Proceeds from sale of property, plant and equipment 16.6 10.3Acquisition of subsidiaries and joint ventures, net of cash acquired (4.1) (10.6)Disposal of subsidiaries, net of cash disposed of 59.4 30.4Dividends received from joint ventures 0.9 4.7Other investing outflows, including additional costs for prior years' disposals (3.1) (6.0)Net cash inflow/(outflow) from investing activities 26.5 (13.7)Net cash inflow before financing activities 94.2 48.9 Cash flows from financing activitiesRepayment of borrowings (29.9) (45.2)Settlement of forward foreign exchange contracts 2 (5.4) 5.5Proceeds from the issue of share capital 8.0 2.1Proceeds from sale of treasury shares 0.9 -Payment of transaction costs - (0.6)Dividends paid to equity shareholders (15.4) -Dividends paid to minority shareholders (3.0) (2.2)Net cash outflow from financing activities (44.8) (40.4)Net increase in cash and cash equivalents 49.4 8.5Cash and cash equivalents at 1 January 63.5 44.0Effect of exchange rate fluctuations on cash and cash equivalents (7.9) 11.0Cash and cash equivalents at 31 December 105.0 63.5 Free cash flow:Net cash inflow from operating activities 67.7 62.6Additional funding contributions into Group pension plans 25.5 10.0Purchase of property, plant and equipment (43.2) (42.5)Proceeds from sale of property, plant and equipment 16.6 10.3Dividends received from joint ventures 0.9 4.7Dividends paid to minority shareholders (3.0) (2.2)Free cash flow 1 64.5 42.9 2006 2005 restated (note 2) Notes £m £mAssetsProperty, plant and equipment 222.4 264.9Intangible assets 429.0 481.6Interests in joint ventures 11.6 13.1Investments 15.8 19.7Income tax recoverable 2.3 2.3Deferred tax assets 11.3 15.0Other receivables 9.8 8.7Total non-current assets 702.2 805.3 Cash and short-term deposits 111.9 65.9Inventories 171.2 179.6Trade and other receivables 303.0 294.0Income tax recoverable 1.1 -Derivative financial instruments 1.7 3.7 588.9 543.2Assets classified as held for sale 18.6 87.2Total current assets 607.5 630.4 Total assets 1,309.7 1,435.7 EquityIssued share capital 13 19.3 375.5Share premium account 14 6.3 645.5Other reserves (17.0) 37.8Retained earnings 15 466.2 (609.8)Total parent company shareholders' equity 474.8 449.0Minority interests 9.4 12.7Total equity 484.2 461.7 LiabilitiesInterest-bearing loans and borrowings 188.1 341.9Employee benefits 17 155.1 224.8Other payables 19.5 35.5Provisions 22.5 11.1Deferred tax liabilities 21.8 21.6Total non-current liabilities 407.0 634.9 Interest-bearing loans and borrowings 104.3 16.3Trade and other payables 241.9 249.2Income tax payable 27.7 16.4Provisions 32.7 20.6Derivative financial instruments 6.1 - 412.7 302.5Liabilities directly associated with assets classified as held for sale 5.8 36.6Total current liabilities 418.5 339.1 Total liabilities 825.5 974.0 Total equity and liabilities 1,309.7 1,435.7 Net debt:Interest-bearing loans and borrowings - non-current 188.1 341.9 - current 104.3 16.3Cash and short-term deposits (111.9) (65.9)Total net debt 1,16 180.5 292.3 2006 2005 £m £m Exchange differences on translation of the net assets of foreign operations (81.1) 73.7Net investment hedges 25.3 (29.9)Actuarial gains/(losses) on employee defined benefit schemes 21.8 (41.1)Changes in fair value of equity securities available-for-sale 0.2 2.2Net (expense)/income recognised directly in equity (33.8) 4.9Profit/(loss) for the year 66.4 (7.6)Total recognised income and expense for the year 32.6 (2.7) Attributable to:Equity holders of the parent company 29.9 (6.0)Minority interests in - profit for the year 3.5 3.4 - foreign exchange translation differences (0.8) (0.1)Total recognised income and expense for the year 32.6 (2.7) Group Reconciliation of Movements in Equity For the year ended 31 December 2006 Total equity attributable to parent company Minority Total equity interests equity holders £m £m £m As at 1 January 2005 450.6 11.7 462.3 Total recognised income and expense for the year (6.0) 3.3 (2.7)New share capital issued 2.1 - 2.1Recognition of share-based payments 2.3 - 2.3Dividends paid - (2.3) (2.3) (1.6) 1.0 (0.6)As at 31 December 2005 449.0 12.7 461.7 As at 1 January 2006 449.0 12.7 461.7 Total recognised income and expense for the year 29.9 2.7 32.6New share capital issued 8.0 - 8.0Disposal of treasury shares 0.9 - 0.9Recognition of share-based payments 2.4 - 