Interim Results

2nd Aug 2006 07:02

Cookson Group PLC02 August 2006 2 August 2006 COOKSON GROUP PLC - ANNOUNCEMENT OF 2006 INTERIM RESULTS Highlights • Ongoing implementation of strategic plan producing strong results • Continuing operations: - Revenue of £819 million up 14% - Trading profit of £72 million up 27% - Return on sales up 0.9 percentage points to 8.8% • Headline PBT and EPS up 57% and 56% respectively • Pension deficit £36 million lower than December 2005 • Net debt £114 million lower than June 2005 • Interim dividend of 3 pence per share Increase/(decrease) vs 2005 Year First Half 2006 2005(3) Reported rates Constant 2005(3) rates Continuing Operations(1) Revenue £819m £720m +14% +10% £1,481mTrading profit(2) £72.0m £56.6m +27% +21% £128.8mReturn on sales(2) 8.8% 7.9% +0.9 pts +0.8 pts 8.7% Total Operations Revenue £866m £795m +9% £1,635mTrading profit(2) £76.0m £56.6m +34% £134.7mReturn on sales(2) 8.8% 7.1% +1.7 pts 8.2% Profit - headline(2) £61.9m £39.5m +57% £101.1mbefore tax - basic £54.9m £32.2m +70% £81.4mEarnings per - headline(2) 21.4p 13.7p +56% 36.8pshare - basic 12.7p 8.5p +49% (5.8)pDividend per share 3.0p - 5.0p Free cash flow(2) £(13.1)m £(17.8)m £4.7m £48.4mNet debt £249m £363m £(114)m £292m (1) Continuing operations exclude the results of the Laminates and SCS businesses (2) Refer to Note 1 of the attached financial statements for definitions (3) The 2006 Interim Results reflect the reclassification of pension interest as described more fully in the Group Financial Review below. Comparatives have been restated for this change and also to include the amortisation of intangibles within trading profit rather than separately as an exceptional item. Commenting on the Group's results and outlook, Nick Salmon, Chief Executive,said: "The Group has made very encouraging progress so far in 2006, both in terms ofimproved trading results and in the execution of our strategic plan. "Revenue from continuing operations for the first six months of 2006 was up 14%,driven by continuing growth in our main end-markets of worldwide steelproduction and consumer electronics, together with some improvement in the USprecious metals market. Trading profit from continuing operations increased 27%over the comparable period last year. This strong improvement reflects thebenefits of the restructuring and investment programmes initiated over the pasttwo years. "In line with our strategic plan and previous guidance, we will be implementingfurther restructuring and investment projects over the next eighteen months.Today, we are announcing the building of additional Ceramics production capacityin Poland and the proposed restructuring of this division's operations in theUK. "We expect the positive market trends to continue into the second half of 2006while noting that the second half of 2005 was markedly stronger than the firsthalf, setting a tougher comparative benchmark for the second half of 2006." OVERVIEW Strategic Plan In January 2005, we announced a strategic plan with a three year horizon,targeted to improve operational performance, reduce debt and resume a dividendprogramme. The plan is based on four principles: • A focus on higher technology products and the exit from commodity activities • Investment in production capacity in emerging markets and restructuring in maturing markets • Cost and overhead reduction • The disposal of non-core activities and assets to reduce debt by over £100 million by the end of 2006 Strategic Plan - Progress to date We have made good progress so far in implementing the strategic plan. Aspreviously advised, in recent years the bulk of restructuring has been in theElectronics division, mainly in the now disposed of Laminates sector. The focushas shifted to the Ceramics division, where the new divisional Chief Executive,Francois Wanecq, has identified a number of further opportunities to improveperformance. Ceramics Whilst organic revenue growth in the first half of 2006 at 7% was broadly inline with steel production growth, trading profit has grown by 26% and themargin at 11.2% now exceeds the original strategic plan target (as restated forthe reclassification of pension interest). A new, more streamlined and responsive organisation has been put in place.Overhead costs have been reduced via the restructuring plan implemented aroundthe end of 2005 which eliminated over 100 positions and this, in particular, hasbenefited the profitability of our NAFTA operations. In April, we completed the disposal of our Ceramic Fibres business. In May, weannounced projects to further increase capacity in China and Mexico as well asthe closure of one of our smaller facilities in the US. In China, we areinvesting £10 million in three new, highly efficient facilities to supply thegrowing foundry, glass and solar cell markets. In June, we sold our carbon blocks business located in Bawtry, UK for £7million. This business had revenue in the full year 2005 of £13 million,trading profit of £1 million, and employed 90 people who have transferred withthe business. This sale involved a substantial (£6 million) non-cash loss ondisposal but enabled us to exit a non-core commodity activity. Today, we are announcing additional significant investment in Poland and somefurther proposed restructuring plans in the UK. We are announcing plans to invest over £10 million in building two newproduction lines at our existing large facility in Skawina, Poland. One willserve as our main European centre for slide-gate production based on the newerresin bonded alumina technology and the second as a new solar crucible facility.We propose, subject to employee consultation, to close the existing slide-gatefacility in Goole, UK by mid-2007. Goole currently employs 114 people. It isenvisaged that the assets associated with this site would therefore bewritten-down in the second half of 2006 as a non-cash charge. Our magnesia-carbon bricks business in Worksop, UK is suffering from a low levelof order intake and poor prospects in the face of strong Asian competition. Wepropose, subject to employee consultation, to close this operation by the end of2006. In 2005, Worksop generated revenue of £11 million and a small tradingloss. It currently employs 73 people. We have written-down the associated netassets as a non-cash charge in these interim results. Lastly, as a result of the above, we propose to further downsize our UK centralorganisation in Barlborough. Electronics The disposal of the Laminates business was completed in April 2006 and therebyeliminated our exposure to this volatile commodity business. The continuingbusinesses of Assembly Materials and Chemistry showed combined revenue growth of20% compared with the first half of 2005 with trading profit up 24%. The maindrivers for these improvements were the continuing market transition to highermargin lead-free products and the non-repeat of the copper damascene productde-stocking issue which adversely affected the first quarter of 2005. In June we completed the closure of our commodity industrial metals businessactivities in Europe (2005 revenue of £7 million) with the loss of 65 jobs atour Naarden facility in The Netherlands. We are increasing lead-free solderproduction capacity, particularly in Asia-Pacific, to keep up with the markettransition and further expanding our R&D facility in Bangalore, India. Precious Metals Net sales value increased by 10% and trading profit by 52% compared with thefirst six months of 2005. The US operations have benefited from improved netsales value in an improving market environment, together with the benefits ofthe major restructuring implemented in the second quarter of 2005. In Europe, net sales value remained flat in a depressed market. Profitabilityhas improved as we execute our plan to restructure our selling and distributionactivities in the UK, which has involved the loss of 42 jobs in 2006 to date. Disposals In addition to the £114 million of disposals previously announced with ourPreliminary Results in March 2006, we have subsequently completed the sale ofthe carbon blocks business for £7 million, payable in instalments over threeyears, and further land and property for £3 million. We are progressing withsome further small business disposals and continuing the rationalisation of ourproperty portfolio. Dividend In June 2006, the Group paid the final dividend of 5 pence per share in respectof 2005, which was the first dividend paid since October 2001. The first halfof 2006 has seen strongly improved profitability and a satisfactory trend offree cash flow generation. This, together with the Board's confidence in thefuture prospects for the Group, has resulted in the Board declaring an interimdividend for 2006 of 3 pence per share. OUTLOOK Market conditions generally remain positive, particularly for Ceramics andElectronics, our two largest divisions. On top of this, we see opportunities inall three divisions to implement further initiatives, consistent with the fourstrategic principles outlined above, which will underpin our recent strongresults progression and further improve our performance and potential. We expect the positive market trends to continue into the second half of 2006while noting that the second half of 2005 was markedly stronger than the firsthalf, setting a tougher comparative benchmark for the second half of 2006. REVIEW OF OPERATIONS Note: the data provided in the tables below are at reported exchange rates andreflect the reclassification of pension interest as described more fully in theGroup Financial Review below. Comparatives have been restated accordingly. Group - continuing operations First Half Year 2006 2005 2005Revenue (£m) 819 720 1,481Trading profit (£m) 72.0 56.6 128.8Return on sales 8.8% 7.9% 8.7% Group revenue from continuing operations in the first half of 2006 was wellahead of the same period in 2005, being 14% higher at reported exchange ratesand up 10% at constant exchange rates. The increase in revenue reflected bothstrong organic growth plus the impact of higher metal prices being 'passedthrough' to customers in the Precious Metals division and the Assembly Materialsand Chemistry sectors of the Electronics division. Revenue for the Group'soperations in the Asia-Pacific region continued to grow strongly nowrepresenting 21% of Group revenue (2005: 