27th Feb 2007 07:03
Bodycote International PLC27 February 2007 BODYCOTE INTERNATIONAL PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2006 Financial highlights • Revenue from continuing operations increased by 18.6% to £558.6 million (2005: £470.9 million)• Headline operating profit 1 rose 17.6% to £79.7 million (2005: £67.8 million)• Operating profit £58.8m (2005: £61.0m)• Headline profit before tax 2 up 19.0% to £70.0 million (2005: £58.8 million)• Profit before tax £46.6m (2005: £52.7m)• Headline earnings per share 3 increased 18.5% to 17.3p (2005: 14.6p)• Basic earnings per share increased 5.5% to 13.4p (2005: 12.7p)• Return on capital employed improved to 10.8% (2005: 9.9%)• Full year total proposed dividend 7.0 pence per share (2005: 6.4p), up 9.4% Operational highlights • Increasing demand in key markets - aerospace, power generation, oil and gas and health sciences markets• 17 bolt-on acquisitions completed during 2006 for £86.3 million• Testing revenues increased significantly; Heat Treatment expanded into new geographies• Revenue from Strategic Partnerships and Long Term Agreements £105 million (2005: £97 million) Commenting on the results, John Hubbard, Chief Executive said: "2006 was another year of strong growth for Bodycote, with increasing demand inall of our most important markets and a number of new outsourcing agreementsfinalised from leading manufacturers. "We have advanced our strategy of significantly expanding our testing business,with 12 new acquisitions. We are also successfully implementing thegeographical expansion of the Group into developing economies, with heattreatment acquisitions in Brazil and Turkey and two new greenfield facilities inMexico, another one in India, a thermal spray facility and laboratory inSingapore and plans for greenfield laboratories in Bahrain, Saudi Arabia,Kazakhstan and Croatia. "Since the start of the current financial year, trading has been above thelevels in the same period in 2006, with a strong performance in Europe andsteady results in North America. Organic growth has been robust with 2006acquisitions contributing as expected. Notably, we entered 2007 with annualisedrevenue for the Testing SBU at approximately £170m. "We enter 2007 confident that we will deliver another successful performance." 1 expressed pre impairment of goodwill (£6.0m: 2005 £5.8m), amortisation ofacquired intangibles (£1.0m: 2005: £0.2m), share of associates interest and tax(£0.6m: 2005 £0.8m), impairment of equity investment in associate (£8.3m: 2005nil) and major facility closure costs (£5.0m: 2005 nil) 2 expressed pre impairment of goodwill (£6.0m : 2005 £5.8m), amortisation ofacquired intangibles (£1.0m: 2005 £0.2m), impairment of equity investment inassociate (£8.3m: 2005 nil), major facility closure costs (£5.0m: 2005 nil) andthe cost of early settlement of US $ private placement debt (£3.1m: 2005 nil) 3 a detailed reconciliation is provided in Note 4 CHAIRMAN'S STATEMENT Bodycote has had another year of successful trading with good growth in sales(up 18.6%) and headline* operating profits (ahead 17.6%), as well as completing17 bolt-on acquisitions with 52 facilities. Our return on invested capital hasincreased to 10.8%. We are expanding into new geographies, and broadening therange of services that we have to offer our customers. The Board is recommending a final dividend of 4.5p (2005: 4.05p), an increase of11.1%, to be paid on 5 July 2007 to all shareholders on the register at theclose of business on 8 June 2007. The total proposed dividend for 2006 istherefore up by 9.4% at 7.0p per share (2005: 6.4p) of which 2.5p per share(2005: 2.35p) was recognised in the 2006 results and is covered 2.5 times byheadline **earnings. Acquisition growth in Testing has been significant and we have consolidated andintegrated systematically. We clearly appreciate that we must maintain highstandards in our existing businesses and we are determined that there should bebalanced and controlled growth. Consequently, there will be an increasedemphasis on organic growth and garnering synergy benefits from recentacquisitions. Thermal Processing has benefited from good organic growth and an expansion intonew geographies, both through acquisition in Brazil and Turkey and investment innew facilities in China, Mexico and Singapore. This initiative will continue in2007 as we enter India and maintain our investment in supporting newertechnologies and processes. Towards the end of the year we decided to close four plants and write-down theequity investment in our associated company, SSCP Coatings. These measuresdemonstrate our commitment to act decisively with the Group's best long terminterests in mind but as a result statutory operating profit fell by £2.2mcompared to 2005. We also saw a reversal in the second half of the currencytranslation gains that we had seen in the first half. Bodycote now employs over 10,000 people and operates from 291 sites in 28countries. In order to manage such growth it is important that we invest in ourpeople and our systems. A significant amount of work has been done on enhancingsafety systems and the training and development of our people throughout theGroup. These are now an integral part of our management systems. The current board has been unchanged since January 2003. We have decided toincrease the membership from seven to nine directors, with four executives andfour independent non executives under a non executive chairman. The expandedand enhanced Board will reflect the changing requirements of the business goingforward and will be in line with the provisions of the Combined Code. RichardScholes will be retiring by rotation at the AGM having served for nine years.We had selected a replacement for him as chairman of the Audit Committee but inJanuary we were informed that he could not join the Board. As a result MrScholes will be proposed for re election. He will, however, step down as adirector upon the later of our interim results being announced and a replacementAudit Committee Chairman being appointed. We thank him for agreeing to staybeyond his current term. The search for his replacement is well underway. Alsofollowing the 2007 AGM Hans Vogelsang has agreed to take on the role of SeniorIndependent Non-Executive Director. In 2008, I will have served 14 years on theBoard, 6 of them as Chairman and I will be retiring at the 2008 AGM. You can beassured, however, that I remain fully committed to the continued success ofBodycote and ensuring that it has a Board with the right balance of skills andexperience. A search for a successor has commenced. After a strategic review in early 2005, we set ourselves ambitious 5 yeartargets. New five year targets are set annually on a rolling basis (see tableon page 2 of the business review). Management incentives are geared to valuecreation for shareholders based on this plan and stretch targets establishedeach year by the Board's Remuneration Committee. Bodycote has a strong platform on which to develop the business and we areconfident for the Group's prospects in 2007. We have high quality committedpeople and a clear understanding of our markets and the drivers for profitablegrowth. Our balance sheet is strong, with an appropriate level of gearingtaking into account the cyclical characteristics of some of our businesses, ourneed for capital