28th Feb 2006 07:05
Bodycote International PLC28 February 2006 EMBARGOED UNTIL 0700 HOURS: 28 FEBRUARY 2006 BODYCOTE INTERNATIONAL PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 Financial Highlights • Revenue from continuing operations increased by 10% to £470.9 million (2004: £426.4 million) • Headline operating profit 1, 2 increased by 28% to £67.8 million (2004: £53.1 million) • Operating profit improved by 10% to £61.0 million (2004: £55.5 million) • Headline profit before tax 1 up 26% to £58.8 million (2004: £46.7 million) • Profit before tax ahead by 13% to £52.7 million (2004: £46.7 million) • Headline earnings per share 3 increased to 14.6p (2004: 11.7p) • Basic earnings per share improved to 12.7p (2004: 12.2p) • Full year dividend 6.4 pence per share (2004: 6.1p), up 5% Operational Review • ROCE improved by 30% to 9.9% (2004: 7.6%) • Testing enters 2006 at £100m annualised sales rate • 14 bolt-on acquisitions completed during 2005 for £31.8 million • Outsourcing agreements grew 35% to 20% of Group revenue (2004: 16%) 1 expressed pre impairment of goodwill (£5.8m: 2004 £nil), amortisation of acquired intangibles (£0.2m: 2004: £nil) and restructuring costs (£nil: 2004 £2.4m). 2 expressed before interest and tax on associates (£0.8m: 2004 £nil). 3 a detailed breakdown of EPS can be found in note 4 on page 26 Chief Executive John D. Hubbard, commenting on the results said: '2005 was another year of solid achievement for Bodycote. The combination ofgrowth in the aerospace market, continuing strong demand from the industrial gasturbine sector, new outsourcing business, increased market share and themajority of energy cost increases having been recovered meant that we were ableto improve sales, margins and profits.' 'We completed 10 acquisitions in Testing, which, combined with organic growth,saw the division enter 2006 with annualised sales in excess of £100m. Weexpanded our Heat Treatment operations into Eastern Europe (Poland and Romania)and lifted margins despite the impact of energy cost increases. The combinationof our continuous self-help programmes, improving market demand, disciplinedcapital investments and value enhancing acquisitions mean that we face 2006 withconfidence.' For further information, please contact: Bodycote International, plcJohn Hubbard, Chief Executive 020 7831 3113David Landless, Group Finance Director 020 7831 3113Financial DynamicsJon Simmons 020 7831 3113 CHAIRMAN'S STATEMENT 2005 was another year of solid achievement for Bodycote. Revenue fromcontinuing operations rose in the year by 10% to £470.9m (2004: £426.4m). Weachieved strong organic growth of 5% and a further 5% from a series of bolt-onacquisitions. Profits and cash flow have continued their upward progression in all theregions, both in terms of local currency and after translating into Sterling.Headline operating profit 1, 2 increased by 28% to £67.8m (2004: £53.1 m). Ourheadline profit before taxation 1 showed an increase of 26% to £58.8m (2004:£46.7m). Operating profit improved by 10% to £61.0m (2004: £55.5m), whilstprofit before taxation was £52.7m compared to £46.7m in 2004. Our balance sheetis strong I am pleased to report that the Board is recommending an increase of 5% for thefinal dividend to 4.05p per share (2004: 3.85p), to be paid on 5 July 2006 tothose shareholders on the register at the close of business on 9 June 2006. Thetotal dividend for the year is therefore up 5% at 6.4p (2004: 6.1p) and iscovered 2.3 times by headline earnings. This year we have improved our return on capital employed (including allgoodwill previously written off) from 7.6% to 9.9% at the pre-tax level, whilstat the same time continuing to invest in projects that will bring a longer termbenefit to the Group. IonBond, in which the Group has a 20% shareholding following the transfer of ourPVD coatings business, also had a good year having grown sales by 25%,principally by acquisition from £53m to £66m. We are continuing the expansion of our Testing business both in terms of serviceofferings and geographical coverage. Further profitable growth is forecast inthis Strategic Business Unit (SBU) for 2006. During the year ten testingacquisitions were made by the Testing SBU at a cost of £21.9m. In the currentyear to date we have made four further acquisitions at a cost of £22.1m. We are also clearly focussed on growing our Thermal Processing businesses, byexpanding into new geographies as well as targeting specific acquisitions inexisting territories. We made four acquisitions in 2005 at a cost of £9.9m,established a facility in Poland and are on schedule to open a greenfield plantin China in mid 2006. As ever we have continued to make progress in the year on improving the safetyand health of our employees at work. Further improvement remains a constantfocus for all the management team. Similarly there has been significantprogress in addressing the Group's environmental profile and our ISO14001approval programme is moving ahead well. These are the first year end accounts that have been prepared under IFRS and, aspreviously reported, whilst adoption of IFRS required significant managementresource, except for the fact that goodwill is no longer amortised, the effectis not significant in terms of pre-tax profits and the balance sheet. Like many companies we do have pension deficits, principally in the UK.However, these liabilities at £29.9m are less than 4% of our marketcapitalisation and have now been reflected in our balance sheet for the firsttime in accordance with IFRS. The Group continues to press for high standards of governance that areappropriate for the needs of the business. Since 1999 we have been performingan annual risk management review and increasing emphasis is placed on riskassessment throughout the Group. The Board and senior operating board assessbusiness risk and prioritise actions and resources to mitigate the impact ofidentified risks more effectively. The objective is to improve the Group'soverall risk management performance and further embed risk management practicesat all levels of management. During 2006 it is planned to provide more trainingfor managers in this area. Our prime objective for delivering value to shareholders is continuing toimprove our return on invested capital. We remain focussed on keeping a closecontrol on costs and increasing efficiency. The Group is in good heart and well positioned for future growth, with its widecustomer base, good geographic spread, and a highly committed workforce who areable to offer our customers an ever improving level of service. Going forwardwe are optimistic that markets are growing, particularly in the area ofaerospace, industrial gas turbine (IGT), oil and gas and health sciences. Weexpect to continue to benefit from our technological innovation and servicelevels to manufacturers as these customers increasingly seek Bodycote's help tomanage their cost base. These strengths and the indications from end markets,mean that we face 2006 with conviction and confidence for further organic growthand the completion of a number of bolt-on acquisitions. J A S Wallace 28 February 2006 1 expressed pre impairment of goodwill (£5.8m: 2004 £nil), amortisation of acquired intangibles (£0.2m: 2004: £nil) and restructuring costs (£nil: 2004 £2.4m) 2 expressed before interest and tax on associates (£0.8m: 2004 £nil) CHIEF EXECUTIVE'S REVIEW 2005 INTRODUCTION I am pleased to report that performance continued to improve in 2005. Grouprevenue (excluding the divested coatings businesses) at £470.9m was 10% ahead of2004. Using constant currency exchange rates, revenue grew 9% compared to 2004,of which 5% was an organic increase. With growth in the aerospace market, acontinuing strong demand from the IGT sector, new outsourcing business,increased market share and the majority of energy cost increases having beenrecovered, we were able to improve operating margins from 13.0% to 14.4%.Headline operating profit 1 grew 28% to £67.8m compared with £53.1m a year