18%), with NAFTA and Europe eachrepresenting 37%. Trading profit from continuing operations in the first half of 2006 increasedsignificantly to £72.0 million (2005: £56.6 million), being 27% higher atreported exchange rates and up 21% at constant exchange rates. All divisionsand sectors reported an increase in their trading profit. These increasesreflected both the strong organic revenue growth and the benefit of the costreduction initiatives enacted over the last eighteen months. The strong growth in trading profit resulted in a significant increase in theGroup's return on sales from continuing operations with an increase to 8.8% from7.9%. The impact of higher metal prices increasing reported revenue depressedthe return on sales in the first half of 2006 by around 0.4 percentage pointscompared to the same period last year. Ceramics division First Half Year 2006 2005 2005Revenue (£m) 399 368 746Trading profit (£m) 44.9 35.6 77.0Return on sales 11.2% 9.7% 10.3% The division performed strongly in the first half of 2006 with revenue atreported exchange rates higher by 9% compared to the same period last year (5%at constant exchange rates). Organic growth, adjusted to take account of thedisposals of Technical Ceramics (McDanel) in 2005 and the Ceramic Fibres and UKcarbon block businesses in 2006, was 7%. Trading profit at £44.9 million was 26% higher at reported exchange rates (20%at constant exchange rates) resulting in the return on sales increasing from9.7% to 11.2%. The strong trading performance was driven by good growth in thedivision's key end-markets, in particular the steel, glass and constructionindustries, plus the beneficial impact of the restructuring and investmentmeasures implemented in 2005 and the first half of 2006. At the end of 2005, a new more streamlined and responsive organisational modelwas introduced which focuses operational responsibilities on a regional basis.We are amending our external reporting to reflect this structure. In eachregion, the key end market is global steel production, which accounts for around65% of the division's revenue. Global steel production grew 8% in the first halfof 2006. This growth compares to the 6% growth seen in the full year 2005.Growth was recorded in all major regions with particularly strong growth insteel production in China (18%) and India (17%). Whilst the division is wellpositioned in these two fast-growing markets, over 76% of the division's revenuestill comes from NAFTA and Europe, in which steel production growth was 5% and4% respectively. NAFTA (comprising the US, Canada and Mexico) Revenue in NAFTA grew by 5% to £151 million at constant exchange rates withgrowth in all principal product lines - flow control, linings and foundry.Steel production in NAFTA grew by 5% in the first half of 2006 compared to thesame period last year and other industrial markets also showed modest growth. Adecline in revenue for the construction & installation business, which suppliesand installs monolithic refractory linings into a variety of industries,reflected the strategy to only focus resources on higher margin, morevalued-added projects. Trading profit in the first half of 2006 increased markedly by around one-thirdon the same period last year reflecting the underlying volume growth, the impactof the elimination of around 60 non-production personnel at the end of 2005, thebenefit to costs of the ongoing relocation of production capacity from the US toMexico and improved profitability in the linings and construction & installationproduct lines. During the first half of 2006, the division continued its restructuringprogramme with the announcement of the closure of the Beaver Falls facility.Slide-gate production capacity is in the process of being expanded at theMonterrey facility in Mexico. Europe Improved market conditions resulted in a 2% growth in revenue at constantexchange rates to £152 million compared to the first half of 2005. Strongrevenue for flow control products reflected a growth in steel production of 4%for the region in the first half of 2006, with growth in Eastern Europe, Italy,Germany, France and the UK, more than offsetting a reduction in Spain. Thelinings and foundry product lines also demonstrated growth. Trading profit grew by nearly one-fifth compared with the first half of 2005 asa result of the underlying volume growth despite weaker profitability in the UK. Following a strategic review of the UK operations, the carbon block business,located in Bawtry (South Yorkshire) was sold in June 2006. The magnesia carbonbrick business, located in Worksop (Nottinghamshire), is currently experiencingvery weak trading conditions. Subject to employee consultation, we plan toclose this facility by the end of 2006. We also plan, subject to employeeconsultation, to close our slide-gate operation in Goole (East Yorkshire) bymid-2007, in light of the planned expansion of our slide-gate capacity at ourfacility in Skawina, Poland based on the newer resin bonded alumina technology.As a result of these initiatives, it is also intended to downsize the Ceramicsdivision's UK headquarters based in Barlborough (Derbyshire). Asia-Pacific and ROW Revenue in these regions grew in total by 15% to £75 million at constantexchange rates reflecting both strong steel production growth in the two keymarkets of China and India, plus broadly unchanged revenue in the construction &installation business, which primarily operates in Australia. China continuesto experience consolidation in the steel industry and the government isencouraging the industry to shift to more modern, energy and pollution efficientmethods of steel production which should expand the market for the Ceramicsdivision's leading flow control products. This trend should enable the divisionto continue its strong progress in China even if the rate of growth of totalsteel production starts to slow. The strong revenue growth has resulted in trading profit being 22% ahead of thefirst half of last year with increased volumes more than offsetting a morecompetitive market environment. In May we announced the construction of a new £5 million foundry cruciblesfacility in Suzhou, Jiangsu Province, near two of the division's existingChinese facilities. The new facility, which should be operational by mid-2007,will produce long-life, high performance alumina graphite crucibles for thefast-growing non-ferrous foundry market. The Chinese foundry industry is thelargest in the world and has experienced annual growth of around 10% over thelast few years. Fused Silica The one product line we manage on a global rather than a regional basis is fusedsilica. The principal products in the global fused silica product line aretempering rollers used in the glass industry and solar crucibles used in themanufacture of photovoltaic ("solar") cells. Revenue has grown by 17% to £21million compared with the first half of 2005 at constant exchange rates, drivenby good market conditions for the glass industry - both strong growth in theconstruction industry in China and increasing demand for flat screen televisionpanels - combined with the growth of the solar energy industry. As anticipated,limited supplies of the polysilicon material used in the majority of solarpanels is restricting growth in the short-term, but additional capacity is nowcoming on stream such that growth should increase to double-digit in the nextcouple of years. Profitability remains strong for this product line with trading profit up byjust over a quarter on the first half of 2005. To meet the increasing demand for fused silica products, in May a £5 millionadditional investment was announced in Kua Tang, the site of the division'sexisting glass roller business in China. This investment, which should becompleted by the end of 2006, will significantly expand capacity for producingthe rollers used in the glass industry and transform this facility into theCeramics division's leading centre worldwide for glass roller production.Alongside this facility, the division is also constructing a new facility tomanufacture solar crucibles for the fast-growing photovoltaic market inAsia-Pacific. Following this additional investment in China, a £7 millioninvestment to build a solar crucible facility in Skawina, Poland to supplyEuropean customers has just been launched. This facility should be operationalby mid-2007. Electronics division First Half Year 2006 2005 2005Revenue (£m) 281 234 489Trading profit (£m) 27.0 21.7 52.5Return on sales 9.6% 9.3% 10.7% Following the completion of the Laminates disposal in April 2006, theElectronics division now comprises two sectors, Assembly Materials andChemistry, the results of which are reviewed below. Assembly Materials First Half Year 2006 2005 2005Revenue (£m) 162 129 273Trading profit (£m) 12.7 9.6 25.6Return on sales 7.9% 7.4% 9.4% Revenue for the sector of £162 million grew very strongly by 25% at reportedexchange rates compared to the first half of 2005 (20% at constant exchangerates). This increase reflected both strong organic revenue growth of around14% (at constant exchange rates) but also the 'pass through' to customers ofhigher metal prices, in particular for silver. Whilst the average price of tin- the sector's major raw material - in the first half of 2006 was onlymarginally higher than the same period last year, the price of silver was onaverage 57% higher between the two periods. Silver is becoming a moresignificant raw material given the increased penetration of lead-free solder,which typically comprises 3% silver by weight. The organic revenue growth wasdriven by continued strong growth in demand for consumer electronics, notablymobile phones, MP3 players, digital televisions and personal computers, onlypartially offset by more difficult markets for solder products used inindustrial applications. Trading profit of £12.7 million was 32% higher than the same period last year atreported exchange rates (25% at constant exchange rates) reflecting the growthin underlying volumes, the higher profitability of lead-free products and theimpact of cost-saving initiatives. Return on sales increased from 7.4% to 7.9%.This improvement was achieved notwithstanding the negative impact on thereturn on sales percentage from the higher metal prices being 'passed through'to customers. Asia-Pacific, the