Bodycote Annual Report 2003

FY2003 Annual Report · Bodycote

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annual report 2003

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At a glance

Bodycote Heat Treatments…
…providing a vital link in the manufacturing process for the automotive, aerospace,, construction,

power generation, electronics, consumer products and general engineering industries. Operating 145 plants

in 18 countries; an unrivalled strategically located network, experienced in supporting large multi-national

customers and their supply chains, as well as local niche specialists. Expanding in Italy and developing the

Bodycote Kolsterising® technology in France and the USA.

38.0

18.7

27.6

61.2

Bodycote Materials Testing…
…assessing and certifying the quality and reliability of materials and products for many clients in the ﬁelds

of civil engineering, environmental protection, food and household goods, microbiology, pharmaceuticals,

pipeline polymers, and transport. Offering a fully accredited group of 46 testing laboratories in 10 countries,

serving international customers. Expanding in the Czech Republic and the Middle East, providing a beneﬁcial

outsource option for advancing businesses.

Bodycote Hot Isostatic Pressing…
…applying the unique product enhancement and novel material production beneﬁts of this advanced technology
to an increasing number of customers in precision foundry, power generation, aerospace, automotive, medical,
precision tooling, and electronic engineering. Managing the western world’s largest HIPping capacity at
11 locations across 6 countries. Developing new materials and manufacturing techniques by collaborative
projects with market-leading OEMs.

36.0

16.3

28.5

56.6

Bodycote Specialty Coatings…
…improving the performance, durability and appearance of components and tools by the application of
functional and decorative coatings utilising, physical vapour deposition (PVD), plasma spray and ceramic
coatings processes. Operating 11 environmentally friendly coatings centres in 6 countries. Expanding the
international provision of PVD coatings services for tooling, tribological and decorative applications and
establishing CoatAlloy™, the unique new Bodycote coating service for the petrochemical industry.

Bodycote Wet Coatings…
…enhancing the corrosion resistance and appearance of constructional components and consumer products
by the application of electroplating and mechanical plating processes. Operating 22 environmentally friendly
coatings centres in 5 countries.

2003 Sales
£448.4m

302.9

2002 Sales
£440.1m

302.7

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2003

2002

Turnover

£448.4m £440.1m

Headline Operating Proﬁt 1

£41.7m £49.4m

Operating Proﬁt

£25.1m £22.4m

Headline Proﬁt Before Taxation 1

£32.0m £38.2m

(Loss)/Proﬁt Before Taxation

(£11.1m)

£11.2m

Headline Earnings Per Share 1,2

9.7p

10.6p

Basic (Loss)/Earnings Per Share

(6.8p)

2.4p

Dividend Per Share

6.1p

1 Headline Operating proﬁt and proﬁt before taxation are stated before exceptional items (2003: £34.0m; 2002: £18.3m) and
amortisation of goodwill (2003: £9.1m; 2002: £8.7m).
2 A reconciliation of headline EPS is given on page 30.

1999

2000

2001

2002

2003

1999

2000

2001

2002

2003

1999

2000

2001

2002

2003

355.4

371.1

Turnover
£ Million

479.4

440.1

448.4

22.5

22.6

Headline Earnings
Per Share
Pence

Dividend
Per Share
Pence

5.5

6.0

6.1

18.2

10.6

9.7

CONTENTS

1 Financial Highlights

19 Independent Auditors’ Report

2 Chairman’s Statement

20 Consolidated Proﬁt and

3 Chief Executive’s Review

6 Finance Director’s Report

9 Directors’ Report and
Corporate Governance

14 Board Report on Remuneration

18 Board of Directors and Advisers

Loss Account

21 Balance Sheets

22 Consolidated Cash Flow Statement

23 Consolidated Statement of Total

Recognised Gains and Losses

23 Reconciliation of Movements
in Group Shareholders’ Funds

24 Accounting Policies

26 Notes to the Financial Statements

47 Five Year Summary

48 Principal Subsidiary Undertakings

51 Notice of Annual General Meeting

53 Financial Calendar

and Supplementary Information

Bodycote annual report 2003

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Chairman’s Statement

Introduction
It has been another tough year. At the beginning
of 2003 there was a general view amongst
macro-economic commentators that the difﬁcult
market conditions that commenced in the
middle of 2001 would start to abate in the
second half of 2003. However, as in 2002,
the encouraging mid-year signs turned out
to be another false dawn. The programme of
self-help initiatives that we have taken have
been extensive and the beneﬁts have gone
some way to compensate for the effects of
downward market demand, pressure on pricing
and the increased costs particularly of medical
insurances, depreciation and utilities.

Trading
Aided by some acquisition growth and
favourable foreign exchange conversion
rates turnover was up by a modest amount
at £448.4m (2002:£440.1m). Operating proﬁt
of £25.1m (2002: £22.4m) was up 12 per cent.
However, despite our cost saving measures
our operating margins weakened and
consequently our proﬁt before taxation, goodwill
amortisation of £9.1m (2002: £8.7m) and
exceptional items of £34.0m (2002: £18.3m)
fell to £32.0m (2002:£38.2m).

Heat Treatment turnover held up well in Europe
but was severely affected in North America,
which also suffered from the adverse effects
of currency translation. Materials Testing was
again our most successful Strategic Business
Unit with an improvement in both sales and
operating proﬁt. HIPping, particularly in the
early part of the year, experienced a further
downturn in turnover and proﬁtability.
Metallurgical Coatings, whilst increasing
turnover, has not so far secured the beneﬁts
from the rationalisation programme and the
increased losses within this division are all
attributable to wet coatings which is an area of
activity that we have concluded does not ﬁt with
Bodycote’s longer term strategy. A decision
has thus been taken to exit the wet coatings
business area in an orderly and timely fashion.

It is particularly pleasing to note that our efforts
to reduce capital expenditure and to improve
working capital continue to show beneﬁts
and we have generated free cash of £30.3m
in the year (2002: £22.0m) and our year
end indebtedness now stands at £210.3m
(2002:£234.2m).

Bodycote annual report 2003

Operating Exceptionals
and Exceptional charges
Principally as a result of the decision to dispose
of our wet coatings businesses we incurred
£34.0m net exceptional and operating
exceptional charges in 2003 (2002: £18.3m).
£33.5m of these charges related to goodwill
and asset write-downs and were of a non cash
nature. It is anticipated that a further £5m cash
of exceptional charges will be incurred in 2004
in respect of disposal and closure costs for
wet coatings.

Future Growth
The focus of the Board is to return the Group
to an organic growth path and a number of
signiﬁcant new outsourcing contracts have been
won and are currently being negotiated. In
addition, the Board have and will continue to
consider appropriate bolt on acquisitions, which
we believe will strengthen the Group, improve
our market position and increase our earning
capacity. Net acquisition costs in 2003 were
£2.2m. The principal acquisition of 3 test
laboratories in the Middle East has been
assimilated well and has signiﬁcantly increased
our presence in this growing market. The other
acquisition of note was the CoatAlloy® slurry
coatings business which is being relocated
from Canada to an existing facility in the UK.

Rights Issue
We have taken the decision to strengthen our
balance sheet and to give ourselves increased
ﬁnancial ﬂexibility going forward. To this end we
have today announced a fully underwritten
rights issue which will raise net proceeds of
approximately £61.9m. We believe that this
issue together with the actions being taken on
wet coatings and the rationalisation measures
already implemented will signiﬁcantly
strengthen Bodycote’s ﬁnancial position.
Full particulars are contained in the prospectus
sent to shareholders under separate cover.

Dividend
The Directors are recommending an unchanged
ﬁnal dividend of 3.85p which maintains the
total dividend for the year at 6.1p and will be
paid on 5 July 2004 to all shareholders on the
register at the close of business on 26 March
2004. The new shares, the subject of the rights
issue, will not qualify for this ﬁnal dividend.

Governance
Over the last two years Bodycote has been
very proactive in reviewing and implementing
changes to its board structure and governance
procedures in general. What has emerged, we
believe, is a structure appropriate for Bodycote.
In keeping with the spirit of the New Combined

Code we explain in the Directors’ Report in
the Annual Report why, for good reasons,
we are at variance with the Code in a small
number of respects. Our clear focus, going
forward, as a Board, is to concentrate on
adding economic value to the Group whilst
continuing to be transparent and open in our
communication with shareholders and the
investment community.

Employees
As always we rely upon the dedication and
professionalism of our staff which has been
clearly demonstrated in what has been another
tough year. The additional ﬁnancial commitment
from our shareholders and the prospects for an
upturn in our markets will provide them with the
opportunity to fully demonstrate their abilities.

Safety, Health and the Environment
The industries we operate in have inherent
safety risks from high temperature,
high pressure, volatile gases and chemicals.
We strive to provide training, equipment and
procedures to manage the risks associated
with our businesses. In the past year we have
enhanced the gathering of detailed safety
performance data relating to incidents,
frequency and severity rates of accidents and
established speciﬁc goals. Environmental
compliance is part of our good citizenship
effort. We now have a group of facilities
certiﬁed to ISO-14001 environmental standard
and are working to certify more locations. We
remain committed to continuous improvement.

Current Trading and Prospects
The results for the ﬁrst two months of the year
are in line with our expectations. With the
operating improvements that have already
been implemented and the actions we are
taking on Wet Coatings, we are conﬁdent
in the ﬁnancial and trading prospects for the
Group in the current year.

Looking further ahead the Group is poised to
move forward as market demand recovers.
Bodycote has capable people, productive
facilities and the systems to deliver exceptional
quality and service. The Group will continue
to focus on higher value added work, gaining
further market share and winning new
outsourcing contracts. The Group’s medium
term strategy is to deliver a pre tax return
on capital in the mid teens.

James Wallace
9 March 2004

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Chief Executive’s Review

2003 brought no respite from the tough trading
conditions we faced since mid 2001 when
demand for the Group’s services began to
decline, particularly in North America.
This trend was quickly exacerbated by the
events of September 11, political instability
and has continued to affect us through 2003.
The Group’s future can best be served by
concentrating on the businesses where we
have strong market positions and excellent
know how, to enable Bodycote to maximise
its return on capital employed.

Sales for the year were up 1.9% over 2002;
however, this was aided by some small
acquisitions generating growth of 1.8% and
favourable currency translation of 1.9%.
Pricing pressures remained high, the result of
our customers benchmarking manufacturing
costs on a global basis and driving their costs
down. In response to difﬁcult markets, over
capacity in the market and overlapping locations,
we closed 13 facilities in 2003, 16 in 2002 and
reduced headcount by around 1,100 in this two
year period. These actions have primarily
targeted Heat Treating and Wet Coatings in
the USA, UK, Sweden and France and have
slightly improved facility utilisation. Market mix,
however, has remained skewed towards lower
value added segments with commercial
aviation, oil and gas, telecommunications and
industrial gas turbine market (IGT) demands
remaining low. We have successfully reduced
our cost structure by £15m annualised over the
past two years, but these gains have been
more than offset by unit cost rises for key
inputs, most notably our people costs, energy
and depreciation. Reﬂecting all these dynamic
forces, operating margins declined in all
Strategic Business Units (SBUs) except
Materials Testing where they remained steady.
We have successfully instituted rigorous controls
on capital expenditure and in 2003 generated
£30.3m free cash ﬂow (2002: £22.0m) and net
cash of £16.1m, after paying the dividend.

Automotive and general engineering end
markets have begun to show some signs
of recovery in demand while aerospace and
power generation markets are stabilising.

We made two signiﬁcant acquisitions during
the year. The ﬁrst, a patented slurry coating
technology developed in Canada which has
been relocated to an existing UK facility with
development support being provided from one
of our laboratories in Canada. The second,
a testing group of three laboratories in the
Middle East.

We captured new outsourcing business which,
when on stream, will equate to over £20m a
year of new sales. In addition, as a result of
our network capability within each geographical
region, we are expecting to see market growth
opportunities develop in late 2004 from our
technology transfer initiatives.

Our two largest SBUs, Heat Treatment and
Materials Testing, are in a good position to
capitalise on improving market conditions.
Demand for HIP remains subdued as this is
more geared to IGT and aerospace markets
which are expected to improve later than
other sectors.

The Wet Coatings performance, however,
continued to decline. With sales in 2003 of
£38.0m, it lost £6.0m, had negative EBITDA
of £1.8m and over the past two years absorbed
£10m of capital investment. The Wet Coatings
group was established in the late 1990s through
a series of acquisitions designed to create
a business which would be synergistic with
Bodycote’s core heat treatment operations.
These synergies, however, have not
materialised. After a thorough evaluation we
have decided to exit the Wet Coating business
sector and aim to do so by divestiture in an
orderly and timely fashion so we can focus our
resources on core businesses. We estimate
that this early action will require a charge of
c.£35.0m. This will include non cash asset write
downs of approximately £30m charged in the
2003 accounts, of which, £19m relates to
tangible ﬁxed assets and £11m to goodwill.
The remaining £5m (cash) relates to exit costs
such as redundancy, and these will be charged
in the 2004 accounts. The exit from this
business will remove a cash and proﬁt drain
on the Group and will allow us to re-focus
attention and develop our core businesses.

In addition to addressing the Wet Coatings
issue, which was mentioned in our December
2003 trading statement, we have today
announced a fully underwritten Rights Issue.
We consider that a combination of equity
issuance and asset sales will signiﬁcantly
improve the ﬁnancial position and ﬂexibility of
the Group. Over time, some of the proceeds
will be used to support outsourcing, organic
growth and to make selective, focused, bolt on
acquisitions for our core SBUs. There have been
no material acquisitions in the past two years
and the few we have made have been in core
businesses and delivered well over 20% return
on capital. We remain totally committed to
improving the Group’s return on capital
employed and generating cash.

HEAT TREATMENT
Overall sales were ﬂat with margins slipping
1.7 percentage points.

North America
In local currency sales for North America
dropped 7.3% year on year with margins
slipping 3 percentage points.

We entered 2003 expecting that the decline
in the manufacturing economy was about to
end and we would beneﬁt from all the cost
reductions achieved. Since the downturn
started in 2001, we reduced the number of
heat treatment locations from 58 to 43 and
the number of people employed by around
450. Cost increases in utilities and medical
insurance offset a lot of the cost reductions
that had been made. Over capacity, and thus
pricing pressures, continue to inﬂuence the
industry. We have been able to increase market
share in some areas and have been successful
in concluding additional Strategic Partnerships
and outsourcing agreements bringing
prospects for growth in 2004 and beyond.
We increased our emphasis on management
training and continued to raise the bar in
areas of safety, health and environmental.

The Bodycote Quality System, a systematic
approach to delivering quality results, is now
installed throughout the organisation and has
advanced to become the Bodycote Management
System to encompass the new ISO 9001-2000
requirements. Most sites have successfully
been accredited to the new ISO standard.

We enter 2004 with a committed and
streamlined organisation. Most of the
planned consolidation work is now behind
us and our base is aligned with market
demand. We move forward focused on
growth and business development.

Central European Group (CEG)
Germany, Netherlands, Austria, Switzerland,
Czech Republic, Hungary and Liechtenstein

In local currency sales for CEG grew 2.0%
year on year with stable margins.

Despite difﬁcult market conditions, national
strikes and the strong inﬂuence of the Iraq
war at the beginning of the year, this division
was able to deliver a respectable proﬁt margin
by tight cost control, a strong sales programme,
high proﬁle marketing and turning around
loss making plants.

CEG increased market share especially in
the high added value sectors of the market.
We continued to develop the outsourcing
concept and improved capacity utilisation.

Bodycote annual report 2003

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Chief Executive’s Review

Steps into new technology applications such
as: laser heat treating/joining, brazing of fuel
cells, diesel exhaust ﬁlters and heat treatment
of automotive common rail components helped
improve our performance.

in other areas to keep sales level with 2002.
Cost increases, however, led to margins declining.
The demand for high value work from the
commercial aerospace and power generation
sectors continued at depressed 2002 levels.

The Netherlands had a satisfactory performance.

Our international reputation for quality and
reliable service has helped us to gain market
share with multi-national manufactures in
the automotive and tooling markets of the
Czech Republic, Hungary and Romania.

Against a background of declining markets
and strong competition we managed to
maintain our sales in Austria. New low
pressure carburizing capacity was installed
for diesel engine applications.

Focus will be maintained on our plans to
produce better returns in Switzerland and
Liechtenstein where declining markets and
excess capacity have driven prices down.

In the Central European Group, winning
additional outsourcing business remains a
focus to increase utilisation of our existing
equipment. Our Eastern European expansion
programme to support manufacturers will
also be a key objective.

France, Belgium, Italy (FBI)
In local currency organic sales for FBI fell 5.4%
year on year with margins remaining stable.

A major restructuring plan in 2003 absorbed
much management time and energy. Five
facilities were closed. As a result our headcount
has been reduced by more than 100 people
but because of the time consuming process
involved in securing government and union
agreement, the full beneﬁt will not be seen
until 2004. Other rationalisation has involved
the merger of all induction heat treatment at
Billy Berclau and the return to proﬁtability under
new management of the Cluses and Thyez
operations. La Talaudière was modiﬁed to house
additional operations and most of the sales
transferred from neighbouring closed facilities.
New low-pressure carburising investment will
focus on emerging automotive applications.

We now have a good base for growth in Italy,
the third largest manufacturing market in Europe,
after our acquisition of the Gamma group in 2002.

United Kingdom
Sales in the UK grew 1.1% year on year with
margins reducing by 2 percentage points.

The UK heat treatment operations focused on
cost control and improvement in return on
capital employed. Sales from new automotive
contracts and growth in vacuum brazing and
electron beam welding offset price pressures

Our new Heat Treatment Centre adjacent to
Delphi in Gillingham opened in March 2003 and
is performing according to plan. Our relationship
with major international manufacturing ﬁrms
continues to strengthen; offering us opportunities
throughout the Western Hemisphere. NADCAP
(National Aerospace and Defence Contractors
Accreditation Programme) audits to meet our
Rolls-Royce commitment started successfully
and will be completed during 2004. This
establishes Bodycote as the ﬁrst NADCAP
approved source on this side of the Atlantic.

Nordic (Sweden, Denmark and Finland)
In local currency sales for the Nordic Group
were at a similar level year on year but margins
dropped almost 6 percentage points.

Although sales in Swedish heat treatment
were ﬂat, low margin sales predominated.

Sales growth in Finland was slightly positive and
with tight cost control, margins were acceptable.
Co-operation with our French colleagues and
a Finnish customer led to the development
of FinNIT, a new process which extends the
life of aluminium extrusion dies. We expect
to offer this service in other geographies.

Increased competition from a start up company
in Denmark has resulted in losses. Costs
have been reduced to improve the situation.

MATERIALS TESTING
Organic sales grew 2.6% year on year and
margins remained steady.

In very tough economic conditions and market
uncertainty, the Materials Testing SBU performed
in line with expectations, primarily by diversifying
our range of expertise and service offerings.
By concentrating on high valued added services
the Group won new business and increased
market share. A key element to this growth was
the formation of a number of cross-border,
industry speciﬁc technical forums which were
able to capitalise on extensive technical
know-how and experience, enabling signiﬁcant
opportunities to be grasped. A number of
innovative projects, indicating the leading
role the Materials Testing SBU places on
technologically driven expertise, were initiated
in early 2003 and included:

The installation in Sweden of BOMIC, our
advanced microcalorimetry testing service,
capable of predicting the shelf life of a number
of defence munitions systems. This world

standard technology has attracted global
business and was partly responsible for growth
in proﬁts at this facility.

In our Italian facilities we added a unique
laboratory speciﬁcally designed to investigate
the ﬁeld failure of telecom and associated
electronic products by utilising various optical
and analytical techniques.

In terms of our geographical market performance,
the core UK business suffered in line with UK
manufacturing and the effects of globalisation
on traditional home produced goods. Our
Radiographic and Materials Engineering units
performed admirably in difﬁcult IGT/Aerospace
markets, and a number of OEM approvals
and investment programmes should provide
added impetus for 2004. The Health Sciences
division posted an improvement in proﬁt.
This business unit will be expanded to take
advantage of further regulatory compliance
monitoring for water quality, asbestos in buildings
and integrated pollution, prevention and
control (IPPC).