ago.Operating profit increased by 10% to £61.0m from £55.5m in 2004. I thank allthe people in Bodycote who have helped deliver these improved results. OPERATIONAL REVIEW During the year we made good progress in executing our strategy to rebalance ourportfolio by growing the relative size of our Testing SBU whilst continuing toexpand our Thermal Processing SBU into developing manufacturing economies. Wealso increased our investment in our associate undertaking IonBond to 20% by theexercise of an option negotiated at the time of the transfer of our PVD divisionin 2004. Securing major outsourcing opportunities remains a key element of our strategy.Outsourcing supports our top line growth, which is typically higher than theofficial rate of increase in the level of manufacturing activity and enhancesmargins through increased facility utilisation. Bodycote's outsourcinginitiative offers manufacturers lower total cost, equal or better quality andfast, reliable turnaround. The key to our outsourcing success is our technicalexpertise in niche technologies which are critical but not core to mostmanufacturers and our highly productive model where we operate at optimumefficiency. As predicted, the trend to outsourcing and closure of in-housefacilities, which is well established in Europe, is accelerating in NorthAmerica, particularly in automotive. Outsourced work from StrategicPartnerships (SP) and Long Term Agreements (LTA) grew 35% and now accounts for21% of Group revenue compared with 16% in 2004. Several new SPs will startgenerating revenue in 2006. Technology transfer initiatives continue to be successful. The extension ofthese high value added services enhances customer satisfaction and leads toadditional revenue. The cross-selling and bundling of multiple services createsa unique offering which appeals to those manufacturers that wish to optimisetheir performance by focusing on their core competencies. The IonBond ventureis proving to offer synergistic benefits to our customers and partners. Ourgeographic and market spread reduces the risk associated with any one account orcountry. Our top ten customers accounted for approximately 12% of totalrevenue, compared to 11% in 2004. During 2005 £31.8m was spent on 14 bolt-on acquisitions. The Health Sciencesdivision of the Testing SBU acquired three laboratories in the food testingsector to spearhead a global expansion in this market. Seven furtherlaboratories were added during the year to enhance our existing footprint ineach of the Materials Testing, Engineering & Technology and Environmentaldivisions. Of particular note was the establishment of a European Engineering &Technical Centre in Sweden through the purchase of CSM Materialteknik AB fromSAAB AB. The Heat Treatment division of our Thermal Processing SBU expanded itsgeographical presence with four bolt-on acquisitions. In Eastern Europe weacquired four plants in Poland and a 75% interest in the heat treatmentactivities of Uttis Industries SA in Romania. We also strengthened our positionin the aerospace and nuclear market sectors by the purchase of Nadcap-approvedExpert Heat Treatments Limited in the UK and ABMT SA in France. The divestiture of our non-core electroplating activities was completed midyearand generated cash receipts of £5.8m. Other asset sales, including thedivestiture of one heat treatment plant in North America, generated a total of£8.6m. THERMAL PROCESSING Thermal Processing revenue was £384.4m (7% growth) and operating profit was£54.3m (18% improvement) with an operating margin of 14% compared to 13% in2004. The Thermal Processing SBU operates as two divisions, Heat Treatment andHot Isostatic Pressing (HIP) with our remaining Surface Engineering activitiesnow incorporated into the Heat Treatment division. Their performance was asfollows: HEAT TREATMENT Revenue was £349.2m (6% growth) and operating profit was £44.8m (15%improvement) with operating margin of 13% compared to 12% in 2004. Stronggrowth in aerospace, oil and gas, continued strength in IGT and overall stableautomotive demand provided a reasonable background for our performance. Americas Revenue of £112.8m (an increase of 9%) and operating profit of £11.2m (up 38%)were generated. Our aerospace, IGT, and oil and gas sectors all saw improveddemand from a combination of market pickup and new outsourcing contracts.Several automotive related facilities saw a decline in the second half which,based on industry forecasts, will remain at subdued levels in 2006. Thecombination of price pressure and increases in energy and employee costscontinue to hold back the margin improvement expected from higher volumes. Weare now able to offer several high value added services (Low PressureCarburising, Electron Beam Welding and Kolsterising of stainless steel) tocomplement existing heat treatment and brazing services thus helping to improvemargins in the oversupplied North American market. Europe Revenue of £236.4m (an increase of 5%) and operating profit of £33.7m (up 11%)were generated. Although the manufacturing sector faced a difficultenvironment, our strategy of pursuing outsourced work, transferring technologyand optimising operational efficiencies paid off. Almost all automotive focusedfacilities are now certified to the stringent TS 16949 automotive qualitystandard, whilst most facilities will achieve ISO 14001 environmentalcertification by the end of 2006. This positions us in line with the qualityand responsibility expectations of world class manufacturers. Our network ofEastern European facilities was expanded in 2005 by the commissioning of astart-up facility in Poland which was immediately followed by the acquisition ofthe market leader with four facilities. Our Romanian facility was merged with acompetitor to create a market leading position, with Bodycote owning 75% of thenew entity. Continued growth in our Eastern European operations during 2006 isanticipated. Asia Our previously announced development in Wuxi, China has been boosted by theaward of an outsourcing contract from Faurecia SA (affiliated to PSA PeugeotCitroen) for the heat treatment of automotive components. Construction of this10,000 m2 plant is expected to be completed in the second half of this year.The size of the plant has been doubled from that originally envisaged due tostrong interest from other western companies setting up manufacturing bases inthe area. As part of the expansion a Testing laboratory has also been added tothe project. The total cost of the new facility is expected to be approximately£5m. Bodycote intends to complete similar new factories in other carefullyselected areas of China over the next 5 years to service predominantly westerncompanies establishing new manufacturing operations in the region. We areactively evaluating opportunities in other Asian markets HIP Divisional revenue was £35.2m (10% growth) and operating profit was £9.5m (34%improvement), with an operating margin of 27% compared with 22% in 2004. Therevenue growth was driven by the continuing strong demand from the IGT marketfor new and replacement parts. Aerospace demand continued to pick up throughoutthe year and is expected to maintain this growth trend beyond 2006. Althoughmargins improved, we still have work to do because the high investment in HIPfacilities requires yet higher margins in order to achieve an acceptable returnon capital employed. We continue to work on innovative new applications in thepowder consolidation sector. The multi-national nuclear fusion project, ITER,which will be sited in France, opens up the prospect of generating additionalrevenue as we have successfully demonstrated our ability to HIP manufacturecritical components. Demand for Densal(R) treatment of aluminium castingsshowed excellent progress in the high performance European automotive sectorwith adoption in three significant applications. In Europe two large HIP units,out of service for a large part of 2004, returned to service in 2005. In NorthAmerica a used HIP unit, previously acquired