1st Jun 2006 07:02
Johnson Matthey PLC01 June 2006 For Release at 7.00 am Thursday 1st June 2006 Preliminary Results for the year ended 31st March 2006 Encouraging prospects for continued growth Summary Results (IFRS basis) Year to 31st March % 2006 2005 change Revenue £4,756m £4,626m +3Sales excluding precious metals £1,341m £1,188m +13Profit before tax £213.8m £167.4m +28Total earnings per share 70.8p 53.2p +33 Before impairment and restructuring costs:Profit before tax £219.8m £204.1m +8Earnings per share 72.7p 67.0p +9 Dividend per share 30.1p 27.7p +9 • Sales excluding precious metals up 13% at £1.3 billion • Profit before tax, impairment and restructuring costs up 8% to £219.8 million • Total earnings per share up 33% to 70.8 pence. Before impairment, restructuring and disposal costs, earnings per share up 9% to 72.7 pence • Dividend up 9% to 30.1 pence Divisional Performance Operating Profit (before impairment and restructuring costs) Year to 31st March % 2006 at 2005 % change£m 2006 2005 change exchange rates Catalysts 134.2 122.5 +10 132.1 +8Precious Metal Products 62.2 52.0 +20 61.2 +18Pharmaceutical Materials 33.8 39.8 -15 33.5 -16Ceramics 21.3 18.8 +13 20.8 +11Corporate (16.8) (16.5) (16.9)Operating Profit 234.7 216.6 +8 230.7 +7 • Operating profit, before impairment and restructuring costs, up 8% to £234.7 million• Catalysts up 10% with good growth in diesel products in Europe, good sales in Asia and strong sales of hydrogen production and purification catalysts• Precious Metal Products up 20% benefiting from favourable trading conditions and growth in manufacturing businesses• Pharmaceutical Materials down 15% following expiry of carboplatin patent• Ceramics up 13% with strong cash generation Business Prospects • Heavy duty diesel (HDD) catalysts poised for significant growth with Johnson Matthey to achieve leading market position• Continuing good growth in light duty diesel (LDD) products expected in Europe particularly catalysed soot filters• Autocatalyst demand in Asia continues to grow with increased vehicle sales in China and India. Further expansion planned• High oil prices to support growth of sales in process catalysts• Outlook for platinum group metals demand remains strong• Pharmaceutical Materials well positioned for recovery in 2006/07• Ceramics' encouraging performance should continue with good cash generation• Investment of £200 million over two years on bolt-on acquisitions and / or share buy-backs Commenting on the results, Neil Carson, Chief Executive of Johnson Matthey said: "Johnson Matthey performed well last year and prospects for future growth arevery encouraging. Our investment in new capacity to meet customer demand willcontinue and we remain optimistic about prospects for future performance. Weexpect growth in earnings to be stronger in the second half of the current yearthan in the first driven by increasing demand for our technology leading dieselcatalyst products. " Enquiries: Ian Godwin Director, IR and Corporate Communications 020 7269 8410John Sheldrick Group Finance Director 020 7269 8438Howard Lee The HeadLand Consultancy 020 7367 5225Laura Hickman The HeadLand Consultancy 020 7367 5227 www.matthey.com Report to Shareholders Introduction Johnson Matthey achieved good results in 2005/06. Total earnings per share wereup 33%. Underlying earnings per share (before impairment, restructuring anddisposal costs) increased by 9%. Growth in the second half of the year was stronger than the first. Operatingprofit for the year, before impairment and restructuring costs, rose by 8%, withCatalysts, Precious Metal Products and Ceramics all achieving double digitgrowth. Pharmaceutical Materials was down but sales and profits improved in thesecond half of the year. This is the first time Johnson Matthey has reported its full year results underInternational Financial Reporting Standards (IFRS). The impact of thetransition from UK GAAP to IFRS was set out in our Report and Accounts for 2005,and is shown on pages 25 to 29 of this report. Review of Results Revenue rose by 3% to £4,756 million. Catalysts Division's sales were wellahead of 2004/05 but sales in Precious Metal Products Division were down,despite higher metal prices, reflecting the withdrawal from gold refining in theUK in 2004/05 and lower trading activity in the first half of the year. Salesexcluding the value of precious metals rose by 13% reflecting good underlyinggrowth in Catalysts Division. Operating profit, before impairment and restructuring costs, increased by 8% to£234.7 million. Exchange translation was favourable, increasing profit by £4.0million compared with last year. Interest rose by £1.7 million to £14.7 millionreflecting the impact of higher short term interest rates in the US. Profitbefore tax, impairment and restructuring costs was up 8% at £219.8 million. An impairment charge of £6.0 million has been included in the results for 2005/06 for the write down of process assets no longer required in the platinum groupmetal refining business following the successful restructuring of that business.Including the impairment charge, profit before tax was £213.8 million whichwas 28% up on the equivalent figure for 2004/05 which included a charge of £36.7million for restructuring costs. Underlying earnings per share rose by 9% to 72.7 pence, benefiting from theaccretive effect of buying back shares. Including impairment, restructuring anddisposal costs total earnings per share rose by 33% to 70.8 pence. Dividend The board is recommending to shareholders a final dividend of 21.0 pence, makinga total dividend for the year of 30.1 pence, an increase of 9%, which is in linewith the growth in underlying earnings per share. Operations Catalysts Division's sales rose by 28% to £1,477 million, partly as a result ofhigher prices for platinum, palladium and rhodium. Excluding the value ofprecious metals, sales rose by 17% to £786 million. This increase was driven bygood volume growth and the impact of higher material costs, such as the cost ofsubstrates for catalysed soot filters, which is a pass through for JohnsonMatthey. The division's operating profit increased by 10% (before acquisition integrationcosts included in the results for 2004/05) to £134.2 million, with most of thegrowth coming in the second half of the year. Environmental Catalysts and Technologies (ECT) was well ahead of last year withgood growth in Europe, particularly for diesel catalysts, and increasingautocatalyst sales in Asia more than offsetting a decline in North America. In Johnson Matthey's financial year to 31st March 2006 global light duty vehiclesales increased by 3.6% to 65.6 million. Car production rose by 3.3% with asmall overall reduction in inventories. Most of the growth in production camein Asia, which was 11% up on last year. Europe and North America were 2% ahead.Demand for diesel vehicles continues to be strong in Europe where theyrepresent just under half the total car market. Johnson Matthey has a leadingposition in the light duty diesel catalyst market which has seen good growth dueto strong sales of diesel oxidation catalysts (DOCs) to meet Euro IV emissionsregulations. Estimated Light Vehicle Sales and Production 2005/06 Year to 31st March 2006 2005 Change millions millions % North America Sales 19.7 19.5 +1.0% Production 15.9 15.6 +1.9% Europe Sales 18.3 18.0 +1.7% Production 19.3 18.9 +2.1% Asia Sales 15.2 13.7 +10.9% Production 23.0 20.7 +11.1% Global Sales 65.6 63.3 +3.6% Production 66.3 64.2 +3.3% Source: Global Insight We are also seeing increasing demand from many of the leading car companies inEurope for catalysed soot filters (CSFs) to remove particulates from dieselexhaust emissions. Although legislation requiring such emission control devicesdoes not come into force in Europe until 2010 many manufacturers are starting tofit these devices much earlier due to public awareness of the environmental andhealth benefits that they provide. In 2005/06 we commissioned a new factory inRoyston, UK to manufacture CSFs and we are putting in new capacity at our SouthAfrican facility which also supplies the European market. Demand for CSFsincreased in the second half of the year and we expect to see further growth in2006/07. The market for heavy duty diesel (HDD) catalysts for new vehicles is alsobeginning to grow. New emission control standards for HDD vehicles came intoforce in Europe in October 2005 for new models. As yet, less than 10% of thenew vehicle fleet is fitted with catalysts. The major growth in this marketwill occur from October 2006 when all new vehicles sold in Europe will need tomeet the new standards. Johnson Matthey is supplying several of the originalequipment manufacturers with products to meet the new legislation and expects tohave a leading share of the market when the legislation applies to all newvehicles. In the United States similar legislation comes into force at thebeginning of January 2007 and Johnson Matthey is again well placed to take aleading market share. Our business in Asia is performing very well. Over the next decade we expectthat most of the growth in world car production will take place in the Asianregion. In the financial year 2005/06 we have achieved strong volume growth inChina and Japan and our operations in India and Malaysia also continued toperform well. In early September we announced plans to build a new autocatalyst factory inSouth Korea, our fifth in the Asian