2.4Dividends paid (15.4) (3.1) (18.5)Acquisition of minority interest - (2.9) (2.9) 25.8 (3.3) 22.5As at 31 December 2006 474.8 9.4 484.2 1 Basis of preparation The audited consolidated financial statements of Cookson Group plc (the "Company") in respect of the year ended 31 December 2006 have been prepared inaccordance with International Financial Reporting Standards ("IFRS") as adoptedin the EU and were approved by the Board of Directors on 13 March 2007. Thefinancial information set out in this preliminary results announcement does notconstitute the Company's statutory accounts, within the meaning of section 240of the Companies Act 1985, for the years ended 31 December 2006 or 2005 but isderived from those accounts. An unqualified audit report was issued on thestatutory accounts for 2006, which will be delivered to the Registrar ofCompanies following the Company's Annual General Meeting. The comparative figures for the financial year ended 31 December 2005 are notthe Company's statutory accounts for that financial year. Those accounts, whichwere prepared under IFRS, have been reported on by the Company's auditor anddelivered to the Registrar of Companies. The report of the auditor wasunqualified and did not contain a statement under section 237(2) or (3) of theCompanies Act 1985. These sections address whether proper accounting recordshave been kept, whether the Company's accounts are in agreement with theserecords and whether the auditor has obtained all the information andexplanations necessary for the purposes of its audit. Disclosure of exceptional items International Accounting Standard ("IAS") 1, Presentation of FinancialStatements, provides no definitive guidance as to the format of the incomestatement, but states key lines which should be disclosed. It also encouragesadditional line items and the re-ordering of items presented on the face of theincome statement when appropriate for a proper understanding of the entity'sfinancial performance. In keeping with the spirit of this aspect of IAS 1, theCompany has 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 exceptional, or for which separate disclosure would assistboth in a better understanding of the financial performance achieved and inmaking projections of future results. Both materiality and 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 orrestructuring activity, curtailment gains or losses relating to employeebenefits, profits and losses on sale or impairment of non-current assets andother items, including the taxation impact of the aforementioned items, whichhave a significant impact on the Group's results of operations either due totheir 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 operating activities; the profit or loss relating tonon-current assets and curtailment gains or losses relating to employeebenefits. The Directors believe that trading profit is an important measure ofthe underlying trading performance of the Group. On the face of the Group income statement, "headline profit before tax" and "headline profit attributable to parent company equity holders" are reported,together with their calculation. The Directors believe that headline profitbefore tax and headline profit attributable to parent company equity holdersprovide important measures of the underlying earning capacity of the Group. On the face of the Group income statement, "headline earnings per share" isreported. The Directors believe that headline earnings per share gives animportant measure of the underlying earning capacity of 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 Restatement of comparative information in the 2006 Group accounts Except as referred to below, this preliminary results announcement has beenprepared on the basis of the accounting policies adopted in the Company'saudited consolidated financial statements for the year ended 31 December 2005. The audited consolidated financial statements for the year ended 31 December2006 have been prepared in accordance with the Companies Act 1985 and IFRS,having been prepared in accordance with IFRS for the first time in 2005. During2006, the Directors continued to assess the detailed impact of IFRS on thepresentation of the Group accounts within the Company's audited consolidatedfinancial statements. As a consequence of this continued assessment, theDirectors have