1st Mar 2005 07:01
Bodycote International PLC01 March 2005 EMBARGOED UNTIL 0700 HRS: 1 MARCH 2005 BODYCOTE INTERNATIONAL PLC PRELIMINARY RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 • Sales up 2% to £457.2m after the impact of currency translation and disposals• Operating profit up 74% to £43.6m• Free cash flow up 88% to £57.1m• Net capital expenditure maintained at 0.8x depreciation• Debt reduced by £121.8m to £88.5m• Headline earnings per share 11.3p* (2003: 9.1p as restated**)• Dividend for the year increased to 6.1p per share (2003: 5.7p as restated**) SUMMARY OF RESULTS Year to Year to 31 Dec 2004 31 Dec 2003 £m £m Turnover 457.2 448.4Headline Operating Profit * 52.1 41.7Operating Profit 43.6 25.1Non-operating exceptional charges (net) 11.2 26.5Headline Profit before taxation* 44.2 32.0Profit/(loss) before taxation 24.5 (11.1)Headline earnings per share* 11.3p Restated** 9.1pBasic earnings/(loss) per share 6.1p Restated** (6.3)pDividend per share 6.1p Restated** 5.7p * Expressed before amortisation of goodwill (2004: £8.5m; 2003: £9.1m) and exceptional items (2004: £11.2m; 2003: £34.0m)** Adjusted for the bonus element of the 1 for 4 rights issue completed in March 2004 Commenting on the results, John Hubbard, Chief Executive said: 'Bodycote delivered an encouraging performance in 2004. Our 'self-help'programme and restructuring initiatives ensured that the Group was wellpositioned to benefit from the pick-up in Aerospace and Industrial Gas Turbinemarkets. As a result operating profit grew by 74% on a modest increase insales. We continued to gain new outsourcing contracts, with StrategicPartnerships and Long Term Agreements now accounting for 17% of Group turnover.Our successful rights issue provided additional financial flexibility andmanagement's focus on improving cash flow and return on capital continued. 2005has begun in line with our expectations and we anticipate that the Group willcontinue to progress through ongoing 'self help' programmes, improving marketdemand, disciplined capital investment and value enhancing acquisitions.' CHAIRMAN'S STATEMENT 2004 Introduction It has been an encouraging year. There has been a good recovery in our overalltrading performance with consequent improvement in our profitability. Thepressure on pricing and cost increases continued and the extent of theunderlying operating improvement has been masked by the impact of currencymovements, particularly in respect of the US dollar. Trading Turnover in the year improved by 2.0% to £457.2m (2003: £448.4m) and operatingprofit increased by 73.7% to £43.6m (2003: £25.1m). Our profit before taxation,goodwill and exceptional items was £44.2m compared to £32.0m in 2003. Goodwillamortisation was £8.5m (2003: £9.1m) and exceptional items were £11.2m (2003:£34.0m). All our Strategic Business Units (SBUs) experienced an increase in sales and inthe main this translated into improved profitability. Of the £8.8m salesgrowth, all but £1.8m of our growth in sales has been organic as theacquisitions that we have made occurred late in the year. The disposal of electroplating has largely been completed and all the lossmaking plants have either been sold or closed. The increasing profitability ofthe anodising and organics businesses in Scandinavia and Germany supports thedecision to retain them in the Group. Under the current accounting rules we arenot able to treat the electroplating activities as discontinued until theprocess is completed, which we anticipate will be in the current year. We made four modest acquisitions in the year at a cost of £4.7m. In addition,in November, we transferred our PVD businesses into a strategic alliance withIonBond, creating an operation with strong technical skills and wide geographicscope which will be expanded by acquisition and leveraging its advanced coatingtechnologies. Our ongoing tight control of capital expenditure brought about a furtherreduction in the year to £34.0m (2003: £38.3m). The £62.0m net proceeds from the rights issue in March greatly improved thestrength of our balance sheet and gave us the financial flexibility to furtherdevelop the business. We have also generated free cash flow of £57.1m fromtrading and this has been complemented by £20.8m from our disposal programme.Consequently there has been a significant reduction in our net borrowings whichhave fallen from £210.3m to £88.5m. Operating Exceptionals and Exceptional charges Exceptional costs of £7.4m were incurred in 2004 in connection with theelectroplating disposals. There was also an £3.8m exceptional charge in respectof transferring our PVD business into the IonBond strategic alliance. Dividend A final dividend of 3.85p is being recommended by the Directors, which togetherwith the interim dividend, will make a total payment of 6.1p per share which isan increase of 7% (2003: 5.7p after adjustment for bonus element of the rightsissue). The dividend will be paid on 6 July 2005 to all shareholders on theregister at the close of business on 10 June 2005. Governance Apart from some minor areas which are explained in the Directors' report,Bodycote is in compliance with the 2003 FRC Combined Code. This mirrors thehigh level of compliance achieved by Bodycote in relation to the 1998 Code inthe period 1999 to 2003. Plans are in place for reporting future results underInternational Financial Reporting Standards starting with our Interim Report inAugust 2005. Employees We have in the past emphasised the dedication and professionalism of our staffand it is pleasing that this year we can show very positive financial benefitsfrom their efforts which complement the additional investment that was made byour shareholders. Current Trading and Prospects We are pleased with the current trading at the start of 2005, which is