region. This new plant is being built inGyeonggi province, 50 kilometres south west of Seoul, where we plan tomanufacture catalysts for both diesel and petrol powered vehicles. Process Catalysts and Technologies (PCT) also achieved good growth in sales andprofits in 2005/06. The Ammonia, Methanol, Oil and Gas (AMOG) business was wellahead of 2004/05 with strong demand for catalysts and purification materials forindustries where hydrogen or synthesis gas are key intermediates. Sales ofedible oil catalysts were also ahead of last year but catalyst sales to thepolymer market declined. On 1st February 2006 we purchased Davy Process Technology Limited (DPT) for anet cost of £24.6 million. DPT develops chemical process technologies andlicenses them to customers in the oil, gas and petrochemical industries. In thetwo months of Johnson Matthey ownership DPT made an operating profit of £0.8million. The acquisition of DPT will provide Johnson Matthey with additionalopportunities to grow its sales of catalysts and technologies into emergingmarkets. The high oil price and moves towards low carbon energy aretransforming the market for catalysts and purification materials used in oil,gas and petrochemicals. We have significantly increased our R&D expenditure onthe development of catalysts for the production of clean synthetic liquidproducts from a wide range of hydrocarbon feedstocks which will be a substantialgrowth market for PCT in the medium term. The division's Research Chemicals business achieved good growth, successfullyintegrating the operations of Lancaster Synthesis which was acquired last year.A new combined catalogue was issued during the year which should provide afurther boost to growth. The same trends that are increasing demand for new catalysts in PCT have alsoincreased interest in Fuel Cells technologies and 2005/06 witnessed significantdevelopments in the fuel cell market, particularly in Europe and Asia. Oneconsequence of these trends has been renewed interest in the use of phosphoricacid fuel cells (PAFCs) for stationary applications. Johnson Matthey has wellestablished technology for components in this area and is collaborating withfuel cell manufacturers on new product development. Another recent developmentis the emergence of small prototype direct methanol fuel cells used as chargersfor mobile phones or power sources for laptop computers. The future developmentof this new market is still uncertain but the Fuel Cells business is workingwith a number of major consumer electronics companies to supply catalysts andmembrane electrode assemblies (MEAs) for their development programmes. In 2005/06 the annual cost of our Fuel Cells business on an IFRS basis fell by£0.5 million to £8.1 million. Under IFRS accounting rules £1.6 million of theannual R&D cost was capitalised in 2005/06 (£1.5 million in 2004/05) whichlowered the reported cost compared with UK GAAP. The business benefited from anexpanded range of customers and initial sales of prototype products to thedirect methanol fuel cells' market. Precious Metal Products Division's sales fell by 7% to £2,962 million. The fallreflected the withdrawal from gold refining in the UK in 2004/05 and a reductionin trading activity in the first half of the year compared with the first halfof 2004/05. Operating profit (before impairment and restructuring costs) roseby 20% to £62.2 million. Much of the growth in operating profit was generated bythe manufacturing businesses. Colour Technologies, which was transferred into the division following therestructuring of the former Colours & Coatings Division, achieved good growth inprofits benefiting from cost reductions undertaken last year and good sales ofautomotive glass enamels particularly in the North American and Asian markets.Similarly, the division's gold and silver businesses benefited from the closureof its UK bullion refinery, which had been loss making, and the transfer of someof its business to our North American refineries. The division's platinum groupmetal (pgm) fabrication businesses also achieved good growth with increasingsales to the industrial sector and strong demand for medical device components. Pgm Refining was transferred from Catalysts into Precious Metal ProductsDivision at the beginning of the financial year. In 2005 we announced a plan torestructure the business in the UK and reduce the quantity of precious metalsheld in the refinery. As a result of the successful completion of this planover £20 million of net cash has been generated from metal reduction. Someparts of the process have been changed and £6.0 million of fixed assets, whichwill no longer be used, were written off in 2005/06. Profits from the division's marketing and trading operations were better than in2004/05 particularly in the second half of the year. Higher average pgm pricesand increased price volatility, especially in the rhodium market, provided morefavourable trading conditions. The price of platinum reached its peak for 2005/06 of $1,084/oz in March 2006, an all time high in dollar terms. The rise in theplatinum price gathered pace as the year progressed with speculative buying,particularly in Japan, adding to the strong supply and demand fundamentals thathave been seen for a number of years. The average price for the year was $942/oz, an 11% increase on 2004/05. Total consumption of platinum increased once more in 2005/06, a pattern unbrokensince 1992. Demand for platinum in autocatalysts increased by 9% with much ofthe growth generated in Europe where diesel vehicles, which predominantly useplatinum catalysts, accounted for nearly 50% of light duty vehicleregistrations. However, usage in jewellery fell as the rising price of platinumencouraged de-stocking and recycling of old jewellery. Supplies of platinumincreased, although at a lower rate than anticipated as South African producershad a number of unforeseen difficulties in reaching their expansion targets.Overall, supplies fell short of demand for the seventh consecutive year,contributing to the trend of rising platinum prices. The palladium price also reached a peak for 2005/06 in March, touching $345/oz.Supply and demand fundamentals became increasingly irrelevant as hedge funds andinstitutional investors extended already substantial long positions in themarket. The average price for the year was $228/oz, a modest increase of 4% on2004/05. Physical demand for palladium increased in 2005/06, a third successiveyear of rising consumption after a slump in 2002/03. Autocatalyst demand wasbroadly flat whereas demand from the burgeoning market for palladium jewelleryin China grew by more than 50%. Palladium supplies were slightly lower than in2004/05 due to a reduction in Russian stock sales. Although the physical marketwas once again in surplus, this was overshadowed by activity in the investmentmarket. The price of rhodium rose sharply in 2005/06, reaching a peak of $4,350/oz inMarch. The average price of $2,544/oz was more than double the average for 2004/05. Strong demand from the automotive and glass industries coupled withspeculative interest left little metal to be offered in the spot market. Thisadditional pressure on a market which was already tight and illiquid inevitablycaused prices to rise dramatically. Pharmaceutical Materials Division's sales rose by 2% to £134 million with arecovery in the second half of the year. Operating profit fell by 15% to £33.8million as a result of reduced income from carboplatin, which went off patent inOctober 2004, and lower revenues in the division's contract research business. The division's European businesses performed well in the year. The fall inprofits all occurred in the United States, although trading improved in thesecond half. Much of the future growth in the US business is expected to comefrom the launch of new generic products by our customers. These productlaunches can be subject to delays in the US courts, which occurred in 2005/06when we had hoped to benefit from the launch of a significant new genericcontrolled drug. We still hope to benefit from the launch of that product in2006/07 but timing remains uncertain. Despite carboplatin going off patent the outlook for platinum anticancer drugsremains encouraging. The market continues to grow and Johnson Matthey is theleading supplier of platinum containing active pharmaceutical ingredients (APIs)to the US market. Johnson Matthey originally discovered Satraplatin(R), apotential new drug to treat prostate cancer which is currently in Phase IIIclinical trials, and the company will receive royalty and manufacturing incomeif this product is successfully launched. Macfarlan Smith, based in Edinburgh, UK, performed well with sales and profitsahead of 2004/05. Sales were up in most product areas with good growth in bothbulk opiates and low volume, high potency products, mainly analgesics, where newcapacity was installed in 2004/05. The major expansion programme to increasecapacity to manufacture specialist opiates (oxycodone, hydromorphone andbuprenorphine), demand for which is growing rapidly, was completed on time andhas now been commissioned. Ceramics is shown as a stand alone division this year following therestructuring of our Colours & Coatings Division. That restructuring includedthe sale of our Pigments & Dispersions business, transfer of the ColourTechnologies business to Precious Metal Products Division and closure orconsolidation of a number