made a number of changes to the accounting treatment andpresentation of certain items in the Group accounts for 2006, together withappropriate changes to the respective comparative information in the prior year.These changes are explained below, none of which have had an impact on theGroup's net cash flows, financial position or total recognised income andexpense as previously reported for 2005. (a) Interest cost and expected returns associated with the Group's definedbenefit pension and other post-retirement benefit plans In the Group's annual financial statements for the year ended 31 December 2005,the interest cost and expected return on assets associated with the Group'sdefined benefit pension and other post-retirement benefit plans were recognisedin the income statement within trading profit. For 2006, the interest cost hasbeen included in the income statement within finance costs and the expectedreturn on assets within finance income. Comparative figures for 2005 have beenrestated accordingly, such that raw material manufacturing costs have increasedby £0.4m; other manufacturing costs have decreased by £1.6m; administration,selling and distribution costs have decreased by £4.1m; trading profit andprofit from operations have increased by £5.3m; finance costs have increased by£24.2m and finance income has increased by £18.9m. This change in accountingtreatment, which the Directors believe provides the user of the financialstatements with more relevant information in relation to the Group's tradingperformance, finance costs and finance income, has no impact upon the Group'spreviously reported net cash flows, financial position or total recognisedincome and expense. (b) Amortisation and impairment of intangibles In the Group's annual financial statements for the year ended 31 December 2005,charges in respect of the amortisation and impairment of intangibles wereseparately disclosed in the Group income statement as a component of profit fromoperations, outside of trading profit. No such costs were incurred for the yearended 31 December 2006 and the Directors believe that these charges do notcurrently warrant separate disclosure. Comparative figures for 2005 have beenrestated, increasing administration, selling and distribution costs by £0.8m andreducing trading profit by £0.8m. This change in presentation has no impact uponthe Group's previously reported net cash flows, financial position or totalrecognised income and expense. (c) Disposal of businesses from continuing operations In the Group's annual financial statements for the year ended 31 December 2005,the loss on disposal of operations which were not classified as discontinuedoperations due to their size and importance, were calculated post-tax andpresented on the face of the income statement below income tax costs. In thesefinancial statements, losses on disposal of continuing operations have beenreported pre-tax as a separate line item below operating profit and beforeprofit before tax. Comparative figures for 2005 have been restated accordingly,such that a loss on disposal of continuing operations of £2.9m has been reportedbefore profit before tax; profit before tax has reduced by £2.9m and income taxcosts on exceptional items have increased by £1.6m. This change in accountingtreatment, which the Directors believe provides the user of the financialstatements with more relevant information in relation to the results fromcontinuing operations, has no impact upon the Group's previously reported netcash flows, financial position or total recognised income and expense. (d) Cash flows from financing activities In the Group's annual financial statements for the year ended 31 December 2005,cash flows resulting from the settlement of forward foreign exchange contractswere disclosed within the statement of cash flows as a component of cash flowsfrom operating activities. The Directors believe that such items should moreappropriately be presented as a component of cash flows from investingactivities and comparative figures for 2005 have been restated accordingly. Thischange in presentation has no impact upon the Group's previously reported netcash flows, financial position or total recognised income and expense. (e) Bank overdrafts In the Group's annual financial statements for the year ended 31 December 2005,overdrafts were disclosed