at low cost, will be brought intoservice in 2006 followed by the addition of new mega-HIP capacity in 2007. TESTING Revenue was £86.5m (32% growth), operating profit was £16.3m (31% improvement)and the operating margin was maintained at 19%. This growth in revenue wasachieved in generally good trading environments with outsourcing demand drivingorganic revenue ahead by 9%. Our strategy to grow this division continues, withten small to medium acquisitions completing in the year. Business development strategies aligned to customer-facing service provisionresulted in a reorganisation of management in 2005 along business streams asopposed to country based organisation. The Testing SBU now operates fourdivisions: Materials Testing, Engineering & Technology, Health Sciences andEnvironmental Testing. Materials Testing Materials Testing advanced strongly as a result of continued demand from thebuoyant oil and gas sector and improving aerospace markets. Automotiveoutsourcing of testing continues to assist our growth. Our European businesssaw substantial revenue gains as a number of global projects from the Caspianregion and Sakhalin Island produced significant demand for our specialistcorrosion services. In aerospace and defence markets, the acquisition of CSM inSweden strengthened our position in advanced NDT systems, polymer/compositetesting, and materials consultancy offerings, enabling deployment of theseservices across our network. The Middle East benefited from the acquisition ofa start-up in Qatar and the purchase of GHD Cladding in Dubai. Continuing highdemand for our services in the Gulf of Mexico region led to investment in a newstate of the art facility in Houston, US with relocation completed in February2006. Engineering & Technology In Engineering & Technology we continued to capitalise on our strategy ofproviding high end technical solutions to a number of industrial sectors. Inthe UK the acquisition of J W Worsley brings advanced environmental simulationtesting into the Group to service our clients in the European transportationmarket. We invested in several large scale vehicle dynamics test stands at ourTechnology Centre in Mississauga, Canada to meet demand from North Americanheavy duty truck manufacturers, with several large outsourcing projects secured. Health Sciences The European Health Sciences unit performed extremely well with the addition ofa food testing/advisory services business complementing strong revenue growth inour pharmaceutical and occupational hygiene segments. The acquisition of LawLaboratories and Allied Laboratories mid-year positioned Bodycote as thelaboratory of choice for a number of large UK food retailers. The networkcontinues to expand, with the acquired expertise and technologies being rolledout to other geographical regions through our technology transfer teams. Environmental Testing Our Environmental Testing business posted significant revenue growth,particularly in Canada, where the acquisition of Arthur Gordon, continuedoperational improvements and investments in fully automated analytical systemsallowed greater customer satisfaction on deliveries whilst improvingproductivity. SAFETY, HEALTH AND ENVIRONMENTAL (SHE) SHE has always been of major importance in our business and since initiating anenhanced Group wide measurement and benchmarking system in 2004 we have seen ourperformance improve but we remain some way from our ultimate goal of zeroaccidents. Our two safety KPIs for lost time accidents showed improvement:Frequency Rate fell by 2.1% and Severity Rate fell by 12.3%. Our initiativehelps us to understand better the reasons and root cause of accidents occurringwithin the Group, improve awareness among the employees and change behaviour.As in every other area of our business, we work on continuously improving ourunderstanding and application of safety procedures in a consistent mannerthroughout the Group. We continue to roll out our Zero Tolerance Policy intothe various countries. The research project we are funding at a University inCalifornia to advance safety in confined space entry procedures is expected tobe finalised in 2006, with recommendations which will benefit the wholeindustry. CURRENT TRADING AND PROSPECTS Trading since the start of the New Year has been in line with the Board'sexpectations. Notably we entered 2006 with annualised revenue for the TestingSBU in excess of £100m. IGT markets were strong in 2005 and we anticipate this sector will showcontinued modest growth in 2006. Aerospace showed improvement in 2005 and weanticipate the pace of growth will increase throughout 2006. Automotive isforecast to remain flat in terms of overall build rate for North America andEurope in 2006. The restructuring being undertaken by some manufacturers willoffer challenges that we are confident we will manage successfully. The low endtooling market has continued to decline in western markets due to the movementof manufacturing to areas of lower cost, where Bodycote does not currently havea significant presence. Since the year end we have acquired four laboratories, NorWest Soil Research(seven Canadian locations and three European joint ventures), West CoastAnalytical in the USA, Tetra in the UK and ACT Laboratories, Testing andEngineering with two locations in Detroit, as well as one Heat Treatmentfacility, SGB Solingen, in Germany. The pipeline of potential acquisitionswhich fit our strategic plan and investment criteria remains well stocked. Therate of acquisitions will continue to be controlled by our commitment tointegrate successfully each acquisition into our operations. People are our number one resource. We will continue to focus our managementefforts on training, improving the working environment, increasing theproductivity, safety and effectiveness of our human resources. Energy, ournumber two cost, is anticipated to remain expensive and we will continue ourendeavours to pass these costs on to our customers. Overall we expect to maintain our performance improvement during 2006 throughour continuous self-help programmes, improving market demand, disciplinedcapital investment and value enhancing acquisitions, all with a focus oncontinuing to improve our return on capital employed. J D Hubbard 28 February 2006 1 expressed pre impairment of goodwill (£5.8m: 2004 £nil), amortisation ofacquired intangibles (£0.2m: 2004: £nil) and restructuring costs (£nil: 2004£2.4m) GROUP FINANCE DIRECTOR'S REPORT Revenue and Operating Profit Group revenue for the continuing business in 2005 was £470.9m compared with£426.4m in 2004. Demand improved in most of the Group's markets, althoughconditions in automotive were challenging, particularly in the second half, forboth North America and continental Europe. Whilst total sales increased by 3%,the improvement excluding the now divested electroplating and PVD businesses was10%, of which 5% was organic, 4% was from acquisitions and 1% was due tofavourable exchange rate movements. Revenue Headline Operating Margin Profit 1 £m £m £m £m % % 2005 2004 2005 2004 2005 2004Heat Treatment 349.2 328.7 44.8 38.8 12.8 11.8HIP 35.2 32.1 9.5 7.1 27.0 22.1Thermal Processing 384.4 360.8 54.3 45.9 14.1 12.7Testing 86.5 65.6 16.3 12.4 18.8 18.9Head Office - - (2.8) (2.8) - -Continuing Business 470.9 426.4 67.8 55.5 14.4 13.0Electroplating/PVD 1.5 30.8 - (2.4) - -(discontinued) 472.4 457.2 67.8 53.1 14.4 11.6 1 before impairment of goodwill of £5.8m (2004: nil), amortisation of acquiredintangible assets of £0.2m (2004: nil), tax and interest on the share of resultsof associates of £0.8m (2004: nil) and restructuring costs of £nil (2004:£11.2m). A reconciliation of headline operating profit to operating profit canbe found on page 21. Following on from the improved market conditions seen in 2004, the year beganwell and first half sales showed organic growth of 5.8%. Aerospace, IGT, oiland gas and health science markets all continued to improve. The second half ofthe year saw a softening in automotive demand and consequently