of smaller manufacturing units. The net impact has been to significantly reduce the cost base which has improvedoperating profit and margins. Ceramics Division also successfully grew itssales in 2005/06 by 10% to £182 million. Operating profit increased by 13% to£21.3 million. The division, headquartered in Spain, is a global supplier of decorativematerials to the ceramic industries particularly tile manufacturing. It isrealising the benefits of the investments made in recent years to position it asone of the lowest cost global producers. Sales were strong in China, which has a large and growing tile market and wherethe division has a factory to supply local consumption. Growth in Europe wasless strong, with our Italian and Spanish customers, who export around 50% oftheir production outside the euro zone, continuing to suffer downward pressureon volumes and prices, due to the strength of the euro. However, sales intoEastern Europe, especially Poland and Russia, showed good growth as the region'smanufacturing base continued to expand. Finance Exchange Rates The main impact of exchange rate movements on the group's results comes from thetranslation of foreign subsidiaries' profits into sterling. A quarter of thegroup's profits are made in North America, mainly in the USA. After severalyears of weakness the US dollar strengthened from an average rate of $1.85/£ in2004/05 to an average of $1.79/£ in 2005/06. Some south east Asian currencies,notably the Chinese renminbi and the Hong Kong dollar also strengthened. Theaverage rate for the euro was unchanged at €1.47/£, while the South African randstrengthened slightly from R11.5/£ to R11.4/£. Overall, exchange translationbenefited operating profit by £4.0 million compared with 2004/05. Interest The group's net interest charge rose by £1.7 million to £14.7 million. Averageinterest rates for floating rate US dollars increased by nearly 2% from the veryfavourable levels experienced in 2004/05, which more than offset the benefit oflower average borrowings. Taxation The group's tax charge rose by £16.0 million to £62.5 million. The increaselargely reflected the tax relief on restructuring costs included in last year'sresults. On an underlying basis the average tax rate was unchanged at 29.3%.The group continues to benefit from tax credits on R&D expenditure. We reachedagreement with HM Revenue & Customs in the UK on several years' tax assessmentswhich resulted in a repayment of tax which benefited the group's cash flow.That amount had already been recognised in current tax so there was no impact onearnings. Cash Flow Johnson Matthey's net cash flow from operating activities rose by 16% to £212.3million. Under the new IFRS rules net cash flow from operating activitiesincludes taxation which benefited from the settlement in the UK. Workingcapital increased by £40.6 million despite the inventory reduction in PgmRefining, largely as a result of the dramatic increase in the rhodium price andthe increased prices of some other materials which affected both inventories andreceivables. Capital expenditure for the year was £124.0 million which was 1.8 timesdepreciation. Most of the investment was focused on Catalysts Division, withthe other divisions spending at levels close to depreciation. Environmental Catalysts and Technologies spent £65 million in the year withmajor investments on new capacity to manufacture CSFs and HDD catalysts. Wehave built a new factory at Royston, UK to manufacture diesel products and areinvesting heavily in new capacity at our facility near Philadelphia, to producesimilar products in the USA. We are also expanding rapidly in Asia withadditional capacity in Japan and a new factory in Korea. In Process Catalystsand Technologies we have added capacity in AMOG to meet demand for catalysts forhydrogen production and the expanding methanol market. Despite the significant investment in capital expenditure the group generated apositive free cash flow of £23.2 million before acquisitions and sharepurchases. We completed our previously announced programme of share buy-backs in the yearacquiring additional shares for the Johnson Matthey Employee Share OwnershipTrust (ESOT). The net cash outflow on share purchases amounted to £25.9million. In February 2006 we acquired Davy Process Technology Limited for a netcost, including debt acquired, of £24.6 million. Including the effect ofexchange translation on foreign currency borrowings the group's net debt rose by£42.4 million to £412.0 million. Pensions The surplus on the group's UK pension schemes increased by £24.9 million to£68.7 million on an IFRS basis at 31st March 2006. The investment performanceof the fund for the year was very good reflecting favourable market conditions,but liabilities also increased mainly as a result of a fall in the discount rateused to measure them. Worldwide, including provisions for the group's post-retirement healthcareschemes, the group had a net surplus of £18.8 million on employee benefitobligations compared with a net deficit of £3.0 million at 31st March 2005. Capital Structure In 2005/06 we invested significantly in future growth. Capital expenditureamounted to 1.8 times depreciation and R&D increased by 9%. In addition weacquired DPT and bought back 1.9 million shares. Net debt increased by £42.4million to £412.0 million but equity also increased by £114.6 million to£1,044.5 million, reflecting good earnings growth and an increased surplus inthe group's UK pension fund. Gearing (debt / equity) was slightly lower at39.4%. Our policy is to maintain a strong balance sheet and use the cash generated toinvest in organic growth and bolt-on acquisitions. In the current financialyear we expect to continue to invest at a high level to enable us to take fulladvantage of the current and future market opportunities arising in ourbusinesses. Capital expenditure is planned to be 1.6 times depreciation and weexpect working capital to increase, particularly at the end of the financialyear, when the US market for HDD emission control products will start to growrapidly. Despite this continued investment we have capacity in the balance sheet forincreased borrowing. We therefore plan to raise the group's gearing to 50% overthe next two years by adding bolt-on acquisitions and buying back furthershares. In aggregate we expect to spend at least £200 million on theseinitiatives both of which should be earnings accretive. We also plan tocontinue to increase dividends in line with earnings growth. Outlook The outlook for the next few years continues to be very encouraging. We expectthe group to achieve strong top line growth from the introduction of newproducts and generate good growth in earnings. New legislation on HDD vehicle emissions in Europe will apply to all newvehicles in October 2006. New legislation in the US starts in January 2007 andwill impact our sales in the final quarter of the financial year. By the end of2008 we expect the market for catalysts for new HDD vehicles to reach US$700million (higher than our previous estimate reflecting the use of more expensivesubstrates and filters). Johnson Matthey is expecting to achieve a leadingshare of this market. In addition, demand for CSFs for light vehicles is strongand sales are expected to grow steadily in 2006/07. The markets for PCT's catalysts have also improved in the last year as a resultof high energy prices and increased environmental concerns. The acquisition ofDavy Process Technology has enhanced Johnson Matthey's technological position inthis market and medium term growth prospects are very good. In 2006/07 Precious Metal Products Division should continue to benefit from thefavourable conditions in the platinum group metal markets. PharmaceuticalMaterials' growth will depend on the timing of customers' new product launches.Ceramics is expected to trade at similar levels to 2005/06 and be strongly cashgenerative. The US dollar has weakened again in the current financial yearwhich will adversely affect exchange translation if it remains at currentlevels. Overall, we expect growth in earnings to be stronger in the second halfof 2006/07 than the first driven by increasing demand for diesel catalystproducts. We will continue to increase our investment in R&D to maintain Johnson Matthey'stechnology leadership positions. We believe that many of the existing andemerging markets for catalysts will show significant growth over the next decadeand Johnson Matthey is well placed to benefit from these new marketopportunities. Consolidated Income Statementfor the year ended 31st March 2006 2006 2005 Notes £ million £ million Revenue 2 4,755.9 4,626.2Cost of materials sold (3,946.0) (3,873.8)Net revenues 809.9 752.4Other cost of sales (397.7) (372.6)Gross profit 412.2 379.8Distribution costs (85.9) (81.5)Administrative expenses (91.6) (81.7)Impairment and restructuring costs 4 (6.0) (36.7)Operating profit 2,3 228.7 179.9Interest payable (31.7) (32.2)Interest receivable 17.0 19.2Share of (loss) / profit of associates (0.2) 0.5Profit before tax 213.8 167.4Income tax expense 5 (62.5) (46.5)Profit for the year from continuing operations 151.3 120.9Loss for the year from discontinued operations - (6.4)Profit for the year 151.3 114.5 Attributable to:Equity holders of the parent company 152.1 115.5Minority interests (0.8) (1.0) 151.3 114.5 pence penceEarnings per ordinary share attributable to the equity holders of the parentcompany