within the balance sheet as a component of cash andcash equivalents. The Directors believe that such items should moreappropriately be presented as a component of interest-bearing loans andborrowings and comparative figures for 2005 have been restated accordingly. Thischange in presentation has no impact upon the Group's previously reported netcash flows, financial position or total recognised income and expense. (f) Investments In the Group's annual financial statements for the year ended 31 December 2005,certain assets held in Rabbi Trusts were disclosed in the balance sheet as acomponent of other financial assets. The Directors believe that such itemsshould more appropriately be presented within non-current investments andcomparative figures for 2005 have been restated accordingly. This change inpresentation has no impact upon the Group's previously reported net cash flows,financial position or total recognised income and expense. 3 Segment reporting As required by IAS 14, Segment Reporting, the analysis of the Group's results bybusiness segments separately includes those central corporate costs,representing the central costs of operating as a public company in the UK, whichare neither directly attributable to nor capable of being allocated on areasonable basis to, individual segments. Inter-segment revenue is not materialin relation to total Group revenue, whether analysed by business or geographicalsegments. The contribution from acquisitions to revenue and profit fromoperations in 2006 and 2005 was not material. By business segments 2006 2005 Profit Profit from from Operations Revenue operations Revenue restated £m £m £m £mCeramics 756.6 89.5 722.1 73.1Electronics 554.7 58.5 489.2 52.5- Assembly Materials 319.3 28.2 273.7 25.6- Chemistry 235.4 30.3 215.5 26.9Precious Metals 278.3 11.0 245.8 7.8Group corporate costs - (8.7) - (8.5)Trading profit - continuing operations 1,589.6 150.3 1,457.1 124.9 - discontinued 71.8 7.9 177.5 9.8operationsRationalisation of operating activities - (34.7) - (18.5)Profit relating to non-current assets - 13.1 - -Curtailment gains relating to employee benefits - 8.6 - -Total Group 1,661.4 145.2 1,634.6 116.2 Of the total cost of rationalisation of operating activities of £34.7m (2005:£18.5m), £22.9m related to Ceramics (2005: £8.1m); £7.0m to Assembly Materials(2005: £0.8m); £1.7m to Chemistry (2005: £2.2m); £2.4m to Precious Metals (2005:£1.4m); £0.6m to Group corporate operations (2005: £0.9m) and £0.1m todiscontinued operations (2005: £5.1m). Of the total net profit relating to non-current assets of £13.1m in 2006 (2005:net nil), £0.1m loss related to Ceramics (2005: £0.1m loss); £1.5m profit toAssembly Materials (2005: £0.3m profit); £12.8m profit to Chemistry (2005: £1.5mloss); £1.1m loss to Group corporate operations (2005: £0.6m loss) and, in 2005,£1.9m profit to discontinued operations. 2006 2005 By By By location of customer By location of customer Group operations location Group operations location Profit Profit from from Operations Revenue operations Revenue Revenue restated RevenueBy geographical segments £m £m £m £m £m £m Europe 590.3 46.2 525.7 566.4 42.4 506.2NAFTA 552.8 30.8 525.9 526.6 22.3 514.4Asia-Pacific 359.8 63.7 420.9 289.7 53.9 328.9Rest of the World 86.7 9.6 117.1 74.4 6.3 107.6Trading profit - continuing operations 1,589.6 150.3 1,589.6 1,457.1 124.9 1,457.1 - discontinued operations 71.8 7.9 71.8 177.5 9.8 177.5Rationalisation of operating activities - (34.7) - - (18.5) -Profit relating to non-current assets - 13.1 - - - -Curtailment gains relating to employee benefits - 8.6 - - - -Total Group 1,661.4 145.2 1,661.4 1,634.6 116.2 1,634.6 Of the total cost of rationalisation of operating activities of £34.7m (2005:£18.5m), £24.2m was incurred in Europe (2005: £8.3m); £9.1m in NAFTA (2005:£3.3m); £1.2m in Asia-Pacific (2005: £0.8m); £0.1m in the Rest of the World(2005: £1.0m) and £0.1m related to discontinued operations (2005: £5.1m). Of the total net profit relating to non-current assets of £13.1m in 2006 (2005:net nil), £8.9m profit related to Europe (2005: £0.6m loss); £3.1m profit toNAFTA (2005: £1.3m loss); £1.2m profit to Asia-Pacific (2005: £nil); £0.1m lossto the Rest of the World (2005: £nil) and £1.9m profit in 2005 to discontinuedoperations. 