sector's largest region, accounted for just over half ofrevenue in the first half of 2006, an increase of 6 percentage points over thesame period last year. This reflected the continued migration of consumerelectronics production to this region. The transition to lead-free solder,driven by European Union legislation which became effective on 1 July 2006,continues to enhance both revenue and profits. In the second quarter of 2006,47% of solder revenue was derived from lead-free products, up from 37% in thefirst quarter of 2006 and 32% in the fourth quarter of 2005. This trend isexpected to continue in the second half of 2006 and capacity for the productionof lead-free solder has been increased, notably in Asia-Pacific. Sales of thesector's proprietary lower cost, lead-free solder with a low silver content(Alpha SACXTM) have been encouraging and it constituted 13% of lead-free solderrevenue in the second quarter of 2006. In June 2006, the closure of our commodity industrial metals business inNaarden, Netherlands was completed with a reduction in headcount of 65. R&D andnew product development remain a key focus, reflected by a further expansion ofR&D capabilities in Bangalore, India. Chemistry First Half Year 2006 2005 2005Revenue (£m) 119 105 216Trading profit (£m) 14.3 12.1 26.9Return on sales 12.0% 11.5% 12.5% Revenue for the first half of 2006 of £119 million grew by 13% at reportedexchange rates (10% at constant exchange rates). This growth was largely drivenby the 'pass through' of higher metal prices (notably for gold and palladium) tocustomers. Prior to this impact, the organic growth in revenue of 1% (atconstant exchange rates) reflected good growth for the sector's higher marginproducts serving the electronics markets (and, in particular, the non-repeat ofthe significant copper damascene de-stocking issue which negatively impacted thefirst quarter of 2005), being offset by weaker sales of lower margin productsfor industrial and automotive markets. Trading profit for the first half of 2006 at £14.3 million was 18% higher thanthe same period last year at reported exchange rates (14% at constant exchangerates). This reflected the better mix of higher margin products serving theelectronics markets, including copper damascene and lead-free immersion silverproducts (AlphaSTARTM). Return on sales increased strongly from 11.5% to 12.0%,notwithstanding the negative impact of higher reported revenue due to higherprecious metal prices. Europe and NAFTA remain the sector's largest regions with 41% and 35% of totalsector revenue, respectively. Asia-Pacific represents 23% of total sectorrevenue. The first half of 2006 saw further progress being made in the rationalisation ofthe sector's European sales and distribution network, a cost-reductioninitiative commenced in 2005. Precious Metals First Half Year 2006 2005 2005Revenue (£m) 139 118 246Net sales value (£m) 57 52 108Trading profit (£m) 4.4 2.9 7.8Return on net sales value 7.7% 5.6% 7.2% The Precious Metals division operates in two distinct geographic regions; theUS, which constitutes 58% of the total net sales value for the division, andEurope (which includes the UK, France and Spain). The calculation of net salesvalue has been revised in the period to better reflect the exclusion of theprecious metals content in revenue. Prior period comparatives have beenrestated accordingly. Precious metal prices (notably for gold, silver andplatinum) have been very volatile in the first half of 2006 with gold reaching a26 year high of US$730/ounce in early May. Whilst prices have reduced sincethis time, the volatility in prices since the beginning of the year and itspotential impact on retail demand continues to create uncertainty for thedivision's trading prospects. Precious Metals - US First Half Year 2006 2005 2005Revenue (£m) 77 62 133Net sales value (£m) 33 29 61Trading profit (£m) 4.1 3.0 7.3Return on net sales value 12.2% 10.3% 11.9% Net sales value of £33 million grew by 16% at reported exchange rates (10% atconstant rates) compared to the same period last year. This increase reflectedsome firming of retail markets and increased business from Tiffany and the USMint (in particular, the supply of 24 carat gold blanks for the production ofthe new 'Buffalo' coin for investors and collectors). Whilst order intake wasnegatively impacted in late May/early June due to high and volatile preciousmetal prices, the position had stabilised by the end of the first half. Trading profit for the first half of 2006 at £4.1 million was 37% ahead of thesame period last year reflecting the strong organic net sales value growth andthe full-period impact of the headcount reductions enacted in the second quarterof 2005. Return on net sales value was 12.2% (2005: 10.3%). At the beginning of August, we announced the consolidation of the operations ofInverness, our US ear-stud business currently located in New Jersey, into ourprincipal US facility in Attleboro, Massachusetts with the transfer of 120 jobs. Precious Metals - Europe First Half Year 2006 2005 2005Revenue (£m) 62 56 13Net Sales Value (£m) 24 23 47Trading profit/(loss) (£m) 0.3 (0.1) 0.5Return on net sales value 1.3% (0.4%) 1.1% Net sales value of £24 million was broadly unchanged compared to the same periodlast year both at reported and constant exchange rates. This reflectedcontinuing weak retail demand (particularly in the UK) being offset by strongerscrap refining business, stimulated by the high precious metal prices. Trading profit for the first half of 2006 at £0.3 million, whilst ahead of thecorresponding period last year, remains unsatisfactory with breakevenprofitability in the UK (2005: loss of £0.3 million) and a small trading profitin each of France and Spain. Return on net sales value was 1.3% (2005: 0.4%loss). The restructuring of the UK operations, to increase the emphasis on selling viathe internet and the existing call-centre, is continuing in line with the planannounced at the beginning of 2006 and should benefit results going forward. Group corporate The Group's corporate costs, being the costs directly related to managing theGroup holding company, were £4.3 million (2005: £3.6 million). The majority ofthe increase relates to non-recurring charges, in particular costs relating tothe successful SEC deregistration. Discontinued operations Discontinued operations include the results of the Laminates business, which wassold in April 2006 and, in 2005, the Specialty Coating Systems business, whichwas sold at the end of December 2005. The Laminates business traded profitablyin the period up to its disposal, reflecting both the restructuring of thisbusiness in 2005 and the discontinuance of any depreciation charge as requiredby its accounting treatment as a business "held for sale". GROUP FINANCIAL REVIEW First Half Year 2006 2005 2005Profit before tax (£m)- headline 61.9 39.5 101.1- basic 54.9 32.2 81.4 Earnings per share (pence)- headline 21.4 13.7 36.8- basic 12.7 8.5 (5.8) Dividend per share (pence) 3.0 - 5.0 Free cash flow (£m) (13.1) (17.8) 48.4Net debt (£m) 249 363 292 Reclassification of pension interest The results for first half of 2006 reflect an amendment to the accountingtreatment for the 'interest' element (in effect, the non-current service cost)of the total expense relating to the Group's defined benefit pension and otherpost-retirement benefit plans. This element of post-retirement expense (which constitutes the net of theinterest on the total plan liabilities and the expected return on the planassets), which was previously deducted in arriving at trading profit, willhenceforward be included within finance costs. The post-retirement expenserelating to service cost remains within trading profit. This reclassification between trading profit and finance costs will have noimpact on profit before tax or earnings per share and complies withInternational Accounting Standard 19 'Accounting for Retirement Benefits inFinancial Statements of Employers', as indeed did the previous treatment. Theamended treatment will reduce the volatility within trading profit from changesrelating to the post-retirement deficit in respect to past service and alsoensures better comparability of the Group's results with those of its peergroup. Comparatives for the first half of 2005 and full year 2005 have beenrestated accordingly. For the first half of 2006, the pension interest nowincluded within finance costs was £2.3 million (first half 2005: £2.6 million;full year 2005: £5.3 million). Group Income Statement Headline profit before tax Headline profit before tax for total operations was £61.9 million for the firsthalf of 2006, which was £22.4 million higher than for the same period in 2005.The increase in headline profit before tax arose as follows: - £12.5 million increase in trading profit from continuing operations at constant exchange rates as discussed in the Operating Review above; - £3.8 million increase in trading profit from discontinued operations at constant exchange rates as discussed in the Operating Review above; - £3.1 million positive trading profit exchange rate translation variance; - £2.6 million lower charge for net interest payable principally due to a decrease of some £61 million in the average level of borrowings; - £0.3 million lower pension interest charge; and - £0.1 million increase in income from joint ventures (net of tax) from £0.4 million to £0.5 million. Items excluded from headline profit before tax A net charge of £7.0 million was incurred in the first half of 2006 (2005: £7.3million) for the following items excluded from headline profit before tax. Ofthe total charge in the first half of 2006, £2.3 million was non-cash related.This charge consisted of the following items: Rationalisation costs: rationalisation costs of £8.8 million (2005: £7.7million) were incurred in the first half, all relating to continuing operations.Of the total charge, £2.3 million related to the non-cash write down of assetsand £6.5 million to cash-related costs. Of the total charge for the first halfof 2006: - £5.1 million arose in the Ceramics division for the rationalisation of facilities in the UK and the US. Of the total charge, £1.7 million related to the non-cash write down of assets; - £1.9 million arose in the Assembly Materials sector primarily relating to