expenditure and our plans for growth, both organically and byacquisition. The Business Review which follows gives a comprehensive summary of ouractivities in the year and enables shareholders to appreciate more fully how wehave performed in our own business environment and how we meet the challenges.I commend it to you. J A S Wallace27 February, 2007 * For reconciliation of headline operating profit to statutoryoperating profit please refer to page ( ) of the Group Business Review ** For reconciliation of headline earnings to basic earnings please referto Note 4 2006 GROUP BUSINESS REVIEW Operations Bodycote provides Thermal Processing and Testing services to manufacturers invirtually every sector of the world economy. From 291 facilities in 28countries, more than 10,000 employees provide high quality services to over60,000 customers. In line with our strategy to grow the Testing StrategicBusiness Unit (SBU) rapidly, this business delivered 26% of Group sales comparedto 18% in 2005. A continued increase in this proportion is expected in 2007.The SBU is organised into two Divisions: Materials, Engineering & Technology andMeasurement (METM) and Health Sciences/Environmental (HSE). The ThermalProcessing SBU delivered 74% of Group sales compared to 82% in 2005 and isorganised into two Divisions: Heat Treatment and Hot Isostatic Pressing (HIP). Competitive environment In the western hemisphere we are the clear leader in Thermal Processing and havea unique multi-disciplinary presence in the Testing market. In both ThermalProcessing and Testing, Bodycote predominantly competes with local, privatelyowned companies and manufacturers' captive facilities. Both supply and demandare very fragmented with hundreds of providers servicing thousands of customers.We have developed a competitive advantage over local entrepreneurs through ourquality systems, extensive knowledge base, breadth of technology, flexiblecapacity and broad range of services. Our proven track record of supplyingThermal Processing and Testing services to many of the world's most respectedmanufacturers is testament to our success in outsourcing and subcontracting formanufacturers, who need to reduce costs, whilst at the same time being confidentthat their critical components are processed to specification. Our HIP businessoperates in a much smaller total market. We have about 60% of westernhemisphere capacity and few manufacturers invest in this technology, principallybecause of its high capital cost and the cyclical nature of demand. Thecompetitors we have vary from smaller private companies to large corporations. Regulatory environment As a service provider to virtually all market sectors and operating in manycountries, we are subject to a multitude of quality, safety, environmental andregulatory requirements. We continuously monitor changes in laws, regulationsand standards, adopting systems and policies to remain compliant. Although thiseffort is costly it clearly differentiates us in the market place. Customershave confidence in our quality and the sustainability of our services. Macro-economic environment The countries we operate in are generally experiencing positive economicconditions, with inflation largely under control. Energy prices increased torecord highs during 2006. Recently we have seen some reduction in natural gasprices but they remain at historically high levels, whilst electricity priceshave continued to rise and are not expected to moderate before the second halfof 2007. Materials such as nickel, chrome and molybdenum used in the basketsand fixtures, have significantly increased in price but we have successfullyrecovered these costs. As a service provider to manufacturers we are subject tothe cyclicality of our customers' demand. Currently the only significantsector we serve that is exhibiting softness is automotive in North America andsome parts of Europe. However, we are being successful in offsetting its impactby winning new business in our traditional territories and expanding into newgeographies. Aerospace, power generation, oil & gas and health sciences demandcontinues to be robust. We have, as part of our strategic plan, been increasingthe contribution from our Testing business, as we believe it will give animproved return on capital employed and be less cyclical than ThermalProcessing. Long term strategy and business objectives After a thorough review in early 2005, we adopted a strategy which incorporatesthree key initiatives, each aiming to enhance shareholder value and accelerategrowth: • Increase Testing to about half of Group sales• Expand the Group into developing manufacturing geographies• Intensify Outsourcing initiatives We measure our performance against this strategy using the following financialand non financial indicators: Key performance indicators 2006 2005 Five Year Target Financial Return on capital employed (1) 10.8% 9.9% Mid teens % Return on sales (2) 14.3% 14.4% High teens % Organic sales growth % (3) 5.5% 5.3% Mid to high single digit % People costs as a percentage of sales (4) Thermal Processing 40.7% 41.8% 40% Testing 51.8% 50.7% 50% Capital expenditure/depreciation ratio (5) 1.2x 1.1x 0.8 - 1.3x Non financial Utilisation (Heat Treatment only) (6) 72% 71% >80% ISO 14001/17025 compliant facilities (7) 184 134 All facilities Accident frequency (8) 2.2 2.1 Zero Our most important indicator is the improvement in return on capital employed(ROCE) and further progress has been made in 2006 towards our 5 year target.The HIP division and Testing SBU both continue to be above this target and henceour primary focus for improvement is in Heat Treatment. Overall return on salessaw a modest reduction despite increases in both Heat Treatment (+0.6%) and HIP(+5.9%). As anticipated, mix changes and additional infrastructure costs haveresulted in a reduction of margins in the Testing SBU. Organic sales growth wasagain in our target range. People costs are the Group's largest expense.Pleasingly Thermal Processing saw a reduction in these costs to 40.7% of salesand is within sight of our target of 40%. Testing, however, deterioratedslightly due to the impact of acquisitions. Capital expenditure was within ourtarget range but was above the level of depreciation, reflecting the Group'sestablishment of new facilities in emerging markets and our commitment toadditional HIP capacity in the US and Germany, to support growing aerospace andautomotive demand. We expect to benefit from this investment in future years.The key metric to improve profitability in heat treatment is capacityutilisation and 2006 saw further progress towards our goal of >80%. Significantprogress has been made during 2006 towards our target of having all the Group'sfacilities meet environmental standard ISO 14001 or ISO 17025 with 63% of sitesnow accredited. This is the third year that Bodycote has been collectingstatistics on accidents in all parts of the Group. Although significantimprovements have been made over three years, the ultimate target of having zeroaccidents has not yet been met. Further initiatives to reduce the number ofaccidents were put in place during 2006 and it is expected that the results ofthese will begin to feed through to the statistics in 2007. Definitions (1) Headline* operating profit as a percentage of average capitalemployed. Capital employed includes