Continuing operations Basic 6 70.8 56.1 Diluted 6 70.5 56.0 Total Basic 6 70.8 53.2 Diluted 6 70.5 53.1 Consolidated Balance Sheetas at 31st March 2006 2006 2005 Notes £ million £ million AssetsNon-current assetsProperty, plant and equipment 661.1 593.0Goodwill 402.4 375.1Other intangible assets 41.3 27.4Investments in associates 4.3 4.8Deferred income tax assets 4.4 2.0Available-for-sale investments 5.9 1.9Other receivables 0.2 -Post-employment benefits net assets 75.0 45.2Total non-current assets 1,194.6 1,049.4 Current assetsInventories 345.8 307.3Current income tax assets 3.6 2.2Trade and other receivables 478.5 363.4Available-for-sale investments 0.1 0.6Cash and deposits 9 133.0 78.7Other financial assets 3.2 -Other current assets 7.1 7.1Total current assets 971.3 759.3Total assets 2,165.9 1,808.7 LiabilitiesCurrent liabilitiesTrade and other payables (385.2) (294.3)Current income tax liabilities (66.0) (12.3)Borrowings and finance leases 9 (90.3) (36.8)Other financial liabilities (4.2) -Provisions (9.1) (26.5)Total current liabilities (554.8) (369.9) Non-current liabilitiesBorrowings, finance leases and related swaps 9 (454.7) (411.5)Deferred income tax liabilities (49.7) (44.6)Employee benefits obligations (56.2) (48.2)Provisions (5.2) (3.9)Trade and other payables (0.8) (0.7)Total non-current liabilities (566.6) (508.9)Total liabilities (1,121.4) (878.8)Net assets 1,044.5 929.9 EquityShare capital 220.2 219.5Share premium account 144.4 139.8Shares held in employee share ownership trusts (63.0) (37.7)Other reserves 28.5 6.3Retained earnings 708.0 594.5 1,038.1 922.4Minority interests 6.4 7.5Total equity 10 1,044.5 929.9 Consolidated Cash Flow Statementfor the year ended 31st March 2006 2006 2005 Notes £ million £ million Cash flows from operating activitiesProfit before tax 213.8 167.4Adjustments for: Share of loss / (profit) in associates 0.2 (0.5) Discontinued operations - 0.4 Depreciation, amortisation and profit on sale of non-current assets and 76.7 66.1 investments Share-based payments 3.2 2.8 Increase in inventories (25.6) (38.2) (Increase) / decrease in receivables (78.7) 9.1 Increase in payables 63.7 19.2 (Decrease) / increase in provisions (18.1) 5.4 Employee benefits obligations charge less contributions (9.3) (8.0) Changes in fair value of financial instruments (12.4) - Net interest 14.7 13.0Income tax paid (15.9) (52.9)Net cash inflow from operating activities 212.3 183.8 Cash flows from investing activitiesDividends received from associates 0.1 0.2Purchases of non-current assets and investments (120.3) (96.3)Proceeds from sale of non-current assets and investments 5.7 4.1Purchases of businesses and minority interests (24.3) (4.0)Net proceeds from sale of business - 23.3Net cash outflow from investing activities (138.8) (72.7) Cash flows from financing activitiesNet purchase of own shares (25.9) (16.1)Proceeds from / (repayment of) borrowings and finance leases 82.3 (50.6)Dividends paid to equity holders of the parent company 7 (60.4) (58.4)Dividends paid to minority shareholders (0.2) (0.2)Interest paid (30.6) (32.1)Interest received 16.6 19.2Net cash outflow from financing (18.2) (138.2) Increase / (decrease) in cash and cash equivalents in the year 55.3 (27.1)Exchange differences on cash and cash equivalents 5.8 0.1Cash and cash equivalents at beginning of year 64.0 91.0Cash and cash equivalents at end of year 9 125.1 64.0 Reconciliation to net debtIncrease / (decrease) in cash and cash equivalents in the year 55.3 (27.1)(Proceeds from) / repayment of borrowings and finance leases (82.3) 50.6Change in net debt resulting from cash flows (27.0) 23.5Borrowings acquired with subsidiaries (1.4) -Exchange differences on net debt (13.4) 1.4Movement in net debt in year (41.8) 24.9Net debt at beginning of year (after adjustment to opening position for IAS 39) 11 (370.2) (394.5)Net debt at end of year 9 (412.0) (369.6) Consolidated Statement of Recognised Income and Expensefor the year ended 31st March 2006 2006 2005 Notes £ million £ million Currency translation differences on foreign currency net investments and related loans 42.3 (2.0)Fair value gain on available-for-sale investments transferred to profit (0.8) -on saleCash flow hedges - losses taken to equity (3.6) -Cash flow hedges - transferred to income statement in the year (2.6) -Fair value losses on net investment hedges (12.5) -Actuarial gain / (loss) on post-employment benefits assets and 19.6 (16.1)liabilitiesTax on above items taken directly to or transferred from equity (7.8) 5.8Net income / (expense) recognised directly in equity 34.6 (12.3)Profit for the year 151.3 114.5Total recognised income and expense relating to the year 185.9 102.2IFRS transition adjustment for financial instruments 11 2.7 - 188.6 102.2 Total recognised income and expense attributable to:Equity holders of the parent company 186.7 103.2Minority interests (0.8) (1.0) 185.9 102.2 Notes on the Preliminary Accountsfor the year ended 31st March 2006 1 Basis of preparation Following a European Union Regulation issued in 2002, with effect from 1st April 2005 the group is reporting its results in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and so its annual report and accounts for the year ended 31st March 2006 are prepared under IFRS. Previous accounts were prepared under UK Generally Accepted Accounting Principles (UK GAAP) and reconciliations converting the group's results from UK GAAP to IFRS for the year ended 31st March 2005 and the balance sheet at 1st April 2004 (the date of transition) are presented in note 14. The financial information contained in this release does not constitute the company's statutory accounts for the years ended 31st March 2006 or 31st March 2005 but is derived from those accounts and the reconciliations from UK GAAP to IFRS. The IFRS accounting policies used are presented towards the end of this release. Statutory accounts for 2005 have been delivered to the Registrar of Companies and those for 2006 will be delivered following the company's Annual General Meeting. The auditors' reports on those accounts were unqualified and did not contain any statement under sections 237(2) and 237(3) of the Companies Act 1985. The accounts for the year ended 31st March 2006 were approved by the Board of Directors on 30th May 2006. As described in the notes on the IFRS restatement (unaudited) in the annual report and accounts for the year ended 31st March 2005, the group has changed its segments under IFRS from those shown under UK GAAP in the accounts for the year ended 31st March 2005. Colour Technologies, which formed part of Colours & Coatings Division, was transferred to Precious Metal Products Division. Ceramics, which comprised the remaining part of Colours & Coatings Division, is shown as a separate segment. Platinum Group Metal Refining, which was part of Catalysts Division, has been transferred to Precious Metal Products Division. 2 Segmental information by business segment Precious Metal Pharmaceutical Catalysts Products Materials Ceramics Eliminations Total £ million £ million £ million £ million £ million £ million Year ended 31st March 2006 Sales to external customers 1,477.4 2,962.4 133.9 182.2 - 4,755.9 Inter-segment sales 17.4 676.9 1.2 4.4 (699.9) - Total revenue 1,494.8 3,639.3 135.1 186.6 (699.9) 4,755.9 External sales excluding precious 786.4 245.4 127.2 182.2 - 1,341.2 metals Segment result before impairment and restructuring costs 134.2 62.2 33.8 21.3 - 251.5 Impairment and restructuring costs - (6.0) - - - (6.0) Segment result 134.2 56.2 33.8 21.3 - 245.5 Unallocated corporate expenses (16.8) Operating profit 228.7 Net interest payable (14.7) Share of loss of associates (0.2) - (0.2) Profit before tax 213.8 Income tax expense (62.5) Profit for the year 151.3 2 Segmental information by business segment (continued) Precious Metal Pharmaceutical Catalysts Products Materials Ceramics Eliminations Total £ million £ million £ million £ million £ million £ million Year ended 31st March 2006 (continued) Segment assets 1,118.4 305.8 331.3 164.6 (26.7) 1,893.4 Investments in associates - 4.3 - - - 4.3 Cash and deposits 133.0 Current and deferred income tax 8.0 assets Post-employment benefits net assets 75.0 Unallocated corporate assets 52.2 Total assets 2,165.9 Segment liabilities 206.5 117.1 24.1 38.0 (26.7) 359.0 Borrowings, finance leases and related swaps 545.0 Current and deferred income tax 115.7 liabilities Employee benefits obligations 56.2 Unallocated corporate liabilities 45.5 Total liabilities 1,121.4 Segment capital expenditure 89.2 13.7 9.9 6.5 - 119.3 Corporate capital expenditure 4.7 Total capital expenditure 124.0 Segment depreciation and amortisation 39.8 13.0 10.0 6.3 - 69.1 Corporate depreciation 1.7 Total depreciation and amortisation 70.8 Significant non-cash expenses other than depreciation - 7.7 - - - 7.7 Year ended 31st March 2005 Sales to external customers 1,157.2 3,171.0 131.8 166.2 - 4,626.2 Inter-segment sales 34.8 496.2 0.2 9.5 (540.7) - Total revenue 1,192.0 3,667.2 132.0 175.7 (540.7) 4,626.2 External sales excluding precious 672.1 224.8 124.6 166.2 - 1,187.7 metals Segment result before impairment and restructuring costs 122.5 52.0 39.8 18.8 - 233.1 Impairment and restructuring costs (3.0) (30.0) - (3.7) - (36.7) Segment result 119.5 22.0 39.8 15.1 - 196.4 Unallocated corporate expenses (16.5) Operating profit 179.9 Net interest payable (13.0) Share of profit of associates 