The European division had strong trading
performances in Sweden, where our Polymer
Piping laboratory won large outsourced testing
programmes from North America and the
Far East. In the Netherlands the laboratories
won work on large tranches of pipeline and
associated oil/gas installation work from France,
Spain and Indonesia. Similarly, the Italian
business captured several signiﬁcant projects
for programmes in Russia, Turkey and Libya.

Our Middle Eastern facilities performed well
ahead of expectations following the completion
of several signiﬁcant construction projects in
the UAE allied to signiﬁcant penetration into
oil/gas markets in Azerbaijan, Kazakhstan
and Iran. This provided the platform for the
further expansion, both in service scope and
geographically, via the acquisition of the
laboratory interests of Carillion plc in Abu Dhabi,
Oman, and Dubai. These laboratories are
now successfully integrated into the Group
and the rationale for the development of the
division was fully vindicated by securing the
multi-million dollar contract for provision of an
on site laboratory for the Dubai Airport extension.

Our North American business Group had mixed
fortunes, with the Canadian Group unable to
match last year’s performance due to price
erosion in our Quebec Environmental/
Pharmaceutical markets. Our Detroit laboratory
which opened an additional facility, enhancing
the large scale environmental simulation
capability available. New chlorine test cells
for Polymer Piping were installed at Melrose
Park to meet changes in the US plumbing

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 5

regulations. Los Angeles continues to be a
challenge due to the continuing downturn in
the US Aerospace sector, however a number
of signiﬁcant quality approvals from major
US/UK engine manufacturers should provide
trading stimulus for 2004.

2003 also witnessed a number of advances in
our infrastructure support systems with the
adoption worldwide of our ISO 17025 quality
system; the roll-out of our North American
developed LIMS system, which allows clients
direct access to their data; and ﬁnally the setting
up of divisional marketing centres to control
enquiry management, co-ordinate web marketing
and provide market intelligence to our business
development teams.

HIP
Overall sales declined 1% year on year and
margins declined 3 percentage points. 2004 will
be a year in which we expect to start improving
our return on capital employed which remains
unacceptably low in this capital intensive SBU.

North America
Aerospace volumes in North America accounted
for 54% of our sales (2002: 54%). We saw a
halving in IGT sales but this was more than
offset by growth in the tooling and electronics
markets, which relate to HIPping of powder
metal billets and ﬂat screen TV targets.

Equipment installed in 2002, to produce
a transparent ceramic material (ALON),
experienced slower than budgeted sales
increase, but we remain conﬁdent that this
work will utilise the installed capacity.

Europe
Positive change came from increased sales of
near net shaped powder densiﬁcation projects.
Improved welding efﬁciency in Sweden has
reduced operating costs and lead-time for
several key customers. The offshore oil and
gas business and demand for industrial gas
turbines, which is the major market for UK
HIP, remained at the levels of 2002 reﬂecting
continued low global demand.

The merger of our Essen facility with Haag, near
Munich, helped reduce the cost base. Densal II®
adoption by a major automotive customer is
assisting in gaining application acceptance.

METALLURGICAL COATINGS
Wet Coatings
The acquisition strategy to grow a wet coatings
group synergistic with our heat-treating network
failed to beneﬁt the Group. After careful review,
we have decided to exit this market in an
orderly and timely fashion so we can focus
our resources on core businesses.

Specialty Coatings
Specialty coatings consist of processes we
believe are synergistic with our heat-treating
business. These value added services provide,
in the main, functional metallurgical enhancement.

Slurry Coatings
Demand for our ceramic slurry coatings increased
during the year in spite of ﬂuctuations in the
oil exploration and textile markets. Our emerging
market applications are medical suppliers and
electronics, the latter requiring an insulating
coating currently under development.

Following our success in the UK, we are now
penetrating the North American and European
steel market. Bodycote is applying K-Tech 17
ceramic densiﬁcation on galvanising and steel
mill furnace rolls, extending their useful life.
A collaboration agreement with a leading UK
manufacturer to supply tungsten carbide coating
and a joint marketing campaign is currently
underway in Europe.

In June, we acquired the intellectual property
rights and production equipment for the
CoatAlloy® range of diffusion bonded metallic
slurry coatings from Surface Engineered Products
Ltd of Alberta, Canada, as part of our strategy
to develop our speciality coating group. These
advanced, high temperature, metallic slurry
coatings will be applied at our previously surplus
facility at Knowsley, UK to a range of oil and gas
and petrochemical applications. This coating
dramatically improves ethylene process yield
and lengthens time between maintenance
requirements offering considerable advantages
for chemical plant operators and is being
marketed through our strategic partnership
with Manoir Industries S.A., a specialist
tubular manufacturer.

Physical Vapour Deposition (PVD)
In order to cope with the international nature of
the PVD customer base and the strong needs
to cross link the coating know how, the 10
facilities have been put under one operating
structure. Speciﬁc regional market knowledge
and coating application know-how is being
leveraged ‘from centres of excellence’ for global
exploitation. PVD operations that have proven
competencies in speciﬁc niches will support the
roll-out of those applications into the geographic
network. The Tecate, Mexico operation is
supporting marketing and process
development for decorative applications,
Chassieu, France for tooling and Venlo,
Netherlands for tribological coatings applications.

Sherardizing/Sheraplex
Two sites focus on large volume Sherardizing/
Sheraplex. Sheraplex has been speciﬁed by
the designer for European and USA foldaway
trailer system for the back of breakdown
trailers. Sheraplex is being marketed worldwide
as a cost effective coating system for fasteners
used on construction projects.

Plasma Spray
New contracts have been won for plasma
spray of titanium honeycomb parts for Airbus
projects at our French facility.

CURRENT TRADING AND PROSPECTS
The results for the ﬁrst two months of the year
are in line with our expectations. With the
operating improvements that have already
been implemented and the actions we are
taking on Wet Coatings, we are conﬁdent
in the ﬁnancial and trading prospects for
the Group in the current year.

In support of our ongoing needs and future
talent requirement for high calibre staff, we
have intensiﬁed initiatives to nurture interest
in a career with Bodycote. Programmes of school
visits, distance learning through related discipline
colleges, graduate sponsorship schemes at
various European and North American
universities and ‘Prize Paper Competition’ have
enhanced Bodycote’s proﬁle amongst this
important talent pool as Bodycote continues to
position itself for further growth and development
and looks forward to the challenges ahead.

John D. Hubbard
9 March 2004

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 6

Finance Director‘s Report

Sales and Operating Proﬁt
The Group recorded sales of £448.4m,
compared to £440.1m in 2002, with difﬁcult
trading conditions in essentially all of the
Group's end markets continuing. Existing
operations accounted for £447.1 m, whilst
acquisitions added £1.3 m.

Following a review of the Coatings operations,
the Board has concluded that the future
development of the Group can best be served
by concentrating on the businesses where
we have strong market positions and excellent
know-how, thereby enabling Bodycote to
maximise its return on capital employed.

Continuing Operations

Heat Treatment
Materials Testing
Hot Isostatic Pressing
Specialty Coatings
Head Ofﬁce

Wet Coatings

Sales

2003
£m

2002
£m

Operating Proﬁt*
2002
2003
£m
£m

Operating Margin*
2002
%

2003
%

302.9
61.2
27.6
18.7
–

410.4
38.0

448.4

302.7
56.6
28.5
16.3
–

404.1
36.0

440.1

31.6
11.4
3.6
2.7
(1.6)

47.7
(6.0)

41.7

36.5
10.9
4.5
(2.6)
(1.3)

53.2
(3.8)

49.4

10.4
18.6
13.0
14.4

12.1
19.3
15.8
16.0

11.6
(15.8)

13.2
(10.6)

9.3

11.2

*before amortisation of goodwill of £9.1m (2002: £8.7m) and exceptional items of £34.0m (2002: £18.3m)

The continued weakness in demand for the
Group’s services during 2003 has resulted in
a degree of price pressure which coupled
with higher employment and energy costs
and operational problems at several wet
coatings plants, more than offset the beneﬁts
of our reorganisation and cost reduction
programme. The effect of this was that
despite closing a further 13 facilities and
reducing headcount by over 380, (excluding
businesses acquired in 2003) operating
proﬁt* fell from £49.4m to £41.7m.

Consequently the Board has decided to exit
the wet coatings business (electroplating
and anodising) in an orderly and timely
fashion. This will result in an impairment in
the asset values of this business and an
exceptional charge in the 2003 accounts of
£30m, made up of £11m goodwill and £19m
for tangible assets. In addition it is expected
that cash costs for this reorganisation will be
£5m to be recognised in 2004.

Sales
£ Million

* Operating Proﬁt
£ Million

500

450

400

350

300

250

200

150

100

Heat Treatment
The UK heat treatment business recorded
sales and proﬁts almost identical in 2003 to
2002, although reported proﬁts in 2003 are
lower by £0.3m due to an unanticipated
pension charge related to a 1998 acquisition
which, if identiﬁed at the time, would have
been included in purchase consideration.
Demand from its key aerospace/IGT markets
appear to have bottomed out and market
increases are now expected. The Central
European Group returned robust results in
the face of weak conditions, particularly in
Germany, with sales and proﬁts in local
currency ahead by 2% and 5% respectively.
This reﬂects good cost control and success
at winning new outsourced contracts,
particularly in the automotive sector.
The France/Belgium/Italy Group had its
operating proﬁt boosted by £0.7m with the
inclusion for a full year of the Gamma
acquisition in Italy (purchased in September
2002). France, however, proved to be one of
our weakest markets in 2003, particularly in
the second half, with our large automotive
orientated continuous furnace facilities most
affected. Progress was also retarded by the
very lengthy process required in France to
action our reorganisation plan. This caused
an eight month delay compared to other parts
of the Group. Ofﬁcial sanction to reduce
headcount by 8% was ﬁnally given in June
and the beneﬁts will be achieved in 2004.
The Nordic division had disappointing results
given that local currency sales were ﬂat but
proﬁts were down £1.1m. This was due to
issues regarding employee cost control and
high maintenance costs, both of which should
be improved in 2004. In addition, results
from Denmark were impacted by signiﬁcant
over capacity in the market. Along with
France, North America proved to be the
most difﬁcult trading environment with sales
down, in local currency, over 7% year on year.
Aerospace and IGT demand was very weak
throughout the year, particularly impacting
our West Coast plants. Automotive was hit
by a very weak Q3 as component suppliers
reacted to the Q2 vehicle production cut back
by the Big Three manufacturers. Despite good
cost control with a further 173 reduction on
headcount, margins were reduced by three
percentage points.

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 7

Materials Testing
Once again, Materials Testing has delivered
increased sales, up 8%, and maintained
margins, whilst serving essentially the same
markets as our other SBUs. Sales were
ahead in all regions, except Canada which
was ﬂat, as the division continues to win
new business for the Group despite weak
end market conditions. In the UK, our traditional
engineering focused laboratories were
impacted, along with heat treatment and HIP,
by weak aerospace and IGT demand but this
was compensated for by growth in Health
Sciences. The European laboratories
performed strongly with new contracts
for polymer pipeline testing for the water
industry and in steel for the oil and gas
sector. The Middle East produced excellent
results as it beneﬁted from strong civil
engineering related demand in the UAE and
our position was signiﬁcantly enhanced mid
year by the acquisition of additional facilities
in the region. Canada was held back by price
erosion in the Quebec environmental and
pharmaceutical laboratories, although this
was offset by increased demand for engine
testing in Ontario. In the USA, the situation
was one of steady growth with the exception
of Los Angeles which was impacted by poor
aerospace demand.

Hot Isostatic Pressing
The UK saw a further signiﬁcant decline in
HIP demand from its key precision casting
customers, who serve the aerospace and
IGT markets, which saw sales down 19%
year on year. With particularly high ﬁxed
costs in HIP, margins were reduced to 11%.
The continental European plants fared much
better with sales ﬂat in Sweden and ahead
in both Germany and Belgium. This reﬂects
a wider spread of business in these markets
with powder consolidation and production
of near net shapes in addition to casting
densiﬁcation. Densal® sales grew by 64%
due to good demand from German automotive
manufacturers. Sales in the USA were
marginally ahead for the year, with Q4 easily
the strongest. Proﬁts were impacted by £0.2m
increase in depreciation charges.

Metallurgical Coatings
The results from the Group’s coatings plants
range from some of the best in the Group to
the worst. Margins and proﬁts in the small
specialty businesses (slurry and ﬂame spray)
were excellent. PVD ranges from satisfactory
to very good with sales ahead 21% compared
to 2002. We expect this trend to continue
in 2004. Along with Materials Testing, this is
an area where Bodycote’s capacity is being
increased. The performance of the anodizing
plants (located in Sweden, Finland and
Germany) should certainly be better but are
not a serious problem. The electroplating
results, however, are very poor, as a
combination of weak demand and
disappointing operational performance at a
handful of facilities have resulted in signiﬁcant
losses. Wet coatings in total lost £6.0m.
The plants that focus on zinc (in the UK,
France and Sweden) have suffered from poor
demand. The aerospace facilities (UK and
France) should experience a recover in
demand in due course. It is taking time to
efﬁciently run the large new highly automated
telecoms oriented operation at Gothenburg,
Sweden. There has also been a high scrap
rate at our chrome on plastic facility at
Anderstorp, Sweden. At St Dizier in France,
operational performance has been stabilised
following a problematic second half of 2002
and ﬁrst half of 2003 but the plant operates
in a small market for chrome on aluminium,
which requires further development before
satisfactory returns can be achieved.

Information Systems
During the last two years the Group has
been moving towards standard information
systems solutions as and when businesses
need to upgrade. Our Central European Group
is close to completing the implementation
of the Navision ERP system (a Microsoft
solution). As well as offering ﬁrst class
functionality for accounting, sales and
purchase order processing and plant
scheduling, the system enables electronic
customer access to scheduling information,
all of which are factors to improve our future
market position and margins. Based on our
experience in the Central European Group,
France, Belgium, Italy, the UK and North
American will adopt Navision to replace
their legacy systems in 2004.

Proﬁt Before Tax, Goodwill Amortisation
and Exceptional Items
Proﬁt before tax, goodwill amortisation (£9.1m)
and net exceptional items (£34.0m) was
£32.0m compared to £38.2m last year.
In 2002 the Group recorded operating
exceptional charges of £18.3m relating to
reorganisation of the Group designed to
bring capacity more into line with reduced
demand levels. In 2003 the continuation
of this programme saw a further charge
of £7.5m, in addition to the £19m provision
against wet coatings tangible ﬁxed assets.
With the exception of wet coatings,
the reorganisation is broadly completed.
The initiative has included the closure of
29 facilities over the two years spread
throughout the network. Against this,
the Group beneﬁted from the settlement
of a fully provided loan to its former furnace
manufacturing business resulting in an
exceptional proﬁt in 2003 of £3.5m.
Pre-goodwill amortisation, pre exceptional
operating proﬁt declined from 2002 to 2003
by £7.7m, of which £2.2m was due to wet
coatings. Foreign exchange movements during
the year resulted in a net beneﬁt to operating
proﬁt of £0.8m. The effect of applying current
exchange rates to the 2003 results would
be an adverse impact on operating proﬁt of
approximately £1.0m, although this would
be partly offset by interest savings on dollar
borrowings of c.£0.6m. The Group’s interest
charge was reduced from £11.2m to £9.7 m
reﬂecting lower borrowings and the beneﬁt
of a weaker US dollar. Goodwill amortisation
has increased by £0.4m to £9.1m excluding
the exceptional write-down of £11m related
to wet coatings.

Taxation
The effective tax rate in 2003, before the
amortisation of goodwill (which is not generally
allowable for tax) was 69% (2002: 24%).
The ﬁgure is distorted by the signiﬁcant
exceptional charges, particularly related to
the disposal of wet coatings, which creates
losses, the tax beneﬁt for which has not been
assumed in the Group accounts, as their
recoverability at the Balance Sheet date is
not known. Before exceptional charges and
goodwill amortisation, the effective tax rate
is 22% (2002: 29%), reﬂecting the mix of
taxable proﬁts and losses and the jurisdictions
in which the Group operates.

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 8

Finance Director‘s Report

Earnings per share
Headline earnings per share were 9.7p
(2002: 10.6p), with basic diluted loss per
share being (6.8)p (2002 earnings per share:
2.4p). The Board is recommending a full year
dividend of 6.1p (2002: 6.1p) per share.
Dividend was covered 1.6 (2002: 1.7) times
by headline earnings. Interest was covered
4.3 (2002: 4.4x) times by proﬁt before
goodwill and exceptional items.

Capital Expenditure
Net capital expenditure for the year was
£38.3m compared to £54.0m in 2002.
The multiple of depreciation (net capital
expenditure divided by depreciation) has
continued to fall, being 0.8 times in 2003
compared to 1.3 times in 2002 as the
Group continues to make greater use
of previous investments.

Major projects undertaken during the year
included: the consolidation of three facilities
into one in St Etienne, France with the
establishment of a new service centre focused
on nitriding technologies, the installation of
additional PVD tribological capacity in Venlo,
Netherlands, tooling capacity in Chassieu,
France, the addition of low pressure
carburizing technologies in Livonia,
USA and established an engine testing
facility in St Catherine’s, Canada.

Capital Expenditure
£ Million

Depreciation
Ratio

100

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

Bodycote annual report 2003

Cash Flow and Borrowings
In July 2003 a three year £195m syndicated
unsecured revolving credit facility was
successfully arranged which, along with
the existing $80m of senior notes due in
December 2009, means that no signiﬁcant
reﬁnancing of borrowings will be required
in 2004 or 2005.

There has been continued focus on cash
collection, which has seen debtor days
reduce from 66 to 64. After allowing for
capital expenditure, interest and tax there
was free cash ﬂow of £30.3m compared
to £22.0m in 2002 even though cash ﬂow
from operations decreased from £94.2 m
to £83.9 m. Acquisitions resulted in net cash
payments of £2.2m, of which the purchase
of the Middle East laboratories, from Carillion
plc, accounted for £1.4m. Net borrowings
ended the year at £210.3m, a reduction in
the year of £23.9m; gearing was reduced
from 60% to 57%.

Gearing
Debt / Equity %

Treasury
Treasury is managed centrally covering
borrowings and its components, including
source, maturity, interest rate and currency.
The objective is to minimise risk through
a balanced approach. Funds are obtained
via privately placed bonds and from banks.
The Group aims to have a range of maturities
both committed and uncommitted currently
ranging from 364 day facilities to the six
years remaining on the private placement
senior notes.

The Group also aims to have a mix of ﬁxed
and ﬂoating rate debt to achieve the desired
proﬁle and to manage interest rate volatility.
During 2003 the balance has been weighted
towards ﬂoating allowing the Group to
beneﬁt from historically low rates. Funding
of overseas activities is generally via local
currency borrowings so as to provide a
partial hedge against the impact of exchange
rate volatility on asset values as translated
into sterling on consolidation.

Pensions
The Group has elected to adopt the transitional
provisions of FRS 17 (Retirement Beneﬁts)
and consequently there is no impact on the
2003 ﬁgures. If FRS17 had been fully
adopted in 2003, the Group would have
recorded an additional liability in its balance
sheet of £14.3m (2002: £17.0m) relating to
deﬁned beneﬁt schemes in the UK, France
and USA of which the UK plan accounted for
£12.5m (2002: £13.4m). The US plans were
inherited with the acquisition of Lindberg.
Since last year the largest of these plans has
been wound-up, requiring the Group to inject
$2.2 m in 2003. The actuaries to the UK
scheme have advised that contributions to
that plan be increased by £0.1m in 2004.

International Accounting Standards
All European Union listed groups are
required to adopt International Accounting
Standards (IAS) for their ﬁnancial statements
from 2005, which will include comparative
information for 2004. The Group is currently
undertaking a detailed review of the impact
of IAS on its published ﬁnancial statements.
Although these standards are themselves
evolving and undergoing improvements, a
preliminary review shows that there is likely
to be an impact on the Group’s accounts,
in relation to accounting for pensions, as the
Group has adopted the transitional
provisions of FRS 17 and for deferred
taxation, where the Group has historically
discounted the liability to present value.

David Landless
9 March 2004

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Directors’ Report

The Directors are pleased to submit their report and the audited
ﬁnancial statements for the year ended 31 December 2003.