in linewith our expectations. We look forward to the rest of 2005 with a degree ofconfidence that we can further improve our trading performance. As well ascontinuing to gain new outsourcing contracts we also expect to expand the Groupwith carefully chosen bolt-on acquisitions which will strengthen our existingbusinesses and extend their geographic spread. We have the essential ingredients of a strong balance sheet, capable people,productive facilities and systems to ensure the delivery of exceptional qualityand service which should enable us to give a good account of ourselves in thechanging market place. The strategy of the Group remains directed towardsconsistently delivering a pre-tax return on capital employed in the mid teens. J A S Wallace1 March 2005 CHIEF EXECUTIVE'S STATEMENT 2004 INTRODUCTION I am pleased to report a welcome improvement in performance during 2004. We havedivested the loss making electroplating operations and poor performingfacilities have been sold, transferred or closed. Our PVD businesses have beenconsolidated into a strategic alliance to provide critical mass in this growingmarket. We have sharpened our Key Performance Indicator (KPI) metrics,standardised our reporting and improved benchmarking across the Group. All ofthese actions are helping to rebuild ROCE. Meanwhile, our successful rightsissue strengthened the balance sheet. We have closed or sold 42 facilities inthe past 3 years (13 in 2004) and acquired 10 new businesses (4 in 2004). Wenow have 261 facilities operating in 26 countries. Sales at £457.2m were 2.0% ahead of 2003. Excluding the disposed electroplatingand PVD sales and using constant currency exchange rates, sales grew 8.5%compared to 2003, of which 8.0% points were an organic increase. With stableautomotive markets, improved demand from general manufacturers, a strong reboundfrom the Industrial Gas Turbines (IGT) sector, new outsourcing business andincreased market share, we were more able to offset cost pressures whichresulted from normal wage and benefit increases and volatile energy costs.Operating profit (before goodwill amortisation and exceptional items) grew 25.0%to £52.1m compared with £41.7m a year ago. Without our self help programme andimproved sales effort we would not have been able to post such an improvement inperformance. I thank all the people in Bodycote who have helped deliver theseimproving results. STRATEGY Our strategy is based on disciplined investments in technologies with a goodfuture, along with continued support of outsourced business from strongmanufacturers focusing on their core competencies. Rapidly growingmanufacturing demand in Eastern Europe and Asia will support the continuedgeographic expansion of the Group over the medium term. In addition, ourMaterials Testing Group is positioned to accelerate its growth by technologytransfer, new outsourced programmes and acquisitions. OPERATIONAL REVIEW Securing major outsourcing opportunities remains a strategic focus to supportour top line growth and margin enhancement. Bodycote's outsourcing initiativeoffers manufacturers lower total cost, equal or better quality and quickturnaround. The key is our technical expertise in niche technologies which arenot core to most manufacturers and our highly productive model where we operateat optimum efficiency. As predicted, the trend to outsourcing and closure ofin-house facilities, which is well established in Europe, is accelerating inNorth America, particularly in automotive. Outsourced work from StrategicPartnerships (SP) and Long Term Agreements (LTA) accounted for 17% of Groupturnover as compared to 13% in 2003. Technology transfer initiatives continue to be successful, with nichecapabilities being transferred geographically to existing facilities. Thesehigh value added services enhance customer satisfaction and lead to additionalrevenue. The cross selling and bundling of multiple services creates a unique offeringwhich appeals to those manufacturers that wish to optimise their performance byfocusing on core competencies. Our geographic and market spread reduces therisk associated with any one account. Our top ten customers accounted forapproximately 10% of total turnover, compared to 9% in 2003. Heat Treatment At constant currency rates, Group wide sales grew 6.7% and operating profitimproved 12.0%. North America At constant currency rates, sales increased 7.0% and operating profit was up13.0%. Aerospace, IGT, and Oil & Gas all saw improved demand from a combination ofmarket pickup and new outsourcing. The locations which are heavily automotiverelated saw a decline in the second half which, based on industry forecasts,will continue into 2005. The combination of price pressure and increases inenergy and employee benefit costs continues to squeeze margins. We are now ableto offer several high value added services (Low Pressure Carburising, EB Weldingand Kolsterizing of stainless steel) to complement existing heat treating andbrazing services thus helping to improve margins in the oversupplied NorthAmerican market. Central European Group (CEG) At constant currency rates, sales grew 8.1% and operating profit was ahead17.2%. Although a difficult environment for the manufacturing sector of the economiesserved by this SBU our strategies of pursuing outsourcing work, transferringtechnology and optimising operational efficiencies paid off. The targetedcapital investment in equipment and people has allowed us to gain market sharewhile improving the mix of work processed. All automotive focused facilities are now certified to the stringent TS 16959while most facilities will achieve ISO 14001 environmental certification by theend of 2005. This positions us in line with quality and responsibilityexpectations of world class manufacturers. Our