0.5 - 0.5 Profit before tax 167.4 Income tax expense (46.5) Profit for the year from continuing 120.9 operations Loss for the year from discontinued operations (6.4) Profit for the year 114.5 2 Segmental information by business segment (continued) Precious Metal Pharmaceutical Catalysts Products Materials Ceramics Eliminations Total £ million £ million £ million £ million £ million £ million Year ended 31st March 2005 (continued) Segment assets 907.2 237.1 326.5 155.7 (15.6) 1,610.9 Investments in associates - 4.7 - 0.1 - 4.8 Cash and deposits 78.7 Current and deferred income tax assets 4.2 Post-employment benefits net assets 45.2 Unallocated corporate assets 64.9 Total assets 1,808.7 Segment liabilities 142.3 79.9 22.1 32.3 (15.6) 261.0 Borrowings, finance leases and related swaps 448.3 Current and deferred income tax 56.9 liabilities Employee benefits obligations 48.2 Unallocated corporate liabilities 64.4 Total liabilities 878.8 Segment capital expenditure 64.4 13.4 16.8 2.8 - 97.4 Capital expenditure on discontinued operations 1.1 Corporate capital expenditure 2.4 Total capital expenditure 100.9 Segment depreciation and amortisation 36.0 13.2 9.6 6.0 - 64.8 Depreciation on discontinued 0.8 operations Corporate depreciation 2.0 Total depreciation and amortisation 67.6 Significant non-cash expenses other than depreciation 0.7 7.8 - - - 8.5 3 Effect of exchange rate changes on translation of foreign subsidiaries' operating profits Average exchange rates used for translation of results of foreign operations 2006 2005 US dollar / £ 1.79 1.85 Euro / £ 1.47 1.47 South African rand / £ 11.42 11.53 The main impact of exchange rate movements on the group's operating profit comes from the translation of foreign subsidiaries' profits into sterling. The one significant exception is the South African rand where the translational impact is more than offset by the impact of movements in the rand on operating margins. Consequently the analysis below excludes the translational impact of the rand. At this At last year's year's rates rates Effect £ million £ million £ million Catalysts 134.2 132.1 2.1 Precious Metal Products 62.2 61.2 1.0 Pharmaceutical Materials 33.8 33.5 0.3 Ceramics 21.3 20.8 0.5 Unallocated corporate expenses (16.8) (16.9) 0.1 Operating profit before impairment and restructuring costs 234.7 230.7 4.0 4 Impairment and restructuring costs 2006 2005 £ million £ million Impairment of UK Pgm Refining assets 6.0 - Closure of UK gold and silver bullion refinery - 13.2 Restructuring of UK Pgm Refining - 10.2 Restructuring of Colour Technologies following disposal of Pigments & - 6.6 Dispersions Restructuring of Ceramics following disposal of Pigments & Dispersions - 3.7 Acquisition integration costs for Activated Metals and - 1.0 Chemicals, Inc. Acquisition integration costs for Lancaster - 2.0 Synthesis 6.0 36.7 5 Income tax expense 2006 2005 £ million £ million United Kingdom 27.1 9.0 Overseas 35.4 37.5 62.5 46.5 The group's share of associated undertakings' taxation for the year ended 31st March 2006 was £ nil (2005 £ nil). 6 Earnings per ordinary share The calculation of earnings per ordinary share is based on a weighted average of 214,895,523 shares in issue (2005 - 217,005,241 shares). The calculation of diluted earnings per ordinary share is based on the weighted average number of shares in issue adjusted by the dilutive outstanding share options and long term incentive plan. These adjustments give rise to an increase in the weighted average number of shares in issue of 967,320 shares (2005 - 497,097 shares). Earnings per ordinary share before impairment and restructuring costs are calculated as follows: 2006 2005 £ million £ million Profit for the year attributable to equity holders of the 152.1 115.5 parent company Loss for the year from discontinued operations - 6.4 Impairment and restructuring costs 6.0 36.7 Tax thereon (1.8) (13.3) Profit for the year before impairment and restructuring 156.3 145.3 costs pence pence Basic EPS before impairment and restructuring 72.7 67.0 costs 7 Dividends A final dividend of 21.0 pence per ordinary share has been proposed by the board which will be paid on 1st August 2006 to shareholders on the register at the close of business on 9th June 2006. The estimated amount to be paid is £44.9 million. In accordance with IFRS accounting requirements this dividend has not been recognised in these accounts. 2006 2005 £ million £ million 2003/04 final ordinary dividend paid - 18.2 pence per - 39.5 share 2004/05 interim ordinary dividend paid - 8.7 pence per - 18.9 share 2004/05 final ordinary dividend paid - 19.0 pence per 40.9 - share 2005/06 interim ordinary dividend paid - 9.1 pence per 19.5 share 60.4 58.4 8 Share purchases During the year the employee share ownership trusts (ESOTs) purchased a further 1,893,000 shares at a cost of £25.3 million. In April 2005 the ESOTs paid £5.9 million for 590,000 shares which had been purchased in the last week of March 2005. 9 Net debt 2006 2005 £ million £ million Cash and deposits 133.0 78.7 Bank overdrafts (7.9) (14.7) Cash and cash equivalents 125.1 64.0 Current other borrowings and finance leases (82.4) (22.1) Non-current borrowings, finance leases and related swaps (454.7) (411.5) Net debt (412.0) (369.6) 10 Changes in equity 2006 2005 £ million £ million Equity at end of prior year 929.9 906.0 IFRS transition adjustment for financial instruments (note 11) 2.7 - Equity at beginning of year 932.6 906.0 Total recognised income and expense relating to the year 185.9 102.2 Dividends paid to equity holders of the parent company (60.4) (58.4) Dividends payable to minority interests (0.3) (0.5) Purchase of minority interest - (0.4) New share capital subscribed 5.3 3.2 Purchase of own shares - (16.3) Purchase of shares for ESOTs (25.3) (8.9) Share-based payments 7.6 7.0 Cost of shares transferred to employees (4.4) (4.2) Tax on items taken directly to or transferred from equity 3.5 0.2 Equity at end of year 1,044.5 929.9 11 IFRS transition adjustment for financial instruments The adjustment to the balance sheet at 1st April 2005 for the implementation of IAS 32, IAS 39 and IFRS 4 is: £ million Current available-for-sale investments 0.9 Other financial assets 4.4 Current trade and other payables (0.4) Other financial liabilities (0.5) Non-current borrowings, finance leases and related swaps (0.6) Deferred income tax liabilities (1.1) Net assets 2.7 Hedging reserve 2.1 Available-for-sale reserve 0.7 Retained earnings (0.1) Total equity 2.7 12 Acquisition of Davy Process Technology On 1st February 2006 the group acquired 100% of the issued share capital of Davy Process Technology Limited (DPT). DPT develops chemical process technologies and licenses them to customers in the oil, gas and petrochemical industries. Its revenue is generated through the licensing of its proprietary technologies and from the sale of associated basic engineering packages, catalysts, specialist equipment and other services. The value of the net assets acquired is provisional, pending detailed investigation into the liabilities acquired and obtaining a surveyor's report on a building acquired. The net assets acquired were: Carrying amounts under IFRS Estimated immediately fair value prior to Fair value at time of acquisition adjustments acquisition £ million £ million £ million Property, plant and equipment 11.4 (0.8) 10.6 Intangible assets - customer contracts and relationships - 6.7 6.7 Intangible assets - patents - 1.9 1.9 Non-current available-for-sale investments 3.4 - 3.4 Deferred income tax assets 0.8 (0.7) 0.1 Trade and other receivables 14.9 (0.3) 14.6 Cash and deposits 17.4 - 17.4 Trade and other payables (20.6) (1.5) (22.1) Current income tax liabilities (1.4) - (1.4) Non-current borrowings (1.4) - (1.4) Employee benefit obligations (3.7) (1.0) (4.7) Provisions (3.8) (2.6) (6.4) Total net assets acquired 17.0 1.7 18.7 Goodwill on acquisition 21.9 40.6 Satisfied by: £ million Purchase consideration - cash 39.9 Costs incurred - cash 0.7 40.6 Net cash outflow arising on acquisition £ million Cash consideration and costs 40.6 Cash and cash equivalents acquired 17.4 Net cash outflow 23.2 Borrowings acquired 1.4 Increase in net debt 24.6 The goodwill arising is attributable to future research and sales synergies arising from the combination. From 1st February 2006 its results are included in Catalysts and were: £ million Operating profit before amortisation of intangible assets recognised on acquisition by Johnson 1.6 Matthey Amortisation of intangible assets recognised on acquisition by (0.8) Johnson Matthey Operating profit 0.8 Net interest receivable 0.1 Profit before tax 0.9 Income tax expense (0.6) Net profit 0.3 13 Precious metal operating leases The group leases precious metals from banks for specified periods (typically a few months) and for which the group pays a fee. These arrangements are classified as operating leases. The group holds sufficient precious metal inventories to meet all the obligations under these lease arrangements as they fall due. At 31st March 2006 precious metal leases were £93.2 million (2005 £102.1 million). 