tangible and intangible assets includingall previously amortised/impaired goodwill and all non-interest bearing assetsand liabilities. (2) Headline* operating profit as a percentage of revenue fromcontinuing operations. (3) Year on year increase in revenue from continuing operationsexcluding revenue from acquisitions made within the prior twelve months. (4) The salary and benefit costs of all employees as a percentage ofrevenue from continuing operations. (5) Net capital expenditure divided by depreciation (6) Actual revenues expressed as a percentage of theoretical maximum revenueassuming that heat treatment facilities operate 24 hours per day, 365 days peryear. (7) The number of facilities holding registrations for ISO 14001 or ISO17025. (8) Accident frequency - the number of accidents x 200,000 (approximating100 man years), divided by the total hours worked. Financial Results for 2006 Revenue (a) Headline operating profit* Margin 2006 2005 2006 2005 2006 2005 £m £m £m £m % %Heat Treatment 375.0 349.2 50.3 44.8 13.4 12.8HIP 38.9 35.2 12.8 9.5 32.9 27.0Thermal Processing 413.9 384.4 63.1 54.3 15.2 14.1Testing 144.7 86.5 21.3 16.3 14.7 18.8Head office costs - - (4.7) (2.8) - -Group Total 558.6 470.9 79.7 67.8 14.3 14.4 Note (a) Revenue from continuing operations after deducting inter-segment sales. • Headline operating profit is derived as follows: 2006 2005 £m £m Headline operating profit 79.7 67.8Share of associates' interest and tax (0.6) (0.8)Amortisation of acquired intangibles (1.0) (0.2)Goodwill impairment (6.0) (5.8)Impairment of equity investment in associate (8.3) -Major facility closure costs (5.0) -Operating profit from continuing operations per financial statements 58.8 61.0 ** A reconciliation of headline earnings is given in Note 4 Bodycote has continued to show strong growth in 2006 with sales increasing by18.6% to £558.6m (2005: 10.4%, £470.9m). Organic sales accounted for 5.5% ofthis improvement (2005: 5.3%) and acquisitions for 13.1% (2005: 4.6%). Movementin exchange rates on translation of overseas sales was less than 1% this year(2005: 1.0%). We have seen increasing demand in several key markets, most notably aerospace,power generation, oil & gas and health sciences. Outsourcing (StrategicPartnerships and Long Term Agreements) provided £8m of additional sales,resulting in a total of £105m in 2006 (2005: £97m). Some notable outsourcingagreements concluded in the year were with Land Rover, SNECMA, Honeywell, TRW,ZF, American Axle, Haering Polska, SKF, Michelin, and GM. Outsourcing salescontinue to account for approximately 20% of Group sales. Headline* operating profit increased by 17.6% to £79.7m in 2006 (2005: 22.2%,£67.8m). The impact of exchange rates on translation of overseas profits wasless than 1% this year (2005: 1.1%). Although headline* operating profit improved by £11.9m, operating profit fell by£2.2m largely due to the impact of the cost of major facility closures (£5.0m)and the write down of the Group's investment in SSCP (£8.3m). Overall, our headline* operating margin decreased slightly from 14.4% in 2005 to14.3% in 2006. Whilst the Heat Treatment business saw its headline* marginincrease to 13.4% (2005: 12.8%) and HIP to 32.9% (2005: 27.0%), Testing saw itsmargin fall to 14.7% (2005: 18.8%). This is largely attributable to the recentacquisitions in the environmental and measurement solutions segments, whichoperate at a lower margin than the Testing SBU average, although with a returnon capital within our target range. In addition, the SBU saw substantialinvestment in its infrastructure to support the rapid growth. A charge of £1.0m has been accrued in head office for a share-based long termincentive plan (LTIP) for senior managers designed to incentivise growth inprofit and return on capital employed. The LTIP was approved by shareholders atthe 2006 AGM. The amount charged reflects the expected fair value, spread overthe three year vesting period, based on current progress towards plan targets. As part of our plans to increase activity in Asia, we have put in place a seniormanagement team to develop our business there. The increased expenditure,included in head office costs, was £0.5m. During the year we acquired seventeen businesses at a cost of £86.3m. Twelvebusinesses were acquired by the Testing SBU, in line with our strategy toincrease its size both geographically and in terms of service offering. Four ofthe acquired businesses were in the Thermal Processing SBU, and one was a smallIS service provider (the Group already being its major customer) to strengthenour in-house IS and IT capability. Much effort has been put into developing ourintegration approach to allow us to bring newly acquired companies into ournetwork quickly and maximise synergies. Review by Strategic Business Unit (SBU) Thermal Processing SBU Thermal Processing delivered sales of £413.9m, an increase of 7.6%. This wassplit 5.2% organic, 2.7% acquired and a reduction of 0.3% in respect of foreignexchange movements. ROCE improved to 9.9% (2005: 8.4%). Margins improved to15.2% (2005: 14.1%). We acquired four businesses representing 14 facilities ata net cost of £20.4m. Two of these acquisitions moved us into the importantdeveloping economies of Brazil and Turkey. The impact of rapid energy pricerises has abated. As expected we have been able to recover almost all of theassociated cost increases, although there is a time lag and therefore marginsare impacted. As part of our continuous review of operations, we sold our lossmaking anodising plant in Espoo, Finland and our St Louis heat treatmentbusiness. A further seven heat treatment facilities have been closed, with aproportion of the work and much of the equipment transferred to other locations.Four of these, two in the USA and two in UK, are major in nature and for whicha closure provision of £5.0m has been established. Asset realisations areexpected to exceed cash closure costs. Heat Treatment Division The division delivered 7.4% growth with sales of £375.0m, which accounts for 67%of the group revenues (2005: 74%). ROCE was 8.5% (2005: 7.4%). Marginsincreased to 13.4% (2005: 12.8%). The UK continued to see strong demand from power generation, aerospace and oil &gas customers resulting in 6.5% organic growth. The rationalisation offacilities (Aldridge, Walsall, Sittingbourne and Gosport) into other sites isexpected to be completed in early 2007 and deliver improved customer service andfinancial results. The acquisition of Ceramet has facilitated the start up of aThermal Spray/Slurry Coating facility in Singapore in support of our oil & gasand aerospace customers. This technology transfer will start production in thefirst half of 2007 along with a new Testing laboratory at the same location.Our Nordic group continues to perform well and organic sales growth was 5.6%.In Central Europe our facilities delivered mixed results, with improvements inthe German/Dutch markets but deterioration in the Alpine countries. Organicsales growth was a creditable 5.9%, overall. Our position in the Ruhr regionwas enhanced by the acquisition of SGB in Solingen. Our Eastern Europeanfacilities continue to grow, but margins have been reduced as we introduceBodycote's quality, safety and business systems to meet the expectations ofwestern manufacturers moving into the region in search of low cost