organic growthwas somewhat less at 4.7%, resulting in a 5.3% improvement for the year as awhole. The second half was also impacted by a significant escalation in energyprices. Gross energy cost was higher in the first half by approximately £1mcompared to a year earlier and in the second half the year on year increase wascirca £2m. Of the total annual increase of £3m, approximately £2m was recoveredin selling prices during 2005 and we expect to recover the balance in 2006. Our exit from the electroplating business was completed in March, except for onefacility which was sold in August. The business broke even in 2005 and thiscompares to a loss, before restructuring costs, of £3.2m in 2004. As part of our continuous improvement programme, we have reduced the activity atone of our North American heat treatment plants and have decided to write offthe associated goodwill in the second half (£4.0m). This is in addition to thecharge taken in the first half (£1.8m) associated with the sale of the facilityat Grand Rapids, Michigan. The first full year since the establishment of the Group's associate venture,IonBond, has met our expectations of higher attributable operating profit froman investment reduced by three quarters, when compared to the business which waswholly owned. The results are now reported within the heat treatment divisionof the Thermal Processing Strategic Business Unit, along with those of thecontinuing surface engineering business. THERMAL PROCESSING Heat Treatment Overall sales at constant currency increased by 5.5% of which 74% was organic.Operational gearing, the ratio of change in organic operating profit to changein organic sales, at 33% was disappointing. This is accounted for by acombination of energy cost increases, soft automotive demand, which kept priceincreases down and labour costs, due to average people cost increases of c. 2%. Energy prices in North America were a major issue, with the gross costincreasing by an average of 12% compared to the prior year. More than half ofthe increase was recovered in selling prices and this accounts for about aquarter of the year on year increase in sales value. Further recovery isexpected in 2006. In Europe the largest increases were in the UK followed byGermany but were less of an issue in France and Scandinavia. Cost increases inEurope are being well recovered. North American sales increased by 8.1%, essentially all organic, driven bygrowth in aerospace, IGT and oil & gas and despite some softness in automotivedemand. Notwithstanding the impact of energy costs, operating margins improvedby two percentage points but over-capacity in the Great Lakes region continuesto see margins, on average, lower than most other parts of the Group. In Europe the best performances were in the north. The UK saw organic salesgrowth of 7.5%, as a result of aerospace demand and the Nordic area was ahead by3%, due to growth in heavy truck, marine, bearings and general engineering. TheUK also benefited from the acquisition of Expert Heat Treatment with sales of£1.7m in 5 months. France and Germany saw modest sales growth in the face ofsoftening automotive demand, particularly in France and Italy in the secondhalf. The best performing areas of continental Europe were the Czech Republicand Poland, with the latter assisted by the acquisition of four facilities earlyin the year. However, these countries currently offer a small fraction of thevolumes available in the developed economies. In Asia, the Group's first wholly-owned facility in China is under constructionand the first equipment to be installed is being transferred from France. Several of our speciality businesses had excellent performances in 2005: K Tech(R) ceramics, which has much of its sales in oil & gas; plasma spray foraerospace applications and Kolsterising(R) for hardening stainless steel, whilstour new metallic diffusion product, CoatAlloy(R) was approved by severalprospective customers. HIP HIP followed a solid performance in 2004 with further progress in 2005. Atconstant currencies sales were ahead 10%, driven by aerospace and IGT demand inthe UK and USA and by Densal(R) for automotive in Germany. Operational gearing,at 80%, was good and above our expectations and resulted in a margin improvementto 27% (2004: 22%). We need to improve margins further still to meet our targetof mid teens pre tax return on capital. TESTING The Testing Strategic Business Unit (SBU) has continued its outstanding recordof growth and profit performance. At constant currencies, sales were up 29% ofwhich 9% came from organic growth and the balance from ten bolt-on acquisitionscompleted during the year at a cost of £21.9m. All parts of the SBU performed well and margins were maintained at 19% andconsequently our return on capital expectations are being met. The Testingdivision, as with Thermal Processing, is being helped by strength in theaerospace, IGT and oil and gas sectors. Engineering and Technology is similarlybenefiting but in addition, and in contrast to other parts of the Group, isseeing increases from automotive in North America as customers seek both toimprove their product offerings and hence increase development programmes andlower costs via outsourcing. Our strengthened Health Science and Environmentalbusinesses have seen good growth, particularly in the UK, the former in the foodtesting arena and the latter due to asbestos characterisation and management incommercial premises. Our laboratories in the Middle East produced solidresults, particularly in civil engineering markets. Profit Before Tax Headline profit before tax 1 was £58.8m compared to £46.7m last year. Headlineoperating profit 1, 2 increased from 2004 to 2005 by £14.7 m. Foreign exchangemovements during the year resulted in a net increase in operating profit of£0.7m. The Group's net interest charge (excluding net pension financing) wasreduced from £8.1m to £7.3m reflecting lower average net borrowings. The netfinancing charge related to the Group's defined benefit pension schemes was£1.0m compared to £0.7m in 2004. Taxation The effective tax rate in 2005, before impairment of goodwill and amortisationof acquired intangible assets (which are not generally allowable for tax) was20.2% (2004: 21.4%) reflecting the mix of taxable profits and losses and thejurisdictions in which the Group operates. Earnings Per Share, Dividends and Interest Headline earnings per share 3 were 14.6p (2004: 11.7p), with basic dilutedearnings per share being 12.7p (2004: 12.2p). The Board is recommending a finaldividend of 4.05p (2004: 3.85p). The dividend is covered 2.3 (2004: 1.9) timesby headline earnings. Interest, excluding net pension financing, was covered9.1 (2004: 6.0) times by headline operating profit 1, 2. Capital Expenditure Net capital expenditure for the year was £44.0m compared to £34.0m in 2004. Themultiple of net capital expenditure to depreciation was 1.1 times, following twoyears when the ratio was 0.8 times. With buoyant demand in a number of theGroup's markets and strong growth expected in Testing, the Group anticipates asimilar ratio in the coming year. Major projects undertaken during the year included new sealed quench furnacelines in Kitchener, Ontario, Indianapolis, Cleveland, Ejby, Denmark and Zabzre,Poland; the establishment of a new heat treatment facility in Brno, CzechRepublic and a new laboratory in Houston; additional Heavy Duty emissions and vehicle cooling system test cells at two locations inCanada; additional Low Pressure Carburizing equipment in Detroit and Kapfenberg,Austria; the start of installation of a new large HIP unit in Camas, Washingtonand a Densal(R) unit in Munich. Cash Flow and Borrowings After allowing for capital expenditure, interest and tax the Group generatedfree cash flow of £42.1m compared to £57.3m in 2004 and cash flow fromoperations was £95.7m compared to £100.5m in 2004. The reduction in free cashflow was primarily due to increased capital expenditure. There has beencontinued focus on cash