14 Reconciliations from UK GAAP to IFRS Reconciliations of profit before tax and net assets Year ended 31st March 2005 Explanation £ million Profit before tax under UK GAAP 131.0 Discontinued operations a 14.9 Goodwill amortisation b 20.9 Goodwill amortisation on associates b 0.1 Development capitalised in the period c 5.4 Amortisation of capitalised development c (1.1) Share options and long term incentive plan d (4.1) Employee benefits e 0.3 Profit before tax under IFRS 167.4 31st March 1st 2005 April 2004 £ million £ million Net assets under UK GAAP 868.7 871.6 Goodwill amortisation b 20.9 - Goodwill amortisation on associates b 0.1 - Net capitalised development c 15.5 11.2 Bid value adjustment for post-employment schemes' assets e (2.0) (1.4) Additional accruals for other short term and long term employee e (3.5) (3.8) benefits Deferred tax adjustments g (10.7) (11.1) Dividends h 40.9 39.5 Net assets under IFRS 929.9 906.0 Explanation of major differences between UK GAAP and IFRS a) Under IFRS 5 - 'Non-current Assets Held for Sale and Discontinued Operations' the post tax profit of discontinued operations and the post tax loss on disposal of those operations have been disclosed as a single amount towards the bottom of the income statement. Also, under IFRS 1 - 'First-time Adoption of International Financial Reporting Standards' goodwill recognised under previous GAAP as a deduction from equity is not transferred to the income statement on disposal of the subsidiary. b) Under IFRS 3 - 'Business Combinations' amortisation of goodwill is no longer required but instead annual impairment reviews have to be performed. Johnson Matthey has elected to take advantage of the exemption allowed under IFRS 1 not to recalculate goodwill for all business combinations. Therefore the group has not adjusted its carrying amount of goodwill at 1st April 2004 (the group's date of transition) from that previously disclosed under UK GAAP. The main adjustment to goodwill on the balance sheet is to reverse all amortisation charged since 1st April 2004. 14 Reconciliations from UK GAAP to IFRS (continued) Explanation of major differences between UK GAAP and IFRS (continued) c) Under IAS 38 - 'Intangible Assets' the group has to capitalise all development expenditure which meets the recognition criteria laid down in the standard and then amortise the asset over its useful life once it is available for use. Under UK GAAP Johnson Matthey did not capitalise any development expenditure. Under IFRS, assets have been recognised in Catalysts Division for some development expenditure on heavy duty diesel catalysts and fuel cell components. The group believes that all other development expenditure is for incremental improvements to existing processes or for projects in an early stage of development and so no assets have been recognised. In addition, under IAS 38 any capitalised software that is not an integral part of the related hardware is reclassified from property, plant and equipment to intangible assets. d) Under IFRS 2 - 'Share-based Payment' the group has to recognise a charge to income in respect of the fair value of outstanding share options granted to employees and shares allocated to employees under the long term incentive plan after 7th November 2002. The fair value has been calculated using an adjusted Black-Scholes options valuation model and is charged to income over the relevant vesting periods, adjusted to reflect actual and expected levels of vesting. e) As Johnson Matthey had already adopted FRS 17, the recent UK GAAP standard for post-retirement benefits, the only adjustments needed for post-employment benefits under IAS 19 - 'Employee Benefits' are to put the net return on retirement benefits assets and liabilities into operating profit, to change the market value of the pension schemes' assets from mid-market value to bid value on the balance sheet and to move the deferred tax balances on the net post-employment assets / obligations to deferred tax. The other adjustments under IAS 19 are to accrue for paid annual leave and other short and long term employee benefits. f) Under IAS 28 - 'Investments in Associates' the group's share of the profit of its associates is shown on a post tax basis, unlike UK GAAP where the group's share of the operating profit of its associates was shown and the group's share of its associates' interest and tax were shown in interest and income tax expense respectively. g) Under IAS 12 - 'Income Taxes' the group is providing for deferred tax on capital gains rolled over, capital gains on intra group loans and capital losses which it did not provide for under UK GAAP. Other adjustments are to provide for deferred tax on the other IFRS accounting changes. Also, IAS 12 does not allow the offset of tax assets and liabilities and so the group has grossed up its current tax assets and liabilities and its deferred tax assets and liabilities. h) Under IAS 10 - 'Events After the Balance Sheet Date' dividends declared after the balance sheet date are not recognised as a liability on the balance sheet. i) Under IAS 17 - 'Leases' the group's precious metal leases are categorised as operating leases and so they, and the related inventory, are removed from the balance sheet and are reported as a note on the accounts. j) There are a number of other reclassifications on the balance sheet mainly to separate out current and non-current assets and liabilities in accordance with IAS 1 - 'Presentation of Financial Statements'. k) As required under IAS 21 - 'The Effects of Changes in Foreign Exchange Rates' exchange differences arising on translation of subsidiaries' results and net assets are now shown as a separate component of equity. The group has taken advantage of the exemption allowed in IFRS 1 to deem the cumulative translation difference for all overseas subsidiaries and associates to be zero at 1st April 2004. 14 Reconciliations from UK GAAP to IFRS (continued) Reconciliation of consolidated balance sheet as at 1st April 2004 IFRS UK GAAP adjustments IFRS Explanation £ million £ million £ million Assets Non-current assets Property, plant and equipment c 608.1 (11.9) 596.2 Goodwill 377.1 - 377.1 Other intangible assets c - 23.1 23.1 Investments in associates 4.6 - 4.6 Deferred income tax assets g 5.4 6.9 12.3 Available-for-sale investments 0.9 - 0.9 Post-employment benefits net assets e 31.5 11.6 43.1 Total non-current assets 1,027.6 29.7 1,057.3 Current assets Inventories i, j 417.3 (134.5) 282.8 Current income tax assets g - 0.9 0.9 Trade and other receivables 382.0 - 382.0 Available-for-sale investments 1.6 - 1.6 Cash and deposits 106.5 - 106.5 Other current assets j - 7.1 7.1 Total current assets 907.4 (126.5) 780.9 Total assets 1,935.0 (96.8) 1,838.2 Liabilities Current liabilities Trade and other payables e, h (316.6) 36.7 (279.9) Precious metal leases i (127.4) 127.4 - Current income tax liabilities g (42.3) (0.9) (43.2) Borrowings and finance leases (46.5) - (46.5) Short term provisions j - (20.3) (20.3) Total current liabilities (532.8) 142.9 (389.9) Non-current liabilities Borrowings and finance leases (454.5) - (454.5) Deferred income tax liabilities e, g (20.4) (21.2) (41.6) Employee benefits obligations e, j (28.0) (12.5) (40.5) Long term provisions j (27.0) 22.0 (5.0) Trade and other payables (0.7) - (0.7) Total non-current liabilities (530.6) (11.7) (542.3) Total liabilities (1,063.4) 131.2 (932.2) Net assets 871.6 34.4 906.0 Equity Share capital 220.6 - 220.6 Share premium 137.1 - 137.1 Shares held in employee share ownership trusts (28.8) - (28.8) Other reserves 4.4 0.5 4.9 Retained earnings 528.9 33.9 562.8 862.2 34.4 896.6 Minority interests 9.4 - 9.4 Total equity 871.6 34.4 906.0 14 Reconciliations from UK GAAP to IFRS (continued) Reconciliation of consolidated income statement for the year ended 31st March 2005 IFRS adjustments Discontinued UK GAAP operations Associates Other IFRS Explanation £ million £ million £ million £ million £ million Revenue 4,638.5 (12.3) - - 4,626.2 Cost of materials sold (3,878.5) 4.7 - - (3,873.8) Net revenues 760.0 (7.6) - - 752.4 Other cost of sales c, e (389.0) 5.5 - 10.9 (372.6) Gross profit 371.0 (2.1) - 10.9 379.8 Distribution costs e (84.1) 1.0 - 1.6 (81.5) Administrative expenses d, e (79.6) 0.7 - (2.8) (81.7) Goodwill amortisation b (21.0) 0.1 - 20.9 - Restructuring costs (36.7) - - - (36.7) Loss on sale of discontinued operations a (15.2) 15.2 - - - Operating profit 134.4 14.9 - 30.6 179.9 Net interest f (13.3) - 0.3 - (13.0) Net return on retirement benefits assets and e 9.2 - - (9.2) - liabilities Share of profit of associates b, f 0.7 - (0.3) 0.1 0.5 Profit before tax 131.0 14.9 - 21.5 167.4 Income tax expense g (44.0) (2.7) - 0.2 (46.5) Profit for the year from continuing 87.0 12.2 - 21.7 120.9 operations Loss for the year from discontinued a - (6.4) - - (6.4) operations Profit for the year 87.0 5.8 - 21.7 114.5 Attributable to: Equity holders of the parent company 88.2 5.8 - 21.5 115.5 Minority interests c (1.2) - - 0.2 (1.0) 87.0 5.8 - 21.7 114.5 14 Reconciliations from UK GAAP to IFRS (continued) Reconciliation of consolidated balance sheet as at 31st March 2005 IFRS UK GAAP adjustments IFRS Explanation £ million £ million £ million Assets Non-current assets Property, plant and equipment c 604.9 (11.9) 593.0 Goodwill b 354.2 20.9 375.1 Other intangible assets c - 27.4 27.4 Investments in associates b 4.7 0.1 4.8 Deferred income tax assets g 0.8 1.2 2.0 Available-for-sale investments 1.9 - 1.9 Post-employment benefits net assets e 33.5 11.7 45.2 Total non-current assets 1,000.0 49.4 1,049.4 Current assets Inventories i, j 416.5 (109.2) 307.3 Current income tax assets g - 2.2 2.2 Trade and other receivables 363.4 - 