products. Weexpect a solid first full year in the group from the acquisition of 60% of Istasin Turkey. France/Belgium continued to show improved sales (4.0% organicgrowth) and margins (an increase of 2.1% points) despite modest automotivedemand. We expect these challenging automotive conditions to lead to increasedoutsourcing opportunities in 2007. Buoyant aerospace demand is also generatingoutsourcing opportunities. North America saw organic sales grow 3.4% and margins improved by 0.6% points.Efforts to turn around two automotive focused facilities (Maple Heights, Ohioand Lansing, Michigan) proved fruitless and we decided to close these. Inaddition, we sold our St Louis facility, which was profitable, but was in ashrinking market and required significant investment. We will continue toreview our various locations in light of our strategy to provide value addedservices with growth potential. In that vein, our investment in low pressurecarburizing capability in Livonia, Michigan (used particularly for newgeneration automotive transmission gears) commenced production at the end of2006 as forecast. Our success in meeting GM quality and service expectationshas led to the award of two more contracts for a similar facility in Mexico andincreased capacity in Livonia, both of which will come on line in early 2008.The latter part of the year saw us enter, for the first time, South America withthe acquisition of Brasimet, Brazil's largest and most respected heat treatmentgroup (six locations). The integration programme is going very well as theyalready had sophisticated quality, IS and management systems similar to those inuse in Bodycote. We have found the Brazilian customer base to be highlycomplementary to that of the rest of our international base. We will also becommercialising a materials testing laboratory which Brasimet recentlyestablished and which creates an entry point into South America for our TestingSBU. Our greenfield facility in Wuxi, China started generating sales in December. Weanticipate our first year in production will generate a modest operating profit. HIP Division The division achieved 11.2% organic growth on the back of strong demand fromaerospace, power generation and oil & gas customers, with sales of £38.9m whichamounted to 7% of the Group (2005: 7%). ROCE increased from 19.7% in 2005 to28.0% and this balances the disappointing performance experienced when endmarkets were at a cyclical low in 2002/2003. Margins were 32.9% (2005: 27.0%).Additional capacity from moth-balled units has been added in Princeton,Kentucky and Haag, Germany. Aerospace led the growth in North America whilepower generation demand was the key driver of European growth. Densal(R) hasbeen gaining new market applications in Europe and North America, but growth wasmodest in 2006 due to capacity constraints which will be addressed by theavailability of an additional unit by mid 2007. Testing SBU Testing delivered sales of £144.7m, an increase of 67.3%. This was split 6.6%organic, 59.0% acquisition and 1.8% due to foreign exchange movements. ROCEeroded slightly to 20.0% although margins slipped to 14.7% (2005: 18.8%) due toa change in business mix as a result of the various acquisitions and the cost ofadditional infrastructure to support the much larger business. We acquired 12Testing businesses representing 38 laboratories and a small IS service providerfor a net cost of £65.9m. These acquisitions took us into several newgeographies (Eire, Hong Kong and Australia) and increased our presence in firetesting and certification as well as adding a new service, MeasurementSolutions. The ROCE of these businesses is in line with our expectations.Several of the acquisitions are in sectors with lower margins, although they areat an equivalent level to similar activities already in the Group. This changein mix has led to a lower blended margin in the SBU. Based on our historicalperformance, we anticipate that we will be able to increase the margins of thenewly acquired businesses by bringing operational systems to bear and byleveraging the synergies of the Group. We expect to see the benefits in 2007.In line with our strategy to grow Testing relative to the size of ThermalProcessing, the SBU now represents 26% of the Group's increased revenue (2005:18%). Testing is a single SBU but to provide enhanced information in this review wehave split its activities into two core divisions. Materials, Engineering & Technology and Measurement Division (METM) The division delivered 55.5% growth, with sales at £99.6m, which accounts for18% of group sales (2005: 14%) with a ROCE of 20.1%. Margins were 14.3% (2005:20.5%). Oil & gas, aerospace and construction demand was robust across allregions, with North America and Middle East particularly strong, posting growthof 39% and 53% respectively. We invested in a number of key market segments tostrengthen our leadership, e.g. two fatigue testing laboratories (Canada and UK)and two advanced high temperature & corrosion laboratories (Czech Republic andUS). The purchase of Staveley laboratories in December, with four sites, hasstrengthened our market coverage in the US. Our Middle East laboratories arebenefiting from the major government backed civil infrastructure investmenttaking place in the region. The acquisition of the Warrington Fire business(seven sites in four countries) significantly expands our existing capabilitiesin this market segment. Similarly, our North American automotive position wasexpanded by the addition of ACT Laboratories with two locations in Michigan. Wecontinued our investment in engine testing and development for trucks andautomotive compliance, where demand is driven by ever tightening environmentalstandards. Sales for our first year of operation in Asia Pacific were £1.2m. Inaddition to the laboratories joining the Group with the Warrington Fireacquisition (Hong Kong and Australia), we have created a business developmentteam based in Singapore to intensify our effort to enter this important marketin support of migrating global manufacturers and local companies. During theyear, Measurement Solutions was added to the division, based initially on abusiness acquired from Saab Aerospace and delivered sales of £11m. The businesscurrently includes eleven laboratories in four countries (Germany, Denmark,Sweden and Finland) with a plan to create a pan-European value added service forour existing customer base, particularly in the aerospace, defence, telecoms andpharmaceutical sectors. The business won a €1m per annum outsourcing contract,starting in 2007, from a large Danish pharmaceutical business. Health Sciences/Environmental (HSE) Division The division delivered 101% growth, with sales at £45.2m, which accounts for 8%of the group (2005: 5%) and ROCE was 20.0%. Margins were 15.6% (2005: 14.1%).The UK pharmaceutical and food markets progressed well. We acquired sixbusinesses in the UK and Eire at multiples which met our demanding acquisitioncriteria (SEAL Land & Water, Norpath, Foodscan, Tetra and Prova R&D all in theUK and Consult-Us in Eire) thus establishing a strong network of facilities insupport of both UK pharmaceutical manufacturers and food retailers. Ourcombination of food testing and advisory enables a unique service offering inthe market. Our North American operations performed well in Ontario and