collection, however, debtor days increased from 65 to 68following a change in the treatment of bills of exchange in France, whichincreased debtors by £4.7m. Acquisitions, along with the additional 5%investment in IonBond, resulted in net cash outgoings of £33.9m. Net borrowingsended the year at £108.5m, an increase of £18.2m; and gearing was 25% comparedto 21% in 2004. Defined Benefit Pension Arrangements The Group has defined pension benefit obligations in the UK, France, Germany andUSA, which are all reflected in the Group balance sheet. In the UK the Grouphas a final salary scheme, which was closed to new members in April 2001 butcontinues to accrue benefits for current employee members, a total of just over300 people. The deficit as calculated by the scheme actuary at 31 December 2005using the principles of IAS 19 is £21.8m. In France we operate a plan whichpays a cash lump sum on retirement and also for long service. The plan is opento new employees but by its nature is not mortality dependant. It is unfundedand the IAS 19 liability at 31 December 2005 was €5.9m. The Group's heattreatment business in Germany has inherited several defined benefitarrangements. They are all unfunded, have no future benefit accrual and areclosed to new members. The IAS 19 liability at 31 December 2005 was €4.4m. Thecompany sponsors five defined benefit pension arrangements in the USA, whichwere inherited with the acquisition of Lindberg and had a total IAS 19 deficitat 31 December 2005 of $1.6m. Treasury Treasury activities have the objective of minimising risk and are centralised inthe Group's head office in Macclesfield. Group Treasury is responsible formanagement of liquidity and interest and foreign exchange risks, operatingwithin policies and authority limits approved by the Board. The use offinancial instruments including derivatives is permitted when approved by theBoard, where the effect is to minimise risk to the Group. Speculative tradingof derivatives or other financial instruments is not permitted. Bodycote has operations in 30 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 Groups non-sterling assets. These borrowings are at both fixed and floatinginterest rates and the Group will use derivatives where appropriate, to generatethe desired effective currency and interest rate exposure. Exposure to interest rate fluctuations on indebtedness is managed by using acombination of fixed and floating rates for borrowings. Consideration is givento entering into interest rate swaps and forward rate agreements. The policyobjective is to have a target proportion, currently 25 to 75 per cent of netborrowings, hedged at all times. At the end of December 2005, 24% of borrowings were at fixed rates for anaverage period of 4.0 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. Bodycote is financed by a mix of cash flows from operations, short-termborrowings and longer-term loans from banks, capital markets and finance leases. Bodycote's funding policy is to ensure continuity of finance at reasonablecost, based on committed funding from several sources, arranged for a range ofmaturities. At 31 December 2005 Bodycote had £72.1m of unutilised committedfacilities. The Group's principal committed facility of £225m (£55m of whichwas unutilised at 31 December 2005) has a maturity of over 4.5 years. The Grouphas an $80m US privately placed bond which has just less than 4 years tomaturity. 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. D F Landless 28 February 2006 1 expressed pre impairment of goodwill (£5.8m: 2004 £nil), amortisation ofacquired intangibles (£0.2m: 2004: £nil) and restructuring costs (£nil: 2004£2.4m) 2 expressed before interest and tax on associates (£0.8m: 2004 £nil) 3 a detailed breakdown of EPS can be found in note 4 on page 26 Consolidated income statementFor the year ended 31 December 2005 2005 2004 £m £mRevenueExisting operations 453.7 424.6Acquisitions 17.2 1.8 Revenue - continuing operations 470.9 426.4 Operating profitExisting operations 57.0 54.2Acquisitions 3.3 1.3Share of results of associates 0.7 -Operating profit - continuing operations 61.0 55.5 Operating profit prior to amortisation and impairment charges 67.0 55.5Amortisation of acquired intangible fixed assets (0.2) -Impairment of goodwill (5.8) - Operating profit - continuing operations 61.0 55.5 Investment income 5.2 4.7Finance costs (13.5) (13.5)Profit before taxation 52.7 46.7 Taxation (11.8) (9.3) Profit for the period from continuing operations 40.9 37.4 Discontinued operationsLoss for the period from discontinued operations - (9.0) Profit for the year 40.9 28.4 Attributable to: Equity holders of the parent 40.7 28.2Minority interest 0.2 0.2 40.9 28.4 pence penceEarnings per shareFrom continuing operations:Basic 12.7 12.2Diluted 12.7 12.2 From continuing and discontinued operations:Basic 12.7 9.3Diluted 12.7 9.3 Consolidated statement of recognised income and expenseFor the year ended 31 December 2005 2005 2004 £m £m Exchange differences on translation of foreign operations (5.1) 2.0Actuarial losses on defined benefit pension schemes (3.7) (8.2)Tax on items taken directly to equity 0.2 2.1Net income recognised directly in equity (8.6) (4.1) Profit for the year 40.9 28.4 Recognised income for the year 32.3 24.3 Attributable to:Equity holders of the parent 32.1 24.1Minority interests 0.2 0.2 32.3 24.3 Consolidated balance sheetAs at 31 December 2005 2005 2004 restated* £m £mNon-current assetsGoodwill 154.2 139.7Other intangible assets 3.7 1.4Property, plant and equipment 442.9 425.9Interests in associates 9.2 5.8Other investments - 0.4Finance lease receivables 1.9 -Deferred tax asset 22.7 18.9Trade and other receivables 6.1 6.1 640.7 598.2 Current assetsInventories 11.9 8.9Finance lease receivables 0.3 -Trade and other receivables 114.5 102.3Cash and cash equivalents 124.8 142.1 251.5 253.3 Non-current assets classified as held for sale 1.2 6.9 Total assets 893.4 858.4 Current liabilitiesTrade and other payables 97.2 86.9Dividends payable 7.5 7.2Current tax liabilities 3.3 2.5Obligations under finance leases 1.4 1.5Bank overdrafts and loans 6.4 7.0Short-term provisions 2.3 1.5 118.1 106.6 Net current assets 133.4 146.7 Non-current liabilitiesBank loans 221.6 219.5Retirement benefit obligation 29.9 24.2Deferred tax liabilities 79.9 72.1Obligations under finance leases 3.9 4.4Long-term provisions 4.7 6.7Other payables 1.8 2.9 341.8 329.8 Total liabilities 459.9 436.4 Net assets 433.5 422.0 * see note 5 Consolidated balance sheetAs at 31 December 2005 2005 2004 £m £mEquityShare capital 32.1 32.1Share premium account 300.3 300.0Own shares (2.5) (0.8)Other reserves 1.7 1.5Hedging and translation reserves 11.1 16.2Retained earnings 89.4 72.0 Equity attributable to equity holders of the parent 432.1 421.0 Minority interest 1.4 1.0 Total equity 433.5 422.0 Consolidated cash flow statementFor the year ended 31 December 2005 2005 2004 £m £m Net cash from operating activities 95.7 100.5 Investing activitiesPurchases of property, plant and equipment (51.8) (37.5)Proceeds on disposal of property, plant and equipment and intangible 8.6 3.6assets Purchases of intangible fixed assets (0.9) (0.5)Acquisition of investment in an associate (2.3) (5.2)Acquisition of subsidiary (31.8) (4.7)Disposal of subsidiary 5.8 20.4 Net cash used in investing activities (72.4) (23.9) Financing activitiesInterest received 5.4 4.2Interest paid (14.9) (12.9)Dividends paid (19.5) (15.7)Dividends paid to a minority shareholder (0.1) -Repayments of bank loans (10.1) (9.2)Payments of obligations under finance leases (1.6) (2.2)New bank loans raised 0.1 5.1New obligations under finance leases 0.1 0.4Proceeds on issue of ordinary share capital 0.3 62.0Own shares purchased (1.7) - Net cash (used in)/from financing activities (42.0) 31.7 Net (decrease)/increase in cash and cash equivalents (18.7) 108.3 Cash and cash equivalents at beginning of year 138.7 29.8 Effect of foreign exchange rate changes 0.7 0.6 Cash and cash equivalents at end of year 120.7 138.7 