network of East European facilities was expanded at the start of 2005 by thecommissioning of a facility in Poland which targets the high end aerospace andtooling markets. We today announced the acquisition of four well-resourcedplants in Poland. We anticipate continued growth in our Eastern Europeanoperations during 2005 both organically and by acquisition. France, Belgium, Italy (FBI) At constant currency rates, sales improved by 1.2% but operating profit wasflat. The challenges we face in France in particular are market migration, pricepressures, mix change and cost creep. All facilities in France are now ISO9000-2000 certified. In addition we now have several plants qualified to theaerospace mandated quality program ACMA-PRO which will be incorporated into theNorth American originated equivalent Nadcap in 2005. Belgium delivered modestsales growth and moved into profit after rationalisation of 3 facilities into 2. Nordic, UK (NUK) At constant currency rates, NUK sales increased 11.7% and operating profit grew36.0%. The sales growth was driven by recovery of the IGT market and anincrease in outsourced work. All UK facilities are now registered to the ISO14001 environmental standard. We now have 9 facilities Nadcap UK accredited tomeet mandates from several key customers such as Rolls-Royce and Boeing. Materials Testing At constant currency rates, sales grew 11.2% and operating profit grew 13.3%. By concentrating on the high value added services, cross border selling and anindustry specific approach we have been able to gain market share at most of ourlaboratories. Sales increased in all geographies and margins were maintained orimproved, with progress in Canada being notable. The USA saw an improvement in demand for aerospace, high end automotive and oil& gas testing but the gains were eroded by increased people costs and pricepressures. We have won several significant outsourcing contracts. In the Middle East we successfully integrated the laboratories acquired fromCarillion plc in 2003 resulting in a 45.0% sales growth year on year. Operatingmargin in the region was somewhat reduced from last year as 2004 had the tailend benefits of a major construction project that had run beyond the contractorscompletion date. All facilities are now ISO 17025 accredited; such standardsare unique in the Gulf region and give us a competitive advantage as blue chipclients are increasingly insisting on these high standards to protect theirmajor investments in construction projects such as the Dubai airport expansion. The Canadian Group won significant outsourced contracts from major aerospace,automotive prime and first tier suppliers while managing their costs well. Insupport of stringent new emission controls stipulated by the EnvironmentalProtection Agency regulations due to come in force in 2007, we have invested intwo advanced Heavy Duty Transient Cells for testing emission compliance in theheavy diesel engine market. This investment will start to generate revenue nearthe end of 2005. UK and Europe had good sales growth based on IGT, Oil & Gas, Health Sciences,and Environmental markets. HIP At constant currency rates, sales increased 23.9% and operating profit was up113.4%. The sales growth was driven by an unexpectedly large increase in IGT demand fornew and replacement parts. Aerospace demand picked up slightly in the secondhalf of the year and is expected to maintain this trend throughout 2005. Thevery high operational gearing, evident in HIP during the downturn in 2002 and2003, rebounded in our favour. Although margins recovered from 13.0% to 22.5%we still have work to do because the high investment in a HIP facility requireyet higher margins in order to achieve an acceptable return on capital employed. We continue to work on innovative new applications in the powder consolidationsector. The ALON ceramic project saw sales increase 100% in 2004 but wellbehind original expectations. Demand for Densal(R) treatment of aluminiumcastings showed excellent progress in the European automotive sector. Two largeHIP units which were out of service for a large part of the year will return toservice in the first half of 2005. A used HIP unit, previously acquired at lowcost, will be brought into service by the first part of 2006 in anticipation ofcontinued increasing demand for IGT and recovering aerospace. Surface Engineering At constant currency rates and excluding PVD and discontinued electroplating,sales grew 7.5% and operating profit improved 49.6%. Anodising and Organics We are focused on developing this business by transferring know-how andprocesses between facilities and approaching customers in a more organisedmanner to gain market share based on technical capability. Diffusion Bonding Our K-Tech coatings continue to find more applications in the oil & gas, textileand steel rolling sectors. Being an engineered solutions business, we investheavily in developing and proving application benefits. The CoatAlloy(R) process, which dramatically improves the performance and lifeof furnace tubes in ethylene production plants, started up in the second half of2004. We experienced the usual teething problems associated with new processes.Technical issues are now resolved with deliveries expected to commence in thefirst half of 2005. Our two Sherardizing facilities were consolidated into Wolverhampton, UK and arenow fully functional. This will improve capacity utilisation, technical supportand profitability. We have several opportunities under development withcustomers in other geographies of our network which could see us install ourfirst Sherardizing process capabilities outside the UK. To enhance our marketcoverage we are installing for start up in the first half of 2005 the Distekprocess, a modification to Sherardizing