Oregonbut were disappointing in Quebec. The acquisition of Norwest in Canada and WestCoast Analytical in California substantially expanded our network, opening upcross-selling opportunities. North American markets were buoyant in the civilsector while UK asbestos testing demand was soft. The acquisition of Norwestadded services in key market segments, including environmental impact studiesfor the Albian oil sands development projects. Associated Company SSCP Coatings Sarl (SSCP) We have been participating in the consolidation of the Physical VapourDeposition (PVD) market by way of our investment in SSCP following the sale ofour own PVD interests to them in 2005. From a customer perspective SSCPcontinues to provide high quality coatings with excellent service and technicalknowledge. However, it was decided that we should write off our equityinvestment (£8.3m) in SSCP at year end following SSCP's poor trading performanceand subsequent refinancing. The consequent infusion of funds allows SSCP tocontinue normal operations, but comes at a cost and could dilute the minorityequity shareholders if we do not subscribe for warrants to be issued in March.If Bodycote elects not to buy warrants, the Group's holding would be diluted to9.25% in the event of a full exercise. We remain hopeful that, over time, thecompany will recover. Bodycote and SSCP continue to jointly market theirsynergistic heat treatment and PVD services. Financial Review Revenue Group revenue from continuing operations, as reported for the year, was £558.6m,an increase of £87.7m (18.6%) on 2005 (£470.9m). Revenue growth for HeatTreatment was £25.8m (up 7.4% on 2005), for HIP £3.7m (up 10.5%) and for Testing£58.2m (67.3% on 2005). Organic growth accounted for £25.9m (30% of totalgrowth) of the increase and acquisitions for £61.6m (70% of total growth). Thenet impact of foreign currency movements on revenues were negligible, withforeign currency losses in Euros and US Dollar being offset by gains in theCanadian Dollar. Operating Profit and Margins Demand was robust in most of our markets in 2006 with the notable exception ofautomotive in North America and France. On the other hand, energy and commodityprices rose considerably and had a significant impact on our ability to improvemargins, particularly in heat treatment, notwithstanding the fact that theseincreased costs were essentially completely recovered via higher selling prices.Consequently, headline* operating profit increased 17.6%. In Heat Treatment,margins improved from 12.8% to 13.4% with headline* operating profits up 12.3%.HIP continued to benefit from robust aerospace and power generation demand andis much less energy intensive than heat treatment. Consequently margins movedahead from 27.0% to 32.9% and headline* operating profit increased by 34.7%.Testing headline* operating profit increased 30.7% but margins fell back from18.8% to 14.7% due to a combination of the mix of businesses acquired andadditional infrastructure costs. Consequently the overall Group operating marginwas slightly lower at 14.3% (2005:14.4%). Interest The net finance charge for the Group was £12.2m compared to £8.3m in 2005. Theincrease was primarily due to a one-off make whole payment of £3.1m as a resultof the early settlement of $80m of privately placed senior notes at 7.79% whichwere originally due in December 2009 and, in addition, higher average net debtlevels resulting from the 2006 acquisitions. Profit before tax Headline* profit before tax was £66.9m compared to £58.7m in 2005. Profitbefore tax was £46.6m compared to £52.7m in 2005. Taxation Taxation was £2.7m for the year, £9.1m lower than in 2005. The effective taxrate for the Group, before impairment of goodwill and amortisation of acquiredintangibles (which are generally not allowed for tax) and before non recurringitems was 7.7% (2005: 20.2%). In the year, the Group was able to reassess thetax effectiveness of treasury management in 2003 and 2004 and has also benefitedfrom a settlement with the relevant tax authority in respect of the Lindbergacquisition in 2001. These items have reduced the tax liability by £11.2m.Excluding these two items, the adjusted underlying effective tax rate would be19.9%. Earnings per share Basic earnings per share for the year were 13.4p (2005: 12.7p) and dilutedearnings per share were 13.4p (2005: 12.7p). Headline earnings per share, afteradding back the post-tax effect of goodwill impairment, amortisation of acquiredintangibles, major facility closure costs, impairment of equity investment in anassociate and prior year tax benefits, rose by 18.5% to 17.3p (2005: 14.6p). Dividend The Board has recommended a final dividend of 4.5p bringing the total dividendin 2006 to 7.0p (2005: 6.4p) an increase of 9.4%. The dividend is covered 2.5times by headline** earnings (2005: 2.3 times). Capital Structure Our balance sheet at 31 December 2006 can be summarised as set out in the tablebelow: Assets Liabilities Net assts £m £m £m Property plant and equipment 448.4 0.0 448.4Goodwill and intangible assets 212.3 0.0 212.3Current assets and liabilities 154.0 (128.5) 25.5Other non-current assets and liabilities 16.8 (9.9) 6.9Post retirement obligations 0.0 (32.8) (32.8)Deferred tax 23.2 (68.7) (45.5) Total before net debt 854.7 (239.9) 614.8 Net debt 34.7 (195.6) (160.9) Total as at 31 December 2006 889.4 (435.5) 453.9 Total as at 31 December 2005 893.4 (459.9) 433.5 Net assets increased by 4.7% to £453.9m (2005: £433.5m) and net assets per shareby 4.4% to £1.41 (2005:£1.35). The main movements in the balance sheet were anincrease in goodwill and intangible assets of £54.4m arising from theacquisitions completed during the year, an increase in net current assets of£9.1m and an increase in net borrowings of £52.4m. Net debt Group net debt was £160.9m (2005: £108.5m). During the year additional loans of£13.4m were drawn down under committed facilities and $80m of senior notes wererepaid early. The Group continues to be able to borrow at competitive rates andtherefore currently deems this to be the most effective means of funding. In2006, a seven year committed loan facility of €125m was completed. Cash flow After allowing for capital expenditure, interest and tax the Group generatedfree cash flow of £41.0m compared to £42.1m in 2005 and cash flow from operatingactivities was £109.2m compared to £95.7m in 2005. The reduction in free cashflow was primarily due to increased capital expenditure. There has beencontinued focus on cash collection although debtor days increased by one to 70.Acquisitions resulted in net cash outgoings of £86.3m. Capital Expenditure Net capital expenditure for the year was £55.4m compared to £44.1m in 2005. Themultiple of net capital expenditure to depreciation was 1.2 times as the Groupexpands into emerging markets and continues to take advantage of outsourcingopportunities. With buoyant demand in a number of the Group's markets, stronggrowth expected in Testing and the major investment in HIP capacity in the USA,the Group anticipates a ratio of 1.3 times in the coming year. Major projects undertaken during the year included the establishment of acombined Thermal Spray and Testing facility in Singapore, expansion of the HIPfacility in Surahammer, Sweden, additional Kolsterising capacity in southernGermany and France, ground breaking for a greenfield