Reconciliation of operating profit to net cash inflow from operating activities 2005 2004 £m £m Operating profit from continuing operations 61.0 55.5Operating loss from discontinued operations - (2.4) Operating profit 61.0 53.1 Share of associates' interest and tax 0.8 -Depreciation of property, plant and equipment 40.5 43.4Amortisation of intangible assets 0.9 0.6Impairment of goodwill 5.8 - EBITDA 1 109.0 97.1 (Gain)/loss on disposal of property, plant and equipment (0.6) 0.5Income from associates (1.6) - Share-based payments 0.2 0.2 Operating cash flows before movements in working capital 107.0 97.8 (Increase)/decrease in inventories (2.1) 3.6Increase in receivables (8.4) (2.1)Increase in payables 2.8 7.1Increase/(decrease) in provisions 4.7 (0.5) Cash generated by operations 104.0 105.9 Income taxes paid (8.3) (5.4) Net cash from operating activities 95.7 100.5 1 Earnings before interest, tax, depreciation and amortisation 1. Operating Profit 2005 2004 Existing Acquisitions Continuing Existing Acquisitions Continuing operations operations operations operations £m £m £m £m £m £m Revenue 453.7 17.2 470.9 424.6 1.8 426.4 Cost of sales (301.4) (10.7) (312.1) (283.5) (1.1) (284.6) Gross profit 152.3 6.5 158.8 141.1 0.7 141.8 Other operating income 2.5 0.1 2.6 - 0.3 0.3 Distribution (14.3) (0.4) (14.7) (13.6) (0.1) (13.7) Impairment of goodwill (5.8) - (5.8) - - - Other administration (77.7) (2.9) (80.6) (72.2) 0.7 (71.5) expenses Total administration (83.5) (2.9) (86.4) (72.2) 0.7 (71.5) expenses Other operating expenses - - - (1.4) - (1.4) Operating profit before 57.0 3.3 60.3 54.2 1.3 55.5 income from associates Income from associates 0.7 - after interest and tax Operating profit 61.0 55.5 2. Business and geographicalsegments Discontinued Operations Heat Hot Testing Electro-plating PVD Dis-continued Head Office Continuing Treatment Isostatic operations and operations Pressing eliminations 2005 2005 2005 2005 2005 2005 2005 2005 £m £m £m £m £m £m £m £m Revenue External sales 349.2 35.2 86.5 1.5 - (1.5) - 470.9 Inter-segment - - 0.6 - - - (0.6) - sales Total revenue 349.2 35.2 87.1 1.5 - (1.5) (0.6) 470.9 Inter-segment sales are charged at prevailing market prices Result Segment result 43.3 9.5 16.3 - - - - 69.1 prior to amortisation of acquired intangible assets and impairment of goodwill Share of associate's 1.5 - - - - - - 1.5 operating profit Unallocated corporate - - - - - - (2.8) (2.8) expenses 44.8 9.5 16.3 - - - (2.8) 67.8 Amortisation of (5.8) - (0.2) - - - - (6.0) acquired intangible assets and impairment of goodwill Segment result 39.0 9.5 16.1 - - - (2.8) 61.8 Share of associates' (0.8) (0.8) interest and tax Operating profit - 61.0 continuing operations Investment revenues 5.2 Finance costs (13.5) Profit before tax 52.7 Tax (11.8) Profit for year 40.9 2. Business and geographical segments(continued) Discontinued Operations Heat Hot Testing Electro-plating PVD Discon-tinued Head office Continuing Treatment Isostatic operations and operations Pressing eliminations 2004 2004 2004 2004 2004 2004 2004 2004 £m £m £m £m £m £m £m £mRevenueExternal sales 328.7 32.1 65.6 19.1 11.7 (30.8) - 426.4Inter-segment sales - - 0.5 - - - (0.5) - Total revenue 328.7 32.1 66.1 19.1 11.7 (30.8) (0.5) 426.4 Inter-segment sales are charged at prevailing market prices ResultSegment result prior to 38.8 7.1 12.4 (14.5) 0.9 13.6 - 58.3amortisation ofacquired intangibleassets and impairmentof goodwillUnallocated corporate - - - - - - (2.8) (2.8)expenses Operating profit - 38.8 7.1 12.4 (14.5) 0.9 13.6 (2.8) 55.5continuing operations Investment revenues 4.7Finance costs (13.5) Profit before tax 46.7Tax (9.3)Loss for the year from (9.0)discontinued operations Profit for year 28.4 2. Business and geographical segments(continued) Other information Discontinued Operations Heat Hot Testing Electroplating PVD Head office and Consolidated Treatment Isostatic eliminations Pressing 2005 2005 2005 2005 2005 2005 2005 £m £m £m £m £m £m £mCapital additions 37.6 5.2 9.9 - - - 52.7Depreciation and 32.2 4.3 4.9 - - - 41.4amortisationImpairment losses 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 736.0 86.5 117.6 - - (46.7) 893.4assets Liabilities:Segment liabilities 399.1 28.0 69.3 - - (36.5) 459.9Segment net assets 336.9 58.5 48.3 - - (10.2) 433.5 Discontinued Operations Heat Hot Testing Electroplating PVD Head office and Consolidated Treatment Isostatic eliminations Pressing 2004 2004 2004 2004 2004 2004 2004 £m £m £m £m £m £m £m Capital additions 30.6 1.2 5.6 - 0.6 (0.6) 37.4Depreciation and 32.6 5.1 4.0 0.6 1.7 (2.3) 41.7amortisation Balance sheetAssets:Segment assets 700.4 77.1 77.3 - - 3.6 858.4 Interests in associates - - - - - - - Consolidated total 700.4 77.1 77.3 - - 3.6 858.4assets Liabilities:Segment liabilities 344.1 19.5 41.0 - - 31.8 436.4 Segment net assets 356.3 57.6 36.3 - - (28.2) 422.0 2. Business and geographical segments(continued) By geographical market Sales revenue 2005 2004 £m £mEurope 297.6 269.2North America 166.7 152.1Rest of world 6.6 5.1 470.9 426.4 Revenue from the Group's discontinued operations was derived principally from Europe (2005: £1.5 million, 2004: £30.8million). Carrying amount of segment Additions to property, assets plant and equipment and intangible assets 2005 2004 2005 2004 £m £m £m £mEurope 293.0 275.8 31.1 26.2North America 126.9 136.9 21.0 10.9Rest of world 13.6 9.3 0.6 0.3 433.5 422.0 52.7 37.4 3. Taxation Continuing Discontinued Operations Total Operations 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m Current taxation 9.4 8.8 - (4.6) 9.4 4.2Deferred taxation 2.4 0.5 - - 2.4 0.5 11.8 9.3 - (4.6) 11.8 4.7 UK corporation tax is calculated at 30% (2004: 30%) of the estimated assessable profit for the year. Taxationfor other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. There was no charge to current tax in 2005 relating to the Electroplating and PVD divisions, the facilities ofwhich were disposed of during 2004 and 2005. No material tax charge or credit arose on the disposal of therelevant assets. 4. Earnings per share From continuing and discontinued operations The calculation of the basic and diluted earnings per share is based on thefollowing data: 2005 2004 £m £mEarningsEarnings for the purposes of basic earnings per share 40.7 28.2being net profit attributable to equity holders of theparent Number of shares Number NumberWeighted average number of ordinary shares for the 319,719,955 304,605,680purposes of basic earnings per share Effect of dilutive potential ordinary shares:Share options 546,590 124,007 Weighted average number of ordinary shares for the 320,266,545 304,729,687purposes of diluted earnings per share From continuing operations 2005 2004 £m £mEarningsNet profit attributable to equity holders of the parent 40.7 28.2 Adjustments to exclude loss for the year from - 9.0discontinued operations Earnings from continuing operations for the purpose of 40.7 37.2basic earnings per share excluding discontinuedoperations The denominators are the same as those detailed above for both basic and diluted earnings pershare from continuing and discontinued operations. Earnings per share from continuing and discontinuedoperations: pence penceBasic 12.7 9.3Diluted 12.7 9.3 Loss per share from discontinued operations: pence pence Basic - (2.9) Diluted - (2.9) 4. Earnings per share (continued) Earning per share from continuing operations: pence penceBasic 12.7 12.2Diluted 12.7 12.2 Headline earnings 2005 2004 £m £mNet profit attributable to equity holders of the parent 40.7 28.2 Add back:Impairment of goodwill 5.8 -Amortisation of acquired intangible fixed assets 0.2 -Restructuring costs after tax - 7.3 Headline earnings 46.7 35.5 Earnings per share from headline earnings: pence pence Basic 14.6 11.7Diluted 14.6 11.7 5. Accounting Policies Basis of accounting The financial statements of the Group have been prepared in accordance withInternational Financial Reporting Standards (IFRS) as adopted for use in the EU. Bodycote International plc's consolidated financial statements were prepared inaccordance with United Kingdom Generally Accepted Accounting Principles (UKGAAP) until 1 January 2005. UK GAAP differs in some areas from IFRS. 