363.4 Available-for-sale investments 0.6 - 0.6 Cash and deposits 78.7 - 78.7 Other current assets j - 7.1 7.1 Total current assets 859.2 (99.9) 759.3 Total assets 1,859.2 (50.5) 1,808.7 Liabilities Current liabilities Trade and other payables e, h (332.8) 38.5 (294.3) Precious metal leases i (102.1) 102.1 - Current income tax liabilities g (10.1) (2.2) (12.3) Borrowings and finance leases (36.8) - (36.8) Short term provisions j - (26.5) (26.5) Total current liabilities (481.8) 111.9 (369.9) Non-current liabilities Borrowings and finance leases (411.5) - (411.5) Deferred income tax liabilities e, g (29.7) (14.9) (44.6) Employee benefits obligations e, j (34.6) (13.6) (48.2) Long term provisions j (32.2) 28.3 (3.9) Trade and other payables (0.7) - (0.7) Total non-current liabilities (508.7) (0.2) (508.9) Total liabilities (990.5) 111.7 (878.8) Net assets 868.7 61.2 929.9 Equity Share capital 219.5 - 219.5 Share premium 139.8 - 139.8 Shares held in employee share ownership trusts (37.7) - (37.7) Other reserves 6.3 - 6.3 Retained earnings 533.5 61.0 594.5 861.4 61.0 922.4 Minority interests c 7.3 0.2 7.5 Total equity 868.7 61.2 929.9 Accounting Policiesfor the year ended 31st March 2006 The group's significant accounting policies are: Basis of accounting and preparationThe accounts are prepared in accordance with International Financial Reporting Standards (IFRS) and interpretationsissued by the International Financial Reporting Interpretations Committee (IFRIC) or the Standing Interpretations Committee (SIC) as adopted by the European Union. For Johnson Matthey, there are no differences between IFRS as adoptedby the European Union and full IFRS as published by the International Accounting Standards Board and so the accounts comply with IFRS. The accounts are prepared on the historical cost basis, except for certain assets and liabilities which are measured atfair value as explained below. Previous accounts were prepared under UK Generally Accepted Accounting Principles (UK GAAP) and reconciliationsconverting the group's results from UK GAAP to IFRS for the year ended 31st March 2005 and the balancesheet at 1st April 2004 (the date of transition) are presented in note 14. Johnson Matthey has taken advantage of the exemption allowed under IFRS 1 - 'First-time Adoption of InternationalFinancial Reporting Standards' not to restate comparative information to comply with International Accounting Standard (IAS) 32 - 'Financial Instruments: Disclosure and Presentation', IAS 39 - 'Financial Instruments: Recognition and Measurement' and IFRS 4 - 'Insurance Contracts'. Note 11 details the adjustment to the balance sheet at 1st April 2005 for the implementation of these standards. The group has also adopted the amendment to IAS 19 - 'Employee Benefits', which permits the full recognition of actuarial gains or losses that occur in the year in the statement of recognised income and expense, and the amendment to IAS 39 and IFRS 4, which ensures that financial guarantee contracts are included in the balance sheet where appropriate. Basis of consolidationThe consolidated accounts comprise the accounts of the parent company and its subsidiaries, including employee shareownership trusts, and include the group's interest in associates. Entities over which the group has the ability to exercise control are accounted for as subsidiaries. Entities that arenot subsidiaries or joint ventures but where the group has significant influence (i.e. the power to participate in thefinancial and operating policy decisions) are accounted for as associates. The results and assets and liabilities of associates are included in the consolidated accounts using the equity methodof accounting. The results of businesses acquired or disposed of in the year are consolidated from or up to the effective date ofacquisition or disposal respectively. The net assets of businesses acquired are incorporated in the consolidated accounts at their fair values at the date of acquisition. Transactions and balances between subsidiaries are eliminated. No profit is taken on transactions between subsidiariesand the group's share of profits on transactions with associates is also eliminated. RevenueRevenue comprises all sales of goods and rendering of services at the fair value of consideration received orreceivable after the deduction of any trade discounts and excluding sales taxes. Revenue is recognised when it can be measured reliably and the significant risks and rewards of ownership are transferred to the customer. With the sale of goods this generally occurs when the goods are despatched or made available to the customer, except for sale of consignment products located at customers' premises where revenue is recognised on notification that the product has been used. With the rendering of services revenue is generally recognised by reference to the stage of completion as measured by the proportion that costs incurred to date bear to the estimated total costs. With royalties this generallyoccurs in accordance with the substance of the relevant agreement. Construction contractsWhere the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference tothe stage of completion. This is normally measured by the proportion that contract costs incurred to date bearto the estimated total contract costs. Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extentof contract costs incurred that it is probable will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that the total contract costs will exceed total contract revenue, the expected loss is recognised asan expense immediately. Foreign currenciesForeign currency transactions are recorded in local currency at the exchange rate at the date of transaction. Foreigncurrency monetary assets and liabilities are retranslated into local currency at the exchange rate at the balancesheet date. Income statements and cash flows of overseas subsidiaries, associates and branches are translated into sterling at theaverage rates for the year. Balance sheets of overseas subsidiaries, associates and branches, including any fair valueadjustments and including related goodwill, are translated into sterling at the exchange rates at the balance sheet date. Exchange differences arising on the translation of the net investment in overseas subsidiaries, associates and branches,less exchange differences arising on related foreign currency financial instruments which hedge the group's net investment in these operations, are taken to a separate component of equity. The group has taken advantage of the exemption allowed in IFRS 1 to deem the cumulative translation difference for all overseas subsidiaries, associates and branches to be zero at 1st April 2004. Other exchange differences are taken to operating profit. Research and developmentResearch expenditure is charged to the income statement in the year incurred. Development expenditure is charged to the income statement in the year incurred unless it meets the IFRS recognitioncriteria for capitalisation. When the recognition criteria have been met any further development expenditure is capitalised as an intangible asset. InterestInterest is recognised in the income statement in the year incurred. Property, plant and equipmentProperty, plant and equipment are stated at cost less accumulated depreciation and any provisions for impairment.Finance costs are not capitalised. Depreciation is generally provided using the straight line method to write off the cost less estimated residual valueover the useful life of the asset. The estimated useful lives vary according to the class of asset, but are typically: leasehold property 30 years (or the life of the lease if shorter); freehold buildings 30 years; and plant and equipment 4 to 10 years. Freehold land is not depreciated. GoodwillGoodwill arises on the acquisition of a business when the fair value of the consideration given exceeds the fair valueattributed to the net assets acquired. It is subject to annual impairment reviews. The group has taken advantage of the exemption allowed under IFRS 1 and so goodwill arising on acquisitions made before1st April 2004 is included at the carrying amount at that date less any subsequent impairments. Up to 31st March 1998goodwill was eliminated against reserves. Intangible assetsIntangible assets are stated at cost less any accumulated amortisation and any provision for impairment. They areamortised in accordance with the relevant income stream or by using the straight line method over their useful lives from the time they are first available for use. The estimated useful lives vary according to the specific asset but aretypically: 1 to 8 year for customer contracts and relationships; 3 to 8 years for capitalised software; 3 to 10 years for patents, trademarks and licences; and 3 to 8 years for capitalised development currently being amortised. Intangible assets which are not yet being amortised are subject to annual impairmentreviews. LeasesLeases are classified as finance leases whenever they transfer substantially all the risks and rewards of ownership tothe group. The assets are included in property, plant and equipment or capitalised software and the capital elements ofthe leasing commitments are shown as obligations under finance leases. The assets are depreciated on a basis consistentwith similar owned assets or the lease term if shorter. The interest element of the lease rental is included