4 Rationalisation of operating activities The charge of £34.7m (2005: £18.5m) was the result of the implementation of anumber of initiatives aimed at reducing the Group's cost base and realigning itsmanufacturing capacity with its customer markets. The initiatives implementedincluded redundancy programmes, the consolidation of facilities, plant closures,the streamlining of manufacturing processes and the rationalisation of productlines. Of these rationalisation charges, £10.3m (2005: £3.0m) represented assetwrite-downs, the majority of which were in Europe and NAFTA. Total cash spend inrespect of rationalisation initiatives was £16.1m (2005: £17.0m). The nettaxation credit attributable to these rationalisation costs was £2.1m (2005:£5.7m). 5 Profit/(loss) relating to non-current assets The net profit on non-current assets of £13.1m in 2006 mainly comprised profitsarising on the sale of surplus property. There was no net (loss)/profit for theGroup during 2005 in relation to non-current assets, as a net loss of £1.9m inthe Group's continuing operations was offset by a profit of £1.9m indiscontinued operations. The net taxation charge attributable to the sale ofnon-current assets was £3.7m (2005: £nil). 6 Curtailment gains relating to employee benefits Curtailment gains of £8.6m (2005: £nil) result from reductions in liabilitiesarising from the closure of the Group's two largest US defined benefit pensionplans to new members and the freezing of the benefits of existing memberstherein, together with reductions in the level of benefits provided throughcertain of the Group's US post-retirement healthcare plans. 7 Finance costs and finance income In the Group's annual financial statements for the year ended 31 December 2005,the interest cost and expected return on assets associated with the Group'sdefined benefit pension and other post-retirement benefit plans was recognisedin the income statement within trading profit. As permitted under IFRS, thesecomponents of the Group's total pension and other post-retirement benefitscharge are now recognised as components of finance costs and finance incomerespectively, which the Directors believe is a more appropriate accountingtreatment. Comparative figures have been restated, such that net pension expenseof £5.3m for the year ended 31 December 2005 has been reclassified in the incomestatement from trading profit, £24.2m of which has been charged within financecosts and £18.9m of which has been credited within finance income. 8 Loss on disposal of continuing operations During the year, the Group disposed of a number of businesses from its Ceramicsand Electronics divisions, none of which represented a separate major line ofbusiness or geographical area of operations. Accordingly, these disposals arepresented within pre-tax results from continuing operations in the Group'sincome statement. The aggregate proceeds received in respect of these disposals,net of selling costs, amounted to £22.4m and, together with additional costs inrelation to prior year disposals, resulted in a net loss before tax of £4.7m. In2005, the Group disposed of its Technical Ceramics business, formerly a part ofthe Ceramics division, and also incurred additional costs in relation to prioryear disposals, resulting in a net loss before tax of £2.9m. The tax chargeassociated with these disposals was £0.6m (2005: £1.6m). 9 Income tax The total charge for income tax of £43.8m for 2006 (2005: £44.4m) comprises atax charge on ongoing activities of £38.5m (2005: £28.4m), representing aneffective rate of 31.3% (2005: 31.3%) on profit from continuing operationsexcluding the Group's share of post-tax joint venture income, together with atax charge on exceptional items of £5.3m (2005: £16.0m). The tax charge onexceptional items comprises a £2.1m credit (2005: credit £5.7m) in relation torationalisation costs, a charge of £3.7m (2005: £nil) in relation to the sale ofnon-current assets, a charge of £3.1m (2005: £3.5m) in relation to the differenttreatment of goodwill amortisation for tax and reporting purposes and a chargeof £0.6m (2005: £1.6m) on the loss on disposal of continuing operations. The2005 charge additionally included a write-down of deferred tax assets of £16.6mfollowing a reassessment of expected future geographical profit contributions. 