PRINCIPAL ACTIVITIES
The Company is a holding company with subsidiaries carrying on
business in the ﬁelds of materials technology and metal processing.
The activities and locations of the principal subsidiary undertakings
are set out on pages 48 to 50. The Chief Executive’s Review
contains a survey of the Group’s activities during the year together
with an outline of future developments.

TRADING RESULTS
After net exceptional charges of £34.0m (2002: £18.3m) in relation
to Group reorganisation, the loss of the Group before taxation was
£11.1m (2002: £11.2m proﬁt). The loss attributable to shareholders
amounted to £17.4m (2002: £6.3m proﬁt) and, after providing for
dividends of £15.6m (2002: £15.6m), both paid and proposed,
£33.0m has been set off against reserves (2002: £9.3m).

DIVIDENDS
The Board is recommending a ﬁnal dividend of 3.85p per share making
a total for the year of 6.1p per share (2002: 6.1p). The ﬁnal dividend,
if approved, will be paid on 5 July 2004 to shareholders on the register
at the close of business on 26 March 2004.

SHARE CAPITAL
The Company’s issued share capital as at 31 December 2003 was
£25.7m and during the year the issued ordinary share capital of the
Company was increased by the issue of 159,442 shares of 10p each
between 27 August and 28 October 2003 for a total consideration of
£168,259 pursuant to options granted under the Company’s executive
share option schemes. The shareholders have authorised the Company
to purchase up to 25,647,088 of its own shares, although no purchases
have been made. This authority expires at the conclusion of the
forthcoming Annual General Meeting to be held on 26 May 2004,
at which time a further authority will be sought from shareholders.

On 9 March 2004 the Group announced its intention to raise
approximately £61.9m net through a fully underwritten rights issue.

ACQUISITIONS
During 2003 the Group made three acquisitions at a net cost of £2.2m:

On 1 April 2003 Bodycote Materials Testing Limited acquired the
business and assets of the UKAS accredited analytical laboratory in
Windsor, UK from Eurotest Limited. The facility offers environmental
and pharmaceutical testing services.

On 30 June 2003 Bodycote Metallurgical Coatings Limited acquired the
intellectual property rights and equipment in respect of CoatAlloy™
from Surface Engineered Products of Canada. The technology and
equipment will be located at Knowsley UK and will provide specialist
coating services for the petrochemical industries.

On 1 July 2003 Bodycote Materials Testing acquired the laboratory
interests of Carillion plc based in Abu Dhabi, Dubai and Oman.
The laboratories provide testing services to the construction,
oil and gas industries.

Note 23 on page 39 provides the necessary ﬁnancial disclosures.

DIRECTORS
The present Directors are listed on page 18 and all served throughout
the year. Mr T. Bell left the Group and resigned as a Director on
27 March 2003 and Dr Rickinson retired at the Annual General
Meeting on 28 May 2003.

Messrs R.T. Scholes and D.F. Landless are retiring by rotation and,
in accordance with the articles of association and each being eligible,
offer themselves for re-election at the forthcoming Annual General
Meeting. The service agreement for Mr Landless is terminable
by one year’s notice. Mr Scholes does not have a service contract
with the Company.

DIRECTORS’ INTERESTS
The interests of the Directors in the shares of the Company at
31 December 2003 and 31 December 2002 are set out below:

Beneﬁcial

2003

2002

J.A.S. Wallace
J.D. Hubbard
D.R. Sleight
R.T. Scholes
D.F. Landless
J. Vogelsang
L.P. Bermejo

45,830
900,000
70,000
15,000
5,500
–
–

Each Executive Director was also technically interested as a potential
beneﬁciary, pursuant to the terms of the Bodycote International
Employee Beneﬁt Trust, in 400,000 shares (2002: 400,000) held as
trustee by Hill Samuel Offshore Trust Company Limited. No Director
has had any dealings in any shares or options in the Company since
31 December 2003. An analysis of Directors’ share options is given
in the Board Report on Remuneration on page 17. None of the Directors
had a material interest in any contract of signiﬁcance in relation to the
Company and its subsidiaries at any time during the ﬁnancial year.

CORPORATE GOVERNANCE
The Group’s mission is:

• To provide world class companies with metallurgical and testing
services that make a positive contribution to the success of
their businesses.

• To earn sustainable proﬁts which attract shareholder interest.

• To engage, develop and retain competent people, harness their

enthusiasm and inspire them to excel.

• To act as a good corporate citizen.

The Group’s aim in terms of corporate governance, therefore, must be
to sustain and support these objectives over the longer term.

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 10

Directors’ Report

Compliance with 2003 FRC Combined Code
The Bodycote Board has overseen substantial changes in its board
and committee membership in the last three years. All these changes
are appropriate to the Company, in accordance with the principles
of good corporate governance, and in line with the provisions of
The Combined Code on Corporate Governance published by the UK
Financial Reporting Council in July 2003 (‘the 2003 Code’), save in
three areas where the reasons for the variance are:

(i) Performance evaluation (code provision A.6)

The Board believes a rolling programme of assessments is the
most practical and effective method of evaluating Bodycote’s
control structures. During 2003 all Executive Directors, the Chairman,
the Senior Independent Non-Executive Director and the Audit
Committee all underwent formal self-assessment with the
assistance, in the last case, of the auditors. A self-assessment
of the Board started in 2003 and was concluded in early 2004.
In 2004 there will be an evaluation of the other Non-Executive
Directors, the Remuneration Committee and the Nomination
Committee as well as the annual appraisal of the Executive
Directors. Bodycote will aim to carry out and report on
assessments of all relevant personnel, committees and the
Board itself within a three-year cycle.

(ii)

Investor Relations (code provision D.1.1)

Bodycote believes that generally it is the responsibility of the
Chief Executive and the Finance Director to manage relationships
with institutional investors. The Chairman is available to meet
institutional investors to discuss overall strategy, governance
and any concerns that shareholders may have. Only where these
more usual channels of communication have failed would the
Company expect the Senior Independent or other Non-Executive
Directors to become involved. Regular feedback by the Company’s
advisers on investor meetings and results presentations are
circulated to all Directors. Non-Executive Directors are also
encouraged to attend one of the results presentations each year.
On speciﬁc issues, as with the introduction in 2003 of a new
incentive scheme, the Chairman will seek the views of Bodycote’s
leading investors.

(iii) Committee membership (code provisions B.2.1/C.3.1)

The Audit Committee is chaired by the Senior Independent
Director, who is ﬁnancially qualiﬁed. Two further members were
appointed on 1 January 2003. The Chairman of the Company,
who is also ﬁnancially qualiﬁed, has remained on the Audit
Committee in order to maintain a balance of experience.

The Chairman is also Chairman of the Remuneration Committee,
a position that he has held since 1994. At the time of his
appointment as Chairman of the Company the Board decided that
he was the most appropriate Non-Executive Director with the time
and experience to ﬁll this important role. The terms of reference
for this committee precludes, of course, his involvement in setting
his own fees.

Apart from these distinct areas, Bodycote will be in compliance with
the provisions of the 2003 Code.

Bodycote annual report 2003

Compliance with the 1998 Code
Many of the recommendations of the 1998 Code of Best Practice
prescribed by the Listing Rules of the Financial Services Authority have
been a feature at Bodycote for some years. Taken together with
the Board Report on Remuneration, this statement explains how
Bodycote has applied the principles of good corporate governance
set out in Section 1 of the Combined Code issued by the Hampel
Committee on Corporate Governance in 1998 (‘the 1998 Code’)
during 2003. A report on the work of the Remuneration Committee,
pursuant to the Directors’ Remuneration Report Regulations 2002,
is given on page 14, and a resolution for approval of that report is
set out on page 51. The Company complied with the 1998 Code
throughout the period.

Leadership
The Board of Directors comprises seven members, of whom three
are independent Non-Executive Directors and three are Executive
Directors led by the Company’s part-time Non-Executive Chairman,
Mr J.A.S. Wallace, who also chairs the Nomination and Remuneration
Committees. The Chief Executive is Mr J.D. Hubbard and the Senior
Independent Non-Executive Director is Mr R.T. Scholes who also
chairs the Audit Committee. Brief biographical details of all Directors
are given on page 18. The Board meets at least nine times a year
and visits are made to UK and overseas facilities. Certain deﬁned
issues are reserved for the Board to decide, inter alia:

• Approval of ﬁnancial statements & circulars

• Capital projects, acquisitions and disposals

• Annual budgets

• Strategy

• Directors’ appointments & service agreements

• Policies for ﬁnancial statements, treasury, safety, health and

environment, donations

• Committee terms of reference

• Board and committee membership

• Investments

• Equity & bank ﬁnancing

• Internal control & risk management

• Corporate governance issues

• Key external & internal appointments

• Pensions & employee incentives

In advance of board meetings Directors are supplied with up-to-date
information about the trading performance of each operating location,
the Group’s overall ﬁnancial position and its achievement against budget
and forecasts. They are also supplied with the latest information on
safety, health and risk management issues. Where required, a Director
may seek independent professional advice at the expense of the
Company and all Directors have access to the Company Secretary,
and may also address speciﬁc issues to the Senior Independent
Non-Executive Director. In accordance with the articles of association all
newly appointed Directors and any who have not stood for re-election
at the two previous Annual General Meetings, if eligible, must submit
themselves for re-election. Non-Executive Directors, including the
Chairman, are appointed for ﬁxed terms not exceeding three years,
after which the appointment may be extended by mutual agreement.
A statement of the Directors’ responsibilities is set out on page 13.
The Board also operates three committees. These are the Nomination
Committee, the Remuneration Committee and the Audit Committee.

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 11

Directors’ Report

Independence of Non-Executive Directors
The Board asserts that Messrs R.T. Scholes, J. Vogelsang and L.P.
Bermejo are independent for the purposes of the 2003 Code.

Commitment
All continuing Directors recorded 100% attendance at the ten Board
meetings held in the year, including visits to overseas facilities in
Sweden, Liechtenstein, Switzerland and the UK.

Performance Evaluation
Performance evaluation of the Chairman, the Senior Independent
Non-Executive Director, the Chief Executive and the Finance and
Corporate Development Directors was carried out internally during
2003. In February 2004 the Board carried out its own evaluation of
the Board as a whole. The Audit Committee assessed its own
performance in December 2003 with input from the external
auditors, the Chief Executive and the Finance Director.

Nomination Committee
Mr J.A.S. Wallace chairs the Nomination Committee which also
comprises Messrs R.T. Scholes, J. Vogelsang, L.P. Bermejo and J.D.
Hubbard. All members attended the only committee meeting in
2003, when it determined the policy on external appointments and
the nominations for re-election at the 2003 Annual General Meeting.

Proposals for Re-election
Following the performance evaluation carried out by the Chairman
in November 2003 in respect of Mr Scholes’ service as Senior
Independent Non-Executive Director and Audit Committee Chairman,
the Board proposes his re-election as Director. His performance was
determined to be effective and he has devoted the necessary time
and commitment (achieving 100% Board and Audit Committee meeting
attendance since appointment in 1998). Following a performance
appraisal by the Chief Executive, the Board also proposes the re-election
of Mr D.F. Landless as a Director.

Audit Committee
The members of the Audit Committee are Messrs R.T. Scholes
(appointed 1998; Chairman from 2002), J.A.S. Wallace (Committee
Chairman 1994 to 2001). J. Vogelsang (2003) and L.P. Bermejo (2003).
Their appointments to the Committee were made by the Board at the
time of their original appointment to the main Board of Bodycote. Their
relevant qualiﬁcations and experience is given on page 18 and their
remuneration on page 16. The Committee Chairman’s responsibilities
are reﬂected by additional remuneration for that role as shown on
page 16. The Committee met three times during 2003 and has the
assistance of the Finance Director, Head of Internal Audit and Company
Secretary, who serves as committee secretary. Save for the absence
abroad of Mr Bermejo for one meeting, 100% attendance was
achieved. The Committee (or its chairman) held meetings with both
the external and internal auditors without management in attendance.
The Head of Internal Audit has a direct reporting line to the Chairman
of the Audit Committee.

In reporting ﬁnancial results to shareholders, the Committee
depends on the skill, objectivity and independence of the auditors.
In the year ended 31 December 2003 the Committee obtained
conﬁrmation of the auditor’s independence. The policy of the
Company is not to use the auditor for non-audit services, save for
tax compliance, without the prior approval of the Audit Committee.
The Committee’s areas of activity are set out below.

• Review ﬁnancial statements and results announcements

• Assess independence of auditors

• Approve auditor appointment and fees

• Recommend policy on use of auditors for non-audit work

• Approve scope of internal and external audits

• Approve accounting policies and resources

• Approve management representations

• Review management improvement letters

• Review audit process

• Assess internal and external audit effectiveness

• Review Committee’s own effectiveness

• Recommend new terms of reference

• Review arrangements for reporting and investigation of

employee concerns

• Review internal audit reports & monitored effectiveness of

internal audit

• Review effectiveness of Board’s internal controls and risk

management process.

Internal Control
The Board has applied Principle D.2 of the 1998 Code by establishing
a continuous process for identifying, evaluating and managing the
Group’s signiﬁcant risks, including risks arising out of Bodycote’s
corporate and social engagement. The Board continuously and regularly
reviews the process, which has been in place from the start of 2000
to the date of approval of this report and which is in accordance with
Internal Control: Guidance for Directors on the Combined Code
published in September 1999. The Board is responsible for the Group's
system of internal control and for reviewing its effectiveness. Such
a system is designed to manage rather than eliminate the risk of
failure to achieve business objectives, and can only provide reasonable
and not absolute assurance against material misstatement or loss.

The Board's monitoring covers all controls, including ﬁnancial,
operational and compliance controls and risk management. It is
based principally on reviewing reports from management and from
internal audit to consider whether any signiﬁcant weaknesses are
promptly remedied and indicate a need for more extensive monitoring.
The Audit Committee assists the Board in discharging these review
responsibilities. During 2003, in compliance with provision D.2.1,
the Board also performed a speciﬁc assessment for the purpose
of this annual report.

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 12

Directors’ Report

The assessment considered all signiﬁcant aspects of internal control
arising during the period covered by the report including the work of
Internal Audit. In addition, the Managing Director of each of the Group’s
Strategic Business Units reported on the existing internal control
procedure and any failings or weaknesses. They identiﬁed and made
an assessment of the risks affecting the businesses they control,
in each case with the assistance of input from those reporting directly
to them. These reports were reviewed and commented upon by the
Heads of Internal Audit, Safety, Health and Environment and Sales
and Marketing functions. Such risks were measured against their
own stated objectives. Following the risk management review by
each participant at Strategic Business Unit level, a Group level
review was prepared for the Directors to assess. No signiﬁcant
previously unidentiﬁed risks were uncovered as part of this process.

Prospects
The Board’s view on the Group’s position and prospects is given by the
Chairman, Chief Executive and Finance Director in their respective
statements on pages 2 to 8 of this report. Following a review of the
Group’s results for 2003 and its budgets for 2004, the Directors consider
that the Company and the Group have adequate resources to ﬁnance
their activities for the foreseeable future, and therefore it is appropriate
to adopt the going concern basis in preparing the ﬁnancial statements.

Investor relations
The Chief Executive and Finance Director regularly talk with and meet
institutional investors, both individually and collectively, and this has
enabled institutional investors to increase their understanding of the
Group’s strategy. The business of the Annual General Meeting now
comprises a review of the Group’s operations for the beneﬁt of
shareholders attending. In addition, since 1998, internet users have
been able to view up-to-date news on the Group and its share price
via the Bodycote website at www.bodycote.com. Users of the
website can also enrol free for a service that automatically notiﬁes
them of results announcements and recent signiﬁcant Group events.
Signiﬁcant enhancements for the beneﬁt of shareholders will be
implemented during 2004.

Bodycote’s ﬁnancial advisers, corporate brokers and ﬁnancial public
relations consultants provide Directors with opinion surveys from
analysts and investing institutions following visits and meetings with
the Chief Executive and Finance Director. Non-Executive Directors
are themselves invited to attend analysts’ presentation at the time
of the regular results announcements. As stated on page 10 the
Chairman and Senior Independent Non-Executive Director are available
to discuss any issues not resolved by the Chief Executive and
Finance Director.

CORPORATE SOCIAL RESPONSIBILITY
As part of the general programme of risk management and review
of internal controls, Bodycote regularly keeps under review the risks
associated with its corporate and social engagement. Where there
is signiﬁcant beneﬁt in terms of shareholder value and or business risk,
Bodycote has already developed appropriate policies and procedures
for each Strategic Business Unit. The accreditable elements are the
subject of both internal and external audit procedures. In areas where
Bodycote does not perceive either shareholder value and or business
risk, the aim is to develop and implement appropriate policies over time.
The areas of signiﬁcance are safety, health and the environment and
the Group’s employees.

Bodycote annual report 2003

SAFETY, HEALTH AND THE ENVIRONMENT
The Group has a positive approach to safety, health and environmental
matters and is committed to the achievement of the highest practicable
standards of safety and health at work for all employees and to the
minimisation of adverse effects on the environment. Appropriate safety
and health policies and procedures are in force at all strategic business
units. During 2003 the Group began collating further data in order
better to benchmark performance in subsequent years. From 1 January
2004 the Group commenced reporting its performance in terms of
lost time, frequency and severity of accidents in a uniform manner.
As a result each Strategic Business Unit will be able to benchmark their
health and safety performance and formulate criteria for improvements.
Where appropriate the Group will develop and implement environmental
management systems consistent with international standards. The Group
continues to seek ways to reduce reliance on the use of solvent
cleaners. In 2001 the Group began an assessment of the steps
required to improve its environmental performance and started seeking
environmental accreditation. In 2002 all Strategic Business Units were
mandated to obtain ISO14001 accreditation. By the end of 2003 one
site in North America, three sites in Sweden, and a further seventeen
sites in the UK have been accredited by ISO14001. Three UK sites
are in the course of seeking approval during 2004. 43 of the Group’s
46 materials testing sites, which have a low environmental proﬁle,
operate to the ISO17025 standard and this incorporates environmental
management requirements. The three remaining sites are set to achieve
the ISO17025 standard during 2004.

EMPLOYMENT
The Group recognises the value that can be added to its future
proﬁtability and strength by the efforts of employees. The involvement
of employees at all levels is key to the Group’s continued success.
Through their attendance at, or participation in, production, safety and
health meetings at site level, employees are kept up to date with
the performance and progress of the Group, the contribution to the
Group made by their site and are advised of safety and health issues.

During 2003 each of the Group’s employees received a printed copy
of “EveryBody”, a staff magazine published in nine languages,
detailing the Group’s activities, performance and some of its personalities.
This was succeeded in autumn 2003 by “EveryBody Extra” which is
published in nine languages across the Bodycote extranet. Approximately
1,200 Bodycote managers are connected to the Bodycote extranet,
which will improve knowledge of Group activities, and assist greatly
with technology exchange and co-ordination. This facility became
multi-lingual during 2003.

It is the Group’s policy to give full and fair consideration to applications
for employment from disabled persons, having regard to their
particular aptitudes and abilities, and to encourage the training and
career development of all personnel employed by the Group,
including disabled persons. Should an employee become disabled
the Group, where practicable, will seek to continue the employment
and arrange appropriate training. An equal opportunities policy is in
operation in the Group.

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Directors’ Report

RESEARCH AND DEVELOPMENT
Product development and quality improvement at all Group companies
is a continuous process. The Group has a policy of deploying the best
technology available and actively seeking improvements. It also conducts
research programmes with its customers. Costs of research and
development are written off in the year in which they are incurred.

DIRECTORS’ RESPONSIBILITIES
The Directors are required by company law to prepare ﬁnancial
statements for each ﬁnancial year which give a true and fair view of
the state of affairs of the Company and the Group and of the proﬁt
or loss of the Group for that year. In preparing the ﬁnancial
statements the Directors are required to:

DONATIONS
Charitable donations during the year net of income tax amounted to
£12,000 (2002: £2,000). There were no political contributions.

CREDITORS POLICY
Group operating companies are responsible for agreeing the terms and
conditions under which business transactions are conducted. It is Group
policy that payments to suppliers are made in accordance with the
terms agreed, provided that these suppliers have also complied with
applicable terms and conditions. Creditor days at the year end for the
Company were 45 days (2002: 45 days).