which allows a thicker yet ductile layerto be diffused onto the substrate. This process will offer customers anenvironmentally friendly alternative to galvanizing. We invested in expanded plasma spray capacity in France to satisfy contractswith suppliers to Airbus for plasma spray of titanium honeycomb parts and expectsales to start next year. We are planning to transfer this technology to our UKfacilities in 2005. ACQUISITIONS, STRATEGIC ALLIANCES AND DIVESTITURES Several modest acquisitions were made during the year, at a cost of £4.7m, withthe emphasis being to expand our Materials Testing operations. Two oil and gaslaboratories were acquired in Canada with Hoogensen Metallurgical EngineeringLimited and an environmental laboratory was added with Clyde Analytical Limitedof Greenock, Scotland. After the year end, four UK environmental andoccupational hygiene sites were acquired with Ensecon Laboratories Limited,expanding our health science operations. A controlling interest was also takenin a civil engineering test laboratory in Qatar. Haustrup Haerderi A/S heat treating in Denmark strengthened our existing marketposition and enabled us to rationalise our facilities and provide access intothe Northern German market. Bird Electron Beam Corporation in Connecticut, USA adds expanded know-how to ourNorth American Group in a technology that has proven to be of value to keycustomers in Europe. In addition, a significant strategic event was the formation of the secondlargest global Physical Vapour Deposition (PVD) Group resulting from the sale ofour 10 PVD operations to IonBond for £25.1m net of costs, with Bodycote takingan initial 15% equity position in the enlarged Group, which was increased to 20%in early 2005 at a total cost of £7.3m. This move is in line with our strategyof growing high value niche businesses whilst managing the risk. The combinedGroup will trade under the IonBond name (capital 'B' in IonBond being the redcentred Bodycote 'B' trademark) and has pro forma sales in 2004 of £53.2m andoperates from 30 locations in 12 countries with more than 600 employees. Along-term cross selling agreement has been put in place under which Bodycotewill continue to offer IonBond's PVD services to our extensive multinationalclient base and IonBond will market Bodycote's heat treatment, materials testingand hot isostatic pressing services. The strategic alliance establishes thetechnical skills and geographic scope to provide global blue-chip manufacturerswith critical solutions. PVD is used in manufacturing to improve mechanical,tribological and decorative properties of components beyond those achievable bytraditional methods and in an environmentally safe manner. Market and customersynergies between PVD and heat treating will be enhanced through the additionalcoverage offered by this focused strategic alliance, which has made anencouraging start. The divestiture of electroplating has almost been completed with the major lossmaking facilities divested in the first half and the remainder sold in thesecond half. Sales and losses before goodwill amortisation and exceptionalitems were £19.4m and £3.0m respectively compared to £26.0m and £6.8m in 2003.A total £37.4m exceptional write down has been taken of which £7.4m has beencharged in the 2004 accounts, the balance of £30.0m having been provided in2003. During 2004 disposal proceeds net of costs were £1.9m. We have retainedthe 5 highly successful anodising and organic coating businesses located inSweden, Finland and Germany and will continue to develop this small specialisedcoatings Group. We believe anodising has significant growth potential due tothe highly fragmented market and increased use of aluminium in manufacturing. SAFETY, HEALTH AND ENVIRONMENTAL (SHE) SHE has always been of major importance in our business and in 2004 we initiatedan enhanced Group wide measurement and benchmarking system to help us betterunderstand the reasons and root cause of accidents occurring within the Group,improve awareness among the employees, change behaviour and drive our accidentrate towards our ultimate goal: zero. The unfortunate loss of life by two ofour key team members at the Hereford HIP operation underlines the necessity ofconstant vigilance on the part of all of us. Just as in every other area of ourbusiness, we work on continuously improving our understanding and consistentapplication of safety procedures throughout the Group. We are funding aresearch project with the University of Southern California to advance safetyprocedures. CURRENT TRADING AND PROSPECTS The New Year has started as expected. With IGT markets having recoveredstrongly in 2004 we anticipate this sector will show more modest growth in 2005.Aerospace showed a slight increase in 2004 and we anticipate the pace ofgrowth will remain steady throughout 2005. Automotive, which has been forecastto turn down for some time, saw a slowdown in North America, in particular inthe second half of 2004, and we anticipate demand in 2005 will remain soft forthat market. The Tooling market has continued to decline due to manufacturingof tools and dies being transferred to areas of lower cost where Bodycote doesnot currently have a significant presence. People are our number one resource. We will continue to focus our managementefforts on improving the productivity and effectiveness of our human resources.Energy, our number two cost, is anticipated to remain relatively high but weexpect to continue to pass most of these costs on to our customers. Overall we expect to continue our performance recovery through our continuousself help programmes, improving market demand and disciplined investments incapital and value enhancing acquisitions. John D. Hubbard1 March 2005 GROUP FINANCE DIRECTOR'S STATEMENT Sales