10 Net post-tax loss on disposal of discontinued operations On 15 December 2005, the Group announced that it had entered into an agreementto sell its Laminates business, which previously formed part of its Electronicsdivision, to ISOLA Group S.A.R.L, with completion of the transaction expected inthe first half of 2006. Accordingly, with effect from 31 December 2005, theassets and liabilities of the Laminates business were reclassified in the Groupbalance sheet to "held for sale" and measured at fair value less costs to sell,resulting in a loss in 2005 of £52.5m, after a related tax credit of £0.6m. In2006, a further loss of £5.8m was incurred on the completion of the disposal on21 April 2006. On 31 December 2005, the Group sold its Specialty Coating Systems (SCS)business, which previously formed part of the Assembly Materials sector of theElectronics division, to Bunker Hill Capital for £29.4m, resulting in a profiton disposal in 2005 of £10.8m, after a related tax charge of £5.7m. During 2006,a further £0.2m of disposal costs were incurred. As part of the sale of the Group's former Speedline business in 2003 to KPS, anequity fund, the sale agreement provided for Cookson to receive furtherconsideration from KPS contingent upon Speedline being sold in the future formore than a specified sum. In December 2006, Speedline was sold by KPS for anamount in excess of the specified sum, resulting in a profit of £2.7m beingrecognised in 2006. There was no tax charge or credit associated with the net post-tax loss ondisposal of discontinued operations in 2006 (2005: net tax charge of £5.1m). 11 Earnings per share Basic earnings per share are calculated using a weighted average number ofordinary shares of 191.5m (2005: 188.5m). Diluted earnings per share arecalculated assuming conversion of all outstanding dilutive share options.Outstanding share options are only treated as dilutive when their conversion toordinary shares would decrease earnings per share or increase loss per share.These adjustments give rise to an increase in the weighted average number ofordinary shares of 1.3m (2005: 1.1m). 12 Dividends During the year, the Company paid a final dividend of 5.0p per share for theyear ended 31 December 2005 and an interim dividend of 3.0p per share for theyear ended 31 December 2006. The total cost of dividends paid in 2006 was £15.4m(2005: £nil). The proposed final dividend for the year of 7.0p per share (2005: 5.0p) issubject to approval by shareholders at the Company's Annual General Meeting andhas not been included as a liability in these financial statements. If approvedby shareholders, the dividend will be paid on 11 June 2007 to ordinaryshareholders on the register at 25 May 2007 and, based upon the number ofordinary shares in issue at 31 December 2006, will cost £13.4m. 13 Issued share capital At an Extraordinary General Meeting of the Company held on 12 January 2006,shareholders approved special resolutions to reduce the issued share capital ofthe Company by cancelling and extinguishing all of the existing deferred sharesof 49p each. The cancellation of the deferred shares became effective on 15February 2006 upon registration of the order of the High Court with theRegistrar of Companies, at which date the balance of £356.5m on the accountbecame a non-distributable reserve of the Company reported within retainedearnings. This reserve becomes distributable only at such time when all externalcreditors of the Company as at 15 February 2006 have either been fully settled,or have agreed that this reserve may be deemed distributable. The holders of ordinary shares are entitled to receive dividends as declaredfrom time to time, are entitled to one vote per share at meetings of the Companyand rank equally with regard to entitlement to the Company's residual assets.The deferred shares carried no right to dividends or voting and were effectivelyworthless. 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. The Board commenced exercising thesecompulsory transfer provisions soon after the amendment was approved byshareholders and, having reduced the number of US resident shareholders below300, the Company announced on 21 February 2006 that it had filed a Form 15 withthe SEC to terminate the SEC registration of its ordinary shares, with SECde-registration occurring on 22 May 2006. On filing of the Form, the Company'sobligations to file certain forms and reports with the SEC, including Forms 20-Fand 6-K, were suspended. Under currently applicable SEC regulations, after the de-registration, thenumber of the Company's US resident shareholders must remain below 300 at eachfinancial year-end to avoid re-commencement of SEC reporting and otherapplicable US obligations. The Company's Articles of Association give theCompany's Directors the ability to limit the number of US resident shareholdersfor this purpose. 