SHAREHOLDERS
As at the date of this report the following interests of 3% or more in the
issued share capital of the Company appeared in the register maintained
under the provisions of Section 211 of the Companies Act 1985:

Number
of shares

% of Issued
share capital

Sprucegrove Investment
Management Limited
19,097,014
Aegon Asset Management UK plc 16,936,946
14,029,660
LD Pensions
Franklin Resources Inc.
10,479,820
Legal & General Investment
Management Limited
HBOS plc

8,055,396
8,014,221

7.4
6.6
5.5
4.1

3.1
3.1

• select suitable accounting policies and then apply them consistently;

• make judgments and estimates that are reasonable and prudent;

• state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the
ﬁnancial statements; and

• prepare the ﬁnancial statements on the going concern basis unless it
is inappropriate to presume that the Group will continue in business.

The Directors are responsible for keeping proper accounting records
which disclose, with reasonable accuracy at any time, the ﬁnancial
position of the Company and enable them to ensure that the ﬁnancial
statements comply with the Companies Act 1985.

They have general responsibility for taking such steps as are reasonably
open to them to safeguard the assets of the Company and Group
and to prevent and detect fraud and other irregularities.

ANNUAL GENERAL MEETING
The 2004 Annual General Meeting will be held on 26 May 2004 in
accordance with the notice set out on pages 51 and 52.

By order of the Board

An analysis of the Company’s shareholders and the shares in issue
at 20 February 2004, numbering 3,317 and 256,630,326 respectively
is given on page 53.

J.R. Grime
Secretary
9 March 2004

AUDITORS
On 1 August 2003 Deloitte & Touche transferred their business
to Deloitte & Touche LLP, a limited liability partnership incorporated
under the Limited Liability Partnerships Act 2000. The Company’s
consent has been given in relation to treating the appointment
of Deloitte & Touche as extending to Deloitte & Touche LLP with
effect from 1 August 2003 under the provisions of section 26(5)
of the Companies Act 1989. In accordance with the provisions of
section 384 of the Companies Act 1985, a resolution for their re-
appointment, special notice of which has been given to the Company,
is to be proposed at the forthcoming Annual General Meeting.

Hulley Road
Hurdsﬁeld
Macclesﬁeld
Cheshire
SK10 2SG

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 14

Board Report on Remuneration

The members of the Remuneration Committee during 2003 were
J.A.S. Wallace (Chairman), R.T. Scholes, B.A. Rickinson (until 28
May 2003), J. Vogelsang and L.P Bermejo.

All members are Non-Executive Directors of the Company and have
no personal ﬁnancial interest, other than as shareholders, in the matters
to be decided, no potential conﬂicts of interest arising from cross
directorships and no day to day involvement in running the business.
The Committee met six times during 2003. 100% attendance was
recorded at meetings save for one absence by Mr Scholes and one
by Dr Rickinson. The Committee operates under terms of reference
approved by the Board in June 2002. These terms (which are available
to view on the Group website) will be revised during 2004 following
an evaluation of the Committee’s performance.

This report for the year ended 31 December 2003 and the
recommendations of the Remuneration Committee have been approved
in full by the Board for submission to shareholders. In accordance
with the requirements of the Companies Act, an ordinary resolution
seeking shareholders’ approval for the remuneration report will be
proposed at the Annual General Meeting. The tables attached to this
report disclosing Directors’ emoluments, pensions and share options
on pages 16 and 17 have been audited, together with the performance
criteria and share price information.

POLICY FOR EXECUTIVE DIRECTORS
The Committee makes recommendations to the Board concerning the
policy on remuneration for senior executives and the remuneration
package for each Executive Director. In determining the remuneration
policy the Committee has given full consideration to the provisions on the
design of remuneration policies contained in the Combined Code and
received input from the Chief Executive. New Bridge Street Consultants
(who were appointed by the Committee) provided independent market
information and remuneration advice (including advice covering the
proposal to adopt a new share incentive scheme) during 2002 and 2003.
In addition during 2003 the Company received actuarial and other pensions
advice from JLT Beneﬁt Consultants Limited (who were appointed by the
Company in 1995) in relation to the pension scheme, of which currently
two executive directors are members. Neither organisation provides
any other services to, or has any other connection with, the Company.

The Committee aims to provide a remuneration policy consistent
with the Group’s overall objectives and thereby attract and retain high
calibre senior executives, align executive rewards with the creation
of shareholder value and motivate executives to achieve and maintain
challenging levels of Company and individual performance.

The Committee has used the remuneration practices of UK engineering
businesses and other FTSE 250 companies, as well as other North
American and European companies in similar trades, as comparables.
In order to ensure that a substantial proportion of the overall remuneration
package can be linked to performance, there is an annual bonus scheme
and an executive share option scheme. Only basic salaries are pensionable.

SALARY AND BONUSES
The basic salary of each Executive Director and senior executive
is reviewed annually and is determined by taking into account the
responsibilities and performance of the individual, having regard to
current market practice. However, for 2003, after consultation with
the Chief Executive, it was decided to leave basic salaries unchanged
and put more emphasis on the variable elements.

A performance related annual bonus is payable to all Executive Directors
and senior executives, based on the Group’s earnings before interest
and tax, the Group’s return on invested capital and other qualitative
measurements. For those senior executives with Strategic Business
Unit responsibilities, part of the performance-related bonus is based on
their relevant sphere of responsibility.

In 2003 the Committee recommended an increase in the total potential
bonus for 2003 and 2004 to 60% (2002: 40%) of basic salary if all targets
are met and assuming that one-third of the bonus (i.e. up to 20% of salary)
is paid in the form of shares in the Company. The shares will be held
in trust for three years and will normally be forfeited if executives leave
or are dismissed. Executives may request that their entire annual
bonus is paid in cash, in which case the maximum bonus would be
50% of salary. This illustrates the increasing importance attached by the
committee to the variable elements of remuneration and encouraging
long-term shareholding by executives. No bonuses were paid in 2003
to executive directors as targets were not met.

Beneﬁts in kind, which comprise the provision of a company car,
private medical insurance for the Director and family and long-term
disability insurance, are consistent with industry standards. An analysis
of Directors’ emoluments is given on page 16.

SHARE OPTION SCHEMES
The Group believes that participation in a share option scheme by
Executive Directors and other executives of the Group is important
and that it strengthens the link between executives’ personal interests
and shareholders’ interests. Bodycote’s Board will encourage Directors
to build up a reasonable shareholding in the Company over a period
of time. However, it will not be prescriptive since the Directors’ ability
to do so will depend on a number of factors, not least being their own
personal commitments. The remuneration committee governs the
granting of share options to Directors and senior executives. Options
up to a maximum value of half annual salary were granted in the year
and an analysis of all Directors’ share options is given on page 17.

Under the rules of the 1994 and 1996 schemes the exercise cost of
all options over unissued shares awarded to a Director cannot exceed
four times that Director’s salary and bonus. Operation of the 1994 and
1996 schemes was extended by using the employee share ownership
trust. Share options granted under the 1994 and 1996 schemes are only
exercisable if, over any rolling period of three years from the date of the
award, the growth in the Group’s earnings per share exceeds United
Kingdom retail inﬂation by 6% (10% in respect of those options granted
in September 2002).

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 15

Following a review and advice in 2003 from New Bridge Street
Consultants shareholders approved the establishment of the 2003
Executive share option scheme to replace the 1994 and 1996 schemes,
under which no further options will be granted. The elements of the
2003 Scheme, under which 1,230,434 options were granted to executives
in September 2003, are:

• The value of shares under options granted to an executive in any

year will not normally exceed 1.5 times basic salary.

• No more than 10% of the new issued ordinary share capital may
be allocated under all of the Company’s share schemes over a
ten-year period.

• The exercise of options will be based on the Company’s earnings

The main features, in respect of Executive Directors, are:

(a) Pensions from age 65 of 1/60th highest average salary of any

consecutive three years out of last ten years prior to retirement
(restricted to the earnings cap where it applies) for each year of
pensionable service, and with increases in pensionable salary after
31 December 2003 restricted to 4.5% (‘the Salary Limit’);

(b) A cash death-in-service beneﬁt of four times basic salary at date of death;

member’s prospective retirement pension (restricted as before) at
65 on death in service, or half member’s pension entitlement on
death in retirement;

per share growth relative to inﬂation.

(d) Members’ contributions are 6% of basic salary.

• No awards can be made at a discount to the market price

• The performance targets will be challenging since they will be measured
only over three or ﬁve years and the following targets will apply

(e) For Executive Directors with basic salaries above the Salary Limit
or the earnings cap the Group will contribute 14% of the excess
over the Salary Limit to a deﬁned contribution arrangement.

Portion of Option Grant

Applicable Performance Target
(average annual growth in pre-tax EPS)

Up to 0.5 x salary

RPI + 3% pa

0.5 - 1 x salary

RPI + 3% - 5% pa

1 - 1.5 x salary

RPI + 5% - 10% pa

The Committee believes that the use of growth in pre-tax earnings
per share is the most appropriate measure of the Company’s ﬁnancial
performance, is transparent (because the performance test relies on
publicly available data) and is consistent with market practice. The chairman
of the Remuneration Committee veriﬁes that the tests have been met.

Directors made no gains on the exercise of share options during 2002
or 2003. The market price of Bodycote’s ordinary shares at 31 December
2003 was 141.75p, the range during 2003 was 65.5p to 181p and the
average was 122.4p. The performance conditions for options granted
since 1998 have yet to be achieved. The performance conditions
attached to the options granted before 1999 and still outstanding at
31 December 2003 have been achieved.

SERVICE CONTRACTS
It is the Company’s policy that Executive Directors have service contracts
with a one-year notice period. All the Executive Directors have service
agreements which are terminable by one year’s notice by either party
at any time, and by one year’s remuneration in lieu of notice by the
employer, and by one year’s remuneration in the event of a change
in control of the company. Legally appropriate factors would be taken
into account to mitigate any compensation payment, covering basic
salary, annual and long term incentives and beneﬁts, which may arise
on the termination of employment of any Executive Director, other than
payments made on a change in control or for payments in lieu of notice.
Mr Hubbard’s contract is dated 5 February 2002 and those for Messrs
Landless and Sleight are each dated 26 September 2001.

PENSIONS
Pensions for Executive Directors are, as far as allowable, provided for
under the Group’s UK contributory ﬁnal salary pension scheme which
has a normal retirement age of 65.

Arrangements for Mr Hubbard are for a contribution to a deﬁned
beneﬁt arrangement of 14% of his basic salary (including any payments
being made by the Group into the Group’s US 401k retirement plan)
from January 2004 onwards.

An analysis of accrued pension entitlements for the three Directors with
accruing beneﬁts under the scheme during 2003 is given on page 16.
Mr Hubbard, the Chief Executive, is a member of the Group’s US 401K
retirement plan to which the Group contributed £3,660 (2002: £8,834).
Pension contributions for Mr Landless’ salary above the earnings cap
amounted to £6,684 (2002: £5,684).

EXTERNAL APPOINTMENTS
The Company believes that there are beneﬁts to the individual and
the Company for Executive Directors’ holding one non-executive
directorship in other organisations, provided that they do not conﬂict
with the Company’s interests.

NON-EXECUTIVE DIRECTORS
The remuneration of Non-Executive Directors is determined by the
Chairman and the Executive Directors. Remuneration for the Chairman
is determined by the whole Board (excluding the Chairman). Non-Executive
Directors do not have formal service agreements and are not entitled
to any pension or other employment beneﬁts or to participate in any
incentive scheme. Payment in respect of Mr Vogelsang’s service is
made to a company owned by him.

TSR PERFORMANCE
The graph on page 16 illustrates the Company’s Total Shareholder
Return (TSR) performance since 1998 in accordance with paragraph
4 of the Directors’ Remuneration Report Regulations 2002, relative
to the FTSE Engineering & Machinery Index, of which the Company
is a component part. Accordingly this sector is considered to be the
most appropriate comparator group for this purpose.

Approved by the Board

J. A. S. Wallace
Chairman of the Remuneration Committee
9 March 2004

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 16

Board Report on Remuneration

TSR Performance Graph

Value
(£)

140

120

100

31-Dec-98

31-Dec-99

31-Dec-00

31-Dec-01

31-Dec-02

31-Dec-03

This graph looks at the value, by 31/12/03, of £100 invested in Bodycote International plc on 31/12/98 compared with that of £100
invested in the FTSE Engineering & Machinery Index. The other points plotted are the values at financial year-ends.

Bodycote International plc

FTSE Engineering & Machinery Index

Source: Datastream

Directors’ emoluments

Executive
J. D. Hubbard
D. R. Sleight
D. F. Landless
T. Bell*

Non-Executive
J. A. S. Wallace
B. A. Rickinson*
R. T. Scholes
J. Vogelsang
L. P. Bermejo

Directors’ pensions

Accrued
annual
pension at
1 January
2003
£000

Transfer
value at
1 January
2003
£000

Real increase
in accrued
annual
pension
£000

Increase in
accrued
annual
pension
£000

Inﬂation
£000

Director

2003

2002

Salary
and fees
£000

Beneﬁts
£000

Total
£000

250
150
170
50

620

80
10
28
25
25

15
13
14
3

–
–
–
–
–

265
163
184
53

665

80
10
28
25
25

268
157
183
161

769

80
24
28
–
–

788

833

901

Transfer
value of real
increase in
accrued
annual
pension (less
members’
contributions)
£000

Increase
in transfer
value less
members’
contributions
£000

Members’
contributions
£000

Accrued
annual
pension at
31/12/03
£000

Transfer
value at
31/12/03
£000

D.R. Sleight

D.F. Landless

T. Bell*

225

131

–

169

403

152

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 17

Directors’ share options

Director

J. D. Hubbard

D. R. Sleight

D. F. Landless

T. Bell*

1 January
2003

41,307
37,500
25,000
12,000
15,000
60,000
–

73,202
55,075
37,500
30,000
15,000
20,000
40,000
–

50,000
50,000
15,000
20,000
40,000
–

41,307
37,500
12,000
20,000

Options
granted
(lapsed)

–
–
–
–
–
–
79,365

(73,202)
–
–
–
–
–
–
47,619

–
–
–
–
–
53,968

(41,307)
(37,500)
(12,000)
(20,000)

31 December
2003

Option price
(pence)

41,307
37,500
25,000
12,000
15,000
60,000
79,365

–
55,075
37,500
30,000
15,000
20,000
40,000
47,619

50,000
50,000
15,000
20,000
40,000
53,968

–
–
–
–

337.35
396.00
312.50
247.50
217.50
134.50
157.50

190.57
258.73
396.00
312.50
247.50
217.50
134.50
157.50

396.00
312.50
247.50
217.50
134.50
157.50

258.73
396.00
247.50
217.50

Dates from
which
exercisable

03/12/2000
26/04/2002
14/12/2002
02/05/2003
24/04/2004
16/09/2005
15/09/2006

–
20/05/2000
26/04/2002
14/12/2002
02/05/2003
24/04/2004
16/09/2005
15/09/2006

26/04/2002
14/12/2002
02/05/2003
24/04/2004
16/09/2005
15/09/2006

–
–
–
–

Expiry
(lapse)
dates

03/12/2007
26/04/2009
14/12/2009
02/05/2010
24/04/2011
16/09/2012
15/09/2013

(18/06/2003)
20/05/2004
26/04/2009
14/12/2006
02/05/2007
24/04/2008
16/09/2009
15/09/2013

26/04/2009
14/12/2006
02/05/2007
24/04/2008
16/09/2009
15/09/2013

(27/03/2003)
(27/03/2003)
(27/03/2003)
(27/03/2003)

* Mr Bell left the Group on 27 March 2003 and Dr Rickinson retired at the Annual General Meeting on 28 May 2003.

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 18

Board of Directors

EXECUTIVE DIRECTORS
J. D. Hubbard Chief Executive (56) United States
Appointed Chief Executive in January 2002; joined the Board in 2001. Previously served as President of Bodycote's North American Heat
Treatment operations from 1996 to 2001. A licensed professional Metallurgical Engineer.

D. R. Sleight Corporate Development Director (54)
Appointed Corporate Development Director in 2002 having joined the Board in 1996, and served previously as Finance Director (1990 to 1995) and
Joint Managing Director (1995 to 2001) of Bodycote's Materials Testing operations. A Chartered Accountant.

D. F. Landless Finance Director (44)
Appointed Finance Director and joined the Group in 1999. From 1989 to 1997 served as Finance Director in UK and US divisions of Courtaulds Plc.
Finance Director of Courtaulds Coatings (Holdings) Limited from 1997 to 1999. A Chartered Management Accountant.

NON-EXECUTIVE DIRECTORS
J. A. S. Wallace Non-Executive Chairman (60)
Appointed a Director in 1994. Non-Executive Chairman of The Lowry Centre Limited (2002) and Non-Executive Director of Holidaybreak Plc
(2002). Deputy Chairman of Pifco Holdings plc from 1994 to 2001. Chairman of the Remuneration and Nomination Committees and member of
Audit Committee. A Chartered Accountant.

R. T. Scholes Senior Non-Executive Director (58)
Appointed in 1998. Non-Executive Director of Keller Group PLC (2002) Chaucer Holdings PLC, Crest Nicolson Plc and Marshalls PLC (2003) and
of British Vita plc (1993 to 2003). Investment banker with Dresdner Kleinwort Wasserstein (1986 to 2001). Chairman of the Audit Committee and
member of the Remuneration and Nomination Committees. A Chartered Accountant.

J. Vogelsang (61) Netherlands
Appointed a Director on 1 January 2003. President of Technology at Basell Polyoleﬁns (2001 to 2002), President of Montell Polyoleﬁns Europe (1999 to
2001), Vice-President of Shell Chemicals Europe and Africa (1994 to 1999) and Chief Executive of the Shell Companies in Sweden (1992 to 1994).
Member of the Audit, Remuneration and Nomination Committees. A Chemical Engineer.

L.P. Bermejo (44) France
Appointed a Director on 1 January 2003. Chief Executive of Dalkia Plc (UK and Ireland subsidiary of Veolia Environment) from 1999 having
previously been Chief Executive of Dalkia in the Czech and Slovak Republics (1995 to 1999) and DEKRA-Veritas Automobile (1993 to 1995),
Member of the Audit, Remuneration and Nomination Committees. A Structural Engineer.

SECRETARY AND REGISTERED OFFICE
J. R. Grime
Hulley Road, Hurdsﬁeld, Macclesﬁeld, Cheshire SK10 2SG. Tel: 01625 505300 Fax: 01625 505313. Registered Number 519057 England and Wales.

Advisers

AUDITORS

Deloitte & Touche LLP

PRINCIPAL BANKERS

HSBC Bank plc, Barclays Bank PLC, The Royal Bank of Scotland plc, Svenska Handelsbanken AB,
Bank of Scotland and Danske Bank A/S

FINANCIAL ADVISERS

Dresdner Kleinwort Wasserstein Limited

SOLICITORS

BROKERS

REGISTRARS

Eversheds LLP

Dresdner Kleinwort Wasserstein Securities Limited

Capita Registrars Limited, Huddersﬁeld

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 19

Independent Auditors’ Report
to the Members of Bodycote International Plc

We have audited the ﬁnancial statements of Bodycote International Plc for
the year ended 31 December 2003, which comprise the consolidated
proﬁt and loss account, the balance sheets, the consolidated cash ﬂow
statement, the consolidated statement of total recognised gains and
losses and the related notes 1 to 27 together with the reconciliation of
net cash ﬂow to movement in net debt, the reconciliation of movements
in Group shareholders’ funds and the accounting policies. These ﬁnancial
statements have been prepared under the accounting policies set out
therein. We have also audited the information in the part of the Board
Report on Remuneration that is described as having been audited.

This report is made solely to the Company's members, as a body, in
accordance with section 235 of the Companies Act 1985. Our audit work
has been undertaken so that we might state to the Company's members
those matters we are required to state to them in an auditors' 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
and the Company's members as a body, for our audit work, for this
report or for the opinions we have formed.