and Operating Profit The Group recorded sales of £457.2m, compared to £448.4m in 2003. Tradingconditions improved in most of the Group's markets and although the headlineturnover increased by only 2%, the improvement was 6.3%, at constant exchangerates. Excluding the discontinuing electroplating and transferred PVDbusinesses, local currency sales were ahead 8.6%. Existing operations accountedfor £455.4m, whilst acquisitions added £1.8m. Sales Operating Profit* Margin £m £m £m £m % % 2004 2003 2004 2003 2004 2003 Heat Treatment 309.0 302.5 34.2 31.5 11.1 10.4Materials Testing 65.6 61.2 12.4 11.4 18.9 18.6Hot Isostatic Pressing 32.1 27.6 7.0 3.6 21.8 13.0Surface Engineering 19.4 18.4 3.3 2.3 17.0 12.5Electroplating (discontinuing) 19.4 26.0 (3.0) (6.8) (15.5) (26.2)Head Office - - (2.7) (1.6)Continuing operations 445.5 435.7 51.2 40.4 11.5 9.3PVD (discontinued) 11.7 12.7 0.9 1.3 7.7 10.2 457.2 448.4 52.1 41.7 11.4 9.3 * before amortisation of goodwill of £8.5m (2003: £9.1m) and exceptional itemsof £11.2m (2003: £34.0m) As the year progressed, demand for the Group's services increased, followingmore than two years of difficult conditions. The improvement has been gradualand although less difficult than in recent years, the pricing environmentremained challenging. Labour rates have been contained at a rate belowinflation and the impact has been mitigated by improved productivity. Energycosts have been stable in continental Europe, but have increased during theautumn in the US and the UK by up to 20%. A majority of the additional cost hasbeen recovered in selling prices. The benefits of our restructuring plans arebeing seen across the Group, but particularly with the exit from theelectroplating businesses, which is essentially complete. Operating losses* inelectroplating of £6.8m in 2003 were reduced to £3.0m in 2004, of which only£0.3m was incurred in the second half. £7.4m was charged as an exceptional itemin respect of closure and divestment costs bringing the total to £37.4m in 2003and 2004. Overall Group operating profit* increased from £41.7m to £52.1m. Following an approach from SSCP Coating S.a.r.l, Bodycote transferred its PVDbusiness and assets to IonBond, realising £25.1m net of costs. An exceptionalcharge in 2004 of £3.8m, including the transaction costs, was required inconnection with the transaction. As part of the agreement, the Group has alsoreinvested £5.2m for a 15% stake in the combined business and a further 5% wasacquired in early 2005 at a cost of £2.1m. Heat Treatment The UK heat treatment business saw sales increase 9.7% with operating profits up18.4%, as demand improved in both the power generation and construction sectors.The Nordic region produced a significant improvement, with local currencyorganic sales up 8.5% and the Haustrups acquisition adding a further 5.3%. Newoutsourced work has been gained in automotive and general engineering and, withimproved cost control and the benefit of the new plant in Denmark, operatingprofit was ahead by 81.9%. The Central European Group delivered anotherexcellent set of results as outsourcing gains, particularly in automotive, morethan made up for any underlying macro economic weakness. Sales and operatingprofit (at constant exchange rates) advanced 8.1% and 17.2% respectively. TheFrance/Belgium/Italy business unit suffered the weakest level of demand in theGroup with the twelve-month moving average of sales only beginning to pick up inquarter four. Consequently sales were ahead marginally and operating profits(expressed in local currency) were flat year on year. North America saw salesimprove by 7.0%, as demand across most sectors and regions moved up. However,pricing pressure remains stronger than in Europe due to continuing over capacityin the market place and, coupled with higher energy costs, margin improvementwas modest. Materials Testing The Materials Testing business continues to meet our growth expectations and, atconstant exchange rates, sales increased by 11.2% and net margins weremaintained at 19.0%. Sales were ahead in all regions and with the exception ofa flat performance in the Middle East so was operating profit. In the UK, ourwell established metallurgical laboratories saw a relatively weak performanceagainst a background of soft general engineering demand. However, this was morethan offset by strong IGT demand for radiography and growth in health sciences.The European laboratories again performed strongly as a result of increasedactivity in oil and gas exploration. The business moved ahead in the MiddleEast following the acquisition in 2003 of the laboratories from Carillion plcand the continuing strength in both the construction and oil and gas sectors andconsequently sales were up 44.9%. Canada made a major step forward based onnotable outsourcing contracts in aerospace and automotive engines testing. TheUSA also had a good performance helped by a much stronger level of activity inoil and gas and some improvement in aerospace demand. Hot Isostatic Pressing Overall, HIP sales in local currency were up 23.9% and profits a pleasing 113.4%higher. Consequently margins improved to 22.5%. The UK and particularly the USsaw a notable increase in demand from precision casting customers who serve theIGT market. The USA had its best ever HIP sales. The European plants were moremixed as IGT constitutes a small part of their business which is more focused onpowder consolidation and production of near net shapes but all showedimprovement compared to 2003. Densal(R) sales continue to increase,particularly for automotive and it is likely that additional capacity will beneeded in 2005. Surface Engineering Following the decision to exit the electroplating business, the Group is nowfocused on nurturing a portfolio of niche coatings