heat treatment plant inSilao, Mexico, additional aerospace focused vacuum heat treatment capacity inFrance, establishment of new laboratories in Dubai, Saudi Arabia, Manchester, UKand Monterrey, Mexico along with additional heavy duty engine testing cells inCanada and new fatigue testing equipment in North America and the UK. Liquidity and investments Bodycote is financed by a mix of cash flows from operations, short-termborrowings, longer-term loans and finance leases. Bodycote's funding policy isto ensure continuity of finance at reasonable cost, based on committedfacilities from several sources, arranged for a spread of maturities. At 31December 2006 Bodycote had £125.8m of unutilised committed facilities withaverage remaining life of 4.4 years. The Group's principal committed facilityof £225m (£84.7m of which was unutilised at 31 December 2006) has a maturity of3.6 years. During the year the Group completed a €125m loan facility committeduntil July 2013 (£41.1m of which was unutilised at 31 December 2006). Part ofthese proceeds have been used to repay US $80m of senior notes. Bodycote also has access to uncommitted and short-term facilities, usedprincipally to manage day-to-day liquidity and working capital requirements. Inaddition pooling, netting and concentration techniques are used to minimiseborrowings. Treasury policy Treasury activities have the objective of minimising risk and are centralised inthe Group's head office. Group Treasury is responsible for management ofliquidity and interest and foreign exchange risks, operating within policies andauthority limits approved by the Board. The use of financial instrumentsincluding derivatives is permitted when approved by the Board, where the effectis to minimise risk to the Group. Speculative trading of derivatives or otherfinancial instruments is not permitted. Bodycote has operations in 28 countries. Assets are hedged where appropriate,by matching the currency of borrowings to the net assets. The Group principallyborrows in US Dollars, Euro and Swedish Krona, consistent with the location ofthe Group's non-sterling assets. These borrowings are at both fixed andfloating interest rates and the Group will use derivatives where appropriate, togenerate the desired effective currency and interest rate exposure. Interest rate fluctuations on indebtedness are managed by using a combination offixed and floating rates. Consideration is given to entering into interest rateswaps and forward rate agreements. The policy objective is to have a targetproportion of net borrowings hedged at all times. At the end of December 2006 4% of borrowings were at fixed rates for an averageperiod of 4.6 years. It is Group policy to hedge exposure to cash transactions in foreign currencieswhen a commitment arises, usually through the use of foreign exchange forwardcontracts but not to hedge exposure for the translation of reported profits. Defined Benefit Pension Arrangements The Group has defined benefit pension obligations in the UK, France, Germany,Sweden, USA and Brazil which are all reflected in the Group balance sheet. Inthe UK the Group has a final salary scheme, which was closed to new members inApril 2001 but continues to accrue benefits for current employee members, atotal of just over 300 people. The deficit as calculated by the scheme actuaryat 31 December 2006 using the principles of IAS 19 is £23.3m. In France weoperate a plan which pays a cash lump sum on retirement and also for longservice. The plan is open to new employees but by its nature is not mortalitydependent. It is unfunded and the IAS 19 liability at 31 December 2006 was£4.1m. The Group's heat treatment business in Germany has inherited severaldefined benefit arrangements. They are all unfunded and are closed to newmembers but existing members continue to accrue benefits. The IAS 19 liabilityat 31 December 2006 was £2.6m. In Sweden, the Group has three defined benefitarrangements. One is funded and two are unfunded and each is open to newemployees. The IAS 19 liability at 31 December 2006 was £2.4m. The companysponsors five defined benefit pension arrangements in the USA which wereinherited with the acquisition of Lindberg and had a total IAS 19 deficit at 31December 2006 of £0.5m. Following the sale of the St Louis facility and closureof Lansing, there are no further accruals on any of these plans. Brasimetoperates a defined benefit plan for three senior members of staff. It is fullyfunded and the members continue to accrue benefits. At 31 December 2006 it hada surplus of £0.1m. Post balance sheet events After the year end the Group purchased Techmeta SA, a French Electron BeamWelding business, for cash consideration of €6.0m (£4.0m) of which €2.7m (£1.8m)is deferred. Change in accounting policies During the year there were no material changes to accounting policies. Going concern After making enquiries, the directors have formed the opinion that at the timeof approving the financial statements, that there is a reasonable expectationthat the group has adequate resources to continue in operational existence forthe foreseeable future. For this reason the directors continue to adopt thegoing concern basis in preparing the financial statements. Current Trading and Prospects The forecasts we have seen for the aerospace, oil & gas, power generation,health sciences and environmental sectors are all positive in the near term.Automotive is experiencing over-capacity in North America and Western Europe,however, demand is increasing in Asia and other emerging economies. Our salescontinue to grow as western manufacturers outsource their thermal processing andtesting requirements to Bodycote. High efficiency, high equipment utilisationand adding support and value beyond the basic service are the tools by which wecombat price competition. In addition, our growing presence in developingcountries is providing us with the opportunities to assist western manufacturerswho are establishing new facilities in these low cost countries. Two greenfield facilities are being built in Mexico. A heat treatment facilityin Silao will initially be focused on supporting GM with low pressurecarburizing and a testing laboratory in Monterey will be supporting a majoraerospace supplier. We are also in the process of building a greenfield heattreatment plant in Pune, India and anticipate it will go into production inearly 2008. A joint greenfield thermal spray and testing facility in Singaporewill commence production by mid-2007. Other developments include plans forgreenfield laboratories in Bahrain, Saudi Arabia, Kazakhstan and Croatia as wellas several transient laboratories in support of large scale infrastructureprojects in the Middle East including the Dubai Light Railway project. An additional 'mega' HIP unit is scheduled to be in production by the end of2007 at our Camas, Washington facility and an additional Densal(R) unit will gointo production in Haag, Germany in the first half of the year. Our Surahammar,Sweden facility is being expanded to improve efficiency of can making/powderfilling which gives us additional work for the HIP unit which will improve ROCE.The International Thermo Nuclear Experimental Reactor (ITER) is continuing tomove forward with funding now committed by an international consortium. Weexpect high value HIP opportunities over the