the rationalisation of the facility in Naarden, Netherlands; - £1.1 million arose in the Chemistry sector for the rationalisation of the selling and distribution network in Europe; and - £0.7 million arose in respect of redundancy initiatives in the Precious Metals division and Group central operations. Profit relating to fixed assets: a net credit of £1.8 million (2005: £1.6million) was realised in the first half of 2006, principally relating to thedisposal of surplus properties. Write-off prepaid debt raising fees: in the first half of 2005 a non-cash chargeof £1.2 million was incurred at the time the existing bank facility was put inplace related to the write-off of the un-amortised portion of the fees incurredin respect of the previous facility. Group profit before tax and after the items noted above was £54.9 million forthe first half of 2006 compared to £32.2 million in the first half of 2005. Taxation The tax charge on ongoing activities was £18.7 million. The effective tax rateon headline profit before tax from continuing operations was 31.5% (2005:28.9%). The increase in the effective tax rate compared to the first half oflast year has arisen as more of the Group's taxable profits are earned inrelatively higher tax rate paying countries, notably in Asia-Pacific. Thistrend is expected to continue, albeit less materially, going forward. A taxcharge of £1.6 million (2005: £1.9 million) arose in relation to all the itemsexcluded from headline profit before tax noted above. Net post-tax loss on disposal of operations A net post-tax loss on disposals of £8.1 million (2005: £0.5 million) wasreported in the period, consisting of a net post-tax loss before goodwill of£4.2 million and a write-off of goodwill of £3.9 million. Of the total net lossin the current period, £6.4 million arose from discontinued operations whichrelates to the completion on 20 April 2006 of the disposal of the Group'sLaminates business to Isola Group S.A.R.L. The loss on disposal after taxcomprises adjustments to the 31 December 2005 estimated fair value less costs tosell, including movements in working capital. The assets and liabilities of theLaminates business, formerly part of the Electronics division, were classifiedas "held for sale" in the Group balance sheet as at 31 December 2005, with theconsequential recording of a loss at that date of £52.5 million in the full year2005 results. The final consideration for the Laminates disposal is subject tocompletion balance sheet adjustments in respect of working capital and capitalexpenditure, both of which are expected to be finalised in the second half of2006, but which are not expected to result in further significant adjustments. In the Ceramics division, the disposal of the Ceramic Fibres business wascompleted in April and resulted in a profit of £4.7 million, after a write-offof goodwill of £2.6 million and a tax charge of £0.2 million; and in June thedivision's UK carbon blocks business was sold, resulting in a loss of £6.4million, after a write-off of goodwill of £1.3 million. The net post-tax loss on disposal of operations of £0.5 million in the firsthalf of 2005 related mainly to the disposal of the Group's Technical Ceramicsbusiness (McDanel), formerly part of the Ceramics division. Headline profit attributable to equity holders Headline profit attributable to equity holders for the first half of 2006 was£40.9 million (2005: £25.8 million), with the £15.1 million increase over 2005arising from the significant increase in headline profit before tax more thanoffsetting both the increase in the effective tax rate and an increase of £0.5million in profit attributable to minority interests. After taking account of all items excluded from headline profit before tax notedabove (net of the related tax impact) and the net post-tax loss on disposal ofoperations, the Group recorded a profit of £26.5 million for the first half of2006, £8.6 million higher than the £17.9 million profit recorded in the firsthalf of 2005. Earnings per share (EPS) Headline EPS, based on the headline profit attributable to equity holders,amounted to 21.4 pence per share in the first half of 2006, an increase of 56%on the 13.7 pence recorded in the first half of 2005. The Directors believethis basis of calculating EPS is an important measure of the underlying earningsper share of the Group. Basic EPS, based on the net profit attributable to parent company equityholders, was 12.7 pence (2005: 8.5 pence). The average number of shares in issue during the first half of 2006 was 191million (2005: 189 million). Dividend In June 2006, the Group paid the final dividend of 5 pence per share in respectof 2005, which was the first dividend paid since October 2001. The first halfof 2006 has seen strongly improved profitability and a satisfactory trend offree cash flow generation. This, together with the Board's confidence in thefuture prospects for the Group, has resulted in the Board declaring an interimdividend for 2006 of 3 pence per share. This will be paid on 16 October 2006 toall shareholders on the register at the close of business on 29 September 2006. Group cash flow Cash generated from operations In the first half of 2006, the Group generated £9.5 million of net cash inflowfrom operations, £2.5 million higher than the first half of 2005. This netimprovement principally arose from: - a £14.7 million increase in EBITDA (being earnings before interest, tax, depreciation and amortisation) to £95.6 million; - a cash outflow of £55.9 million for trade working capital, £13.1 million higher than 2005, of which £8.8 million related to a cash outflow for trade working capital for the Laminates business prior to its disposal; - a £1.1 million increase in the cash spend for rationalisation costs to £9.2 million; - a £7.8 million increase in pension "top-up" payments to £12.8 million; and - a net decrease in cash outflow for operating provisions and other items of £9.8 million. The cash outflow in respect of trade working capital, prior to the impact ofdiscontinued operations, results from both the increase in underlying revenuebut also the negative impact on the levels of inventories and trade receivablesat 30 June 2006 of higher metal prices (notably gold, silver and tin) in thePrecious Metals division and the Assembly Materials and Chemistry sectors.However, there continues to be a strong focus on working capital management,evidenced by the ratio of average trade working capital to revenue fromcontinuing operations reducing from 22.4% for the full year 2005 to 22.0% forthe first half of 2005. Cash outflow for rationalisation was £9.2 million, of which £3.4 million relatedto programmes that were initiated in the first half of 2006 in respect ofcontinuing businesses and the balance from prior period initiatives. Aspreviously indicated, a cash outflow of around £20 million for rationalisationis expected in each of the full years, 2006 and 2007. Cash generated from operations in the first half of 2006 was negatively impactedby the cash outflow from the discontinued Laminates business in the period priorto its disposal. Cash generated from continuing operations in the first half of2006, prior to the impact of discontinued operations, was £16.4 million, animprovement of £9.6 million on the £6.8 million for the comparable period lastyear. Net cash from operating activities In the first half of 2006, the Group generated £12.6 million of net cash outflowfrom operating activities, £4.2 million lower than the first half of 2005. Thisnet improvement principally arose from a £3.7 million lower outflow for netinterest paid. Net cash from investing activities Capital expenditure: Payments to acquire property, plant and equipment in thefirst half of 2006 were £14.6 million, marginally ahead of the first half of2005 and representing 74% of depreciation (2005: 57%). Proceeds from the saleof surplus properties, primarily in the US and India, were £2.8 million (2005:£5.7 million). Dividends from joint ventures: Dividends of £0.9 million were received in theperiod (2005: £4.7 million) from the Chemistry division's Japanese jointventure. Acquisitions and disposals: Net cash inflow for acquisitions and disposals inthe period was £53.2 million which included the following: - proceeds from the disposal of businesses, net of disposal costs, of £56.9 million, primarily comprising £11.9 million for the disposal in March 2006 of the Ceramic Fibres business, £43.6 million for the disposal in April 2006 of the Laminates business, and £1.4 million for the disposal in June 2006 of the Ceramics division's operations in Bawtry, UK; - trailing costs and purchase price adjustments paid for prior year disposals of £2.8 million; and - £0.9 million payments in respect of deferred consideration. Free cash flow Free cash flow is defined as net cash flow from operating activities and afternet outlays for the acquisition and disposal of fixed assets, dividends fromjoint ventures and dividends paid to minority shareholders, but beforeadditional funding contributions to Group pension plans. Free cash outflow for the first half of 2006 was £13.1 million; £4.7 millionlower than the £17.8 million outflow in the first half of 2005 due to theincrease in cash flow from operating activities for the reasons described above. The Group traditionally experiences free cash outflows in the first half of theyear. This is then followed by inflows in the second half, mainly due to theseasonality of trade working capital cash flows. The annualised free cashinflow for the year ended June 2006 was £53.1 million. This compares with the£48.4 million cash inflow in the year ended December 2005. Net cash flow before financing Net cash inflow before financing for the first half of 2006 was £29.7 million,£54.4 million higher than for the first half of 2005. This improvementprimarily reflects proceeds from the disposal of businesses of £56.9 million(2005: £2.4 million) more than offsetting additional funding contributions toGroup pension plans of £12.8 million (2005: £5.0 million). After an outflow for financing activities (before repayment of borrowings) of£6.1 million (2005: £3.1 million), arising primarily from the payment of £9.6million relating to the 2005 final dividend of 5 pence per share in June 2006,the net cash inflow for the first