14 Share premium account At an Extraordinary General Meeting of the Company held on 12 January 2006,shareholders approved a special resolution to cancel the share premium accountof the Company. The cancellation became effective on 15 February 2006 uponregistration of the order of the High Court with the Registrar of Companies, atwhich date the balance of £646.9m on the account became a non-distributablereserve of the Company reported within retained earnings. 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. 15 Retained earnings The balance on the Group's retained earnings increased by £1,076.0m during theyear, of which £356.5m resulted from a non-distributable reserve that arose onthe cancellation of the Company's deferred shares (note 13) and £646.9m resultedfrom a non-distributable reserve that arose on the cancellation of the sharepremium account of the Company (note 14). 16 Reconciliation of movement in net debt Balance at Foreign Non-cash Cash flow Balance at 1 January exchange movements 31 December 2006 adjustment 2006 £m £m £m £m £m Short-term deposits - - - 68.0 68.0Cash at bank and in hand 65.9 (7.8) - (14.2) 43.9Bank overdrafts (2.4) (0.1) - (4.4) (6.9) Cash and cash equivalents 63.5 (7.9) - 49.4 105.0 Current (13.9) 2.0 (92.0) 6.5 (97.4)Non-current (343.0) 38.8 92.0 23.4 (188.8)Refinancing costs and issue costs 1.1 - (0.4) - 0.7 Borrowings, excluding overdrafts (355.8) 40.8 (0.4) 29.9 (285.5) Net debt (292.3) 32.9 (0.4) 79.3 (180.5) 17 Employee benefits The balance as at 31 December 2006 of £155.1m (2005: £224.8m) in respect of theGroup's defined benefit pension and other post-retirement benefit obligations,classified in the balance sheet as "Employee benefits", results from an interimactuarial valuation of the Group's defined benefit pension and otherpost-retirement obligations as at that date. Of the total balance, £118.1m(2005: £178.5m) relates to the combined deficits of the Group's principaldefined benefit pension schemes in the UK and the US. Of the remainder of thetotal, £13.6m (2005: £14.3m) relates to defined benefit pension arrangements inthe Rest of the World and £23.4m (2005: £32.0m) relates to unfundedpost-retirement benefit arrangements, being mainly healthcare benefitarrangements in the US. The total charge in the income statement for 2006 in respect of the Group'sdefined benefit pension and other post-retirement benefit obligations, beforecurtailment gains, was £15.3m (2005: £14.8m). Curtailment gains in 2006 of £8.6m(2005: £nil) have been credited in arriving at operating profit (note 6) andsettlement losses of £0.3m (2005: £0.9m curtailment gains) have been charged inarriving at the net post-tax loss on disposal of operations. Cash contributions into the Group's defined benefit pension plans, includingadditional funding contributions aimed at accelerating the reduction in the UKplan deficit agreed with the plan Trustee of £25.5m (2005: £10.0m), amounted to£40.1m (2005: £23.0m). Actuarial gains and favourable exchange rate movements together contributed£30.9m to the reduction in the employee benefits balance in the year (2005:£46.9m increase). 18 Exchange rates The Group reports its results in pounds sterling. A substantial portion of theGroup's revenue and profits are denominated in currencies other than poundssterling. It is the Group's policy to translate the income statements and cashflow statements of overseas operations into pounds sterling using average annualexchange rates and to translate the balance sheet using year end rates. Theprincipal exchange rates used were as follows: Year end rate Average rate 2006 2005 2006 2005US dollar ($ per £) 1.96 1.72 1.84 1.82Euro (• per £) 1.48 1.46 1.47 1.46Singapore dollar (S$ per £) 3.00 2.85 2.92 3.03Hong Kong dollar (HK$ per £) 15.22 13.31 14.30 14.17Chinese Renminbi (RMB per £) 15.28 13.85 14.68 14.81 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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