Respective responsibilities of Directors and Auditors
As described in the statement of Directors’ responsibilities, the Company’s
Directors are responsible for the preparation of the ﬁnancial statements
in accordance with applicable United Kingdom law and accounting
standards. They are also responsible for the preparation of the other
information contained in the annual report, including the Board Report
on Remuneration. Our responsibility is to audit the ﬁnancial statements
and the part of the Board Report on Remuneration described as having
been audited in accordance with relevant United Kingdom legal and
regulatory requirements and auditing standards.

We report to you our opinion as to whether the ﬁnancial statements
give a true and fair view and whether the ﬁnancial statements and the
part of the Board Report on Remuneration described as having been
audited have been properly prepared in accordance with the Companies
Act 1985. We also report to you if, in our opinion, the Directors’ Report
is not consistent with the ﬁnancial statements, if the Company has not
kept proper accounting records, if we have not received all the information
and explanations we require for our audit or if information speciﬁed by
law regarding Directors’ remuneration and transactions with the Company
and other members of the Group is not disclosed.

We review whether the corporate governance statement reﬂects the
company’s compliance with the seven provisions of the Combined Code
speciﬁed for our review by the Listing Rules of the Financial Services
Authority and we report if it does not. We are not required to consider
whether the Board's statements on internal control cover all risks and
controls, or form an opinion on the effectiveness of the Group's corporate
governance procedures or its risk and control procedures.

We read the Directors’ Report and the other information contained in the
annual report for the above year as described in the contents section
including the unaudited part of the Board Report on Remuneration and
consider the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the ﬁnancial statements.

Basis of audit opinion
We conducted our audit in accordance with United Kingdom auditing
standards issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the ﬁnancial statements and the part of the Board
Report on Remuneration described as having been audited. It also
includes an assessment of the signiﬁcant estimates and judgments
made by the Directors in the preparation of the ﬁnancial statements
and of whether the accounting policies are appropriate to the
circumstances of the Company and the Group, consistently applied
and adequately disclosed.

We planned and performed our audit so as to obtain all the information
and explanations which we considered necessary in order to provide us
with sufﬁcient evidence to give reasonable assurance that the ﬁnancial
statements and the part of the Board Report on Remuneration described
as having been audited are free from material misstatement, whether
caused by fraud or other irregularity or error. In forming our opinion,
we also evaluated the overall adequacy of the presentation of
information in the ﬁnancial statements and the part of the Board
Report on Remuneration described as having been audited.

Opinion
In our opinion:

• the ﬁnancial statements give a true and fair view of the state of affairs
of the Company and the Group as at 31 December 2003 and of the
loss of the Group for the year then ended; and

• the ﬁnancial statements and part of the Board Report on

Remuneration described as having been audited have been properly
prepared in accordance with the Companies Act 1985.

Deloitte & Touche LLP
Chartered Accountants
Registered Auditors

Manchester
9 March 2004

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 20

Consolidated Proﬁt and Loss Account
for the year ended 31 December 2003

Turnover

Existing operations
Acquisitions

Continuing operations

Operating proﬁt

Existing operations
Acquisitions

Continuing operations

Total operations:
Trading
Operating exceptional item arising from restructuring and asset write downs
Goodwill amortisation

Operating proﬁt

Exceptional items

Proﬁt on disposal of discontinued operations
Loss on termination of operations

(Loss)/proﬁt on ordinary activities before interest and taxation

Net interest payable

(Loss)/proﬁt on ordinary activities before taxation

Tax on (loss)/proﬁt on ordinary activities

(Loss)/proﬁt on ordinary activities after taxation

Minority interests - equity

(Loss)/proﬁt for the ﬁnancial year

Dividends - paid and proposed

Retained loss for the ﬁnancial year

Earnings/(loss) per share

Headline
Headline - diluted
Basic
Basic - diluted

The accompanying notes and statement of accounting policies are an integral part of these ﬁnancial statements.

20
20

Bodycote annual report 2003
Bodycote annual report 2003

2003
£m

447.1
1.3

448.4

24.9
0.2

25.1

41.7
(7.5)
(9.1)

25.1

3.5
(30.0)

(1.4)

(9.7)

(11.1)

(6.2)

(17.3)

(0.1)

(17.4)

(15.6)

(33.0)

2002 Note

£m

440.1
–

440.1

22.4
–

22.4

49.4
(18.3)
(8.7)

22.4

–
–

22.4

(11.2)

11.2

(4.8)

6.4

(0.1)

6.3

(15.6)

(9.3)

9.7p
9.7p
(6.8p)
(6.8p)

10.6p
10.6p
2.4p
2.4p

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 21

Balance Sheets
as at 31 December 2003

Fixed assets

Intangible assets - goodwill
Tangible assets
Investments

Current assets

Stocks
Debtors
Cash at bank and in hand

Creditors

Amounts falling due within one year

Net current assets/(liabilities)

Group

Company

Note

2003

£m

2002
As restated
£m

2003

£m

2002
As restated
£m

137.5
478.7
0.9

617.1

18.2
102.7
35.2

156.1

155.5
498.4
0.9

654.8

17.7
111.6
43.5

172.8

(119.1)

37.0

(202.8)

(30.0)

–
0.2
831.6

831.8

–
11.4
3.2

14.6

(32.4)

(17.8)

10
11
12

13
14

–
0.2
830.8

831.0

–
28.3
6.3

34.6

(99.3)

(64.7)

Total assets less current liabilities

654.1

624.8

814.0

766.3

Creditors

Amounts falling due after more than one year

Provisions for liabilities and charges

(239.5)

(42.8)

(190.8)

(44.6)

(493.2)

(426.1)

–

Net assets

371.8

389.4

320.8

340.2

Capital and reserves

Called-up share capital
Share premium account
Currency and other reserves
Proﬁt and loss account

Shareholders’ funds - equity

Minority interests - equity

25.7
244.4
14.2
86.6

370.9

0.9

25.6
244.2
(0.2)
119.6

389.2

0.2

25.7
244.4
0.7
50.0

320.8

–

25.6
244.2
0.6
69.8

340.2

–

371.8

389.4

320.8

340.2

Approved by the Board of Directors on 9 March 2004 and signed on its behalf by:

J. D. Hubbard } Directors

D. F. Landless

The accompanying notes and statement of accounting policiesare an integral part of these ﬁnancial statements.

Bodycote annual report 2003
Bodycote annual report 2003

21
21

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 22

Consolidated Cash Flow Statement
for the year ended 31 December 2003

Net cash inﬂow from operating activities

Returns on investments and servicing of ﬁnance
Taxation
Capital expenditure and ﬁnancial investment
Acquisitions and disposals
Equity dividends paid

Cash inﬂow/(outﬂow) before management of liquid resources and ﬁnancing

Management of liquid resources
Financing

(Decrease)/increase in cash in the year

Reconciliation of net cash ﬂow to movement in net debt

(Decrease)/increase in cash in the year
Cash outﬂow/(inﬂow) from decrease/(increase) in debt and lease ﬁnancing
Cash inﬂow from movement in liquid resources

Change in net debt resulting from cash ﬂows
Debt acquired with subsidiaries
Currency adjustments

Movement in net debt in the year

Net debt at 1 January

Net debt at 31 December

2003
£m

83.9

(10.3)
(4.9)
(38.3)
1.3
(15.6)

16.1

5.9
(23.5)

(1.5)

(1.5)
23.7
(5.9)

16.3
–
7.6

23.9

2002 Note

21
21

£m

94.2

(11.0)
(7.2)
(54.0)
(10.1)
(15.6)

(3.7)

7.8
3.6

7.7

7.7
(3.6)
(7.8)

(3.7)
(1.1)
12.6

7.8

(234.2)

(210.3)

(242.0)

(234.2)

The accompanying notes and statement of accounting policies are an integral part of these ﬁnancial statements.

22
22

Bodycote annual report 2003
Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 23

Consolidated Statement of Total Recognised Gains and Losses
for the year ended 31 December 2003

(Loss)/proﬁt for the ﬁnancial year
Disposal of revalued property
Currency adjustments

Total recognised gains and losses relating to the year

Reconciliation of Movements in Group Shareholders’ Funds
for the year ended 31 December 2003

(Loss)/proﬁt for the ﬁnancial year
Dividends paid and proposed

Retained loss for the ﬁnancial year
Disposal of revalued property
Currency adjustments
New shares issued

Net movement in shareholders’ funds

Shareholders’ funds at 1 January (as previously stated)
Prior year adjustment (note 12)

Shareholders’ funds at 1 January (as restated)

Shareholders’ funds at 31 December

The accompanying notes and statement of accounting policies are an integral part of these ﬁnancial statements.

2003
£m

(17.4)
–
14.4

(3.0)

2002
£m

6.3
(0.6)
9.7

15.4

2003

£m

(17.4)
(15.6)

(33.0)
–
14.4
0.3

(18.3)

390.0
(0.8)

389.2

370.9

2002
As restated
£m

6.3
(15.6)

(9.3)
(0.6)
9.7
–

(0.2)

390.2
(0.8)

389.4

389.2

Bodycote annual report 2003
Bodycote annual report 2003

23
23

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 24

Accounting Policies

PENSION COSTS
For deﬁned beneﬁt schemes the amount charged to the proﬁt and loss
account in respect of pension costs is the estimated regular cost of
providing the beneﬁts accrued in the year, adjusted to reﬂect variations
from that cost. For deﬁned contribution schemes the amounts charged
are the contributions payable in the year.

LEASES
Assets held under ﬁnance leases are capitalised as tangible ﬁxed assets
at fair value and the corresponding rental liability is shown net of interest
under ﬁnance leases within creditors. The capitalised values are written
off over the shorter of the period of the lease and the useful life of the
asset concerned and ﬁnance charges are written off over the period
of the lease.

Rental costs under operating leases are charged to the proﬁt and loss
account over the period of the lease.

TANGIBLE FIXED ASSETS
Tangible ﬁxed assets are stated at cost or valuation. Depreciation is
provided on a straight line basis, to reduce the carrying value to the
estimated residual value at the point of sale, at the following annual rates:

Land
Fixtures and ﬁttings
Plant and machinery
Leasehold property
Buildings
Motor vehicles

nil
10% to 20%
5% to 20%
over the period of the lease
2%
20% to 33%

ACCOUNTING CONVENTION
The ﬁnancial statements have been prepared under the historical cost
convention and in accordance with applicable United Kingdom
accounting standards with the exception of the policy for accounting
for employee beneﬁt trusts which is explained in note 12.

The accounting policies have been applied consistently throughout the
year and the preceding year in dealing with items that are considered
material in relation to the Group’s ﬁnancial statements.

BASIS OF CONSOLIDATION
The Group ﬁnancial statements consolidate the accounts of the Company
and its subsidiary undertakings, all of which are drawn up to 31 December
each year. The acquisition method of accounting has been adopted.
The results of subsidiaries acquired or sold during the year are
consolidated from or to the date on which control passed.

In accordance with Section 230 of the Companies Act 1985 a separate
proﬁt and loss account dealing with the results of the Company has
not been presented.

GOODWILL
Purchased goodwill arising on the acquisitions of subsidiary undertakings
before 1 January 1998, when FRS 10 Goodwill and Intangible Assets
was adopted, was written off to reserves in the year of acquisition and,
as allowed by this Standard, has not been reinstated in the balance sheet.

Purchased goodwill arising on acquisitions since 31 December 1997
has been capitalised and is being amortised in equal instalments over
its estimated useful life up to a maximum of twenty years. Provision
is made for any impairment.

TURNOVER
Turnover represents amounts receivable for goods and services sold
to outside customers, excluding value added tax.

INVESTMENTS
Investments are held at cost less provision for impairment.

STOCK
Stock is valued at the lower of cost and net realisable value. In the case
of manufactured products, cost includes the attributable proportion of
manufacturing overhead costs. Net realisable value comprises the
estimated selling price less all further costs to completion and all costs
to be incurred in selling and distribution.

Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 25

GOVERNMENT GRANTS
Capital based government grants are included within accruals and
deferred income in the balance sheet and credited to the proﬁt and loss
account over the estimated useful economic lives of the assets to
which they relate. Revenue based government grants are credited to
the proﬁt and loss account in the period in which they are receivable.

DEBT
Debt is initially stated at the amount of the net proceeds after deduction
of issue costs. The carrying amount is increased by the ﬁnance cost
in respect of the accounting period and reduced by payments made
in the period. Finance costs of debt are recognised in the proﬁt and
loss account over the term of such instruments at a constant rate on
the carrying amount.

DERIVATIVES AND FINANCIAL INSTRUMENTS
The Group uses derivatives and ﬁnancial instruments to reduce
exposure to foreign exchange risk. The Group does not hold or issue
derivatives or ﬁnancial instruments for speculative purposes.

For a forward foreign exchange contract to be treated as a hedge, the
instrument must be related to actual foreign currency assets or liabilities
or to a probable commitment. It must involve the same currency or
similar currencies as the hedged item and must also reduce the risk
of foreign currency exchange movements on the Group’s operations.
Gains and losses arising on these contracts are deferred and recognised
in the proﬁt and loss account, or as adjustments to the carrying amount
of ﬁxed assets, only when the hedged transaction has itself been
reﬂected in the Group’s accounts. If an instrument ceases to be
accounted for as a hedge, for example, because the underlying hedged
position is eliminated, the instrument is marked to market and any
resulting proﬁt or loss recognised at that time.

TAXATION
Current UK corporation tax and foreign tax, is provided at amounts
expected to be paid (or recovered) using the tax rates and laws that
have been enacted or substantively enacted by the balance sheet date.

Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions
or events that result in an obligation to pay more tax in the future or a
right to pay less tax in the future have occurred at the balance sheet
date. Timing differences are differences between the Group's taxable
proﬁts and its results as stated in the ﬁnancial statements that arise from
the inclusion of gains and losses in tax assessments in periods different
from those in which they are recognised in the ﬁnancial statements.

A net deferred tax asset is regarded as recoverable and therefore
recognised only when, on the basis of all available evidence, it can be
regarded as more likely than not that there will be suitable taxable proﬁts
from which the future reversal of the underlying timing differences can
be deducted.

Deferred tax is recognised in respect of the retained earnings of overseas
subsidiaries only to the extent that, at the balance sheet date, dividends
have been accrued as receivable or a binding agreement to distribute
past earnings in future has been entered into by the subsidiary.

Deferred tax is measured at the average tax rates that are expected
to apply in the periods in which the timing differences are expected
to reverse, based on tax rates and laws that have been enacted or
substantively enacted by the balance sheet date. Deferred tax is measured
on a discounted basis to reﬂect the time value of money over the period
between the balance sheet date and the dates on which it is estimated
that the underlying timing differences will reverse. The discount rates
used reﬂect the post-tax yields to maturity that can be obtained on
government bonds with similar maturity dates and currencies to
those of the deferred tax assets or liabilities.

FOREIGN CURRENCIES
The results of overseas subsidiaries are translated into sterling using
average rates of exchange during the year. Assets and liabilities of
overseas subsidiaries are translated at the rates of exchange ruling at
the balance sheet date. Exchange differences arising from the translation
of investments in subsidiary undertakings at closing rates are taken to
reserves, together with exchange differences on foreign currency
borrowings which ﬁnance a proportion of foreign currency investments.

Bodycote annual report 2003
Bodycote annual report 2003

25
25

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 26

Notes to the Financial Statements
31 December 2003

1. Segmental analysis

By activity

Turnover

Proﬁt

Net assets

2002
As restated
£m

288.4
25.3
64.9
9.9

388.5
0.9

389.4

2003

2002

2003

2002

2003

Heat treatment
Materials testing
Hot isostatic pressing
Specialty coatings

Wet coatings

Head ofﬁce expenses

£m

302.9
61.2
27.6
18.7

410.4
38.0

448.4

302.7
56.6
28.5
16.3

404.1
36.0

440.1

Operating proﬁt before amortisation of goodwill and exceptional items

Net interest payable

Proﬁt on ordinary activities before amortisation of
goodwill and exceptional items

Amortisation of goodwill

Proﬁt on ordinary activities before exceptional items
Operating exceptional item arising from restructuring and asset write downs
Exceptional items

(Loss)/proﬁt on ordinary activities before taxation

£m

296.9
32.6
66.9
15.6

412.0
(40.2)

371.8

£m

31.6
11.4
3.6
2.7

49.3
(6.0)

43.3

(1.6)

41.7

(9.7)

32.0

(9.1)

22.9
(7.5)
(26.5)

(11.1)

£m

36.5
10.9
4.5
2.6

54.5
(3.8)

50.7

(1.3)

49.4

(11.2)

38.2

(8.7)

29.5
(18.3)
–

11.2

By geographical origin

Turnover

Proﬁt before tax

Net assets

United Kingdom
Mainland Europe
North America
Rest of World

2003

2002

2003

2002

2003

£m

60.6
229.0
154.9
3.9

448.4

£m

62.2
201.0
174.6
2.3

440.1

£m

(0.9)
(5.5)
4.2
0.8

(1.4)

£m

4.5
5.3
12.0
0.6

22.4

£m

2.7
340.1
23.7
5.3

371.8

2002
As restated
£m

32.2
261.8
91.2
4.2

389.4

Net interest payable

Proﬁt on ordinary activities before taxation

(9.7)

(11.2)

(11.1)

11.2

By geographical destination

Turnover

United Kingdom
Mainland Europe
North America
Rest of World

2003
£m

58.8
224.9
154.9
9.8

448.4

2002
£m

62.5
199.5
174.5
3.6

440.1

The segmental disclosure by activity for 2002 has been restated to reﬂect the transfer of certain businesses from the heat treatment to
the metallurgical coatings division.

26
26

Bodycote annual report 2003
Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 27

2. Operating proﬁt

Turnover
Cost of sales

Gross proﬁt

Distribution costs
Administrative expenses
- Other
- Goodwill amortisation
- Operating exceptional items arising from restructuring

and asset write downs

Operating proﬁt

Operating proﬁt is stated after charging/(crediting):

Depreciation
Amortisation of goodwill
Operating lease rentals, plant and machinery
Operating lease rentals, other
Auditors’ remuneration for audit services
Government grants receivable
Rents receivable
Operating exceptional item (see below)

2003

2003
Existing Acquisitions

Operations
£m

447.1
(314.7)

132.4

(16.3)

(74.7)
(9.0)

(7.5)

24.9

£m

1.3
(0.7)

0.6

–

(0.3)
(0.1)

–

0.2

2003
Total

£m

2002
Continuing
Operations
£m

448.4
(315.4)

440.1
(303.4)

133.0

136.7

(16.3)

(16.4)

(75.0)
(9.1)

(7.5)

25.1

(70.9)
(8.7)

(18.3)

22.4

2003
£m

2002
£m

45.7
9.1
3.2
5.7
0.4
(0.2)
(0.7)
7.5

43.0
8.7
3.3
5.6
0.3
(0.4)
(0.6)
18.3

Amounts payable to Deloitte & Touche LLP and their associates by the Group in respect of non-audit services were £0.4m (2002: £0.8m).

A more detailed analysis of auditors' remuneration on a worldwide basis is provided below:

Audit services

Statutory audit

Tax services

Compliance services
Advisory services

Other services

Other services not covered above

2003

2002

£m

0.4

0.1
0.2

0.3

0.1

0.8

13
25

100

£m

0.3

0.2
0.5

0.7

0.1

1.1

18
46

100

In addition to the amounts shown above, the auditors received fees of £7,000 (2002: £7,000) for the audit of the Group’s UK
pension schemes.

A description of the work of the Audit Committee is set out in the Directors’ Report on page 11 and includes an explanation of how
auditor objectivity and independence is safeguarded when non-audit services are provided by the auditors.

Bodycote annual report 2003
Bodycote annual report 2003

27
27

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 28

Notes to the Financial Statements

2. Operating proﬁt continued

Operating exceptional item:
A restructuring charge of £7.5m (2002: £18.3m) has been recognised to cover the costs of plant closures, asset write offs and
reorganisation of continuing operations. £2.1m (2002: £5.1m) remains as a provision at 31 December 2003 (see note 16).