half of 2006 (before repayment of borrowings)was £23.6 million, £51.4 million higher than the first half of 2005. The cash inflow was further improved by a positive translation effect of £18.3million, mainly due to the increase in the value of sterling from US$1.72 toUS$1.85 during the first half of 2006, resulting in a decrease in net debt of£43.6 million to £248.7 million. Group borrowings As at 30 June 2006, the Group had gross borrowings of £304 million which weredrawn on available medium to long-term committed facilities of around £495million. The Group's net debt comprised the following: 30 June 31 December 30 June 2006 2005 2005 £m £m £mUS Private Placement loan notes 295 318 298Committed bank facilities - 23 68Lease financing and asset securitisation 3 5 15Other loans, overdrafts, other 6 10 14Gross borrowings 304 356 395Cash and short-term deposits (55) (64) (32)Net Debt 249 292 363 The US Private Placement loan notes, currently US$545 million, are repayable atvarious dates between 2007 and 2012, with US$180 million being due for repaymentin 2007. The committed bank facility of £200 million has a current maturity date of March2009. The facility, which includes an option to extend its maturity by afurther twelve months beyond March 2009, is unsecured. There were no drawingson this facility at 30 June 2006. Currency The US dollar weakened against sterling during the course of the period suchthat the exchange rate at 30 June 2006 was some 8% higher than at 31 December2005. The average US dollar exchange rate for the first half of 2006 was 4%lower than the average exchange rate for the first half of 2005. Other USdollar "tracking" currencies, such as the Singapore and Hong Kong dollar and theChinese renminbi, also showed a similar trend. The value of the euro wasrelatively stable against sterling, both in respect of the period-end rates andthe average for the half year compared to last half year. In the first half of 2006, the net translation impact of currency changes was toimprove headline profit before tax by £3 million and to reduce net debt by £18million. Pension fund and other post-retirement obligations The Group operates defined contribution and defined benefit pension plans,principally in the UK and US. In addition, the Group has various other definedbenefit post-retirement arrangements, being principally healthcare plans in theUS. As at 30 June 2006, a liability of £188.8 million is recognised in respect ofemployee benefits, a decrease of £36.0 million compared with the £224.8 millionas at 31 December 2005. This decrease results primarily in respect of the UKand US plans from increases in the prescribed discount rates used to presentvalue future plan liabilities together with the "top-up" cash payments referredto below. Of the total liability, £96.2 million relates to the deficit on theGroup's defined benefit pension plan in the UK, £48.7 million to the Group'sdefined benefit pension plan in the US, £15.0 million to pension arrangements inthe Rest of the World, and £28.9 million to unfunded post-retirement definedbenefit arrangements, being mainly healthcare benefit arrangements in the US. In February 2006, following the successful implementation of the Group's recentdisposal programme and the increase in the net pension deficit for the UK planduring 2005, it was agreed with the Trustee of the Group's UK plan, to make "top-up" payments (in addition to the normal cash contributions) of £25.5 millionin 2006 and £26.5 million in 2007. The level of these additional "top-up"payments will be reviewed in consultation with the Trustee when the nexttriennial valuation is available in the first half of 2007. In the first halfof 2006, additional "top-up" payments of £12.8 million have been made (2005:£5.0 million). The Group's UK defined benefit pension plan was closed to new entrants in 2004and the equivalent US plans were closed to new entrants in January 2006. Plansare currently being finalised to freeze the accruals for existing members of theUS plans with effect from 1 January 2007. Future pension benefit will beprovided through a defined contribution arrangement. The reduction in the futuredefined benefit liability expected to arise as a consequence of this change tothe US arrangements will result in a curtailment credit to the income statementin the second half of 2006, which is expected to be reported as an exceptionalitem. The total charge to the income statement in the first half of 2006 for allpension plans (including defined contribution plans) was £11.4 million, areduction of £1.2 million over the first half of 2005. Of this charge, £9.1million has been deducted in arriving at trading profit and £2.3 million hasbeen included within finance charges. Total pension cash contributions intodefined benefit pension plans amounted to £17.7 million in the first half of2006 (2005: £9.0 million). Shareholder/analyst enquiries:Nick Salmon, Chief Executive Cookson Group plcMike Butterworth, Group Finance Director Tel: + 44 (0)20 7822 0000Isabel Vilela, Investor Relations Manager Press enquiries:John Olsen Hogarth Partnership Tel: +44 (0)20 7357 9477 Cookson management will make a presentation to analysts on 2 August 2006 at 10:30am (UK time). This will be broadcast live on Cookson's website. An archiveversion of the presentation will be available on the website from late afternoonon 2 August. Forward Looking Statements This announcement contains certain forward looking statements regarding theGroup's financial condition, results of operations, cash flows, dividends,financing plans, business strategies, operating efficiencies or synergies,budgets, capital and other expenditures, competitive positions, growthopportunities for existing products, plans and objectives of management andother matters. Statements in this document that are not historical facts arehereby identified as "forward looking statements". Such forward lookingstatements, including, without limitation, those relating to the future businessprospects, revenues, working capital, liquidity, capital needs, interest costsand income, in each case relating to Cookson, wherever they occur in thisdocument, are necessarily based on assumptions reflecting the views of Cooksonand involve a number of known and unknown risks, uncertainties and other factorsthat could cause actual results, performance or achievements to differmaterially from those expressed or implied by the forward looking statements.Such forward looking statements should, therefore, be considered in light ofvarious important factors. Important factors that could cause actual results todiffer materially from estimates or projections contained in the forward lookingstatements include without limitation: economic and business cycles; the termsand conditions of Cookson's financing arrangements; foreign currency ratefluctuations; competition in Cookson's principal markets; acquisitions ordisposals of businesses or assets; and trends in Cookson's principal industries. The foregoing list of important factors is not exhaustive. When relying onforward looking statements, careful consideration should be given to theforegoing factors and other uncertainties and events, as well as factorsdescribed in documents the Company files with the UK regulator from time to timeincluding its annual reports and accounts. Such forward looking statements speak only as of the date on which they aremade. Except as required by the Rules of the UK Listing Authority and the LondonStock Exchange and applicable law, Cookson undertakes no obligation to updatepublicly or revise any forward looking statements, whether as a result of newinformation, future events or otherwise. In light of these risks, uncertaintiesand assumptions, the forward looking events discussed in this announcement mightnot occur. Cookson Group plc, 165 Fleet Street, London EC4A 2AERegistered in England and Wales No. 251977www.cooksongroup.co.uk Independent review report on the condensed consolidated interim financialinformation to the members of Cookson Group plc Introduction We have been instructed by the Company to review the financial information forthe six months ended 30 June 2006 which comprises the Condensed Group IncomeStatement, the Condensed Group Balance Sheet, the Condensed Group Cash FlowStatement, the Condensed Group Statement of Recognised Income and Expense andthe related notes. We have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the Company in accordance with the terms of ourengagement to assist the Company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the Company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the Company forour review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the UK. A review consistsprincipally of making enquiries of management and applying analytical proceduresto the financial information and underlying financial data and, based thereon,assessing whether the accounting policies and presentation have beenconsistently applied unless otherwise disclosed. A review excludes auditprocedures such as tests of controls and verification of assets, liabilities andtransactions. It is substantially less in scope than an audit performed inaccordance with International Statements on Auditing (UK and Ireland) andtherefore provides a lower level of assurance than an audit. Accordingly, we donot express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2006. KPMG Audit PlcChartered AccountantsRegistered AuditorLondon 2 August 2006 Condensed Group Income StatementFor the six months ended 30 June 2006 Dis- Half Dis- Half Full Continuing continued year Continuing continued year year operations operations 2006 operations operations 2005 2005 as as as restated restated restated Notes £m £m £m £m £m £m £m Revenue 3 819.0 46.5 865.5 719.7 75.0 794.7 1,634.6Manufacturing costs - raw materials (386.5) (23.9) (410.4) (321.5) (38.1) (359.6) (743.2) - other (201.5) (11.6) (213.1) (193.1) (24.4) (217.5) (437.0)Administration, selling and distribution costs (159.0) (7.0) (166.0) (148.5) (12.5) (161.0) (319.7) Trading profit 3 72.0 4.0 76.0 56.6 - 56.6 134.7Rationalisation of operating activities 4 (8.8) - (8.8) (7.5) (0.2) (7.7) (18.5)Profit relating to fixed assets 5 1.8 - 1.8 1.6 - 1.6 - Profit from operations 3 65.0 4.0 69.0 50.7 (0.2) 50.5 116.2Net finance costs - borrowings related 6 (12.3) - (12.3) (14.9) - (14.9) (29.7) - employee benefits 6 (2.3) - (2.3) (2.6) - (2.6) (5.3) - other activities 6 - - - (1.2) - (1.2) (1.2)Share of post-tax profit of joint ventures 0.5 - 0.5 0.4 - 0.4 1.4 Profit before tax 50.9 4.0 54.9 32.4 (0.2) 32.2 81.4Income tax costs - ongoing activities 7 (18.1) (0.6) (18.7) (11.3) (0.6) (11.9) (28.4) - other activities 7 (1.6) - (1.6) (1.8) (0.1) (1.9) (14.4) Net post-tax loss on disposal of operations 8 (1.7) (6.4) (8.1) (0.5) - (0.5) (46.2) Profit/(loss) for the period 29.5 (3.0) 26.5 18.8 (0.9) 17.9 (7.6) Profit/(loss) for the periodattributable to:Equity holders of the parent company 27.2 (3.0) 24.2 17.0 (0.9) 16.1 (11.0)Minority interests 2.3 - 2.3 1.8 - 1.8 3.4 Profit/(loss) for the period 29.5 (3.0) 26.5 18.8 (0.9) 17.9 (7.6) Earnings per share (pence):Basic 9 14.3 (1.6) 12.7 9.0 (0.5) 8.5 (5.8)Diluted 9 14.2 (1.6) 12.6 9.0 (0.5) 8.5 (5.8) Dividends per share (pence):Paid 10 5.0 - -Declared 10 3.0 - - Headline profit before tax and earnings per share:Trading profit 76.0 56.6 134.7Share of post-tax profit of 0.5 0.4 1.4joint venturesNet finance costs - borrowings related (12.3) (14.9) (29.7) - employee benefits (2.3) (2.6) (5.3) Headline profit before tax 1 61.9 39.5 101.1Income tax costs on ongoing activities (18.7) (11.9) (28.4)Profit attributable to minority interests (2.3) (1.8) (3.4) Headline profit attributable to parent company equity holders 1 40.9 25.8 69.3 Headline earnings per share (pence) 1, 9 21.4 13.7 36.8 Condensed Group Statement of Cash FlowsFor the six months ended 30 June 2006 Half year Half year Full year 2006 2005 2005 as as restated restated Notes £m £m £mCash flows from operating activities Profit from operations 69.0 50.5 116.2Add back: Rationalisation of operating activities 8.8 7.7 18.5 Profit relating to fixed assets (1.8) (1.6) - Depreciation and amortisation 19.6 24.3 47.9EBITDA 1 95.6 80.9 182.6Net increase in trade working capital (47.1) (42.8) (23.7)Net outflows related to assets and liabilities classified as held for sale (8.8) - -Outflows related to rationalisation of operating activities 4 (9.2) (8.1) (17.0)Additional funding contributions to Group pension plans 12 (12.8) (5.0) (10.0)Other items (8.2) (18.0) (14.1)Cash generated from operations 9.5 7.0 117.8 Cash generated from operations - from continuing operations 16.4 6.8 110.3 - from discontinued operations (6.9) 0.2 7.5 Interest paid (14.4) (16.6) (31.3)Interest received 3.3 1.8 1.8Income taxes paid (11.0) (9.0) (20.2) Net cash (outflow)/inflow from operating activities (12.6) (16.8) 68.1 Cash flows from investing activitiesPurchase of property, plant and equipment (14.6) (13.8) (42.5)Proceeds from sale of property, plant and equipment 5 2.8 5.7 10.3Acquisition of subsidiaries, net of cash acquired (0.9) (3.9) (10.6)Disposal of subsidiaries, net of cash disposed of 8 56.9 2.4 30.4Dividends received from joint ventures 0.9 4.7 4.7Other, including additional costs for prior periods' disposals (2.8) (3.0) (6.0)Net cash inflow/(outflow) from investing activities 42.3 (7.9) (13.7) Net cash inflow/(outflow) before financing activities 29.7 (24.7) 54.4 Cash flows from financing activities(Repayment of)/increase in borrowings 11 (28.4) 15.1 (45.2)Proceeds from the issue of share capital 5.9 0.1 2.1Payment of transaction costs - (0.6) (0.6)Dividends paid to equity shareholders 10 (9.6) - -Dividends paid to minority shareholders (2.4) (2.6) (2.2)Net cash (outflow)/inflow from financing activities (34.5) 12.0 (45.9) Net (decrease)/increase in cash and cash equivalents 11 (4.8) (12.7) 8.5 Cash and cash equivalents at beginning of period 63.5 44.0 44.0Effect of exchange rate fluctuations on cash and cash equivalents (3.3) 0.2 11.0Net (decrease)/increase in cash and cash equivalents (4.8) (12.7) 8.5Cash and cash equivalents at end of period 55.4 31.5 63.5 Free cash flow:Net cash (outflow)/inflow from operating activities (12.6) (16.8) 68.1Additional funding contributions to Group pension plans 12.8 5.0 10.0Purchase of property, plant and equipment (14.6) (13.8) (42.5)Proceeds from sale of property, plant and equipment 2.8 5.7 10.3Dividends received from joint ventures 0.9 4.7 4.7Dividends paid to minority shareholders (2.4) (2.6) (2.2) Free cash flow 1 (13.1) (17.8) 48.4 Condensed Group Balance SheetAs at 30 June 2006 30 June 31 Dec 30 June 2006 2005 2005 Notes £m £m £mAssetsProperty, plant and equipment 230.9 264.9 312.8Intangible assets 448.3 481.6 497.0Investments in joint ventures 11.5 13.1 12.9Other investments 9.6 11.2 13.8Income tax recoverable 2.3 2.3 2.2Deferred tax assets 12.3 15.0 27.3Other receivables 12.2 8.7 7.4Total non-current assets 727.1 796.8 873.4 Cash and cash equivalents 11 55.4 63.5 31.5Inventories 177.2 179.6 186.1Trade and other receivables 315.5 294.0 330.0Income tax recoverable 1.6 - 0.7Other financial assets 7.7 12.2 13.4 557.4 549.3 561.7Assets classified as held for sale 21.1 87.2 -Total current assets 578.5 636.5 561.7 Total assets 1,305.6 1,433.3 1,435.1 EquityIssued share capital 13 19.3 375.5 375.5Share premium account 14 4.2 645.5 643.8Other reserves 1,003.3 37.8 1.3Retained earnings (575.2) (609.8) (564.4)Total parent company shareholders' equity 451.6 449.0 456.2Minority interests 11.2 12.7 11.3 Total equity 462.8 461.7 467.5 LiabilitiesInterest-bearing loans and borrowings 11 268.4 341.9 370.3Employee benefits 12 188.8 224.8 213.6Other payables 27.1 35.5 24.4Provisions 8.1 11.1 9.4Deferred tax liabilities 21.6 21.6 15.3 Total non-current liabilities 514.0 634.9 633.0 Interest-bearing loans and borrowings 11 35.7 13.9 24.0Trade and other payables 249.7 249.2 283.8Income tax payable 23.3 16.4 13.4Provisions 17.1 20.6 13.2Other financial liabilities 0.4 - 0.2 326.2 300.1 334.6Liabilities directly associated with assets classified as held for sale 2.6 36.6 - Total current liabilities 328.8 336.7 334.6 Total liabilities 842.8 971.6 967.6 Total equity and liabilities 1,305.6 1,433.3 1,435.1 Net debtInterest-bearing loans and - non-current 268.4 341.9 370.3 - current 35.7 13.9 24.0Cash and cash equivalents (55.4) (63.5) (31.5) Net debt 1 248.7 292.3 362.8 Condensed Group Statement of Recognised Income and ExpenseFor the six months ended 30 June 2006 Half year Half year Full year 2006 2005 2005 Notes £m £m £m Exchange differences on translation of the net assets of foreign operations (51.5) 18.6 73.7Net investment hedges 13.7 (10.5) (29.9)Actuarial gains/(losses) on employee defined benefit schemes 12 19.1 (21.8) (41.1)Changes in fair value of equity securities available-for-sale (0.7) 1.9 2.2Net income and expense recognised directly in equity (19.4) (11.8) 4.9Profit/(loss) for the period 26.5 17.9 (7.6) Total recognised income and expense for the period 7.1 6.1 (2.7) Total recognised income and expense for the period attributable to:Equity holders of the parent company 5.4 3.9 (6.0)Minority interests in - profit for the period 2.3 1.8 3.4 - foreign exchange translation differences (0.6) 0.4 (0.1) 7.1 6.1 (2.7) Notes to the financial statements 1 Basis of preparation These condensed interim financial statements have been prepared in accordancewith the accounting policies detailed in note 2 below. They do not include allof the information required for full annual financial statements, and should beread in conjunction with the consolidated financial statements of the Group forthe year ended 31 December 2005. The financial information presented in thisdocument is unaudited, but has been reviewed by the Company's auditor and itsreport appears on page 20. The comparative figures for the financial year ended31 December 2005 are not the Company's statutory accounts for that financialyear. Those accounts have been reported on by the Company's auditor anddelivered to the Registrar of Companies. The report of the auditor wasunqualified, did not include a reference to any matters to which the auditordrew attention by way of emphasis without qualifying its report and did notcontain a statement under section 237(2) or (3) of the Companies Act 1985. Thesesections address whether proper accounting records have been kept, whether theCompany's accounts are in agreement with those records and whether the auditorhas obtained all the information and explanations necessary for the purposes ofits audit. Disclosure of significant items International Accounting Standard (IAS) 1, Presentation of Financial Statements,provides no definitive guidance as to the format of the income statement, butstates key lines which should be disclosed. It also encourages additional lineitems and the re-ordering of items presented on the face of the income statementwhen appropriate for a proper understanding of the entity's financialperformance. In keeping with the spirit of this aspect of IAS 1, the Company hasadopted a policy of disclosing separately on the face of its income statementthe effect of any components of financial performance considered by theDirectors to be significant and/or for which separate disclosure would assistboth in a better understanding of the financial performance achieved and inmaking projections of future results. Materiality and/or the nature and functionof the components of income and expense are considered in deciding upon suchpresentation. Such items may include, inter alia, the financial effect of anyprofit or loss arising on business disposals, major rationalisation and/orrestructuring activity, profits and losses on sale or impairment of fixedassets, and impairment of intangible and other non-current assets and otheritems, including the taxation impact of the aforementioned items, which have asignificant impact on the Group's results of operations either due to their sizeor nature. Non-GAAP financial measures The Company uses a number of non-Generally Accepted Accounting Practice ("non-GAAP") financial measures in addition to those presented in accordance withIAS 1. Because GAAP measures reflect all items which affect reportedperformance, the Directors believe that certain non-GAAP measures, which reflectwhat they view as the underlying performance of the Group, are important andshould be considered alongside the GAAP measures. The following non-GAAPmeasures are referred to in this document. On the face of the condensed Group income statement, "trading profit" isseparately disclosed, being