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 2006. The Group has made use of the exemption available under IFRS 1 to only apply IAS32, 'Financial Instruments: Disclosure and Presentation' and IAS 39 'FinancialInstruments: Recognition and Measurement' from 1 January 2005. The financial statements have been prepared on the historic cost basis. Theprincipal accounting policies adopted are set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and entities controlled by the Company (its subsidiaries) made up to31 December each year. Control is achieved where the Company has the power togovern the financial and operating policies of an investee entity so as toobtain benefits from its activities. On acquisition, the assets and liabilities and contingent liabilities of asubsidiary are measured at their fair values at the date of acquisition. Anyexcess of the cost of acquisition over the fair values of the identifiable netassets acquired is recognised as goodwill. Any deficiency of the cost ofacquisition below the fair values of the identifiable net assets acquired (i.e.discount on acquisition) is credited to profit and loss in the period ofacquisition. The interest of minority shareholders is stated at the minority'sproportion of the fair values of the assets and liabilities recognised.Subsequently, any losses applicable to the minority interest in excess of theminority interest are allocated against the interests of the parent. The results of subsidiaries acquired or disposed of during the year are includedin the consolidated income statement from the effective date of acquisition orup to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies used into line with those used bythe Group. All intra-group transactions, balances, income and expenses are eliminated onconsolidation. Investments in associates An associate is an entity over which the Group is in a position to exercisesignificant influence, but not control or joint control, through participationin the financial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in thesefinancial statements using the equity method of accounting. Investments inassociates are carried in the balance sheet at cost as adjusted bypost-acquisition changes in the Group's share of the net assets of theassociate, less any impairment in the value of individual investments. Lossesof the associates in excess of the Group's interest in those associates are notrecognised. Any excess of the cost of acquisition over the Group's share of the fair valuesof the identifiable net assets of the associate at the date of acquisition isrecognised as goodwill. Any deficiency of the cost of acquisition below theGroup's share of the fair values of the identifiable net assets of the associateat the date of acquisition (i.e. discount on acquisition) is credited in profitand loss in the period of acquisition. Where a group company transacts with an associate of the Group, profits andlosses are eliminated to the extent of the Group's interest in the relevantassociate. Losses may provide evidence of an impairment of the assettransferred, in which case appropriate provision is made for impairment. Non-current assets held for sale Non-current assets (and disposal groups) classified as held for sale aremeasured at the lower of carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if theircarrying amount will be recovered through a sale transaction rather than throughcontinuing use. This condition is regarded as met only when the sale is highlyprobable and the asset (or disposal group) is available for immediate sale inits present condition. Management must be committed to the sale which should beexpected to qualify for recognition as a completed sale within one year from thedate of classification. Goodwill Goodwill arising on consolidation represents the excess of the cost ofacquisition over the Group's interest in the fair value of the identifiableassets and liabilities of a subsidiary, associate or jointly controlled entityat the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment at leastannually. Any impairment is recognised immediately in profit or loss and is notsubsequently reversed. On disposal of a subsidiary, associate or jointly controlled entity, theattributable amount of goodwill is included in the determination of the profitor loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRSs has beenretained at the previous UK GAAP amounts, subject to being tested for impairmentat that date. Goodwill written off to reserves under UK GAAP prior to 1998 hasnot been reinstated and is not included in determining any subsequent profit orloss on disposal. Revenue recognition Revenue is measured at the fair value of the consideration received orreceivable and represents amounts receivable for goods and services provided inthe normal course of business, net of discounts, VAT and other sales-relatedtaxes. Interest income is accrued on a time basis, by reference to the principaloutstanding and at the effective interest rate applicable, which is the ratethat exactly discounts estimated future cash receipts through the expected lifeof the financial asset to that asset's net carrying amount. Dividend income from investments is recognised when the shareholder's rights toreceive payment have been established. The Group as a Lessee Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the lessee. All otherleases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at theirfair value or, if lower, at the present value of the minimum lease payments,each determined at the inception of the lease. The corresponding liability tothe lessor is included in the balance sheet as a finance lease obligation.Lease payments are apportioned between finance charges and reduction of thelease obligation so as to achieve a constant rate of interest on the remainingbalance of the liability. Finance charges are charged directly against income. Rentals payable under operating leases are charged to income on a straight-linebasis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operatinglease are also spread on a straight-line basis over the lease term. The Group as a Lessor Amounts due from lessees under finance leases are recorded as receivables at theamount of the group's net investment in the leases. Finance lease income isallocated to accounting periods so as to reflect a constant periodic rate ofreturn on the group's net investment outstanding in respect of the leases. Foreign currencies Transactions in currencies other than pounds sterling are recorded at the ratesof exchange prevailing on the dates of the transactions. At each balance sheetdate, monetary assets and liabilities that are denominated in foreign currenciesare retranslated at the rates prevailing on the balance sheet date. Gains andlosses arising on retranslation are included in net profit or loss for theperiod. On consolidation, the assets and liabilities of the Group's overseas operationsare translated at exchange rates prevailing on the balance sheet date. Incomeand expense items are translated at the average exchange rates for the periodunless exchange rates fluctuate significantly. Exchange differences arising, ifany, are classified as equity and transferred to the Group's translationreserve. Such translation differences are recognised as income or as expensesin the period in which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate. The Group has elected to treat goodwill andfair value adjustments arising on acquisitions before the date of transition toIFRSs as sterling-denominated assets and liabilities. Borrowing costs Borrowing costs are recognised in profit or loss in the period in which they areincurred. Government grants Government grants relating to property, plant and equipment are treated asdeferred income and released to profit and loss over