Heat treatment
Hot isostatic pressing
Materials testing
Metallurgical coatings

Total

Asset Redundancy
costs
£m

write off
£m

Plant
closures
£m

2.1
–
0.4
1.0

3.5

0.8
–
–
0.2

1.0

2.5
0.1
0.1
0.3

3.0

3. Exceptional items reported after operating proﬁt

Receipt of fully provided deferred consideration relating to prior years’ disposal
Loss on termination of operations (see below)

The loss on termination of discontinuing operations comprises
Goodwill impairment losses (note 10)
Tangible ﬁxed assets impairment losses (note 11)

4. Net interest payable

Interest payable and similar charges - bank loans and overdrafts
Bank interest receivable

5. Employees

The average monthly number of persons employed by the Group
(including Executive Directors) was:
Heat treatment
Materials testing
Hot isostatic pressing
Metallurgical coatings

Total employee costs (including Executive Directors) were:
Wages and salaries
Social security costs
Other pension costs (see note 24)

Details of Directors’ emoluments are given on page 16.

28
28

Bodycote annual report 2003
Bodycote annual report 2003

2003
Total
£m

5.4
0.1
0.5
1.5

7.5

2003
£m

3.5
(30.0)

(26.5)

2003
£m

11.1
18.9

30.0

2003
£m

(13.2)
3.5

(9.7)

2002
Total
£m

11.9
0.4
0.3
5.7

18.3

2002
£m

–
–

–

2002
£m

–
–

–

2002
£m

(14.4)
3.2

(11.2)

2003
Number

2002
Number

4,926
1,334
269
856

7,385

2003
£m

158.8
38.5
4.9

202.2

5,239
1,266
266
875

7,646

2002
£m

159.9
38.9
5.5

204.3

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 29

6. Tax on (loss)/proﬁt on ordinary activities

The charge for tax comprises:

Current tax:
UK corporation tax
Overseas tax
Adjustments in respect of prior years:
- UK corporation tax
- Overseas tax

Total current tax

Deferred tax:
Origination and reversal of timing differences
(Increase)/decrease in discount

Total deferred tax (see note 16)

Total tax on (loss)/proﬁt on ordinary activities

The tax effect of exceptional items comprises:
Proﬁt on disposal of discontinued operations - overseas
Operating exceptional restructuring charges

2003
£m

2002
£m

1.4
5.0

0.4
(1.0)

5.8

2.1
(1.7)

0.4

6.2

1.8
(2.7)

(0.9)

3.5
6.3

(0.5)
(2.5)

6.8

(3.7)
1.7

(2.0)

4.8

–
(6.2)

(6.2)

The loss on termination of operations (note 3) has no tax effect.

The difference between the total current tax shown above and the amount calculated by applying the standard rate of UK corporation
tax to the proﬁt before tax is as follows.

Group (loss)/proﬁt on ordinary activities before tax

Tax on Group (loss)/proﬁt on ordinary activities at standard UK corporation tax rate of 30% (2002 - 30%)

Effects of:
Goodwill amortisation not deductible for tax purposes
Other expenses not deductible for tax purposes
Exceptional provision for asset write downs not considered recoverable
Adjustments to tax charge in respect of previous periods
Origination and reversal of timing differences

Group current tax charge for the year

2003
£m

(11.1)

(3.3)

2.7
0.1
9.0
(0.6)
(2.1)

5.8

2002
£m

11.2

3.4

2.6
0.1
–
(3.0)
3.7

6.8

A deferred tax asset amounting to £14.2m (2002: £nil) for trading losses has not been recognised because in the opinion of the directors
there will be no suitable taxable gains available in the forseeable future.

(Loss)/proﬁt for the ﬁnancial year

The loss for the ﬁnancial year dealt with in the ﬁnancial statements of the parent company amounted to £4.2m (2002: £4.0m proﬁt).

Bodycote annual report 2003
Bodycote annual report 2003

29
29

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 30

Notes to the Financial Statements

8. Dividends - paid and proposed

Interim - 2.25p per share (2002: 2.25p) on 256,630,326 (2002: 256,470,884)
shares paid 6 January 2004 (2002: 2 January 2003)
Final - 3.85p per share (2002: 3.85p) proposed on 256,630,326 (2002: 256,470,884) shares

9. Earnings/(loss) per share

(Loss)/proﬁt for the ﬁnancial year
Goodwill amortisation charge
Exceptional items after tax

Headline earnings

Weighted average number of ordinary shares in issue - basic

Adjustment in respect of share options

Weighted average number of ordinary shares in issue - diluted

Headline
Headline - diluted
Basic
Basic - diluted

2003
£m

5.8
9.8

15.6

2003
£m

(17.4)
9.1
33.1

24.8

2002
£m

5.8
9.8

15.6

2002
£m

6.3
8.7
12.1

27.1

Number
256,115,749

Number
256,052,197

–

327,984

256,115,749

256,380,181

9.7p
9.7p
(6.8p)
(6.8p)

10.6p
10.6p
2.4p
2.4p

The Directors consider that the headline earnings per share ﬁgures more accurately reﬂect the underlying performance of the Group.
The ﬁgures for basic and diluted weighted average share capital exclude 400,000 shares in respect of which dividend entitlement has
been waived on behalf of the Bodycote International Employee Beneﬁt Trust.

FRS 14 requires presentation of diluted EPS when a company could be called upon to issue shares that would decrease net proﬁt or
increase net loss per share. Net loss per share would only be increased by out-of-the-money options. Since it seems inappropriate to
assume that option holders would act irrationally, no adjustment has been made to diluted EPS.

10. Intangible ﬁxed assets - Goodwill

Group

Cost

1 January 2003
Additions (note 23)

31 December 2003

Amortisation

1 January 2003
Charge for the year
Impairment losses (note 3)

31 December 2003

Net book value

31 December 2003
31 December 2002

30
30

Bodycote annual report 2003
Bodycote annual report 2003

£m

180.6
2.2

182.8

25.1
9.1
11.1

45.3

137.5
155.5

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 31

11. Tangible ﬁxed assets

Group

Cost

1 January 2003
Currency adjustments
Recategorisation
Subsidiaries acquired
Additions
Disposals

31 December 2003

Depreciation

1 January 2003
Currency adjustments
Recategorisation
Charge for the year
Provision for impairment (note 3)
Disposals

31 December 2003

Net book value

31 December 2003
31 December 2002

Land and buildings
Long
leasehold
£m

Plant
and
leasehold machinery
£m

Short

£m

Freehold
£m

Fixtures
and
ﬁttings
£m

38.9
1.9
0.8
–
2.6
(1.9)

42.3

25.8
1.3
1.0
4.8
1.4
(1.7)

32.6

Total
£m

747.3
18.9
–
0.7
39.9
(22.1)

784.7

248.9
9.5
–
45.7
18.9
(17.0)

306.0

526.6
12.5
(1.5)
0.6
33.7
(16.9)

555.0

196.6
6.8
(1.3)
36.0
13.6
(14.2)

237.5

317.5
330.0

9.7
13.1

478.7
498.4

163.4
3.7
0.7
0.1
3.0
(3.3)

167.6

18.8
1.0
0.3
4.2
3.9
(1.1)

27.1

140.5
144.6

12.4
0.8
–
–
0.2
–

13.4

6.3
0.4
–
0.3
–
–

7.0

6.4
6.1

6.0
–
–
–
0.4
–

6.4

1.4
–
–
0.4
–
–

1.8

4.6
4.6

Included in the net book value of ﬁxed assets of £478.7m (2002: £498.4m) is £13.1m (2002: £13.1m) which relates to freehold land not depreciated.

During the year the Group recategorised some of its ﬁxed assets.

In the Directors’ opinion the net book value of leased assets is not material.

Bodycote annual report 2003
Bodycote annual report 2003

31
31

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 32

Notes to the Financial Statements

11. Tangible ﬁxed assets continued

Company
Cost

31 December 2003 and 2002

Depreciation

31 December 2003 and 2002

Net book value

31 December 2003 and 2002

12. Investments

Cost

31 December 2002 (as previously stated)
Prior year adjustment (see below)

1 January 2003 (as restated)
Acquisitions and advances
Disposals and repayments
Currency adjustments

31 December 2003

Provision

1 January 2003
Acquisitions

31 December 2003

Net book value

31 December 2003
31 December 2002 (as restated)

Group investments comprise:

Name of company

Traitement Compression Services SA
International Heat Treatment Limited

Fixtures
and
ﬁttings
£m

0.3

0.1

0.2

Total
£m

833.6
(0.8)

832.8
10.3
(0.3)
(9.2)

Group
other
Shares investments
£m

£m

Company

Total
£m

Shares
£m

Loans
£m

1.4
(0.8)

0.6
–
–
–

0.6

0.2
0.1

0.3

0.3
0.4

0.5
–

0.5
–
(0.1)
0.2

0.6

–
–

–

0.6
0.5

1.9
(0.8)

1.1
–
(0.1)
0.2

1.2

0.2
0.1

0.3

0.9
0.9

398.3
(0.8)

397.5
–
–
–

397.5

2.0
–

2.0

435.3
–

435.3
10.3
(0.3)
(9.2)

436.1

833.6

–
–

–

2.0
–

2.0

395.5
395.5

436.1
435.3

831.6
830.8

Nature of
business

Hot Isostatic Pressing
Heat Treatment

Country of
i ncorporation

France
Hong Kong

% Holding of
ordinary shares

49
40

Equity accounting has not been applied in respect of these entities as the impact would be immaterial. Details of principal subsidiary
undertakings are given on pages 48 to 50.

Prior year adjustment

During the year, the Group adopted the requirements of UITF 38, ‘Accounting for ESOP Trusts’, as a result of which the policy for accounting
for the Group’s employee beneﬁt trust was changed. The comparative ﬁgures in the primary statements and notes have been restated to
reﬂect the new policy. There is no impact on the results for the year ending 31 December 2003 or 2002. The effects of the change in policy
are summarised below:

Balance Sheet

Investments

Decrease in net assets

32
32

Bodycote annual report 2003
Bodycote annual report 2003

2003
£m

(0.8)

2002
£m

(0.8)

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 33

13. Stocks

Raw materials and consumables
Work in progress
Finished goods and goods for resale

Group

2003
£m

12.0
5.3
0.9

18.2

2002
£m

12.1
4.9
0.7

17.7

There is no material difference between the balance sheet value of stocks and their replacement cost.

14. Debtors

Group

Company

Amounts falling due within one year:

Trade debtors
Amounts owed by subsidiary undertakings
Other debtors
Prepayments and accrued income

Amounts falling due after more than one year:

Other debtors

15. Creditors

Amounts falling due within one year:

Bank loans
Obligations under ﬁnance leases
Bank overdrafts
Trade creditors
Amounts owed to subsidiary undertakings
Corporation tax
Proposed dividends
Other taxes and social security
Other creditors
Accruals and deferred income

Amounts falling due after more than one year:

Bank loans
Obligations under ﬁnance leases
Amounts owed to subsidiary undertakings
Other creditors

2003
£m

2002
£m

2003
£m

86.1
–
6.0
6.9

99.0

2002
£m

86.3
–
10.1
7.0

–
6.9
3.5
1.0

103.4

11.4

3.7

8.2

102.7

111.6

–

11.4

–
15.4
8.3
0.1

23.8

4.5

28.3

Group

Company

2003
£m

2002
£m

2003
£m

2002
£m

9.3
1.6
5.4
36.1
–
3.2
15.6
14.5
8.6
24.8

87.3
1.5
6.5
34.9
–
1.4
15.6
16.1
9.4
30.1

119.1

202.8

224.9
4.3
–
10.3

239.5

177.8
4.6
–
8.4

190.8

2.9
–
1.9
0.3
10.0
–
15.6
–
0.3
1.4

32.4

216.0
–
277.2
–

493.2

80.1
–
0.5
0.7
0.3
–
15.6
–
0.3
1.8

99.3

163.2
–
262.9
–

426.1

Bodycote annual report 2003
Bodycote annual report 2003

33
33

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 34

Notes to the Financial Statements

15. Creditors continued

Bank loans are repayable:

After 5 years
Between 2 and 5 years
Between 1 and 2 years

On demand or within 12 months

Finance leases are repayable:

After 5 years
Between 2 and 5 years
Between 1 and 2 years

On demand or within 12 months

Group

Company

2003
£m

2002
£m

2003
£m

2002
£m

47.6
165.8
11.5

224.9

9.3

56.8
114.4
6.6

177.8

87.3

44.7
161.3
10.0

216.0

2.9

49.7
109.9
3.6

163.2

80.1

234.2

265.1

218.9

243.3

0.6
2.5
1.2

4.3

1.6

5.9

0.8
2.6
1.2

4.6

1.5

6.1

–
–
–

–

–
–
–

–

Bank loans are secured by interlocking intra Group guarantees with principal subsidiaries. The bank loans falling due after 5 years bear
interest at a weighted average rate of 7.79% (2002: 7.79%).

Finance leases are secured on the assets to which they relate.

16. Provisions for liabilities and charges

Group

1 January 2003
Proﬁt and loss account charge
Currency adjustments
Utilised in the year

31 December 2003

Deferred tax

Deferred tax is provided as follows:

Accelerated capital allowances

Other timing differences

Undiscounted provision for deferred tax

Discount

Discounted provision for deferred tax

34
34

Bodycote annual report 2003
Bodycote annual report 2003

Deferred Restructuring
provision
£m

tax
£m

39.5
0.4
0.8
–

40.7

5.1
7.5
–
(10.5)

2.1

Total
£m

44.6
7.9
0.8
(10.5)

42.8

Group

2003
£m

2002
£m

64.9

(5.6)

59.3

61.8

(5.4)

56.4

(18.6)

(16.9)

40.7

39.5

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 35

17. Capital and reserves

Share capital:

Authorised 347,060,000 (2002: 347,060,000) ordinary shares of 10p each

Allotted, called-up and fully paid 256,630,326 (2002: 256,470,884) ordinary shares of 10p each

2003
£m

34.7

25.7

2002
£m

34.7

25.6

An analysis of the shares that were issued is given in the Directors’ Report on page 9.

Share options:

During the year options covering 1,230,434 ordinary shares were granted to 68 employees pursuant to the rules of the Bodycote
International Executive Share Option Scheme 2003. Options covering 159,442 ordinary shares were exercised and 660,842 options lapsed.

At 31 December 2003 options under the Bodycote International Share Option Schemes 1994, 1996 and 2003 were outstanding in respect
of 9,301,081 ordinary shares granted to 475 employees at prices ranging from 105.53p to 509p per share and which expire at dates
between 8 January 2004 and 15 September 2013.

Outstanding options

Date of grant

November
May
October
June
November
November
December
May
December
January
May
October
April
May
December
May
April
April*
September
September*
September

1994
1995
1995
1996
1996
1996
1996
1997
1997
1998
1998
1998
1999
1999
1999
2000
2001
2001
2002
2002
2003

Option price
pence

105.53
113.73
142.42
190.57
253.58
251.47
271.08
258.73
337.35
377.60
509.00
305.00
396.00
352.00
312.50
247.50
217.50
217.50
134.50
134.50
157.50

Exercise
period

1997-2004
1998-2005
1998-2005
1999-2006
1999-2003
1999-2003
1999-2006
2000-2007
2000-2007
2001-2008
2001-2008
2001-2008
2002-2009
2002-2009
2002-2009
2003-2010
2004-2011
2004-2008
2005-2012
2005-2009
2006-2013

Number of options
2002

2003

154,467
46,411
19,027
73,202
–
–
366,238
2,399,805
571,372
240,000
38,750
285,000
459,875
15,000
185,000
1,034,000
1,184,558
42,942
870,700
84,300
1,230,434

313,909
46,411
19,027
219,606
43,920
16,423
404,790
2,490,679
605,791
247,500
63,750
326,250
539,875
15,000
185,000
1,105,500
1,239,558
42,942
880,700
84,300
–

9,301,081

8,890,931

Shares under option marked * have been purchased in the market from previously issued share capital and are held by the trustees
of the Bodycote International Employee Beneﬁt Trust.

Bodycote annual report 2003
Bodycote annual report 2003

35
35

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 36

Notes to the Financial Statements

17. Capital and reserves continued

Reserves:

Group

31 December 2002 (as previously stated)
Prior year adjustment (note 12)

1 January 2003 (as restated)
Currency adjustments
Retained loss for the year
Premium on shares issued

31 December 2003

Company

31 December 2002 (as previously stated)
Prior year adjustment (note 12)

1 January 2003 (as restated)
Currency adjustments
Retained loss for the year
Premium on shares issued

31 December 2003

Cumulative goodwill written off to reserves at 31 December 2003 and 2002 amounted to £122.1m.

18. Minority interests - equity

Equity interest at 1 January
Share of proﬁts for the period
Acquisition/(disposal) of subsidiary undertaking
Dividend payable

Equity interest at 31 December

36
36

Bodycote annual report 2003
Bodycote annual report 2003

Currency
premium and other
reserve
account
£m
£m

Proﬁt
and loss
account
£m

244.2
–

244.2
–
–
0.2

244.4

244.2
–

244.2
–
–
0.2

244.4

0.6
(0.8)

(0.2)
14.4
–
–

14.2

1.4
(0.8)

0.6
0.1
–
–

0.7

Total
£m

364.4
(0.8)

363.6
14.4
(33.0)
0.2

119.6
–

119.6
–
(33.0)
–

86.6

345.2

69.8
–

69.8
–
(19.8)
–

315.4
(0.8)

314.6
0.1
(19.8)
0.2

50.0

295.1

Group

2003
£m

0.2
0.1
0.7
(0.1)

0.9

2002
£m

0.7
0.1
(0.5)
(0.1)

0.2

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 37

19. Capital and leasing commitments

Contracted capital expenditure not provided for in the ﬁnancial statements:

The annual commitment for payments in respect of operating leases is:

Expiring:
Within 12 months
Between 1 and 5 years
After 5 years

20. Reconciliation of operating proﬁt to operating cash ﬂows

Operating proﬁt
Depreciation charges
Amortisation of goodwill
Loss on sale of tangible ﬁxed assets
Fixed assets written off on restructuring
Decrease in stocks
Decrease in debtors
(Decrease)/increase in creditors and provisions

Net cash inﬂow from operating activities

21. Analysis of cash ﬂows

Returns on investments and servicing of ﬁnance:

Interest received
Interest paid
Dividend paid to minority shareholder

Net cash outﬂow from returns on investments and servicing of ﬁnance

Capital expenditure and ﬁnancial investment:

Purchase of tangible ﬁxed assets
Sale of tangible ﬁxed assets
Sale of investments

Net cash outﬂow from capital expenditure and ﬁnancial investment

Group

2003
£m

12.1

2002
£m

11.7

Land and buildings

Other

2003
£m

2002
£m

2003
£m

2002
£m

0.6
1.1
2.2

3.9

0.3
1.7
1.3

3.3

1.9
2.2
0.2

4.3

2003
£m

25.1
45.7
9.1
0.1
3.5
–
12.1
(11.7)

83.9

2003
£m

3.6
(13.8)
(0.1)

(10.3)

(39.9)
1.5
0.1

(38.3)

0.7
2.9
–

3.6

2002
£m

22.4
43.0
8.7
–
8.4
0.6
8.7
2.4

94.2

2002
£m

3.2
(14.1)
(0.1)

(11.0)

(59.1)
4.6
0.5

(54.0)

Bodycote annual report 2003
Bodycote annual report 2003

37
37

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 38

Notes to the Financial Statements

21. Analysis of cash ﬂows continued

Acquisitions and disposals:

Net cash/(overdrafts) acquired with subsidiaries
Purchase of subsidiary undertakings (note 23)
Purchase of minority interests
Sale of discontinued operations (note 3)

Net cash inﬂow/(outﬂow) from acquisitions and disposals

Management of liquid resources:

Cash withdrawn from short term deposits
Cash placed on short term deposits

Net cash inﬂow from management of liquid resources

Financing:

Issue of ordinary share capital
Repayment of bank loans
Additional bank loans
Repayment of ﬁnance leases
Additional ﬁnance leases

Net cash (outﬂow)/inﬂow from ﬁnancing

22. Analysis of changes in net debt

Cash
Short term deposits

Cash at bank and in hand

Bank overdrafts
Bank loans due within one year
Bank loans due after one year
Finance leases due within one year
Finance leases due after one year

38
38

Bodycote annual report 2003
Bodycote annual report 2003

2003
£m

0.7
(2.9)
–
3.5

1.3

70.8
(64.9)

5.9

0.2
(215.6)
192.6
(1.5)
0.8

(23.5)

2002
£m

(0.2)
(9.4)
(0.5)
–

(10.1)

86.1
(78.3)

7.8

–
(30.9)
34.2
(0.9)
1.2

3.6

1 Jan
2003 Cash ﬂow

Non-cash
Currency
changes adjustments

31 Dec
2003

£m

36.1
7.4

43.5

(6.5)
(87.3)
(177.8)
(1.5)
(4.6)

(234.2)

£m

(4.2)
(5.9)

(10.1)

2.7
84.2
(61.2)
1.3
(0.6)

16.3

£m

–
–

–

–
(2.5)
2.5
(1.3)
1.3

–

£m

1.8
–

1.8

(1.6)
(3.7)
11.6
(0.1)
(0.4)

£m

33.7
1.5

35.2

(5.4)
(9.3)
(224.9)
(1.6)
(4.3)

7.6

(210.3)

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 39

23. Acquisition of subsidiary undertakings

Acquisitions were made at a cost of £2.9m. The signiﬁcant acquisitions in the year are given on page 9 in the Directors’ Report.
The following table analyses the acquisitions made in the year and adjustments made in respect of acquisitions in prior years. No fair value
adjustments were required to be made to the amounts at which the assets and liabilities were recorded in the books of the acquired entities.
The fair values below are provisional.