defined as profit from operations before the costsof rationalisation of operating activities and the profit or loss relating tofixed assets. The Directors believe that trading profit is an important measureof the underlying trading performance of the Group. The "return on sales"margins of Group businesses are calculated by dividing their trading profit bytheir revenue. On the face of the condensed Group income statement, "headline profit before tax", "headline profit attributable to parent company equity holders" and "headlineearnings per share" are reported, together with their calculation. The Directorsbelieve that these are important measures of the underlying earning capacity ofthe Group. On the face of the condensed Group statement of cash flows, "EBITDA" is reportedas a sub-total, representing Group earnings before interest, tax, depreciationand amortisation charges. EBITDA is a financial measure that is commonly usedand the Directors believe it to be an important measure of the underlyingtrading performance of the Group. On the face of the condensed Group statement of cash flows, "free cash flow" isreported, together with its calculation. The Directors believe that free cashflow, which reflects the Group's operational cash flow before repayment ofborrowings and defined benefit post-retirement deficits or expenditure onbusiness acquisitions or disposals, gives an important measure of the underlyingcash-generation capacity of the Group. On the face of the Group balance sheet, "net debt" is reported, together withits calculation. The Directors believe that this is an important measure as itshows the Group's aggregate net indebtedness to banks and other externalfinancial institutions. 2 Significant accounting policies Except as disclosed below, the condensed financial statements have been preparedusing the same accounting policies as used in the preparation of the Group'sannual financial statements for the year ended 31 December 2005. In the Group's annual financial statements for the year ended 31 December 2005,the interest cost and expected return on assets associated with the Group'sdefined benefit pension and other post-retirement benefit plans was recognisedin the income statement within trading profit. As permitted under IFRS, thesecomponents of the Group's total pension and other post-retirement benefitscharge are now recognised as a component of net finance costs, which theDirectors believe is a more appropriate accounting treatment. Prior periodcomparatives have been restated, such that net pension expense of £2.6m for thesix months ended 30 June 2005 and £5.3m for the year ended 31 December 2005 hasbeen reclassified in the income statement from administration, selling anddistribution costs to net finance costs. This has had the effect of increasingboth trading profit and net finance costs by £2.6m and £5.3m for the respectiveperiods, while leaving the rest of the income statement unchanged. Thisreclassification has no impact upon the Group's previously reported cash flows,financial position or recognised income and expense. In the Group's annual financial statements for the year ended 31 December 2005,charges in respect of the amortisation and impairment of intangibles wereseparately disclosed in the Group income statement as a component of profit fromoperations, outside of trading profit. No such costs were incurred in the sixmonths to 30 June 2006 and the Directors are of the opinion that these chargesdo not currently warrant separate disclosure. Accordingly, they are nowclassified as a component of trading profit within administration, selling anddistribution costs. Prior period comparatives have been restated reducingtrading profit by £0.4m and £0.8m respectively in the six months to 30 June 2005and the year ended 31 December 2005. 3 Segment information For management reporting purposes the Group is organised into three mainbusiness segments, Ceramics, Electronics and Precious Metals, which form thebasis of the primary reporting format disclosures below. Segment revenuerepresents revenue to external customers; inter-segment revenue is immaterial.Segment results include items directly attributable to a segment as well asitems that can be allocated on a reasonable basis. Half year 2006 Half year 2005 Full year 2005 as restated as restated Revenue Profit Revenue Profit Revenue Profit £m £m £m £m £m £m Ceramics 399.4 44.9 367.6 35.6 746.1 77.0Electronics 280.8 27.0 234.3 21.7 488.9 52.5- Assembly Materials 161.7 12.7 129.2 9.6 273.4 25.6- Chemistry 119.1 14.3 105.1 12.1 215.5 26.9Precious Metals 138.8 4.4 117.8 2.9 245.8 7.8Corporate costs (4.3) (3.6) (8.5) Continuing operations 819.0 72.0 719.7 56.6 1,480.8 128.8Discontinued operations 46.5 4.0 75.0 - 153.8 5.9 Group trading profit 76.0 56.6 134.7Rationalisation of operating (8.8) (7.7) (18.5)activitiesProfit relating to fixed assets 1.8 1.6 - Total Group 865.5 69.0 794.7 50.5 1,634.6 116.2 Of the total cost of rationalisation of operating activities of £8.8m (2005:half year £7.7m; full year £18.5m), £5.1m related to Ceramics (2005: half year£1.1m; full year £8.1m), £3.0m to Electronics (2005: half year £2.1m; full year£3.0m) and £0.4m to Precious Metals (2005: half year £0.6m; full year £1.4m) and£0.3m to corporate activities (2005: half year nil; full year nil). A further£3.9m in the half year 2005 related to discontinued operations (2005: full year£5.1m) and £0.9m in the full year 2005 to corporate activities. Of theElectronics costs of £3.0m, £1.9m related to Assembly Materials (2005: half year £0.6m; fullyear £0.8m) and £1.1m to Chemistry (2005: half year £1.5m; full year £2.2m). Of the total profit relating to fixed assets of £1.8m (2005: half year £1.6m;full year nil), £1.4m related to Electronics (2005: half year £0.3m; full year£1.2m loss) and £0.4m to corporate activities (2005: half year £0.6m loss; fullyear £0.6m loss). All of the Electronics profit related to Assembly Materials(2005: half year £0.3m Assembly Materials; full year £0.3m Assembly Materialsand £1.5m loss Chemistry). In 2005, losses on disposal of £0.1m arose in thefull year in Ceramics and profits on disposal of £1.9m arose in discontinuedoperations in the half and full year. 4 Rationalisation of operating activities The rationalisation of operating activities charge of £8.8m (2005: half year£7.7m; full year £18.5m) represents the cost of a number of initiativesthroughout the Group aimed at reducing the Group's cost base and re-aligning itsmanufacturing capacity. Cash costs of £9.2m were incurred in the first half of2006 (2005: half year £8.1m; full year £17.0m) in respect of the rationalisationand redundancy initiatives commenced both this period and in prior periods. 5 Profit relating to fixed assets The disposal of surplus Group properties and other fixed assets during the firstsix months of 2006 generated cash proceeds of £2.8m (2005: half year £5.7m; fullyear £10.3m) and resulted in a profit of £1.8m (2005: half year £1.6m; full year£nil). 6 Net finance costs Total net finance costs are analysed on the face of the condensed Group incomestatement between those relating to borrowing activities, those relating to thenet finance cost associated with the Group's defined benefit pension and otherpost-retirement benefit plans and those relating to other activities. In 2005,costs relating to other activities comprised the write-off of £1.2m ofunamortised fees associated with the Company's £148m committed syndicated bankfacility, which was replaced by a new £200m facility in March of that year. 7 Income tax costs The total charge for income tax of £20.3m (2005: half year £13.8m; full year:£42.8m) comprises a tax charge on ongoing activities of £18.7m (2005: half year£11.9m; full year £28.4m), together with a £1.6m (2005: half year £1.9m; fullyear: £14.4m) charge from other activities. The effective tax rate for theperiod of 31.5% (2005: half year: 28.9%; full year: 30.3%) relates to continuingoperations and is calculated by reference to the income tax cost on ongoingactivities of £18.1m (2005: half year £11.3m; full year £28.4m) and headlineprofit before tax and excluding the Group's share of post-tax joint ventureincome of £57.4m (2005: half year £39.1m; full year £93.8m). The total chargefrom other activities includes a charge of £1.7m (2005: half year: £1.9m; fullyear: £3.5m) relating to deferred tax on goodwill, a credit of £0.4m (2005: halfyear: £nil; full year: £5.7m) in relation to rationalisation costs and a chargeof £0.3m on profits on disposal of fixed assets (2005: half year: £nil; fullyear: £nil). Additionally in 2005, other activities included a charge of £16.6mfor the write-down of deferred tax assets. 8 Net post-tax loss on disposal of operations The net post-tax loss of £8.1m (2005: half year £0.5m; full year £46.2m) ondisposal of operations consists of a net post-tax loss before goodwill of £4.2mand a write-off of goodwill of £3.9m. Of the total net loss in the current period, £6.4m arose from discontinuedoperations which relates to the completion on 20 April 2006 of the disposal ofthe Group's Laminates business to Isola Group S.A.R.L. The loss on disposalafter tax comprises adjustments to the estimated fair value less costs to sellat 31 December 2005, including movements in working capital. The assets andliabilities of the Laminates business, formerly part of the Electronicsdivision, were classified as "held for sale" in the Group balance sheet as at 31December 2005, with the consequential recording of a loss at that date of £52.5min the full year 2005 results. The final consideration for the Laminatesdisposal is subject to completion balance sheet adjustments in respect ofworking capital and capital expenditure, both of which are expected to befinalised in the second half of 2006, but which are not expected to result infurther significant adjustments. In the Ceramics division, the disposal of the Ceramic Fibres business wascompleted in April and resulted in a profit of £4.7m, after a write-off ofgoodwill of £2.6m and a tax charge of £0.2m. In June the division's UK carbonblocks business was sold, resulting in a loss of £6.4m, after a write-off ofgoodwill of £1.3m. The net loss of £1.7m arising from these transactions isreported as part of the Group's continuing operations. The net post-tax loss on disposal of operations of £0.5m in the first half of2005 related mainly to the disposal of the Group's Technical Ceramics business,formerly part of the Ceramics division. Of the net post-tax loss on disposal ofoperations of £46.2m in the full year 2005 results, £41.7m related todiscontinued operations, comprising a loss of £52.5m related to the sale of theGroup's Laminates businesses and a profit of £10.8m related to the sale ofSpecialty Coating Systems, Inc., both formerly part of the Electronics division.The £4.5m net loss from continuing operations, after a tax cost of £1.6m,included the disposal of the Group's Technical Ceramics business (McDanel),formerly part of the Ceramics division, plus a number of additional trailingcosts related to previous years' disposals. In accordance with IFRS 5, theassets and liabilities of the Laminates business were disclosed in the Groupbalance sheet as at 31 December 2005 as held for sale and carried at fair valueless costs to sell. Cash generated from the disposal of operations, after disposal costs and net ofcash disposed of, amounted to £56.9m (2005: half year £2.4m; full year: £30.4m). 