in the income statement. All other leases are classified as operating leases and the rentals payable are expensed on a straight line basis overthe lease term. GrantsGrants related to assets are included in deferred income and released to the income statement in equal instalments overthe expected useful lives of the related assets. Grants related to income are generally deducted in reporting the related expense. Precious metal inventoriesInventories of gold, silver and platinum group metals are valued according to the source from which the metal isobtained. Metal which has been purchased and committed to future sales to customers or hedged in metal markets is valuedat the price at which it is contractually committed or hedged, adjusted for unexpired contango or backwardation. Other precious metal inventories owned by the group, which are unhedged, are valued at the lower of cost and net realisable value using the weighted average cost formula. Other inventoriesNon precious metal inventories are valued at the lower of cost, including attributable overheads, and net realisablevalue. Except where costs are specifically identified, the first-in, first-out or weighted average cost formulae are used to value inventories. Derivative financial instrumentsThe group uses derivative financial instruments, in particular forward currency contracts and currency swaps, to managethe financial risks associated with the group's underlying business activities and the financing of those activities. The group does not undertake any trading activity in derivative financial instruments. Derivative financial instruments are measured at their fair value. Derivative financial instruments may be designated at inception as fair value hedges, cash flow hedges or net investment hedges if appropriate. Changes in the fair value of any derivative financial instruments that are not designated as or are not determined to beeffective hedges are recognised immediately in the income statement. Changes in the fair value of derivative financial instruments designated as fair value hedges are recognised in theincome statement, together with the related changes in the fair value of the hedged asset or liability. Changes in the fair value of derivative financial instruments designated as cash flow hedges are recognised in equity.If the hedged item results in the recognition of a non-financial asset or liability, the amount recognised in equity istransferred out of equity and included in the initial carrying amount of the asset or liability. Otherwise, the amount recognised in equity is transferred to the income statement in the same period that the hedged item is recognised in theincome statement. Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. Other financial instrumentsAll other financial instruments are initially recognised at fair value plus transaction costs. Subsequent measurement is as follows: • Unhedged borrowings are measured at amortised cost. • Available-for-sale investments are measured at fair value with changes in fair value recognised directly in equity. On disposal of the investment the amount recognised in equity will be transferred to the income statement at the trade date. • All other financial assets and liabilities, including short term receivables and payables, are measured at amortised cost less any impairment provision. Cash and cash equivalentsCash and deposits comprise cash at bank and in hand, including short term deposits with a maturity date of three monthsor less from the date of acquisition. The group routinely utilises short term bank overdraft facilities, which are repayable on demand, as an integral part of its cash management policy. Therefore cash and cash equivalents in the cashflow statement are cash and deposits less bank overdrafts. Offset arrangements across group businesses have been applied to arrive at the net cash and overdraft figures. TaxationCurrent and deferred tax are recognised in the income statement, except when they relate to items recognised directly inequity when the related tax is also recognised in equity. Current tax is the amount of income tax expected to be paid in respect of the taxable profits using the tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amount in the balance sheet. It is provided using the tax rates that are expected to apply in the period when the asset or liability is settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. No deferred tax asset or liability is recognised in respect oftemporary differences associated with investments in subsidiaries, branches and associates where the group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. Provisions and contingenciesProvisions are recognised when the group has a present obligation as a result of a past event and a reliable estimate can be made of a probable adverse outcome, for example for warranties, environmental claims and restructurings. Otherwise, material contingent liabilities are disclosed unless the transfer of economic benefits is remote. Contingentassets are only disclosed if an inflow of economic benefits is probable. The group considers financial guarantees of its share of the borrowings and precious metal leases of its associates to be insurance contracts. These are treated as contingent liabilities unless it becomes probable that it will be requiredto make a payment under the guarantee. Share-based payments and employee share ownership trusts (ESOTs)The fair value of outstanding share options granted to employees and shares allocated to employees under the long termincentive plan after 7th November 2002 is calculated using an adjusted Black-Scholes options valuation model and theresulting cost is charged to the income statement over the relevant vesting periods, adjusted to reflect actual and expected levels of vesting. The group provides finance to the ESOTs to purchase company shares on the open market. Costs of running the ESOTs arecharged to the income statement. The cost of shares held by the ESOTs are deducted in arriving at equity until they vest unconditionally in employees. Pensions and other post-employment benefitsThe group operates a number of contributory and non-contributory plans, mainly of the defined benefit type, which require contributions to be made to separately administered funds. The costs of the defined contribution plans are charged to the income statement as they fall due. For defined benefit plans, the group recognises the net assets or liabilities of the schemes in the balance sheet. Obligations are measured at present value using the projected unit credit method and a discount rate reflecting yields on high quality corporate bonds. Assets are measured at their fair value at the balance sheet date. The changes in scheme assets and liabilities, based on actuarial advice, are recognised as follows: • The current service cost is spread over the period during which benefit is expected to be derived from the employees' services based on the most recent actuarial valuation and is deducted in arriving at operating profit. • The interest cost, based on the discount rate at the beginning of the year and the present value of the defined benefit obligation during the year, is included in operating profit. • The expected return on plan assets, based on market expectations at the beginning of the year for returns over the entire life of the related obligation and amended for changes in the fair value of plan assets as a result of contributions paid in and benefits paid out, is included in operating profit. • Actuarial gains and losses, representing differences between the expected return and actual return on plan assets, differences between actuarial assumptions underlying the plan liabilities and actual experience during the year, and changes in actuarial assumptions, are recognised in the statement of recognised income and expense in the year they occur. • Past service costs are spread evenly over the period in which the increases in benefit vest and are deducted in arriving at operating profit. If an increase in benefits vests immediately, the cost is recognised immediately. • Gains or losses arising from settlements or curtailments are included in operating profit. Financial Calendar 9th JuneFinal ordinary dividend record date 25th July115th Annual General Meeting (AGM) 1st AugustPayment of final dividend subject to declaration at the AGM 22nd NovemberAnnouncement of results for the six months ending 30th September 2006 Cautionary StatementThis announcement contains forward looking statements that are subject to risk factors associated with, amongstother things, the economic and business circumstances occurring from time to time in the countries and sectors in which the group operates. It is believed that the expectations reflected in this announcement are reasonable but they may be affected by a wide range of variables which could cause actual results to differ materially from those currently anticipated. Johnson Matthey Public Limited CompanyRegistered Office: 40-42 Hatton Garden, London EC1N 8EETelephone: 020 7269 8400Internet address: www.matthey.comE-mail: [email protected] Registered in England - Number 33774 RegistrarsLloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DATelephone: 0870 600 3970Internet address: www.shareview.co.uk This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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