Tangible ﬁxed assets
Stocks
Debtors
Creditors

Total net assets acquired
Goodwill

Cash paid

2003
Book and
fair value
£m

0.7
0.1
0.8
(0.9)

0.7
2.2

2.9

Of the goodwill arising on the acquisition of subsidiary undertakings, £2.2m was capitalised in the year in accordance with FRS 10.
This then resulted in an amortisation charge of £0.1m.

The subsidiary undertakings acquired during the year contributed £0.3m to the Group’s net operating cash ﬂow, paid nil in respect
of net returns on investments and servicing of ﬁnance and utilised £0.5m for capital expenditure.

Bodycote annual report 2003
Bodycote annual report 2003

39
39

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Notes to the Financial Statements

24. Pension schemes

The Group operated a number of pension schemes during the year. The cost to the Group of these schemes was £4.9m (2002: £5.5m)
of which £3.3m (2002: £4.1m) related to overseas arrangements.

UK Schemes

The Group operates a funded deﬁned beneﬁt arrangement for UK employees in which the assets are held in separate trustee administered
funds. The pension cost relating to the UK arrangement is assessed in accordance with the advice of qualiﬁed actuaries using the projected
unit method. The last actuarial assessment of the scheme was performed on 6 April 2002. The assumptions that have the most signiﬁcant
effect on the results of each of the actuarial assessments are those relating to the rate of return on the investments (6.5%), the rate of
increase in salaries (4.0%) and the allowance (2.75%) made for pension payment increases of 5% or retail price inﬂation if less.

At the last actuarial valuation of the scheme, the market value of the assets totalled £26.8m. The actuarial value of these assets
represented 83% of the beneﬁts that had accrued to members after allowing for expected future increases in earnings.

At 6 April 2002, there was a surplus of £0.2m on the basis of the minimum funding requirement of the Pensions Act 1995.

The contributions made by the employer over the ﬁnancial year have been £1,556,000, equivalent to 18% of pensionable pay (after allowing
for National Insurance rebates). This contribution rate is to continue until reviewed following the triennial valuation of the scheme due as
at 6 April 2005. As the scheme is closed to new entrants, the current service cost as a percentage of pensionable payroll is likely to increase
as the membership ages, although it will be applied to a decreasing pensionable payroll.

The transitional arrangements of the new accounting standard FRS 17 require disclosure of assets and liabilities as at 31 December 2003
calculated in accordance with the requirements of FRS 17. They also require disclosure of the items which would appear in the proﬁt and
loss account and in the statement of total recognised gains and losses were the full requirements of FRS 17 in place. For the purpose of
these ﬁnancial statements, all of these ﬁgures are illustrative only and do not impact on the actual 31 December 2003 balance sheet or
on this year’s performance statements.

Assumptions

The assets of the scheme have been taken at market value and the liabilities have been calculated using the following principal
actuarial assumptions:

Inﬂation
Salary increases
Rate of discount
Allowance for pension increases of 5%
per annum or RPI if less in payment or if deferred

2003
% p.a.

2.75
4.00
5.75

2.75

2002
% p.a.

2.50
3.75
5.50

2.50

2001
% p.a.

2.50
3.75
5.75

2.50

The fair value of the assets in the scheme, the present value of the liabilities in the scheme and the expected rate of return at each
balance sheet date were:

Equities
Bonds
Cash
With proﬁts insured policy

Total fair value of assets

Present value of scheme liabilities

Deﬁcit in the scheme

Related deferred tax asset

Net pension liability

40
40

Bodycote annual report 2003
Bodycote annual report 2003

2003
%

7.0
4.7
4.0
4.7

2001
%

7.0
5.4
–
5.4

2002
%

7.0
5.4
4.0
5.2

2003
£m

18.2
2.9
0.5
4.5

26.1

(38.6)

(12.5)

3.8

(8.7)

2002
£m

14.8
2.5
0.8
4.6

22.7

(36.1)

(13.4)

4.0

(9.4)

2001
£m

20.0
1.6
–
4.3

25.9

(30.9)

(5.0)

1.5

(3.5)

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 41

24. Pension schemes continued

Amounts which would be charged to the proﬁt and loss account over the ﬁnancial year

Current service cost (charge to operating proﬁt)
Interest on pension scheme liabilities (charge to net ﬁnance costs)
Expected return on pension scheme assets (credit to net ﬁnance costs)

Total charge

2003
£m

0.7
2.0
(1.4)

1.3

2002
£m

0.7
1.8
(1.8)

0.7

Amounts which would be included within the statement of total recognised gains and losses

Difference between expected and actual return on assets

Experience gains and losses arising on the scheme liabilities

Effects of changes in the demographic and ﬁnancial
assumptions underlying the present value of the scheme liabilities

Total (credit)/charge

Analysis of movements during the year

Deﬁcit at 1 January

Movement in the year:
Current service cost
Net ﬁnance charge
Contributions
Actuarial (gain)/loss

Deﬁcit at 31 December

Overseas Schemes

2002
% of scheme
assets/
liabilities

2003
% of scheme
assets/
liabilities

£m

9.2

0.3

4.9

(2.4)

(0.1)

1.9

(0.6)

£m

6.4

0.6

2.0

9.0

28.3

1.6

5.6

2002
£m

5.0

0.7
–
(1.3)
9.0

2003
£m

13.4

0.7
0.6
(1.6)
(0.6)

12.5

13.4

The Group operates an unfunded scheme for employees in France. The total liability in respect of beneﬁts is (cid:128) 3.3m (£2.3m) of which
(cid:128) 2.4m (£1.7m) has been provided.

The company also sponsors six deﬁned beneﬁt pension arrangements in the USA. These are Lindberg Corporation, Metallurgical Inc.
Pension Plan, Lakeside Heat Treating, Lansing (UAW), St Louis Hourly and Supplemental Retirement Plans. During the year the Lindberg
Corporation plan was fully bought out through the payment of lump sums and the purchase of annuities with an insurance company. The
ﬁgures calculated for the purposes of US accounting requirement FASB No 32 as at 31 December 2003 have been obtained and adjusted
on an approximate basis for the purpose of illustrating the liabilities for the UK accounting standard FRS17. The disclosures required
under the transitional arrangements of FRS 17 in respect of these pension schemes are set out below.

The contributions made by the employer over the ﬁnancial year have been $2,467,000 (£1,505,000) equivalent to 7% of pensionable pay.
The next actuarial valuations for funding purposes are at dates between 1 September 2003 and 1 January 2004.

Assumptions

The assets of the scheme have been taken at market value and the liabilities have been calculated using a discount rate of 5% per
annum (5% at 31 December 2002).

Bodycote annual report 2003
Bodycote annual report 2003

41
41

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 42

Notes to the Financial Statements

24. Pension schemes continued

The fair value of the assets in the scheme, the present value of the liabilities in the scheme and the expected rate of return at each
balance sheet date were:

2002
%

7.00
5.00
1.25

2002
£m

0.8
0.6
11.6

13.0

2002
$m

1.3
0.9
18.6

20.8

2001
%

7.00
6.00
1.75

2001
£m

1.1
0.6
11.9

13.6

2001
$m

1.8
1.0
19.1

21.9

(16.0)

(25.8)

(13.4)

(21.6)

Equities
Bonds
Cash

2003
%

7.00
5.00
1.25

Total fair value of assets

Present value of scheme liabilities

(Deﬁcit)/surplus in the scheme

Related deferred tax asset/(liability)

Net pension (liability)/asset

2003
£m

2003
$m

0.9
0.5
0.3

1.7

(3.0)

(1.3)

0.6

(0.7)

1.7
0.9
0.6

3.2

(5.4)

(2.2)

1.0

(1.2)

Charge to the proﬁt and loss account over the ﬁnancial year

Current service cost (charge to operating proﬁt)
Gain on settlements and curtailments

Total operating (credit)/charge
Interest on pension scheme liabilities (charge to net ﬁnance costs)
Expected return on pension scheme assets (credit to net ﬁnance costs)

Total (credit)/charge

(3.0)

1.3

(1.7)

2003
£m

0.1
(0.6)

(0.5)
0.4
(0.1)

(0.2)

(5.0)

2.3

(2.7)

2003
$m

0.2
(1.0)

(0.8)
0.6
(0.2)

(0.4)

2003

% of scheme
assets/
$m liabilities

Amounts which would be included within the statement of total recognised gains and losses

Difference between expected and actual return on assets

Experience gains and losses arising on the scheme liabilities

Effects of changes in the demographic and ﬁnancial
assumptions underlying the present value of the scheme liabilities

Total charge

£m

–

Analysis of movements during the year

(Deﬁcit)/surplus at 1 January

Movement in the year:
Current service cost
Contributions
Other ﬁnance charges
Gain on curtailment
Actuarial loss

Deﬁcit at 31 December

42
42

Bodycote annual report 2003
Bodycote annual report 2003

(0.1)

0.1

–

£m

(3.0)

(0.1)
1.5
(0.2)
0.5
–

3.9

1.8

–

£m

0.3

–

2.7

3.0

0.5

–

4.0

4.5

2003

2002

(5.0)

(0.2)
2.4
(0.4)
1.0
–

£m

0.2

(0.1)
0.2
(0.5)
–
(2.8)

(1.3)

(2.2)

(3.0)

(5.0)

0.2

(0.1)

0.1

2002
£m

0.1
–

0.1
0.9
(0.3)

0.7

0.3

(0.1)

0.2

2002
$m

0.2
–

0.2
1.3
(0.5)

1.0

2002

% of scheme
assets/
liabilities

3.1

–

1.5

0.3

(0.2)
0.2
(0.8)
–
(4.5)

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 43

24. Pension schemes continued

The analysis of reserves that would have arisen if FRS17 had been fully implemented is as follows:

Proﬁt and loss reserve excluding pension liability
Amount relating to deﬁned beneﬁt pension liability, net of related deferred tax

Proﬁt and loss reserve

25. Contingent liabilities

2003
£m

86.6
(11.7)

2002
£m

119.6
(12.4)

74.9

107.2

The Company has guaranteed bank overdrafts and loans of certain subsidiary undertakings amounting to £2.3m (2002: £3.7m).

26. Derivatives and other ﬁnancial instruments

The Finance Director’s Report on page 8 summarises the objectives and policies for holding or issuing ﬁnancial instruments and similar
contracts, and the strategies for achieving those objectives that have been followed during the period.

The numerical disclosures in this note deal with ﬁnancial assets and ﬁnancial liabilities as deﬁned in FRS 13 Derivatives and Other
Financial Instruments: Disclosures. Certain ﬁnancial assets such as investments in subsidiary and associated companies are excluded
from the scope of these disclosures.

As permitted by FRS 13, short term debtors and creditors have also been excluded from the disclosures, other than the currency
disclosures.

Interest rate proﬁle

Financial assets:
The Group’s ﬁnancial assets are made up of cash deposits which are part of the ﬁnancing arrangements of the Group. These deposits
comprise amounts placed on money market at ﬁxed rates for various durations from call up to one week and are detailed as follows:

Currency
Sterling
US Dollar
Swedish Krona
Norwegian Krone
Danish Krone
Euro
Canadian Dollar
UAE Dirham
Swiss Franc
Czech Koruna
Omani Rial
Mexican Peso

Total

2003
£m

2002
£m

3.5
6.7
0.2
0.5
0.1
19.9
0.3
1.2
0.5
1.6
0.2
0.5

35.2

8.0
11.6
–
0.3
0.1
18.6
0.9
1.7
0.9
1.4
–
–

43.5

Bodycote annual report 2003
Bodycote annual report 2003

43
43

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 44

Notes to the Financial Statements

26. Derivatives and other ﬁnancial instruments continued

Financial liabilities:
After taking into account forward foreign currency contracts entered into by the Group, the interest rate proﬁle of the Group’s ﬁnancial
liabilities at 31 December 2003 and 31 December 2002 was as follows:

Currency
Sterling
US Dollar
Swedish Krona
Danish Krone
Euro
Canadian Dollar
Swiss Franc
Czech Koruna

Total

Total
2003
£m

1.2
135.3
14.9
1.5
74.7
1.4
16.1
0.4

245.5

Floating
rate
2003
£m

Fixed
rate
2003
£m

Interest
free
2003
£m

1.1
90.6
14.9
1.5
64.5
1.2
16.1
–

189.9

0.1
44.7
–
–
9.9
0.2
–
0.4

55.3

–
–
–
–
0.3
–
–
–

0.3

Total
2002
£m

0.5
158.1
14.3
1.1
82.7
1.9
16.1
3.0

277.7

Floating
rate
2002
£m

Fixed
rate
2002
£m

Interest
free
2002
£m

0.3
107.4
14.3
1.1
73.2
1.6
14.5
2.5

214.9

0.2
50.7
–
–
9.2
0.3
1.6
0.5

62.5

–
–
–
–
0.3
–
–
–

0.3

Further analysis of the interest rate proﬁle at 31 December 2003 and at 31 December 2002 is as follows:

Currency:
Sterling
US Dollar
Czech Koruna
Euro
Swiss Franc
Canadian Dollar

2003
Fixed rate

2003
Interest free

Weighted average
interest rate

12.08
7.79
20.00
4.49
2.56
7.30

Weighted average
period for which
rate is ﬁxed
Years

0.4
6.0
1.3
3.1
0.5
0.3

Weighted average
period to maturity

Years

–
–
–
2.8
–
1.0

2002
Fixed rate

2002
Interest free

Weighted average
interest rate

12.29
7.72
20.00
5.14
3.71
7.06

Weighted average
period for which
rate is ﬁxed
Years

1.3
6.9
1.7
2.7
0.6
1.7

Weighted average
period to maturity

Years

–
–
–
3.6
–
–

The interest on ﬂoating rate ﬁnancial liabilities is based on the relevant national inter-bank rate and is ﬁxed in advance for periods normally
between 3 and 12 months.

44
44

Bodycote annual report 2003
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ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 45

26. Derivatives and other ﬁnancial instruments continued

Currency exposures

The Group’s objectives in managing the currency exposures arising from its net investment overseas (in other words, its structural currency
exposures) are to maintain a low cost of borrowings and to retain some potential for currency-related appreciation while partially hedging
against currency depreciation. Gains and losses arising from these structural currency exposures are recognised in the statement of total
recognised gains and losses.

The table below shows the Group’s currency exposures; in other words, those transactional (or non-structural) exposures that give rise to
the net currency gains and losses recognised in the proﬁt and loss account. Such exposures comprise the monetary assets and monetary
liabilities of the Group that are not denominated in the operating (or “functional”) currency of the operating unit involved, other than certain
non-sterling borrowings treated as hedges of net investments in overseas operations.

The exposures as at 31 December 2003 were as follows:

Net foreign currency monetary assets
US $
£m

Euro
£m

SEK
£m

Total
£m

Functional currency of Group operation

Sterling
Swiss Franc

Total

The exposures at 31 December 2002 for comparison purposes were as follows:

Functional currency of Group operation

Sterling
Czech Koruna
Swedish Krona

Total

1.1
–

1.1

1.4
0.1

1.5

0.1
–

0.1

2.6
0.1

2.7

Net foreign currency monetary assets

US $
£m

Euro
£m

SEK
£m

Total
£m

0.2
–
–

0.2

0.5
0.1
0.3

0.9

–
–
–

–

0.7
0.1
0.3

1.1

The amounts shown in the tables above take into account the effect of any forward contracts and other derivatives entered into to
manage these currency exposures.

Maturity of ﬁnancial liabilities

The maturity proﬁle of the Group’s ﬁnancial liabilities at 31 December 2003 and 31 December 2002 was as follows:

In one year or less
In more than one year but not more than two years
In more than two years but not more than ﬁve years
In more than ﬁve years

Total

2003
£m

16.3
12.7
168.3
48.2

245.5

2002
£m

95.3
7.8
117.0
57.6

277.7

Bodycote annual report 2003
Bodycote annual report 2003

45
45

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 46

Notes to the Financial Statements

26. Derivatives and other ﬁnancial instruments continued

Fair values

Set out below is a comparison by category of book values and fair values of the Group’s ﬁnancial assets and liabilities at
31 December 2003 and 31 December 2002.

2003
Book
value
£m

2003
Fair
value
£m

2002
Book
value
£m

2002
Fair
value
£m

Primary ﬁnancial instruments held or issued
to ﬁnance the Group’s operations

Financial assets
Long-term borrowings
Short-term ﬁnancial liabilities and current portion of long-term borrowings

35.2
(229.2)
(16.3)

35.2
(231.4)
(16.3)

43.5
(182.4)
(95.3)

43.5
(186.8)
(95.3)

The fair value of forward foreign currency contracts and US Dollar denominated long-term ﬁxed rate debt with a carrying amount of
£44.7m (2002: £53.9m) have been calculated by discounting cash ﬂows at prevailing interest rates. All the other fair values shown
above have been determined by reference to prices available from the markets on which the instruments involved are traded.

Gains and losses on hedges

The Group enters into forward foreign currency contracts to eliminate the currency exposures that arise on sales and purchases
denominated in foreign currencies when those sales or purchases are transacted. Changes in the fair value of instruments used
as hedges are not recognised in the ﬁnancial statements until the hedged position matures. The unrecognised gains and losses
were not material either in 2003 or 2002.

Borrowing facilities

The Group had undrawn committed borrowing facilities at 31 December 2003 and 31 December 2002, in respect of which all conditions
precedent had been met, as follows:

Expiring in one year or less
Expiring in more than two years

Total

27. Post balance sheet event

2003
£m

18.4
14.5

32.9

2002
£m

3.9
3.5

7.4

On 9 March 2004 the Group announced its intention to raise approximately £61.9m net through a fully underwritten rights issue.