9 Earnings per share Earnings per share are calculated using a weighted average of 190.8m ordinaryshares in issue during the period (2005: half year 188.5m; full year 188.5m).The ordinary shares held by the Group's Employee Share Ownership Plan ("ESOP")are excluded from the weighted average number of shares as they are held withinretained earnings. As at 30 June 2006 the ESOP held 0.8m ordinary shares (2005:half year 1.2m; full year 1.2m). Diluted earnings per share are calculated assuming conversion of all outstandingdilutive share options. Outstanding share options are treated as dilutive whentheir conversion to ordinary shares would decrease earnings per share orincrease loss per share. The fully diluted weighted average number of ordinaryshares in issue during the period was 192.1m (2005: half year 189.8m; full year189.6m). 10 Dividends On 12 June 2006, a final dividend of 5.0p per ordinary share (2005: half yearnil; full year nil) was paid in respect of the year ended 31 December 2005. Thetotal cost of the dividend was £9.6m (2005: half year nil; full year nil). TheDirectors have declared an interim dividend of 3.0p per ordinary share (2005:nil) in respect of the year ending 31 December 2006. The dividend will be paidon 16 October 2006 to ordinary shareholders on the register at 29 September2006. Based upon the number of ordinary shares in issue at 30 June 2006, thetotal cost of the dividend would be £5.8m. 11 Borrowings Balance at Foreign Refinancing Balance 1 January exchange Non-cash and issue 30 June 2006 adjustment Disposals movements costs Cash flow 2006 £m £m £m £m £m £m £m Cash at bank and in hand 65.9 (3.3) - - - (2.0) 60.6Bank overdrafts (2.4) - - - - (2.8) (5.2) Cash and cash equivalents 63.5 (3.3) - - - (4.8) 55.4Other loans and financeleases:- Current (13.9) 0.1 1.9 (27.0) - 3.2 (35.7)- Non-current (341.9) 21.5 - 27.0 (0.2) 25.2 (268.4) Other loans and finance leases (355.8) 21.6 1.9 - (0.2) 28.4 (304.1) Net debt (292.3) 18.3 1.9 - (0.2) 23.6 (248.7) 12 Employee benefits The balance of £188.8m in respect of "Employee benefits" as at 30 June 2006results from an interim actuarial valuation of the Group's defined benefitpension and other post-retirement obligations as at that date (31 December 2005:£224.8m; 30 June 2005: £213.6m). Of the total balance, £144.9m relates to thecombined deficits of the Group's principal defined benefit pension schemes inthe UK and the US (31 December 2005: £178.5m; 30 June 2005: £166.8m). Of theremainder of the total, £15.0m (31 December 2005: £14.3m; 30 June 2005: £12.7m)relates to defined benefit pension arrangements in the rest of the world and£28.9m (31 December 2005: £32.0m; 30 June 2005: £34.1m) relates to unfundedpost-retirement benefit arrangements, being mainly healthcare benefitarrangements in the US. The valuation of the Group's pension arrangements at 30 June 2006 represents a "roll-forward" from the date of the last full individual scheme valuations, whichwas 31 December 2003 in the case of the UK pension scheme and 31 December 2005for the US pension schemes. For the UK and US pension schemes, changes inactuarial assumptions, mainly an increase in discount rates, resulted in a£17.8m reduction in the combined scheme liabilities, which is reflected in the£19.1m actuarial gain in the condensed Group statement of recognised income andexpense. Together with additional cash funding into the UK plan of £12.8m,these movements represent the main components of the £36.0m decrease in thecombined valuation deficit from 31 December 2005. For valuation purposes, thediscount rates used were 5.22% for the UK (31 December 2005: 4.75%; 30 June2005: 5.00%) and 6.32% for the USA (31 December 2005: 5.50%; 30 June 2005:5.25%). The mortality assumptions used in the Group's actuarial valuations at30 June 2006 were consistent with those used as at 31 December 2005 as detailedin the Group's 2005 Annual Report. The total charge against trading profit in the income statement for the sixmonths to 30 June 2006 in respect of the Group's defined benefit pension andother post-retirement obligations was £5.1m (2005: £6.0m). Note 2 providesinformation on the change in reporting treatment within the income statement forthe interest element of the pension charge. In addition to the regular funding contributions into the Group's UK definedbenefit pension plan, in agreement with the plan Trustee, the Company has madeadditional funding contributions aimed at accelerating the reduction in the plandeficit. Additional contributions of £12.8m were made in the six months to 30June 2006 (2005: half year £5.0m; full year £10.0m). 13 Issued capital At an Extraordinary General Meeting of the Company held on 12 January 2006,shareholders approved special resolutions to reduce the issued share capital ofthe Company by cancelling and extinguishing the Company's deferred shares of 49peach. On 15 February 2006, the High Court of Justice confirmed the reduction ofcapital of the Company from £550.0m (divided into 1,934,963,124 ordinary sharesof 10 pence each and 727,558,546 deferred shares of 49 pence each) to £193.5m(divided into 1,934,963,124 ordinary shares of 10 pence each). The Order of theCourt was registered on 15 February 2006 and the reduction of capital, includingthe cancellation of the deferred shares, was effective on that date. Upon theircancellation, the balance of £356.5m in respect of the deferred shares became anon-distributable reserve of the Company. This reserve becomes distributableonly at such time when all external creditors of the Company as at 15 February2006 have either been fully settled, or have agreed that this reserve may bedeemed distributable. Also at the Extraordinary General Meeting of the Company held on 12 January2006, shareholders approved a special resolution to amend the Company's Articlesof Association to facilitate termination of the Company's registration with theSecurities Exchange Commission ("SEC") of the US. The amendment included aprovision conferring upon the Board the power to require ordinary shares whichare held directly or indirectly by US resident shareholders to be sold in orderto reduce the number of such shareholders below 300, as presently required bythe SEC for termination of registration. In order to avoid the costs ofcomplying with SEC registration requirements in respect of the financial yearended 31 December 2005, the Board commenced exercising these compulsory transferprovisions soon after the amendment was approved by shareholders and, havingreduced the number of US resident shareholders below 300, the Company announcedon 21 February 2006 that it had filed a Form 15 with the SEC to terminate theSEC registration of its ordinary shares. SEC de-registration duly occurred on 22May 2006. On filing of the form, the Company's obligations to file certain formsand reports with the SEC, including Forms 20-F and 6-K, were suspended. Under currently applicable SEC regulations, the number of the Company's USresident shareholders must remain below 300 at each financial year-end to avoidre-commencement of SEC reporting and other applicable US obligations. TheCompany's Articles of Association give the Company's Directors the ability tolimit the number of the Company's US resident shareholders for this purpose. 14 Share premium account At an Extraordinary General Meeting of the Company held on 12 January 2006,shareholders approved a special resolution to cancel the share premium accountof the Company. The cancellation became effective on 15 February 2006 uponregistration of the order of the High Court of Justice with the Registrar ofCompanies, at which date the balance of £646.9m on the account became anon-distributable reserve of the Company. This reserve becomes distributableonly at such time when all external creditors of the Company as at 15 February2006 have either been fully settled, or have agreed that this reserve may bedeemed distributable. 15 Exchange rates The Group reports its results in pounds sterling. A substantial portion of theGroup's revenue and profits are denominated in US dollars and in currenciesother than pounds sterling. It is the Group's policy to translate the incomestatements and cash flow statements of its overseas operations into poundssterling using average exchange rates for the period reported (except when theuse of average rates does not approximate the exchange rate at the date of thetransaction, in which case the transaction rate is used) and to translatebalance sheets using period end rates. The principal exchange rates used were asfollows: Period end rates of exchange Average rates of exchange for the period Half year Half year Full year Half year Half year Full year 2006 2005 2005 2006 2005 2005 US dollar ($ per £) 1.85 1.83 1.72 1.79 1.87 1.82Euro (• per £) 1.45 1.50 1.46 1.46 1.46 1.46Singapore dollar (S$ per £) 2.92 3.06 2.85 2.88 3.09 3.03Chinese Renminbi (RMB per £) 14.8 15.1 13.9 14.4 15.5 14.8South African rand (ZAR per £) 13.2 12.1 10.9 11.3 11.6 11.6Japanese yen (Y per £) 211 200 203 207 199 200 This information is provided by RNS The company news service from the London Stock Exchange

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