businesses which offerproprietary technology or specialist know-how and which complement our core heattreatment business. Sales in local currencies increased by 7.5% and operatingprofit by 49.6% driven by the specialist anodising plants in Sweden, which offerservices principally to automotive and telecoms customers. We also continued toexpand the use of K-Tech(R) ceramic coatings and established the firstproduction location for CoatAlloy(R) metallic coatings. PVD In the ten months prior to transferring the PVD business into IonBond sales wereup 13.8% at constant exchange rates, as demand from automotive customers fortribological coatings continued to increase. However, profits were flat due toincreased marketing and development costs. Since the transfer, given theGroup's significant influence on IonBond, profits will be included in theGroup's results on an equity accounting basis. With a 15% shareholding, theGroup's share of operating profits in November and December were immaterial. Electroplating The major loss making facilities were sold or closed in the first half of 2004,which enabled us to operate at close to breakeven (loss £0.3m) in the secondhalf. We expect the divestiture programme to be completed in early 2005. Profit Before Tax, Goodwill Amortisation and Exceptional Items Profit before tax, goodwill amortisation and exceptional items was £44.2mcompared to £32.0m last year. In 2004, the Group recorded exceptional chargesof £11.2m relating to the costs of the disposal of the electroplating business(£7.4m) and the merger of PVD assets with IonBond (£3.8m). Operating profitbefore goodwill amortisation and exceptional items increased from 2003 to 2004by £10.4m. Foreign exchange movements during the year resulted in a netreduction to operating profit of £2.5m. The effect of applying current exchangerates to the 2004 results would be an adverse impact on operating profit ofapproximately £0.2m, although this would be entirely offset by interest savingson dollar borrowings. The Group's interest charge was reduced from £9.7m to£7.9m reflecting lower borrowings and the benefit of a weaker US dollar.Goodwill amortisation reduced by £0.6m to £8.5m as a result of theelectroplating and PVD disposals. Taxation The effective tax rate in 2004, before the amortisation of goodwill (which isnot generally allowable for tax) was 17% (2003: 69%). The figure is distortedby the exceptional charges related to the disposal of wet coatings and themerger of the PVD business with IonBond. Before exceptional charges andgoodwill amortisation, the effective tax rate is 21.4% (2003: 22.3%), reflectingthe mix of taxable profits and losses and the jurisdictions in which the Groupoperates. Earnings Per Share Headline earnings per share were 11.3p (2003: 9.1p as restated), with basicdiluted earnings per share being 6.1p (2003: loss per share 6.3p restated). TheBoard is recommending a final dividend of 3.85p (2003: 3.6p after adjusting forthe Rights Issue) per share. The dividend is covered 1.9 (2003: 1.6) times byheadline earnings. Interest was covered 6.6 (2003: 4.3) times by operatingprofit before goodwill and exceptional items. Capital Expenditure Net capital expenditure for the year was £34.0m compared to £38.3m in 2003. Themultiple of depreciation (net capital expenditure divided by depreciation) hasremained at 0.8 times as the Group continues to maximise the benefit fromprevious investments. Major projects undertaken during the year included an additional fully automatedsealed quench furnace line in Vasteras, Sweden, re-location and expansion of ourMaterials Testing laboratories in Houston, USA (to be completed in 2005),completion of a new facility specialising in low pressure carburising inLivonia, USA and the start-up of an installation of a Kolsterising line inLondon, USA. Cash Flow and Borrowings After allowing for capital expenditure, interest and tax the Group generatedfree cash flow of £57.1m compared to £30.3m in 2003 and cash flow fromoperations increased to £104.3m from £83.9m in 2003. There has been continuedfocus on cash collection, which has seen debtor days maintained at 65.Acquisitions, along with the investment in IonBond, resulted in net cashpayments of £9.9m. In March 2004 the Group successfully completed a 1 for 4Rights Issue which raised £62.0m net of expenses. Net borrowings ended the yearat £88.5m, a reduction in the year of £121.8m; gearing was reduced from 56.7% to20.3%. Treasury Treasury is managed centrally covering borrowings and its components. Theobjective is to minimise risk through a balanced approach. Funds are obtainedvia privately placed bonds and from banks. The Group aims to have a range ofmaturities, both committed and uncommitted, currently ranging from 364 dayfacilities to the five years remaining on the private placement senior notes.The Group also aims to have a mix of fixed and floating rate debt to achieve thedesired profile and to manage interest rate volatility. During 2004 the balancehas been weighted towards floating allowing the Group to benefit from continuedlow rates. Funding of overseas activities is generally via local currencyborrowings so as to provide a partial hedge against the impact of exchange ratevolatility on asset values as translated into Sterling on consolidation. Pensions The Group has elected to adopt the transitional provisions of FRS 17 (RetirementBenefits) and consequently there is no impact on the 2004 figures. If FRS 17had been fully adopted in 2004, the Group would have recorded an additionalliability, net of deferred tax, in its balance sheet of £15.5m (2003: £10.0 m)relating to defined benefit schemes in the UK, France and USA of which the UKplan accounted for £14.5m (2003: £8.7m). The US plans were inherited with theacquisition of Lindberg. Three