46
46

Bodycote annual report 2003
Bodycote annual report 2003

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 47

Five Year Summary

Turnover

Metal technology
Discontinued operations

Proﬁts/(Losses)

Trading proﬁt
Operating exceptional items

Operating proﬁt
Proﬁt/(loss) on disposal of discontinued operations
Restructuring costs
(Loss)/proﬁt on disposal of ﬁxed assets
Net interest payable

(Loss)/proﬁt before taxation
Taxation

(Loss)/proﬁt after taxation
Minority interests

(Loss)/proﬁt for the ﬁnancial year

2003

£m

448.4
–

448.4

32.6
(7.5)

25.1
3.5
(30.0)
–
(9.7)

(11.1)
(6.2)

(17.3)
(0.1)

(17.4)

2002

2001

1999
As restated As restated As restated As restated
£m

2000

£m

440.1
–

440.1

479.4
–

479.4

359.4
11.7

371.1

322.8
32.6

355.4

40.7
(18.3)

22.4
–
–
–
(11.2)

11.2
(4.8)

6.4
(0.1)

6.3

72.1
–

72.1
(1.9)
–
(0.8)
(13.9)

55.5
(18.0)

37.5
(0.1)

37.4

82.8
–

82.8
9.5
–
–
(6.9)

85.4
(21.0)

64.4
–

64.4

81.1
–

81.1
11.8
(5.2)
0.8
(3.3)

85.2
(27.3)

57.9
0.1

58.0

Headline earnings per share (pence)
Dividend per share (pence)

9.7
6.1

10.6
6.1

18.2
6.1

22.6
6.0

22.5
5.5

Assets employed

Intangible ﬁxed assets
Tangible ﬁxed assets
Other current assets and liabilities

Financed by

Share capital
Reserves

Shareholders’ funds
Minority interests
Net borrowings

Net assets per share (pence)
Return on capital employed before exceptional items (%)
Return on capital employed after exceptional items (%)

137.5
478.7
(34.1)

155.5
498.4
(30.3)

154.4
496.6
(18.5)

81.6
410.5
(31.1)

64.1
357.4
(21.9)

582.1

623.6

632.5

461.0

399.6

25.7
345.2

370.9
0.9
210.3

582.1

144.5
5.4
(0.2)

25.6
363.6

389.2
0.2
234.2

623.6

151.8
6.5
3.6

25.6
364.2

389.8
0.7
242.0

632.5

152.0
13.2
12.8

25.6
341.7

367.3
0.2
93.5

461.0

143.3
19.2
21.4

25.8
295.2

321.0
0.2
78.4

399.6

124.7
22.4
24.2

Bodycote annual report 2003
Bodycote annual report 2003

47
47

England

Germany

Netherlands

Liechtenstein

Austria

Switzerland

Czech Republic

Hungary

Romania

USA

ID1313 Bc AR 2003 v17 white 25/3/04 5:14 pm Page 48

Principal Subsidiary Undertakings

Metal Technology

Heat Treatment

Country of incorporation
or registration

*Bodycote Heat Treatments Limited

Bodycote Wärmebehandlung GmbH

Aldridge, Broxburn, Cambridge, Chard, Cheltenham, Coventry,
Derby, Gillingham, Great Barr, Hazel Grove, Macclesﬁeld,
Rotherham, Skelmersdale, Walsall, Willenhall and Woodford

Ebersbach, Eching, Essen, Esslingen, Karben, Köln, Korntal,
Landsberg, Langenselbold, Lüdenscheid, Menden, Nürnberg,
Remscheid, Sömmerda, Sprockhövel and Wehingen

Bodycote Hardingscentrum BV

Diemen, Hengelo, Tilburg and Venlo

Bodycote Hardiff BV

Bodycote Rheintal Wärmebehandlung AG

Apeldoorn

Schaan

Bodycote Austria Wärmebehandlung GmbH

Kapfenberg, Marchtrenck and Vienna

Bodycote Switzerland Wärmebehandlung AG

Fallenden and Urdorf

Bodycote Czech Republic Heat Treatment S.r.o.

Modrice, Pilzen, Prague and Pribram

HT Progres S.r.o.

Bodycote Hokezelo KFT

Vide Express Romania (83% owned)

Brno and Liberec

Budapest

Brasov

Bodycote IMT Inc.

London OH and Camas WA

Bodycote Thermal Processing, Inc.

Boaz AL, Fremont, San Diego, Santa Fe Springs, Santa Ana, Gardena,
Huntington Park, Los Angeles, Rancho Dominguez, Vernon, Walnut,
Westminster and Tarzana CA, Berlin, Waterbury and South Windsor CT,
Ipswich and Worcester MA, Canton, Lansing, Livonia (under construction)
and Grand Rapids MI, Cincinnati and Cleveland OH, Oklahoma City
and Tulsa OK, Dallas, Houston and Fort Worth TX, Laconia NH,
Melrose Park IL, Indianapolis IN, Eden Prairie MN, St Louis MO,
Rochester NY, Lexington TN, Clintonville, Sturtevant
and New Berlin WI

USA

Bodycote Thermal Processing Canada, Inc.

Newmarket and Kitchener ON

Canada

Bodycote HIT

Ambazac, Amiens, Beaugency, Brétigny sur Orge,
Billy-Berclau, Cernay, Chanteloup les Vignes,
Charleville Mézières, Chassieu, Cluses, Condé sur Noireau,
Gemenos, Gennevilliers, Lagny sur Marne,
La Monnerie Le Montel, La Talaudière, Le Subdray,
Neuilly sur Marne, Neuilly en Thelle, Nogent, Pusignan,
Serres Castet, St Aubin les Elbeuf, St Dié, St Nicholas d’Aliermont,
St Rémy en Mauges, Thyez and Voreppe

Bodycote Italia Srl (90% owned)

Gorgonzola

Bodycote Trattamenti Termici SPA

Flero, Madone and Rodengo

Bodycote Belge

Bodycote Värmebehandling AB

Brussels and Nivelles

Anderstorp, Göteborg, Karlskoga, Linköping, Malmö,
Mora, Stockholm, Värnamo and Västerås

Bodycote Lämpökäsittely Oy

Pieksämäki, Tampere, Vaasa and Vantaa

Bodycote Värmebehandling A/S

Århus and Herlev

France

Italy

Belgium

Sweden

Finland

Denmark

Vacuum and sealed quench and induction heat treatment, carburising, carbonitriding, plasma nitriding, copper, silver and gold brazing,
hardening, tempering, kolsterising, electron beam welding and laser processing.

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Metal Technology continued

Hot Isostatic Pressing

*Bodycote H.I.P. Limited

Bodycote IMT Inc.

Chesterﬁeld and Hereford

Andover MA, London OH, Princeton KT and Camas WA

Bodycote Heiss-Isostatisches Pressen GmbH

Haag

Bodycote IMT NV

Bodycote Hot Isostatic Pressing AB

Sint-Niklaas

Surahammar

England

USA

Germany

Belgium

Sweden

Application of the hot isostatic process and the manufacture of specialist steels and products using hot isostatic pressing technology.

Materials Testing

Bodycote Materials Testing Limited

Bodycote Materials Testing BV

Bodycote Materials Testing A/S

Bodycote Materials Testing Srl

Bodycote CTR Srl

Bridgwater, Burton-on-Trent, Daventry,
Droitwich, Dudley, Glasgow, Lancaster, Manchester,
Middlesbrough, Newcastle, Newbridge, Nuneaton,
Poole, Salford, Shefﬁeld, Shotton and Windsor

Emmen and Spijkenisse

Sandnes

Milan

Padua

Bodycote Materials Testing Services Limited

Abu Dhabi and Al Ain

Al Futtaim Bodycote Materials Testing
Services LLC (49% owned)‡

Dubai

Bodycote Materials Testing
Services Limited Company & LLC (70% owned)‡

Muscat and Sohar

Bodycote Materials Testing Inc.

Bodycote Materials Testing Canada Inc.

Chicago and Melrose Park IL, Houston TX, Los Angeles CA,
Detroit MI and Portland OR

Burlington, Cambridge, Mississauga and Niagara Falls ON,
Montreal and Quebec City QC

Bodycote Polymer AB

Bodycote CMK AB

Bodycote Materials Testing s.r.o.

Nyköping

Karlskoga

Pilzen

Scotland

Netherlands

Norway

Italy

Guernsey

Dubai

Oman

USA

Canada

Sweden

Czech Republic

Testing services for producers and users. Mechanical, corrosion, physical, radiographic and chemical testing of ferrous and non-ferrous
alloys, building products, ceramics, composites and plastics and lifetime assessment of polymers. Healthcare testing, microbiological
assessment, water analysis, ﬁre, drug, pharmaceutical and food product testing. Automotive engine structural and environmental
exposure testing.

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Principal Subsidiary Undertakings
Principal Subsidiary Undertakings

Metal Technology continued
Metal Technology continued

Metallurgical Coatings
Metallurgical Coatings

Country of incorporation
Country of incorporation
or registration
or registration

*Bodycote Metallurgical Coatings Limited
*Bodycote Metallurgical Coatings Limited

Darlington, Knowsley, Liverpool, Macclesﬁeld,
Darlington, Knowsley, Liverpool, Macclesﬁeld,
Poole, Rochdale, Uxbridge and Wolverhampton
Poole, Rochdale, Uxbridge and Wolverhampton

Bodycote Coating Centrum BV
Bodycote Coating Centrum BV

Bodycote Metallurgical Coatings, Inc.
Bodycote Metallurgical Coatings, Inc.

Bodycote K-Tech, Inc
Bodycote K-Tech, Inc

Bodycote de Mexico SA de CV
Bodycote de Mexico SA de CV

Bodycote Ytbehandling AB
Bodycote Ytbehandling AB

Venlo
Venlo

Greensboro NC
Greensboro NC

Hot Springs AR
Hot Springs AR

Tecate
Tecate

Anderstorp, Göteborg, Gnosjö, Katrineholm,
Anderstorp, Göteborg, Gnosjö, Katrineholm,
Karlstad, Mullsjö, Solna, Vansbro and Västra Frölunda
Karlstad, Mullsjö, Solna, Vansbro and Västra Frölunda

Bodycote Pintakäsittely Oy
Bodycote Pintakäsittely Oy

Alajärvi and Espoo
Alajärvi and Espoo

Bodycote Nussbaum GmbH & Co KG.
Bodycote Nussbaum GmbH & Co KG.

Kaufbeuren
Kaufbeuren

Bodycote HIT
Bodycote HIT

Procolor
Procolor

Europeenne de Chromage
Europeenne de Chromage

Chassieu, Pau, Neuilly en Thelle and St Dié
Chassieu, Pau, Neuilly en Thelle and St Dié

Auterive
Auterive

St. Dizier
St. Dizier

England
England

Netherlands
Netherlands

USA
USA

Mexico
Mexico

Sweden
Sweden

Finland
Finland

Germany
Germany

France
France

Anti-corrosion processing including sherardizing, mechanical plating, zinc electroplating, organic and metal ﬁnishing, vacuum and
Anti-corrosion processing including sherardizing, mechanical plating, zinc electroplating, organic and metal ﬁnishing, vacuum and
ceramic and high temperature alloy coating and physical vapour deposition.
ceramic coating and physical vapour deposition.

Property and General
Property and General

*Thomas Cook & Son Insurance
*Thomas Cook & Son Insurance
Brokers Limited (75% owned)
Brokers Limited (75% owned)

Burnley
Burnley

Insurance broking, industrial and commercial risk management, independent ﬁnancial advisers.
Insurance broking, industrial and commercial risk management, independent ﬁnancial advisers.

Bodycote Property Holdings Inc.
Bodycote Property Holdings Inc.

Mississauga ON
Mississauga ON

Bodycote MAS Redevelopment Corporation
Bodycote MAS Redevelopment Corporation

St Louis MO
St Louis MO

Managers of the Group’s property interests.
Managers of the Group’s property interests.

England
England

Canada
Canada

USA
USA

Except where stated, these companies are wholly owned subsidiaries and have only one class of issued shares. Subsidiaries marked
Except where stated, these companies are wholly owned subsidiaries and have only one class of issued shares. Subsidiaries marked
with an asterisk* are held directly by Bodycote International plc.
with an asterisk* are held directly by Bodycote International plc. Entities marked ‡ have been treated as subsidiary undertakings in the
ﬁnancial statements because the Group exercises a dominant inﬂuence over these entities.

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Notice of Annual General Meeting

NOTICE IS HEREBY GIVEN that the 51st Annual General Meeting of BODYCOTE INTERNATIONAL PLC will be held at
The Stanneylands Hotel, Stanneylands Road, Wilmslow SK9 4EY on Wednesday 26 May 2004, at 1500 hours for the
following purposes:

As ordinary business

1. To receive the annual report and statement of accounts for the year ended 31 December 2003.
2. To approve the Board Report on Remuneration.
3. To declare a ﬁnal dividend.
4. To re-elect Mr R T Scholes as a Director of the Company.
5. To re-elect Mr D F Landless as a Director of the Company.
6. To re-appoint Deloitte & Touche LLP as auditors of the Company and authorise the Directors to ﬁx their remuneration.

As special business

To consider and, if thought ﬁt, to pass the following resolutions which will be proposed as to resolutions 7 and 8 as ordinary
resolutions and as to resolutions 9 and 10 as special resolutions:

7. That the authorised share capital of the Company be increased from £34,706,000 divided into 347,060,000 ordinary shares of

10p each to £43,000,000 by the creation of 82,940,000 additional ordinary shares of 10p each.

8. That the Directors be and they are hereby generally and unconditionally authorised pursuant to Section 80 of the Companies

Act 1985 to exercise any power of the Company to allot and grant rights to subscribe for or to convert securities into shares of
the Company up to a maximum aggregate nominal amount equal to the nominal amount of authorised but unissued share capital
immediately following the passing of resolution 7 above PROVIDED THAT the authority hereby given shall expire on the date which
is ﬁfteen calendar months after the passing of this resolution unless previously renewed, varied or revoked by the Company in
general meeting save that the Directors may, notwithstanding such expiry, allot any shares or grant any such rights under this
authority in pursuance of an offer or an agreement so to do made by the Company before the expiry of this authority.

9. That, subject to the passing of the resolution numbered 8, the Directors be and they are hereby empowered pursuant to

Section 95 of the Companies Act 1985 to allot equity securities (within the meaning of Section 94 of the Companies Act 1985)
for cash pursuant to the authority conferred by the said resolution as if Section 89(1) of the Companies Act 1985 did not apply
to any such allotment provided that this power shall be limited:

(a) to the allotment of equity securities (within the meaning of Section 94 of the Companies Act 1985) in connection with rights
issues in favour of ordinary shareholders where the equity securities respectively attributable to the interests of all ordinary
shareholders are proportionate (as nearly as may be) to the respective numbers of ordinary shares held by them subject to
such exclusions or other arrangements as the Directors consider appropriate, necessary or expedient to deal with any
fractional entitlements or with any requirements of any regulatory body or recognised investment exchange or otherwise;

(b) to the allotment of equity securities pursuant to the terms of the Bodycote International executive share option schemes

(c) to the allotment (otherwise than pursuant to sub-paragraphs (a) and (b) above) of equity securities up to an aggregate

nominal value of £1,603,939 being 5% of the issued share capital of the Company; and

(d) the authority hereby given shall expire at the close of the next annual general meeting of the Company to be held after the date
hereof unless such authority is renewed prior to such time; but a contract of purchase may be made before such expiry which
will or may be executed wholly or partly thereafter, and a purchase of shares may be made in pursuance of any such contract.

10. That the Company be and it is hereby generally and unconditionally authorised to make market purchases (within the meaning

of Section 163(3) of the Companies Act 1985) of ordinary shares of 10 pence each in the Company provided that:

(a) the maximum number of shares hereby authorised to be acquired is 32,078,790;

(b) the maximum price which may be paid for any such share is an amount equal to 105% of the average of the middle market
quotations for an ordinary share as derived from the London Stock Exchange Daily Ofﬁcial List for the ﬁve business days
immediately preceding the day on which the share is contracted to be purchased;

By order of the Board
J. R. GRIME,
Secretary.

Hulley Road, Hurdsﬁeld,
Macclesﬁeld, Cheshire SK10 2SG
9 March 2004

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Notice of Annual General Meeting continued

Notes

1. Pursuant to Regulation 41 of the Uncertiﬁcated Securities Regulations 2001, the Company speciﬁes that only those shareholders

registered in the Register of Members of the Company as at 1700 hours on 24 May 2004 shall be entitled to attend or vote at
the Meeting in respect of the number of shares registered in their names at that time. Changes to entries on the Register of
Members after 1700 hours on 24 May 2004 shall be disregarded in determining the rights of any person to attend or vote at
the Meeting.

2. Every member who is entitled to attend and vote at the meeting is entitled to appoint one or more proxies to attend and on

a poll vote in his/her stead. A proxy need not be a member.

3. Brief biographical details of Directors standing for re-election at the Meeting are set out on page 18.

Recommendation and explanatory notes

Increase in authorised share capital (Resolutions 7).

When the issued share capital of the Company is increased by the rights issue announced on the 9th March 2004, the headroom
available for the further issue of new shares pursuant to Section 80 of the Companies Act 1985 will be reduced from 26.1% to 7.6%
of authorised share capital, which the Directors consider insufﬁcient. Resolution 7 will increase the authorised share capital by 23.9%
and restore the headroom to approximately 25.4%.

Renewal of authority to allot shares (Resolutions 8 and 9).

Under the provisions of Section 80 of the Companies Act 1985 the Directors are not able to allot shares except with the general or
speciﬁc approval of shareholders. A general authority was granted on 28 May 2003 in respect of the shares then unissued and it is
now proposed in resolution number 8 in the notice convening the annual general meeting that this authority be renewed for a period
of ﬁfteen months from the date of passing the resolution in respect of unissued share capital immediately following the passing of
resolution 7, which will then represent approximately 25.4% of the authorised share capital. No shares are held in treasury.

The Board has no present intention of issuing any further shares nor will any such issue be made which would effectively alter the
control of the Company without the prior approval of shareholders in general meeting.

Sections 89 and 95 of the Companies Act 1985 provide that any ordinary shares issued for cash must ﬁrst be offered to existing
shareholders unless their approval is obtained that this stipulation should not be applied. The Directors consider it desirable that they
should have the authority to make allotments of ordinary shares for cash, other than by way of rights issues to existing shareholders,
up to a maximum nominal value of £1,603,939 being 5% of the issued ordinary share capital immediately following the passing of
resolution 7.

Purchase of own Shares (Resolution 10)

Under Article 9 the Company is empowered to purchase its own shares. The Directors consider that the power to make purchases in
the market of the Company’s own shares should be maintained even in the circumstances of the announcement of a fully underwritten
rights issue, and accordingly recommend the approval of the special resolution set out as resolution number 10. The Directors intend
to exercise this authority only where, in the light of market conditions prevailing at that time, they believe that the effect of such
purchases would be to increase earnings per share, or to deliver shares to participants in the Bodycote International executive share
option schemes. Any shares purchased in this way will either be cancelled, in which case the number of shares in issue will be reduced
accordingly, or held as treasury shares.

The resolution speciﬁes the maximum and minimum prices at which shares may be bought, and the maximum number of shares
which may be bought, this being 10% of the Company’s issued ordinary share capital following completion of the rights issue
announced on 9 March 2004. As at 31 December 2003 outstanding share options over unissued shares totalled 9,173,839 and this
represented 3.6% of the Company‘s issued share capital. Based on the estimated issued share capital following the rights issue,
if the Company utilised the authority proposed by resolution 10 in full, outstanding share options would then represent 3.2% of the
consequently reduced share capital.

The Directors consider that the proposals described in this notice are in the best interests of the shareholders as a whole and unanimously
recommend shareholders to vote in favour of all the resolutions proposed, as they intend to do in respect of their own beneﬁcial holdings.

A form of proxy is enclosed for those entitled to vote. Instructions are given for electronic proxy voting.

Bodycote annual report 2003

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Financial Calendar

Annual general meeting

Final dividend for 2003

Interim results for 2004

Interim dividend for 2004

Results for 2004

Shareholder Enquiries

26 May 2004

5 July 2004

August 2004

January 2005

March 2005

Enquiries on the following administrative matters can be addressed to the Company’s registrars, Capita Registrars, Northern House,
Woodsome Park, Fenay Bridge, Huddersﬁeld HD8 0LA. Telephone: 0870-1623131; Fax: 01484-600911; and
email: shareholder.services@capitaregistrars.com

- Change of address
- Lost share certiﬁcates or dividend cheques
- Dividend mandates
- Amalgamation of holdings

Forms for these matters can be downloaded from the registrars’ website at www.capitaregistrars.com, where shareholders can also
check their holdings and details.

Shareholder Information

Analysis of share register as at 20 February 2004

Holding range:

1 to 1,000
1,001 to 10,000
10,001 to 100,000
100,001 to 500,000
500,001 and over

Number of
shareholders

1,116
1,588
435
94
84

33.65
47.88
13.11
2.83
2.53

Number of
Shares

588,240
5,725,566
12,993,749
21,146,078
216,176,693

0.23
2.23
5.06
8.24
84.24

3,317

100.00

256,630,326

100.00

Types of shareholders:

% of shareholders

% of total shares

Directors’ interests
Major institutional and corporate holdings
Other shareholdings

0.1
5.9
94.0

100.0

0.4
91.2
8.4

100.0

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outsourcing for industry

Bodycote International plc
Hulley Road
Macclesﬁeld
Cheshire
SK10 2SG

Tel: +44 (0)1625 505300
Fax: +44 (0)1625 505313
Email: info@bodycote.com

www.bodycote.com