medium term as we saw from the CERNproject on which we completed work in 2006. In line with our strategy, we will continue to seek bolt-on acquisitions whichare either in Testing, developing markets or have technical niches which arevalue enhancing. Strict investment criteria and disciplined operations willcontinue to aid our growth and performance improvement. Overall, the Groupanticipates about £60m will be spent on acquisitions in 2007, of whichapproximately two thirds will be in Testing. The Thermal Processing SBUacquired Techmeta SA in France at the beginning of February. Techmeta is anElectron Beam (EB) service provider and a global supplier of EB equipment whichproduced c. £6m of sales in 2006. This expands our current technicalcapabilities in servicing the aerospace, power generation and nuclearindustries. We estimate about £70m will be invested in capital expenditurewhich will be approximately 1.3 times depreciation (2006: 1.2 times) andreflects the high level of investment in greenfield facilities in emergingmarkets and the Camas HIP facility in 2007. About half of the capitalexpenditure will be for additional capacity to grow the business in newtechnologies (e.g. low pressure carburizing) or enter new geographies and theremainder will be to replace equipment for cost saving projects orinfrastructure. Since the start of the current financial year, trading has been above the levelsin the same period in 2006, with a strong performance in Europe and steadyresults in North America. Organic growth has been robust with 2006 acquisitionscontributing as expected. Notably, we entered 2007 with annualised revenue forthe Testing SBU at approximately £170m. We enter 2007 confident that we will deliver another successful performance. J D Hubbard D F Landless27 February 2007 27 February 2007 The company will broadcast the meeting with analysts on 27 February in a liveweb cast commencing at 0900 AM GMT on the company's website at www.bodycote.com(follow the link to the Investor Relations page) Consolidated income statementFor the year ended 31 December 2006 2006 2005 £m £mRevenueExisting operations 510.3 453.7Acquisitions 48.3 17.2 558.6 470.9 Operating profitExisting operations 51.3 57.0Acquisitions 7.2 3.3Share of results of associates 0.3 0.7 58.8 61.0 Operating profit prior to amortisation, impairment charges and majorfacility closure costs 79.1 67.0Amortisation/impairment of acquired intangible fixed assets (1.0) (0.2)Impairment of goodwill (6.0) (5.8)Impairment of investment in associate (8.3) -Major facility closure costs (5.0) - Operating profit 58.8 61.0 Investment income 3.4 5.2Finance costs (15.6) (13.5)Profit before taxation 46.6 52.7 Taxation (2.7) (11.8) Profit for the year 43.9 40.9 Attributable to: Equity holders of the parent 43.1 40.7Minority interest 0.8 0.2 43.9 40.9 Earnings per share pence penceFrom continuing operations:Basic 13.4 12.7Diluted 13.4 12.7 Consolidated statement of recognised income and expenseFor the year ended 31 December 2006 2006 2005 £m £m Exchange differences on translation of foreign operations (6.7) (5.1)Actuarial losses on defined benefit pension schemes (3.7) (3.7)Tax on items taken directly to equity 1.6 0.2Net loss recognised directly in equity (8.8) (8.6) Profit for the year 43.9 40.9 Recognised income for the year 35.1 32.3 Attributable to:Equity holders of the parent 34.3 32.1Minority interests 0.8 0.2 35.1 32.3 Consolidated balance sheetAs at 31 December 2006 2006 2005 £m £mNon-current assetsGoodwill 201.9 154.2Other intangible assets 10.4 3.7Property, plant and equipment 448.4 442.9Interests in associates 1.2 9.2Finance lease receivables 1.4 1.9Deferred tax asset 23.2 22.7Derivative financial instruments 0.6 -Trade and other receivables 11.3 6.1 698.4 640.7 Current assetsInventories 13.7 11.9Finance lease receivables 0.3 0.3Derivative financial instruments 1.9 -Trade and other receivables 138.1 114.5Cash and cash equivalents 34.7 124.8 188.7 251.5 Non-current assets classified as held for sale 2.3 1.2 Total assets 889.4 893.4 Current liabilitiesTrade and other payables 111.1 97.2Dividends payable 8.0 7.5Current tax liabilities 6.7 3.3Obligations under finance leases 1.4 1.4Bank overdrafts and loans 4.4 6.4Derivative financial instruments 0.2 -Short-term provisions 2.5 2.3 134.3 118.1 Net current assets 54.4 133.4 Non-current liabilitiesBank loans 186.5 221.6Retirement benefit obligation 32.8 29.9Deferred tax liabilities 68.7 79.9Obligations under finance leases 3.3 3.9Derivative financial instruments 0.1 -Long-term provisions 4.1 4.7Other payables 5.7 1.8 301.2 341.8Total liabilities 435.5 459.9 Net assets 453.9 433.5 Consolidated balance sheetAs at 31 December 2006 2006 2005 £m £mEquityShare capital 32.2 32.1Share premium account 302.1 300.3Own shares (2.4) (2.5)Other reserves 3.8 1.7Hedging and translation reserves 4.4 11.1Retained earnings 109.4 89.4 Equity attributable to equity holders of the parent 449.5 432.1 Minority interest 4.4 1.4 Total equity 453.9 433.5 Consolidated cash flow statementFor the year ended 31 December 2006 2006 2005 £m £m Net cash from operating activities 109.2 95.7 Investing activitiesPurchases of property, plant and equipment (59.5) (51.8)Proceeds on disposal of property, plant and equipment and intangibleassets 4.8 8.6Purchases of intangible fixed assets (0.7) (0.9)Acquisition of investment in an associate - (2.3)Acquisition of subsidiaries (86.3) (31.8)Disposal of subsidiaries 0.1 5.8 Net cash used in investing activities (141.6) (72.4) Financing activitiesInterest received 2.9 5.4Interest paid (15.7) (14.9)Dividends paid (20.5) (19.5)Dividends paid to a minority shareholder (0.1) (0.1)Repayments of bank loans (65.5) (10.1)Payments of obligations under finance leases (1.8) (1.6)New bank loans raised 46.0 0.1New obligations under finance leases 0.5 0.1Proceeds on issue of ordinary share capital 1.9 0.3Settlement of share options/own shares purchased 0.1 (1.7) Net cash used in financing activities (52.2) (42.0) Net decrease in cash and cash equivalents (84.6) (18.7) Cash and cash equivalents at beginning of year 120.7 138.7 Effect of foreign exchange rate changes (2.7) 0.7 Cash and cash equivalents at end of year 33.4 120.7 Reconciliation of operating profit to net cash from operating activities 2006 2005 £m £m Operating profit 58.8 61.0 Share of associates' interest and tax 0.6 0.8Depreciation of property, plant and equipment 44.8 40.5Amortisation/impairment of intangible assets 1.6 0.9Impairment of goodwill 6.0 5.8Impairment in investment in associate 8.3 -Major facility closure costs 5.0 -EBITDA1 125.1 109.0 (Gain)/loss on disposal of property, plant and equipment 0.3 (0.6)Income from associates (0.9) (1.6)Share-based payments 2.1 0.2 Operating cash flows before movements in working capital 126.6 107.0 Increase in inventories (0.4) (2.1)Increase in receivables (15.5) (8.4)Increase in payables 9.5 2.8(Decrease)/increase in provisions (2.6) 4.7 Cash generated by operations 117.6 104.0 Income taxes paid (8.4) (8.3) Net cash from operating activities 109.2 95.7 1 Earnings before interest, tax, depreciation and amortisation 1. Operating Profit 2006 2005 Existing Acquisitions Continuing Existing Acquisitions Continuing operations operations operations operations £m £m £m £m £m £m Revenue 510.3 48.3 558.6 453.7 17.2 470.9 Cost of sales (334.7) (31.3) (366.0) (301.4) (10.7) (312.1) Gross profit 175.6 17.0 192.6 152.3 6.5 158.8 Other operating income 2.8 - 2.8 2.5 0.1 2.6 Distribution costs (16.5) (2.1) (18.6) (14.3) (0.4) (14.7) Administration expenses (90.7) (7.1) (97.8) (77.7) (2.7) (80.4) Other operating expenses (0.2) - (0.2) - - - Amortisation/impairment of acquired intangible fixed assets* (0.4) (0.6) (1.0) - (0.2) (0.2) Impairment of goodwill* (6.0) - (6.0) (5.8) - (5.8) Impairment of investment in associate* (8.3) - (8.3) - - - Major facility closure costs* (5.0) - (5.0) - - - Operating profit before income from associates 51.3 7.2 58.5 57.0 3.3 60.3 Income from associates after interest and tax 0.3 0.7 Operating profit 58.8 61.0 * Administration expenses (total £118.1m; 2005: £86.4m) 2. Business and geographical segments Discontinued Operations Heat Hot Testing Electroplating Head Office and Continuing Treatment Isostatic eliminations operations Pressing 2006 2006 2006 2006 2006 2006 £m £m £m £m £m £mRevenueExternal sales 375.0 38.9 144.7 - - 558.6Inter-segment sales - - 0.6 - (0.6) - Total revenue 375.0 38.9 145.3 - (0.6) 558.6 Inter-segment sales are charged at prevailingmarket prices ResultSegment result prior toamortisation ofacquiredintangible assetsand impairment ofgoodwill 49.5 12.7 21.3 - - 83.5Share of associates' operating profit 0.8 0.1 - - - 0.9Unallocated corporate expenses - - - - (4.7) (4.7) 50.3 12.8 21.3 - (4.7) 79.7 Amortisation / impairment ofacquiredintangible assetsand impairment ofgoodwill andinvestment inassociate (10.7) - (4.6) - - (15.3)Major facility closure costs (5.0) - - - - (5.0) Segment result 34.6 12.8 16.7 - (4.7) 59.4 Share of associates'interest and tax (0.6) (0.6) Operating profit -continuing operations 58.8Investmentrevenues 3.4Finance costs (15.6) Profit before tax 46.6Tax (2.7) Profit for year 43.9 2. Business and geographical segments (continued) Discontinued Operations Heat Treatment Hot Testing Electroplating Head Office and Continuing Isostatic eliminations operations Pressing 2005 2005 2005 2005 2005 2005 £m £m £m £m £m £mRevenueExternal sales 349.2 35.2 86.5 1.5 (1.5) 470.9Inter-segment sales - - 0.6 - (0.6) - Total revenue 349.2 35.2 87.1 1.5 (2.1) 470.9 Inter-segment sales are charged at prevailingmarket prices ResultSegment result prior to amortisation of acquired intangibleassets andimpairment ofgoodwill 43.3 9.5 16.3 - - 69.1Share of associates' operating profit 1.5 - - - - 1.5 Unallocated corporate expenses - - - - (2.8) (2.8) 44.8 9.5 16.3 - (2.8) 67.8 Amortisation of acquired intangibleassets andimpairment ofgoodwill (5.8) - (0.2) - - (6.0) Segment result 39.0 9.5 16.1 - (2.8) 61.8 Share of associates' interest and tax (0.8) (0.8) Operating profit -continuing operations 61.0 Investment revenues 5.2Finance costs (13.5) Profit before tax 52.7Tax (11.8)Profit for year 40.9 2. Business and geographical segments (continued) Other information Discontinued Operations Heat Hot Testing Electroplating Head office and Consolidated Treatment Isostatic eliminations Pressing 2006 2006 2006 2006 2006 2006 £m £m £m £m £m £mCapital additions 38.8 6.6 14.5 - 0.3 60.2Depreciation and amortisation 33.1 4.3 8.6 - 0.2 46.2Impairment losses recognised in income 13.9 - 3.9 - - 17.8 Balance sheetAssets:Segment assets 772.6 87.2 196.5 - (168.1) 888.2Interests in associates 1.2 - - - - 1.2 Consolidated total assets 773.8 87.2 196.5 - (168.1) 889.4 Liabilities:Segment liabilities 445.7 36.1 168.0 - (214.3) 435.5Segment net assets 328.1 51.1 28.5 - 46.2 453.9 Discontinued Operations Heat Hot Testing Electroplating Head office and Consolidated Treatment Isostatic eliminations Pressing 2005 2005 2005 2005 2005 2005 £m £m £m £m £m £m Capital additions 37.6 5.2 9.9 - - 52.7Depreciation and amortisation 32.2 4.3 4.9 - - 41.4Impairment losses recognised in income 5.8 - - - - 5.8 Balance sheetAssets:Segment assets 726.8 86.5 117.6 - (46.7) 884.2Interests in associates 9.2 - - - - 9.2 Consolidated total assets 736.0 86.5 117.6 - (46.7) 893.4 Liabilities:Segment liabilities 399.1 28.0 69.3 - (36.5) 459.9 Segment net assets 336.9 58.5 48.3 - (10.2) 433.5 2. Business and geographical segments (continued) By geographicalmarket Sales revenue 2006 2005 £m £mEMEA 356.8 304.2Americas 200.6 166.7Asia Pacific 1.2 - 558.6 470.9 Revenue from the Group's discontinued operations was derived principally from EMEA (2006: £nil, 2005: £1.5million). Carrying amount of segment Additions to property, plant assets and equipment and intangible assets 2006 2005 2006 2005 £m £m £m £mEMEA 321.5 305.6 37.3 31.5Americas 129.8 126.9 19.6 21.0Asia Pacific 2.6 1.0 3.3 0.2 453.9 433.5 60.2 52.7 3. Taxation 2006 2005 £m £m Current taxation - charge for the year 10.5 9.5Current taxation - adjustment in respect of previous years 1.6 (0.1)Deferred taxation (9.4) 2.4 2.7 11.8 UK corporation tax is calculated at 30% (2005: 30%) of the estimated assessable profit for the year.Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. 4. Earnings per share The calculation of the basic and diluted earnings per share is based on thefollowing data: 2006 2005 £m £mEarningsEarnings for the purposes of basic earnings per share being net profit attributable to equity holders of theparent 43.1 40.7 Number of shares Number NumberWeighted average number of ordinary shares for the purposes of basic earnings per share 320,462,772 319,719,955 Effect of dilutive potential ordinary shares:Share options 880,065 546,590 Weighted average number of ordinary shares for the purposes of diluted earnings per share 321,342,837 320,266,545 pence penceBasic 13.4 12.7 Diluted 13.4 12.7 £m £mHeadline earnings Net profit attributable to equity holders of the parent 43.1 40.7 Add back:Impairment of goodwill 6.0 5.8Amortisation/impairment of acquired intangible fixed 1.0 0.2assetsImpairment of investment in associate 8.3 -Major facility closure costs 5.0 -Cost of early settlement of US dollar private placement 3.1 -debtTax settlements in respect of prior years (11.2) - Headline earnings 55.3 46.7 Earnings per share from headline earnings: pence pence Basic 17.3 14.6 Diluted 17.2 14.6 5. Basis of preparation The financial information has been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) as adopted for use in the EU. Whilst the financial information contained in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards,this announcement does not itself contain sufficient information to comply withIFRS. The Company expects to publish full financial statements that comply withIFRS in March 2007. The financial information has been prepared under the same accounting policiesas the 2005 financial statements. 6. Non-statutory financial statements The financial information set out above does not constitute the Group'sstatutory financial statements for the year ended 31 December 2006 or 2005 butis derived from those financial statements. Statutory financial statements for2005 have been delivered to the Register of Companies. Those for 2006 will bedelivered following the company's annual general meeting, which will be convenedat 3 pm on 23 May 2007. The auditors have reported on those accounts: theirreport was unqualified and did not contain any statement under Section 237(2) or(3) of the Companies Act 1985. This report was approved by the Board of Directors on 27 February 2007. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Bodycote