of these plans have been closed and no furtherbenefits are accruing. A further two remain open under the terms of unionagreement. The actuaries to the UK scheme have advised that contributions tothat plan be increased by £0.4m in 2005. International Financial Reporting Standards Following the EU's adoption of Regulation No. 1606/2002 on the use ofInternational Financial Reporting Standards (IFRS) by EU-listed companies, theGroup is implementing IFRS from 1 January 2005. The first financial information to be reported by the Group in accordance withIFRS will be for the six months ending 30 June 2005 but the requirement topresent comparative information means that a balance sheet as at 31 December2003 and primary statements for 2004 prepared in accordance with IFRS will alsobe required. The Group has continued to report its consolidated accounts inaccordance with UK GAAP for 2004. The Group plans to provide a separate reconciliation of the UK GAAP 2004 resultsand the balance sheet at 31 December 2003 to IFRS during the second quarter of2005. At that time a full explanation of the known impacts of IFRS will be givenas well as details of the accounting policies that are expected to be adoptedunder IFRS as from 1 January 2005. This analysis of the impact of IFRS is being prepared by the Directors usingtheir best knowledge of the expected standards and interpretations expected tobe effective, and the accounting policies expected to be adopted, when theDirectors prepare the company's first complete set of IFRS financial statementsas at 31 December 2005. Therefore, as these interpretations develop, there is apossibility that the analysis may evolve further before constituting the finalIFRS balance sheet as at 31 December 2005 when the Company prepares its firstcomplete set of IFRS financial statements. Our work to date has identified that the following areas will impact the Group'saccounts: Retirement Benefits Under UK GAAP, the Group currently accounts for defined benefit pension schemesin accordance with SSAP 24 Accounting for Pension Costs (SSAP 24). The Groupalso reports the transitional disclosures required in accordance with FRS 17Retirement Benefits (FRS 17), including the adjustment from the figures reportedunder SSAP 24 which would be required if FRS 17 was adopted in the financialstatements. The methodology and assumptions used to calculate the value of pension assetsand liabilities under FRS 17 are substantially consistent with the requirementsof IAS 19 Employee Benefits (IAS 19). Proposed Dividends Under SSAP 17 Post Balance Sheet Events, proposed dividends are accrued for asan adjusting post balance sheet event in the accounting period to which theyrelate. Under IAS 10 Events after the Balance Sheet Date, dividends arerecognised in the accounting period in which they are declared. Accordingly, theGroup will reverse the accrual for its final dividend and report it in theconsolidated IFRS accounts for the following period. Intangible Assets - goodwill Under UK GAAP, the Group's policy is to capitalise goodwill in respect ofbusinesses acquired and amortise it on a straight line basis over its estimateduseful economic life, which has been assessed as 20 years for all acquisitionsto date. On transition to IFRS, IFRS 1 requires the Group to review the carrying value ofcapitalised goodwill at 31 December 2003 for potential impairments. In accordance with IFRS 3 Business Combinations, no amortisation of goodwillwill be charged in the Group's consolidated IFRS accounts from 1 January 2004.Instead, annual reviews of the goodwill will be performed to test for potentialimpairments. Share-based Payments Under UK GAAP, the cost of share options is based on the intrinsic value in theoption at the date of grant, meaning that options granted to employees at marketprice or allowable discount do not generate an expense. Under IFRS 2 Share-basedPayments, the Group is required to measure the cost of all share options grantedsince November 2002 using fair value models. As a result, additional expensewill be recognised in the IFRS profit and loss account in respect of optionsissued in September 2003. Deferred Tax Under IAS 12 Income Taxes, deferred tax liabilities may not be discounted topresent value, whereas FRS19 allows this. The Group currently uses thediscounting method and accordingly the Group will restate its deferred taxliability under IFRS. D F Landless1 March 2005 Consolidated profit and loss accountfor the year ended 31 December 2004 2004 2003 £m £mTurnover Existing operations 443.7 435.7 Acquisitions 1.8 -Continuing operations 445.5 435.7Discontinued operations 11.7 12.7 457.2 448.4 Operating profit Existing operations 42.5 23.8 Acquisitions 0.2 -Continuing operations 42.7 23.8 Discontinued operations 0.9 1.3 Total operations- Trading 52.1 41.7- Operating exceptional items arising from restructuring andasset write downs - (7.5)- Goodwill amortisation (8.5) (9.1) Operating profit 43.6 25.1 Exceptional items(Loss)/profit on disposal of discontinued operations (3.8) 3.5Loss on termination of operations (7.4) (30.0) Profit/(loss) on ordinary activities before interest andtaxation 32.4 (1.4)Net interest payable (7.9) (9.7) Profit/(loss) on ordinary activities before taxation 24.5 (11.1)Tax on profit/(loss) on ordinary activities (5.6) (6.2) Profit/(loss) on ordinary activities after taxation 18.9 (17.3)Minority interests - equity (0.2) (0.1) Profit/(loss) for the financial year 18.7 (17.4)Dividends - paid and proposed (19.6) (15.6) Retained loss for the financial year (0.9) (33.0) RestatedEarnings/(loss) per share (Note 4) Headline 11.3p 9.1pHeadline - diluted 11.3p 9.1pBasic 6.1p (6.3)pBasic - diluted 6.1p (6.3)p Consolidated balance sheetas at 31 December 2004 2004 2003 £m £mFixed assetsIntangible assets - goodwill 131.4 137.5Tangible assets 428.7 478.7Investments 6.2 0.9 566.3 617.1 Current assetsStocks 13.4 18.2Debtors 108.4 102.7Cash at bank and in hand 142.1 35.2 263.9 156.1 CreditorsAmounts falling due within one year (117.2) (119.1) Net current assets 146.7 37.0 Total assets less current liabilities 713.0 654.1 CreditorsAmounts falling due after more than one year (234.2) (239.5) Provisions for liabilities and charges (42.9) (42.8) Net assets 435.9 371.8 Capital and reservesCalled-up share capital 32.1 25.7Share premium account 300.0 244.4Currency and other reserves 17.1 14.2Profit and loss account 85.7 86.6 Shareholders' funds - equity 434.9 370.9Minority interests - equity 1.0 0.9 435.9 371.8 Consolidated cash flow statementfor the year ended 31 December 2004 2004 2004 2003 2003 £m £m £m £m Operating profit 43.6 25.1Depreciation charges 43.7 45.7Amortisation of goodwill 8.5 9.1Loss on sale of tangible fixed assets 0.3 0.1Fixed assets written off on restructuring - 3.5Decrease in stocks 3.8 -(Increase)/decrease in debtors (2.1) 12.1Increase/(decrease) in creditors and provisions 6.5 (11.7) Net cash inflow from operating activities 104.3 83.9Returns on investment and servicing of finance (7.8) (10.3)Taxation (5.4) (4.9)Capital expenditure and financial investment (34.0) (38.3)Acquisitions and disposals 10.5 1.3Equity dividends paid (15.6) (15.6) Cash inflow before management of liquid resourcesand financing 52.0 16.1 Management of liquid resources (70.9) 5.9Financing 56.3 (23.5) Increase/(decrease) in cash in the year 37.4 (1.5) Reconciliation of net cash flow to movement in netdebtIncrease/(decrease) in cash in the year 37.4 (1.5)Cash inflow from increase in debt and leasefinancing 5.7 23.7Cash outflow/(inflow) from movement in liquidresources 70.9 (5.9) Change in net debt resulting from cash flows 114.0 16.3Debt acquired with subsidiaries (1.7) -Debt disposed of 1.0 -Currency adjustments 8.5 7.6 Movement in net debt in the year 121.8 23.9Net debt at 1 January (210.3) (234.2) Net debt at 31 December (88.5) (210.3) Consolidated statement of total recognised gains and lossesfor the year ended 31 December 2004 2004 2003 £m £m Profit/(loss) for the financial year 18.7 (17.4)Currency adjustments 2.9 14.4 Total recognised gains and losses relating to the year 21.6 (3.0) Reconciliation of movements inGroup shareholders' funds 2004 2003for the year ended 31 December 2004 £m £m Profit/(loss) for the financial year 18.7 (17.4)Dividends (19.6) (15.6)Retained loss for the financial year (0.9) (33.0)Currency adjustments 2.9 14.4New shares issued 62.0 0.3 Net movement in shareholders' funds 64.0 (18.3) Shareholders' funds at 1 January 370.9 389.2 Shareholders' funds at 31 December 434.9 370.9 Notes to the financial statements31 December 2004 1. Segmental analysis By activity 2004 2004 2003 2003 £m £m £m £m Restated RestatedTurnover Heat treatment 309.0 302.5Materials testing 65.6 61.2Hot isostatic 32.1 27.6pressingSurface engineering 19.4 18.4Electroplating - 19.4 26.0discontinuing 445.5 435.7PVD - discontinued 11.7 12.7 457.2 448.4 Profit/(loss) onordinary activitiesbefore taxation Pre Post Pre Post goodwill goodwill goodwill goodwill amortisation amortisation amortisation amortisation Heat treatment 34.2 26.7 31.5 24.1Materials testing 12.4 11.7 11.4 10.7Hot isostatic 7.0 7.0 3.6 3.6pressingSurface engineering 3.3 3.0 2.3 1.9Electroplating - (3.0) (3.0) (6.8) (7.4)discontinuing 53.9 45.4 42.0 32.9PVD - discontinued 0.9 0.9 1.3 1.3 54.8 46.3 43.3 34.2 Head office expenses (2.7) (2.7) (1.6) (1.6) Operating profit 52.1 43.6 41.7 32.6before exceptionalitemsNet interest payable (7.9) (7.9) (9.7) (9.7)Profit on ordinaryactivities beforeexceptional items 44.2 35.7 32.0 22.9Amortisation of (8.5) - (9.1) -goodwill Profit on ordinaryactivities beforeexceptional items 35.7 35.7 22.9 22.9Operating - (7.5)exceptional items Exceptional items (11.2) (26.5) Profit/(loss) onordinary activitiesbefore taxation 24.5 (11.1) The segmental disclosure by activity for 2003 has been restated to reflect thetransfer of certain business from heat treatment to the PVD division and fromelectroplating (formerly wet coatings) to surface engineering (formerlyspecialty coatings). The former specialty coatings division has been dividedinto surface engineering and PVD. Notes to the financial statements (continued) 2. Geographical analysis of turnover and profit before taxation by origin Turnover Profit/(loss) before tax 2004 2003 2004 2003 £m £m £m £m United Kingdom 62.5 60.6 2.0 (0.9)Mainland Europe 234.2 229.0 17.8 (5.5)North America 155.4 154.9 11.2 4.2Rest of World 5.1 3.9 1.4 0.8 457.2 448.4 32.4 (1.4)Net interest payable (7.9) (9.7)Profit/(loss) on ordinary activities beforetaxation 24.5 (11.1) 3. Tax on profit/ (loss) on ordinary activities 2004 2003 £m £mThe charge for taxation comprises:Current tax:UK corporation tax 0.5 1.4Overseas tax 6.4 5.0Adjustments in respect of previous years (2.7) (0.6)Total current tax 4.2 5.8 Deferred tax:Origination and reversal of timing differences 0.1 2.1Decrease/(increase) in discount 1.3 (1.7)Total deferred tax 1.4 0.4 Total tax on profit/(loss) on ordinary 5.6 6.2activities 4. Earnings/(loss) per share 2004 2003 £m £mProfit/(loss) for the financial year 18.7 (17.4)Goodwill amortisation charge 8.5 9.1Exceptional items after tax 7.3 33.1 Headline earnings 34.5 24.8 2004 2003 Number Number Restated Weighted average number of ordinary shares in issue - 304,605,680 273,921,081basicAdjustment in respect of share options 124,007 -Weighted average number of ordinary shares in issue - 304,729,687 273,921,081diluted Adjusted for the bonus element of the 1 for 4 rights issue completed in 2004 Notes to the financial statements (continued)Related Shares:
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