the expected useful livesof the assets concerned. Operating profit Operating profit is stated after charging restructuring costs, goodwillimpairment, amortisation of acquired intangible assets and after the post-taxshare of results of associates but before investment income and finance costs. Retirement benefit costs Payments to defined contribution retirement benefit schemes are charged as anexpense as they fall due. Payments made to state-managed retirement benefitschemes are dealt with as payments to defined contribution schemes where theGroup's obligations under the schemes are equivalent to those arising in adefined contribution retirement benefit scheme. For defined benefit retirement benefit schemes, the cost of providing benefitsis determined using the Projected Unit Credit Method, with actuarial valuationsbeing carried out at each balance sheet date. Actuarial gains and losses arerecognised in full in the period in which they occur. They are recognisedoutside profit or loss and presented in the statement of recognised income andexpense. Past service cost is recognised immediately to the extent that the benefits arealready vested, and otherwise is amortised on a straight-line basis over theaverage period until the benefits become vested. The retirement benefit obligation recognised in the balance sheet represents thepresent value of the defined benefit obligation, as reduced by the fair value ofscheme assets. Taxation The tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if thetemporary difference arises from goodwill or from the initial recognition (otherthan in a business combination) of other assets and liabilities in a transactionthat affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, and interests in jointventures, except where the Group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciationand any recognised impairment loss. Depreciation is charged so as to write off the cost of assets, other than land,over their estimated useful lives, using the straight-line method, on thefollowing bases: Freehold buildings 2%Leasehold property over the period of the leaseFixtures and fittings 10% - 20%Plant and machinery 5% - 20%Motor vehicles 20% - 33% Assets held under finance leases are depreciated over their expected usefullives on the same basis as owned assets or, where shorter, over the term of therelevant lease. The gain or loss arising on the disposal or retirement of an asset is determinedas the difference between the sales proceeds and the carrying amount of theasset and is recognised in income. Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indication thatthose assets have suffered an impairment loss. If any such indication exists,the recoverable amount of the asset is estimated in order to determine theextent of the impairment loss (if any). Where the asset does not generate cashflows that are independent from other assets, the Group estimates therecoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use, the estimated future cash flows are discountedto their present value using a discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset forwhich the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset(cash-generating unit) is reduced to its recoverable amount. An impairment lossis recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset(cash-generating unit) is increased to the revised estimate of its recoverableamount, but so that the increased carrying amount does not exceed the carryingamount that would have been determined had no impairment loss been recognisedfor the asset (cash-generating unit) in prior years. A reversal of animpairment loss is recognised as income immediately. Inventories Inventories are stated at the lower of cost and net realisable value. Costcomprises direct materials and, where applicable, direct labour costs and thoseoverheads that have been incurred in bringing the inventories to their presentlocation and condition. Net realisable value represents the estimated sellingprice less all estimated costs of completion and costs to be incurred inmarketing, selling and distribution. Financial instruments Financial assets and financial liabilities are recognised on the Group's balancesheet when the Group becomes a party to the contractual provisions of theinstrument. Trade receivables Trade receivables do not carry any interest and are stated at their nominalvalue as reduced by appropriate allowances for estimated irrecoverable amounts. Financial liabilities and equity Financial liabilities and equity instruments are classified according to thesubstance of the contractual arrangements entered into. An equity instrument isany contract that evidences a residual interest in the assets of the Group afterdeducting all of its liabilities. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceedsreceived, net of direct issue costs. Finance charges, including premiumspayable on settlement or redemption and direct issue costs, are accounted for onan accrual basis to the profit and loss account using effective interest methodand are added to the carrying amount of the instrument to the extent that theyare not settled in the period in which they arise. Trade payables Trade payables are not interest-bearing and are stated at their nominal value. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received,net of direct issue costs. Hedge accounting The Group's activities expose it primarily to the financial risks of changes inforeign currency exchange rates. The Group uses foreign currency debt to hedgeits exposure to changes in the underlying net assets of overseas operationsarising from exchange rate movements. Gains and losses arising from the retranslation of foreign currency debt that isdesignated and effective as a hedge of the group's investment in overseasoperations are recognised directly in equity and the ineffective portion isrecognised immediately in the income statement. Hedge accounting is discontinued when the hedging instrument expires or is sold,terminated, or exercised, or no longer qualifies for hedge accounting. Provisions Provisions for restructuring costs are recognised when the group has a detailedformal plan for the restructuring that has been communicated to affectedparties. During the year, the Group changed the classification of certain restructuringand environmental liabilities from long-term payables to provisions andaccordingly the comparative information at 31 December 2004 has been restated.This has reduced long-term payables at that date by £6.7 million and increasedprovisions by the same amount. In the opinion of the directors, this a moreappropriate presentation of these liabilities. Share-based payments The Group has applied the requirements of IFRS 2 Share-based Payments. Inaccordance with the transitional provisions, IFRS 2 has been applied to allgrants of equity instruments after 7 November 2002 that were unvested as of 1January 2005. The Group issues equity-settled share-based payments to certain employees.Equity-settled share-based payments are measured at fair value at the date ofgrant. The fair value determined at the grant date of the equity-settledshare-based payments is expensed on a straight-line basis over the vestingperiod, based on the group's estimate of shares that will eventually vest. Fair value is measured by use of a Black-Scholes model. 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 2005 or 2004 butis derived from those financial statements. Statutory financial statements for2004 were prepared under UK GAAP and have been delivered to the Register ofCompanies. Those for 2005 will be delivered following the company's annualgeneral meeting, which will be convened at 3 pm on 23 May 2006. The auditorshave reported on those accounts: their report was unqualified and did notcontain any statement under Section 237(2) or (3) of the Companies Act 1985. This report was approved by the Board of Directors on 28 February 2006. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Bodycote